Statutory Forfeiture of Auction Deposit Is an Inflexible Legal Consequence Following Default in Balance Payment

The second respondent firm, with respondents 3 and 4 (the petitioner’s parents) as partners, mortgaged a property to the Central Bank of India. Upon loan default, the bank initiated SARFAESI proceedings.

The petitioner participated in two successive auctions (September 2017 and January 2018), was declared the highest bidder, and paid initial deposits totaling approximately ₹42.72 lakhs.

The petitioner failed to remit the balance sale consideration within the stipulated timelines, despite extensions granted by the Bank.

The Bank forfeited the deposits and sold the property to a third party in a third auction on May 29, 2018.

The petitioner challenged the sale and sought a refund of the forfeited amount in SA No. 59 of 2018 before the DRT-I, Chennai, which was dismissed; the Debt Recovery Appellate Tribunal (DRAT) subsequently dismissed the appeal on September 16, 2025.

1. Whether the auction sale in favor of a third party was illegal given the petitioner’s substantial prior deposits.

2. Whether the petitioner is entitled to a refund of the 25% sale consideration forfeited by the Bank due to default in paying the balance amount.

3. Whether the non-joinder of the auction-purchaser is fatal to the petitioner’s challenge against the sale.

The Court applied Rule 9 of the Security Interest (Enforcement) Rules, 2002, specifically Sub-rule (3) regarding the mandatory 25% deposit, Sub-rule (4) regarding the timeline for balance payment, and Sub-rule (5) which empowers the Authorised Officer to forfeit the deposit upon default.

The Court relied heavily on the Supreme Court precedent in Authorised Officer, Central Bank of India v. Shanmugavelu (2024 INSC 80), which established that the forfeiture of a 25% deposit under Rule 9(5) is a statutory legal consequence that cannot be substituted or diluted by principles of equity, regardless of whether a subsequent sale fetches a higher price.

The Court reasoned that the petitioner’s failure to comply with the mandatory payment timelines under Rule 9(4) of the SARFAESI Rules triggered the statutory consequence of forfeiture under Rule 9(5).

The Bench observed that the Bank had provided the petitioner with communication regarding the balance due, granted extensions, and issued show-cause notices before finalizing the forfeiture.

Applying the Shanmugavelu precedent, the Court held that once a default occurs, the forfeited amount cannot be refunded as the rule is mandatory and leaves no room for judicial or equitable interference.

The Court found the petitioner’s challenge to the third-party sale procedurally flawed, as the petitioner failed to implead the successful auction-purchaser, who was a necessary party to the proceedings.

The High Court dismissed the writ petition, upholding the orders of the DRT and DRAT.

The Court further held that the auction sale in favor of the third party was conducted in conformity with mandatory requirements and was not liable to be set aside, especially in the absence of the auction-purchaser as a party.