These appeals are at the instance of a Nationalized Bank and are directed against the common judgment and order dated 27.10.2021 passed by the High Court of judicature at Madras in C.R.P No(s). In order to recover its dues, the appellant bank took measures under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the “ SARFAESI Act ”), more particularly under Section 13(4) by taking over the possession of the Secured Asset and putting the same for sale by way of public auction.
Bidders are required to go through the website https://www.bankeauctions.com for detailed terms and conditions of auction sale before submitting their bids and taking part in the e- Auction sale proceedings. However, the intending bidders should make their own independent inquiries regarding the encumbrances, title of property put on auction and claims / rights / dues affecting the property, prior to submitting their bid. No 044- 42625259 Mobile 9962029300 e-mail ID: bmchen3507@centralbank.co.in during officer hours i.e. The bidder who submits the highest bid amount (not below the Reserve Price) on closure of e-Auction process shall be declared as Successful Bidder and a communication to that effect will be issued which shall be subject to approval by the Authorized Officer/Secured Creditor. In case of default in payment by the highest and successful bidder, the amount already deposited by the bidder shall be liable to be forfeited and property shall be put to re-auction and the defaulting bidder shall have no claim / right in respect of property/amount. 3,06,75,000/- as the earnest money deposit upon which, the appellant confirmed the sale of the Secured Asset in favour of the respondent vide its letter dated 07.12.2016 which inter-alia stipulated that in the event of default in payment of the balance amount, the sale shall be liable to be cancelled and the earnest money would be forfeited. Sunbright Designers Private Limited Module No – 4, Readymade Garment Complex SIDCO Industrial Estate, Guindy Chennai-600032 Sir, Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in our borrowal account M/s Best & Crompton Engineering Projects Limited – E Auction of property held on 07/12/2016.
9,20,25,000/-
(Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) is to be remitted by you by RTGS to the same account number on or before 15 days from today; failing which the sale is liable to be cancelled and the EMD will be forfeited. The appellant bank vide its letter dated 20.12.2016, acceded to the request of the respondent and granted a further extension of three-months’ time i.e., till 07.03.2017 in terms of Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (for short, the “ SARFAESI Rules ”). A-19, Thiru Vi Ka Industrial Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate East by: 80 feet Road, West by: Service Road, you have been declared as successful bidder at the sale price of Rs. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) was to be remitted by you before 15 days from the date of bid failing which the sale is liable to be cancelled and the EMD will be forfeited. However, the appellant vide its letter dated 27.03.2017 turned down the said request for further extension and intimated the respondent that due to its failure in remitting the balance amount within the stipulated time, the sale is cancelled and the amount already deposited stands forfeited. Thiru Vi Ka Industrial Estate, South by: Plot no. 3,06,75,000 towards 25% of the sale price on (i.e.
After carefully going through your request, the Authorized officer permitted/allowed you to pay the balance amount of Rs.9,20,25,000/-( Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) within 90 days from the date of BID vide our letter No CFB/CHEN/2016-17/718 dated 20/12/2016. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) by 22/03/2017 thereby giving three months time from the 15 day of confirmation of sale as per the Security Interests (Enforcement) Rules, 2002. 143 of 2018 before the Debts Recovery Tribunal-II (“ DRT ”) assailing the appellant’s sale cancellation and forfeiture letters dated 27.03.2017 and 06.04.2017 respectively. The DRT-II vide its order dated 06.05.2019 allowed the application being SA No 143 of 2018 and directed the appellant bank to refund the earnest money deposited by the respondent after deducting a sum of Rs. 1892 & 2282 of 2021 respectively, assailing the order dated 30.07.2021 passed by the DRAT, Chennai, wherein the High Court vide the impugned judgment and final order dated 27.10.2021 allowed the respondent’s civil revision petition. The High Court held that Rule 9 sub-rule (5) of the SARFAESI Rules which provides for forfeiture cannot override the underlying ethos of Section 73 of the Indian Contract Act, 1872 (for short, “the 1872 Act”).
