Rs 35,000 Short on EMD: Supreme Court Saves a SARFAESI Auction Sale and Orders Bank to Pay Interest on the Surplus

Case at a glance: The Supreme Court has upheld a 2009 SARFAESI auction of a Chetpet, Chennai property even though the successful bidders’ earnest money deposit was Rs 35,000 short. It held that the EMD requirement was a non-statutory, ancillary tender condition, and the shortfall caused no prejudice because 25% of the bid was deposited on the auction date. It also directed the bank to refund the surplus sale proceeds of Rs 1,33,94,054 to the borrower with 7% annual interest.

The borrower’s cash-credit account, with dues of Rs 88,52,741 against an Rs 85 lakh limit, was declared an NPA and a Section 13(2) demand notice issued on 1 August 2008. The bank’s sale notice of 18 March 2009 fixed the auction for 24 April 2009 and required offers with an EMD of Rs 21,50,000, stating that “the offer without earnest money deposit will be rejected.” The appellants bid with an EMD of Rs 21,15,000 and emerged highest at Rs 2,17,40,000, then deposited a further amount to make up 25% of the bid.

The DRT dismissed the borrower’s challenge on 1 October 2009, the balance was paid on 5 October and the sale certificate was registered on 15 October 2009. But the DRAT in 2011, and again on remand in 2012, held the auction non-compliant with Rule 8(5) of the Security Interest (Enforcement) Rules and the notice terms, and the Madras High Court dismissed the writ petitions on 22 March 2013.

The Key Question Before the Court

Does a small shortfall in the earnest money deposit invalidate a SARFAESI auction bid, and what must a bank do with surplus sale proceeds?

Essential and Ancillary Tender Conditions

Surveying the tender-law precedents including Poddar Steel, (1991) 05 SC CK 0016, Central Coalfields, (2016) 08 SC CK 0181, Vidarbha Irrigation, (2019) 01 SC CK 0083, G.J. Fernandez, (1990) 02 SC CK 0042 and B.S.N. Joshi, (2006) 10 SC CK 0006, the Court distinguished essential eligibility conditions, which must be enforced strictly, from ancillary conditions, where the authority may deviate and substantial compliance may suffice if no one is prejudiced. The EMD requirement here was non-statutory and served to weed out non-serious bidders; since the 25% deposit under Rule 9(3) was made on the auction date, the shortfall caused no prejudice to the other bidder or to the borrower. It therefore “does not affect the validity of the bid of the auction-purchasers in any manner.”

The plea that the balance was paid late had not been raised before the DRT or DRAT; in any event the notice permitted extension, the bank’s letter of 4 June 2009 indicated one, and payment came within days of the DRT’s decision. On the surplus, the Court held that “the Bank ought to have kept the aforesaid balance amount in an interest-bearing account”, and the borrower should not suffer for the bank’s omission.

What the Court Actually Held

• The High Court’s judgment of 22 March 2013 and the DRAT’s order of 20 June 2011 were set aside, and the auction-purchasers’ appeals and the bank’s appeal were allowed.
• A non-statutory EMD condition is ancillary; a minor shortfall causing no prejudice does not invalidate the bid.
• The late-payment objection, not raised before the DRT or DRAT, failed.
• The bank must refund Rs 1,33,94,054 to the borrower with 7% annual interest from 23 March 2010 until payment.

Why This Judgment Matters

• It brings settled tender-law principles into SARFAESI auctions.
• It protects auction-purchasers against technical challenges raised years later.
• It reminds banks that surplus sale proceeds belong to the borrower and must earn interest.

What Should Advocates Take Away From the Judgment?

For Auction-Purchasers and Banks

• Identify whether a condition is statutory or merely contractual before treating non-compliance as fatal.
• Record any extension of time for payment in writing.

For Borrowers

• Raise every objection at the DRT stage; new grounds later may not be entertained.
• Claim interest where surplus proceeds were held back in a non-interest account.

Key Takeaways

Frequently Asked Questions

Yes. The Supreme Court set aside the DRAT and High Court orders and upheld the auction-purchasers’ bid.

The EMD requirement was non-statutory and ancillary, and the 25% deposit made on the auction date meant nobody was prejudiced.

The surplus of Rs 1,33,94,054 with 7% annual interest from 23 March 2010.

Conclusion