Shortfall in non-statutory EMD does not invalidate SARFAESI auction when 25% sale price is deposited and no prejudice is caused, Supreme Court rules

M/s. Airtech Projects Engineers Pvt. Ltd. obtained a cash-credit facility from United Bank of India, whose account was declared an NPA after default. The Bank issued a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and initiated measures for sale of the secured property, comprising land and a building in Chennai.

After an earlier sale notice was quashed because the auction was scheduled on a Sunday, the Bank issued a fresh possession-cum-sale notice fixing the auction for 24.04.2009.

The sale notice required each bidder to deposit earnest money of Rs.21,50,000, failing which the offer would be rejected. The auction-purchasers submitted the highest bid of Rs.2,17,40,000 but deposited only Rs.21,15,000 as EMD, resulting in a shortfall of Rs.35,000. The other bidder had made an identical short deposit.

On the date of auction, the auction-purchasers deposited a further amount so that the total deposit equalled 25% of the bid price, and subsequently paid the balance sale consideration. A sale certificate was issued and registered in their favour.

The DRT upheld the sale, but the DRAT held that the auction violated Rule 8(5) of the Security Interest (Enforcement) Rules, 2002 and directed restoration of possession to the borrower. The High Court ultimately dismissed the challenges to the DRAT’s decision, leading to the present appeals.

Whether the auction-purchasers’ failure to deposit the full EMD stipulated in the sale notice rendered their bids invalid and vitiated the auction?

Whether the auction-purchasers’ payment of 25% of the sale price in compliance with Rule 9(3) cured or rendered insignificant the prior shortfall in the EMD?

Whether the delayed payment of the balance sale consideration invalidated the sale?

Whether the borrower was entitled to interest on the surplus sale proceeds retained by the Bank in a non-interest-bearing account?

The Court applied the SARFAESI Act and Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002. Rule 8(6) requires the sale notice to specify, inter alia, the earnest money deposit stipulated by the secured creditor, while Rule 9(3) requires the purchaser to immediately deposit 25% of the sale price, failing which the property must be resold; Rule 9(4) governs payment of the balance consideration within the prescribed or extended period, and Rule 9(5) provides for forfeiture upon default.

The Court applied the distinction between essential eligibility conditions and ancillary or subsidiary conditions in tender processes: essential conditions ordinarily require strict compliance, whereas deviation from a non-essential condition may be permissible where it causes no substantial prejudice or injustice.

This principle was drawn from Poddar Steel Corporation v. Ganesh Engineering Works, Om Prakash Sharma v. Ramesh Chand Prashar, Central Coalfields Ltd. v. SLL-SML (Joint Venture Consortium), Bakshi Security & Personnel Services Pvt. Ltd. v. Devkishan Computed Pvt. Ltd., Vidarbha Irrigation Development Corporation v. Anoj Kumar Agarwala, G.J. Fernandez v. State of Karnataka, Indian Railway Catering and Tourism Corporation Ltd. v. Doshion Veolia Water Solutions Pvt. Ltd., National High Speed Rail Corporation Ltd. v. Monte Carlo Ltd., and B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd.

The Court held that the EMD requirement in Clause 7 of the sale notice was a non-statutory condition incorporated to screen out non-serious bidders, rather than an essential statutory eligibility requirement.

Both bidders had deposited the same amount, Rs.21,15,000, and the Bank had entertained and considered both bids. The successful auction-purchasers thereafter deposited 25% of the bid price, including the EMD, in compliance with the mandatory requirement under Rule 9(3). Since the statutory 25% deposit was made and no prejudice was caused to the borrower or the competing bidder, the Rs.35,000 EMD shortfall did not invalidate the bid or the auction.

The challenge based on delayed payment of the balance consideration was rejected because it had not been raised before the DRT or DRAT. In any event, the sale notice permitted extension by the Bank, and the Bank had deferred the payment date during the pendency of proceedings. The balance was paid immediately after dismissal of the borrower’s challenge, demonstrating that the delay had been authorised or accepted by the Bank.

However, the Bank had retained surplus sale proceeds of Rs.1,33,94,054 in a non-interest-bearing account. The borrower could not be penalised for the Bank’s failure to preserve the surplus in an interest-bearing account and was therefore entitled to interest on that amount.

The challenge to the timing of payment of the balance consideration was also rejected, as the Bank had extended or deferred the payment period and the amount was paid immediately after the borrower’s proceedings failed.

The Court set aside the High Court’s judgment dated 22.03.2013 and the DRAT’s order dated 20.06.2011, thereby upholding the auction sale and the auction-purchasers’ title.

The Bank was directed to refund Rs.1,33,94,054 to the borrower with interest at 7% per annum from 23.03.2010 until payment.

Civil Appeal Nos. 9228–9231 of 2013 and the Bank’s appeal were allowed; the auction-purchasers’ connected appeals were disposed of. There was no order as to costs.