What Section 73 of the Contract Act mandates is that a party who suffers as a result of a breach committed by the other party to the contract “is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.” Any detailed discussion on such provision would be beyond the scope of the present lis and may require many more sheets that may be conveniently expended in the present exercise. Thus, notwithstanding the wide words used in Rule 9(5) of the said Rules, a secured creditor may not forfeit any more than the loss or damage suffered by such creditor as a consequence of the failure on the part of a bidder to make payment of the consideration or the balance consideration in terms of the bid. Though Section 37 of the Act refers to several statutes by name, the residual limb of such provision recognises “or any other law for the time being in force”, which would embrace the Contract Act within its fold. Though an element of guesstimation is permitted while assessing damages, when an initial authority has indicated a ballpark figure, any tinkering with such figure at the appellate stage would require material in support thereof, which is completely lacking in the judgment and order impugned dated July 30, 2021 passed by the appellate authority in the present case.
However, no secured creditor, not even by embracing the provisions of the said Act of 2002, can unjustly enrich itself or obtain any more by way of resorting to any of the measures contemplated under Section 13(4) of the Act or otherwise than the debt that is due to it and the costs that may have been incurred in course of trying to recover the debt due. The plain reading of the aforesaid findings recorded by the High Court lays down three propositions of law as follows: (1) Rule 9(5) of the SARFAESI Rules is merely an enabling provision that permits forfeiture in principle. (3) Rule 9(5) of the SARFAESI Rules if not read along with the principle recognised in Section 73 of the 1872 Act, the same may result in a secured creditor unjustly enriching itself which is not permissible. It was submitted that the High Court was not correct in reading down Rule 9(5) and holding that the same must yield to the principles recognized in Section 73 of the 1872 Act, notwithstanding the wide words used in Rule 9(5) of SARFAESI Rules. Muralidhar, the learned Senior Counsel appearing for the respondent on the other hand vehemently submitted that no error not to speak of any error of law could be said to have been committed by the High Court in passing the impugned judgment and order. Such unguided power conferred on a delegated authority like the authorized officer in a bank is opposed to public policy and would result in unjust enrichment. Whether, the underlying principle of Section(s) 73 & 74 respectively of the 1872 Act is applicable to forfeiture of earnest-money deposit under Rule 9(5) of the SARFAESI Rules? Due to various difficulties the banks and financial institutions had to face in recovering loans and enforcement of securities, the Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short, the “ RDBFI Act ”).
On the recommendations of the Narasimham Committee and Andyarujina Committee, the SARFAESI Act was enacted to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the court. The banking industry in India is progressively complying with the international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery or reconstruction. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field, namely, the Recovery of Debts Due to Banks and Financial Institutions Act. In Chapter VIII of the Second Report the Narasimham Committee deals about legal and legislative framework and observed: “8.1.
It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions has been attracting attention and the matter was considered in depth by the Committees specially constituted consisting of the experts in the field. We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Recovery of Debts Due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Due to lack of adequate infrastructure and non-availability of manpower, the regular courts could not accomplish the task of expeditiously adjudicating the cases instituted by banks and other financial institutions for recovery of their dues.
Rules 8 and 9 respectively of the SARFAESI Rules prescribe the procedure and formalities to be followed for the sale of immovable secured asset as per Section 13 of the SARFAESI Act. –(1) No sale of immovable property under these rules, in first instance shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of rule 8 or notice of sale has been served to the borrower: Provided further that if sale of immovable property by any one of the methods specified by sub-rule (5) of rule 8 fails and sale is required to be conducted again, the authorised officer shall serve, affix and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale. of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorised officer conducting the sale and in default of such deposit, the property shall be sold again; (4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months. (8) On such deposit of money for discharge of the encumbrances, the authorised officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly. –The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” Section 37 of the SARFAESI Act provides that the provisions of the SARFAESI Act shall be in addition to the Acts mentioned in or and any other law for the time being in force and that the other laws shall also be applicable alongside the SARFAESI Act, and reads as under: – “ 37. –The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.” 46.
The question, therefore, is whether the public interest in recovering debts due to banks and financial institutions is to give way to the public interest in rehabilitation of sick industrial companies, regard being had to the present economic scenario in the country, as reflected in parliamentary legislation. The existing procedure for recovery of debts due to the banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. The Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure.
