Minor EMD Shortfall Does Not Invalidate SARFAESI Auction Sale: SC
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Minor initial shortfalls in earnest money deposits cannot defeat a valid bank auction when the successful bidder subsequently complies with the mandatory statutory requirement of depositing 25% of the total bid price on the same day.
A Supreme Court division bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe set aside a High Court judgment that had quashed a property auction due to a minor deficiency in the initial earnest money deposit (EMD). The Court underscored the legal distinction between essential eligibility conditions and ancillary procedural stipulations in auction notices issued under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Key Takeaways
EMD Shortfall Pales Into Insignificance
Any anterior deficiency in EMD becomes immaterial once the mandatory 25% purchase price requirement under Rule 9(3) is met on the auction day.
Ancillary Tender Terms Allow Relaxation
Non-statutory conditions aimed at filtering out non-serious bidders can be relaxed if no substantial prejudice or injustice is caused to any party.
Bank Obligated to Pay Interest on Excess Proceeds
Failure by a bank to keep surplus sale proceeds in an interest-bearing account entitles the borrower to restitution through interest on the delayed refund.
Anterior EMD Shortfall and Judicial Rationale
Addressing the validity of the auction, the Court observed that Clause 7 of the sale notice requiring an EMD was a non-statutory condition intended primarily to screen out non-serious bidders. Relying on established precedents including Poddar Steel Corporation v. Ganesh Engineering Works and Ors. ( "(1991) 3 SCC 273": 1991 CaseBase(SC) 551), Om Prakash Sharma v. Ramesh Chand Prashar & Ors. ( "(2016) 12 SCC 632": 2016 CaseBase(SC) 233), Central Coalfields Ltd. & Anr. v. SLL-SML (Joint Venture Consortium) & Ors., Bakshi Security & Personnel Services Pvt. Ltd. v. Devkishan Computed Pvt. Ltd. & Ors. ( "(2016) 8 SCC 446": 2016 CaseBase(SC) 302), Vidarbha Irrigation Development Corporation & Ors. v. Anoj Kumar Agarwala & Ors. ( "(2020) 17 SCC 577": 2019 CaseBase(SC) 1220), G.J. Fernandez v. State of Karnataka & Ors. ( "(1990) 2 SCC 488": 1990 CaseBase(SC) 331), Indian Railway Catering and Tourism Corporation Ltd. & Anr. v. Doshion Veolia Water Solutions Pvt. Ltd. & Ors., National High Speed Rail Corporation Ltd. v. Monte Carlo Ltd. & Anr. ( "(2022) 6 SCC 401": 2022 CaseBase(SC) 123), and B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. & Ors., the Court reiterated that ancillary tender conditions permit flexibility where strict adherence is not essential.
The Court, in its reasoning, observed: "The auction-purchasers in accordance with Rule 9(3) of the Rules deposited 25% of the amount of bid price inclusive of EMD on the next day i.e., 24.04.2009. The auction-purchasers were statutorily obliged to comply with the 25% mark of the sale price on the same day which was made good. Therefore, any anterior shortfall in deposit of EMD pales into insignificance, the moment the 25% of the sale price was deposited. Thus, the non-conformity of the bid of the auction-purchasers insofar as it pertains to deposit of EMD has not resulted in any prejudice or injustice to the other bidder much less to the borrower."
The Court issued specific directions regarding the surplus proceeds retained by the bank:
The Court has following directions:
"The Bank is directed to refund the amount of Rs.1,33,94,054/- (Rupees One Crore Thirty-Three Lakhs Ninety-Four Thousand Fifty-Four only) along with interest at the rate of 7% per annum from 23.03.2010 i.e. the date when the surplus amount was kept in a non-interest bearing account till the payment is made to the borrower."
Ratio
A minor technical deficiency or shortfall in the earnest money deposit required under a non-statutory auction notice clause does not invalidate the sale if the bidder substantially complies with the statutory mandates under Rule 9 of the Security Interest (Enforcement) Rules, 2002 and causes no prejudice to any competing party or the borrower.
Background
The borrower, M/s. Airtech Projects Engineers Pvt. Ltd., defaulted on a cash-credit facility granted by United Bank of India (later merged with Punjab National Bank), leading to its account being classified as an NPA. The Bank initiated recovery under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and issued a possession-cum-sale notice for a secured property in Chennai. Under Clause 7 of the notice, bidders were required to submit an EMD of Rs. 21,50,000/-.
The auction-purchasers submitted a bid accompanied by an EMD of Rs. 21,15,000/-, incurring a shortfall of Rs. 35,000/-. Being the highest bidder at Rs. 2,17,40,000/-, the auction-purchasers immediately deposited a total of 25% of the bid price in compliance with Rule 9(3) of the Security Interest (Enforcement) Rules, 2002, and subsequently paid the balance 75% upon the resolution of initial tribunal proceedings. Although the Debts Recovery Tribunal dismissed the borrower's challenge, the Debts Recovery Appellate Tribunal and later the Madras High Court set aside the sale on grounds of non-compliance with the auction notice terms.
Reversing the High Court's ruling, the Supreme Court allowed the appeals filed by the auction-purchasers and the Bank, while disposing of the borrower's appeal with directions for the refund of surplus sale proceeds along with interest.
Case Details:
Case No.: Civil Appeal Nos. 9228–9231 of 2013
Neutral Citation: 2026 INSC 909
Case Title: Lakshmi Mohan (Dead) Through LRs. & Anr. v. M/s. Airtech Projects Engineers Pvt. Ltd. & Anr.
Source: 2026 CaseBase(SC) 825
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