Notes on clauses explain in detail the provisions of the Bill.” The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 took away the jurisdiction of the courts and vested this jurisdiction in tribunals established by the Act so as to ensure speedy recovery of debts due to the banks and financial institutions mentioned therein. Clearly, therefore, the object of the 2000 Amendment to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was to make the Sick Industrial Companies (Special Provisions) Act, 1985 prevail over it. They could, by following the procedure laid down in Section 13, take direct action against the debtors by taking possession of secured assets and selling them; they could also take over the management of the business of the borrower. Three of these Acts, namely, the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992, relate to securities generally, whereas the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 relates to recovery of debts due to banks and financial institutions. Section 73 of the 1872 Act deals with the compensation for loss or damage caused by breach of contract. 461, wherein it was observed: “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.
If special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract which they would reasonably contemplate would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.
(2.)
In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. (6.) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss.
The Court held that when a party commits breach of contract, the other party is entitled to receive compensation for any loss by the damage caused to him which naturally arose in the usual course of business from such breach or which the parties knew when they made the contract to be likely to result from the breach of it. As the parties did not know and could not have known when the contract was made in July 1952 that the scrap iron would be ultimately sold by the appellant to the Export Corporation, the parties could not have known of the likelihood of the loss actually suffered by the appellant, according to him, on account of the failure of the respondent to fulfil the contract. The general rule is that where two parties enter into a contract and one of them commits breach, the other party will be entitled to receive as damages in respect of such breach of contract, such sum as may fairly and reasonably be considered arising naturally, that is according to the usual course of things, from such breach of contract itself or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. But, on the other hand, if the special circumstances were not made known to the party breaking the contract, the party breaking the contract, at the most, could only be supposed to have had in its contemplation the amount of injury which would arise generally and directly and not any remote or unknown loss or damage.
If on such a comprehensive consideration, the court finds that the real purpose for which the stipulation was incorporated in the contract was that by reason of its burdensome or oppressive character it may operate in terrorem over the promiser so as to drive him to fulfil the contract, then the provision will be held to be one by way of penalty.” The SARFAESI Rules, more particularly Rule 9 was first examined by this Court in Rakesh Birani (Dead) through LRs v. Under Rule 9(2) of the 2002 Rules, the sale is required to be confirmed in favour of the purchaser who has offered the highest sale price to the authorised officer and shall be subject to confirmation by the secured creditor. Rule 9(4) makes it clear that balance amount of the purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of “confirmation of sale of the immovable property” or such extended period as may be agreed upon in writing between the purchaser and the secured creditor.
Once the afore-stated conditions are satisfied i.e., the auction purchaser after confirmation of sale fails to deposit the balance amount within the stipulated time, the secured creditor is required to forfeit the original auction purchaser’s earnest money deposit and the secured assets have to be resold. If we read the provisions otherwise then we find even before the confirmation of sale within fifteen days, the amount would be forfeited by the authorised officer who may decide not to confirm the sale that would be a result not contemplated in Rules 9(2), 9(4) and 9(5) which fortify our conclusion that it is only after the confirmation is made under Rule 9(4) that amount has to be deposited and on failure to deposit the amount, twenty-five per cent amount has to be forfeited and property has to be resold….” Such action taken by the secured creditor is, in our opinion, a part of the measures specified in Section 13(4) and, therefore, it is regarded as a measure taken Under Section 13(4) read with Rule 9(5)….” (Emphasis supplied) 57. The said decision is in two parts: – a) It held that as the SARFAESI Act is a special enactment with overriding effect over other laws by virtue of Section(s) 35 and 37, the 1872 Act more particularly Section(s) 73 and 74 will not be applicable to Rule 9(5) of the SARFAESI Rules especially since the rules framed under a statute become part of the statute. However, once a party expresses willingness to enter into a contractual relationship subject to terms and conditions and makes an offer which is accepted but thereafter commits a breach of contract, he does so at his own risk and peril and naturally has to suffer the consequences. It is in such a scenario that provisions of enactments, particularly those provisions which have a direct bearing on the economy of the nation, must receive such interpretation so that it not only fosters economic growth but is also in tune with the intention of the law-makers in introducing a provision such as sub-rule (5) of rule 9, which though harsh in its operation, is intended to suppress the mischief and advance the remedy. Apart from the law laid down in such decision, these are the other relevant considerations which ought to be borne in mind while examining a challenge to a forfeiture order.
On the date an order of forfeiture is in contemplation of the authorized officer of the secured creditor for breach committed by the bidder, factually, the position is quite uncertain for the former in that there is neither any guarantee of his receiving bids pursuant to a future sale, much to the satisfaction of the secured creditor, nor is there any gauge to measure the likely loss to be suffered by it (secured creditor) if no bidders were interested to purchase the immovable property.
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Does sub-rule (5) of rule 9, which is part of a delegated legislation, i.e., the Rules, have the effect of diluting section 73 and section 74 of the Contract Act? Having regard to the terms of rule 9, the notice for auction constitutes the ‘invitation to offer’; the bids submitted by the bidders constitute the ‘offer’ and upon confirmation of sale in favour of the highest bidder under sub-rule (2) of rule 9, the contract comes into existence.
Though it is true that the power conferred by sub-rule (5) of rule 9 of the Rules ought not to be exercised indiscriminately without having due regard to all relevant facts and circumstances, yet, the said sub-rule ought also not be read in a manner so as to render its existence only on paper. However, what does generally escape notice in the process is that it is the mischievous borrower who steals a march over the secured creditor by managing to have a highly valuable property purchased by one of its henchmen for a song, thus getting such property freed from the clutches of mortgage and by diluting the security cover which the secured creditor had for its loan exposure. Since neither Section 35 nor Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is subject to the other, we think it is necessary to interpret the expression “or any other law for the time being in force” in Section 37.
This expression will, therefore, have to be held to mean other laws having relation to the securities market only, as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 is the only other special law, apart from the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, dealing with recovery of debts due to banks and financial institutions. Frozen Foods Exports (supra) that this Court has consistently construed that only those laws which have either been enumerated in Section 37 SARFAESI Act or similar to it would be applicable in addition to the SARFAESI Act i.e., laws which deal with securities or occupy the same field as the SARFAESI Act. Suffice to say, that in view of the above discussion, the statutory right of redemption under the Act, 1882 will not be applicable to the SARFAESI Act at least in view of the amended Section 13(8) and any right of redemption of a borrower must be found within the SARFAESI Act in terms of the amended Section 13(8).” (Emphasis supplied) 61. However, the legislature has consciously provided for only one consequence in the event of failure of the successful auction purchaser in depositing the balance amount i.e., forfeiture and has not provided for imposition of any other stipulation by the secured creditor in the event of a breach.
(ii) Secondly, such an interpretation would allow unscrupulous borrowers being hands-in-glove with the auction purchasers to use subversive methods to participate in an auction only to not pay the balance amount at the very end and escape relatively unscathed under the guise of Section(s) 73 and 74 of the 1872 Act, thereby gaming the entire auction process and leaving any possibility of recoveries under the SARFAESI Act at naught. At this stage, we may also answer the submission of the respondent that the authorised officer under Rule 9(5) of the SARFAESI Rules has been conferred with unguided and unfettered power of forfeiture and as such the said rule is liable to be struck down. Being so, the underlying principle envisaged under Section(s) 73 & 74 of the 1872 Act which is a general law will have no application, when it comes to the SARFAESI Act more particularly the forfeiture of earnest-money deposit which has been statutorily provided under Rule 9(5) of the SARFAESI Rules as a consequence of the auction purchaser’s failure to deposit the balance amount. The Black’s Law Dictionary defines ‘forfeiture’ as follows [See: Henry Campbell Black on “Black’s Law Dictionary”, 1968, 4 Edition]: – “ the loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty.” “something (especially money or property) lost or confiscated by this process; a penalty” “a destruction or deprivation of some estate or right because of the failure to perform some obligation or condition contained in a contract” 71. reported in (1977) 4 SCC 98, while explaining the true purport and meaning of the term ‘forfeiture’ observed that whether a forfeiture clause is penal in nature must be decided in the specific setting of a statute. This, perhaps, may have to be decided in the specific setting of a statute. .’;’something imposed as a punishment for an offence or delinquency.’ The word, in this sense, is frequently associated with the word ‘penalty’, According to Black’s Legal Dictionary.
In legislative proceedings, however, the construction is otherwise and a forfeiture is always to be regarded as a punishment inflicted for a violation of some duty enjoined upon the party by law; and such, very clearly, is the meaning of the word in the act in question 19. Unless the loss or deprivation of the goods is by way of a penalty or punishment for a crime, offence or breach of engagement it would not come within the definition of forfeiture This word ‘forfeiture’ must bear the same meaning of a penalty for breach of a prohibitory direction. Har Swarup reported in (1926) 23 LW 172, while dealing with the concept of earnest money, had observed as follows: – “Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee.” (Emphasis supplied) 73. 73 and 74 of the Contract Act, have no application in such a case and are not intended to apply to it. They contemplate a case in which he is seeking to recover compensation for the breach. 391) specifically allow a deposit to be forfeited and the mere fact that the word “may” is used in that Rule cannot be taken to mean that only such sum out of the deposit can be forfeited as the Court may think proper as damages following the failure of the buyer to complete the sale.” (Emphasis supplied) 74.
Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. In all cases, therefore, where there is a stipulation in the nature of penalty for forfeiture of an amount deposited pursuant to the terms of contract which expressly provides for forfeiture, the court has jurisdiction to award such sum only as it considers reasonable, but not exceeding the amount specified in the contract as liable to forfeiture. There is no ground for holding that the expression “contract contains any other stipulation by way of penalty” is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract pre-determining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. 24,000/- out of the amount paid by the defendant was stipulation in the nature of penalty, and the plaintiff can retain that amount or part thereof only if he establishes that in consequence of the breach by the defendant, he suffered loss, and in the view of the Court the amount or part thereof is reasonable compensation for that loss.
24,000/- was to be paid when vacant possession of the land and building was delivered, and it was expressly referred to as “out of the sale price.” If this amount was also to be regarded as earnest money, there was no reason why the parties would not have so named it in the agreement of sale. 689; “Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e.g. … Forfeiture of earnest money under a contract for sale of property — Movable or immovable — If the amount is reasonable, does not fall within Section 74. That has been decided in several cases: Kunwar Chiranjit Singh v. These cases are easily explained, for forfeiture of reasonable amount paid as earnest money does not amount to imposing a penalty. Tata Air Craft Limited reported in (1969) 3 SCC 522, laid down the principles regarding earnest money, which read as under: – “9.
Kewal Krishnan Goel reported in 1996 (4) SCC 249 concluded that only that deposit which has been given as an earnest-money for the due performance of the obligation is liable to be forfeited in the event of a breach. In other words, if the payment is made only towards part-payment of consideration and not intended as earnest money then the forfeiture clause will not apply.” Since Rule 9 sub-rule (5) provides for the forfeiture of only the earnest- money deposit of the successful auction purchaser i.e. This is why Fateh Chand (supra) Maula Bux (supra) and Satish Batra (supra) held that forfeiture of earnest-money deposit is not a penal clause, as the deposit of earnest money is intended to signify assent of the purchaser to the contract, and its forfeiture is envisaged as a deterrent to ensure performance of the obligation. However, a close reading would reveal that the reason why this Court held the said deposit as a penal clause was because the said amount was paid over and above the earnest-money deposit already paid by the purchaser in the said case and more importantly the said sum was not liable to be adjusted against the total consideration.
If the Promisee defaults to carry out the contract, he loses the earnest but may recover the part payment leaving untouched the Promisor’s right to recover damages. The distinction between a deposit and a part payment is thus described by Benjamin, in his book “Treatise on the Law of Sale of Personal Property”, 1950, 8 Edition at page 946: – “A deposit is not recoverable by the buyer, for a deposit is a guarantee that the buyer shall perform his contract and is forfeited on his failure to do so. If the seller is unable or unwilling to deliver the goods, or to pass a good title thereto, or the contract is voidable by the buyer for any reason, the buyer may repudiate the contract and recover the deposit. If, on the other hand, the intention was that the money should be deposited as earnest or as a guarantee for the due performance of the payer’s obligation, the rule at common law is that if the contract is rescinded by reason of his default the deposit is forfeited to the payer and cannot be recovered.
The buyer is not disentitled to recover, even if he is the party in breach, because breach of contract on the part of the buyer would only entitle the seller to sue for damages but not to forfeit the advance. The question whether the amount is a deposit (earnest) or a part payment cannot be determined by the presence or absence of a forfeiture clause. (i) When there is no forfeiture clause, if money is handed over in part payment of the purchase price, and then the buyer makes default as to the balance, then, so long as the seller keeps the contract open and available for performance, the buyer cannot recover the money, but once the seller rescinds the contract or treats it as at an end owing to the buyer’s default, then the buyer is entitled to recover his money by action at law, subject to a cross-claim by the seller for damages: see Palmer v. reported in (2015) 4 SCC 136 wherein it was held that Section 74 of the 1872 Act will be applicable to cases of forfeiture of earnest-money deposit, however, where such forfeiture takes place under the terms and conditions of a public auction, Section 74 will have no application.
Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the court. ” (Emphasis supplied) Since, the forfeiture under Rule 9(5) of the SARFAESI Rules is also taking place pursuant to the terms & conditions of a public auction, we need not dwell any further on the decision of Kailash Nath (supra) and leave it at that.
Suffice to say, in view of the above discussion, Section(s) 73 and 74 of the 1872 Act will have no application whatsoever, when it comes to forfeiture of the earnest-money deposit under Rule 9 sub-rule (5) of the SARFAESI Rules. In the Impugned Order, the High Court also took the view that Rule 9(5) of the SARFAESI Rules must be read down so as to yield to the underlying principle recognized in Section(s) 73 & 74 of the 1872 Act. It is only if such principle as embodied in Section 73 of the Contract Act, is read into Rule 9 (5) of the said Rules, would there be an appropriate answer to the conundrum as to whether a colossal default of the entirety of the consideration or the mere default of one rupee out of the consideration would result in the identical consequence of forfeiture as indicated in the provision.” (Emphasis supplied) 93. The principle of “reading down” a provision refers to a legal interpretation approach where a court, while examining the validity of a statute, attempts to give a narrowed or restricted meaning to a particular provision in order to uphold its constitutionality.
… It is also well settled that first attempt should be made by the courts to uphold the charged provision and not to invalidate it merely because one of the possible interpretations leads to such a result, howsoever attractive it may be. Similarly, for upholding any provision, if it could be saved by reading it down, it should be done, unless plain words are so clear to be in defiance of the Constitution. reported in (2003) 10 SCC 533, wherein this Court observed that the rule of “Reading Down” is only for the limited purpose of making a provision workable so as to fulfil the purpose and object of the statute. The rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute.
The High Court in its Impugned Order resorted to reading down Rule 9(5) of the SARFAESI Rules not because its plain meaning would result in the provision being rendered invalid or unworkable or the statute’s objective being defeated, but because it would result in the same harsh consequence of forfeiture of the entire earnest-money deposit irrespective of the extent of default in payment of balance amount. Any dilution of the forfeiture provided under Rule 9(5) of the SARFAESI Rules would result in the entire auction process under the SARFAESI Act being set at naught by mischievous auction purchaser(s) through sham bids, thereby undermining the overall object of the SARFAESI Act of promoting financial stability, reducing NPAs and fostering a more efficient and streamlined mechanism for recovery of bad debts.
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Hence, in our view, it cannot be said that a step taken towards securitisation of the debts and to evolve means for faster recovery of NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field, namely, the Recovery of Debts Due to Banks and Financial Institutions Act.
The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.” (Emphasis supplied) 104.
Case Title: THE AUTHORISED OFFICER CENTRAL BANK OF INDIA Vs. SHANMUGAVELU (2024 INSC 80)
Case Number: C.A. No.-000235-000236 / 2024
