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Judgment
V. Ramasubramanian, J.—A person, who participated in an auction conducted by the respondent-Bank under the SARFAESI Act, came
up with the above writ petition seeking refund of the earnest money deposited by him. However, after the writ petition was filed, the writ petitioner
died and his wife and children have been substituted in his place. We have heard Mr.T.Arockiadas, Learned Counsel for the petitioners and
Mr.Jayesh B.Dolia, Learned Counsel for the respondent-Bank.
In respect of credit facilities availed by one K.P.Nagarajan, Proprietor of M/s. L.G. Textiles, in the year 2001, the respondent-Bank initiated
proceedings in O.A.No.360 of 2004 on the file of the Debt Recovery Tribunal, Madurai, for recovery of a sum of Rs. 74,98,000/-. Subsequently,
the Bank switched over to the SARFAESI Act and issued a demand notice u/s 13(2) on 27.8.2008. It was followed by a possession notice dated
28.02.2009. After taking possession, the Bank issued a sale notice dated 08.5.2009, fixing the auction sale on 15.6.2009. Since there was no
bidders, another auction was fixed on 26.02.2010. Even this auction did not materialise. The properties were put up for auction for a third time on
02.8.2010.
In the auction held on 02.8.2010, the petitioner was declared as the successful bidder in respect of item Nos.1 and 5. In respect of item No. 4,
a person by name Karthik was the successful bidder.
On the date of the auction, namely 02.8.2010, the Bank called upon the petitioner to pay 25% of the bid amount immediately. The bid amount
offered by the petitioner for item No. 1 was Rs. 44,80,000/-. Therefore, as per the terms and conditions of the auction sale, the writ petitioner was
supposed to pay immediately, 25% of the bid amount, namely, Rs. 11,20,000/- and he was supposed to pay the balance amount within 15 days.
Similarly, the highest bid for item No. 5 was Rs. 27,55,000/- and the petitioner was supposed to pay 25% of the same immediately.
The writ petitioner did not pay 25% of the bid amount. On the contrary, the writ petitioner issued a legal notice dated 07.8.2010 calling upon
the Bank to refund the amount paid on the date of the auction, namely Rs. 3,57,000/-, on the ground that the properties were encumbered and that
the encumbrances were not notified. However, the respondent-Bank forfeited the earnest money deposit made by the writ petitioner, on
16.8.2010. Therefore, after making a representation dated 19.4.2011, the writ petitioner came up with the above writ petition.
The main ground on which the writ petitioner seeks refund of the earnest money deposit made by him is that the property did not even stand in
the name of the defaulter and that it had already been alienated. According to the writ petitioner, the Bank failed to disclose encumbrances and that
the provisions of Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002, stood violated.
Per contra, it is the contention of the Bank that a sale made by a secured creditor in terms of the provisions of the SARFAESI Act, would
always convey a title free of encumbrances. All encumbrances made after the creation of the security interest in favour of the Bank, are of no
consequence. More over, it is also contended by the Bank that the auction sale was only in ""as is where is and as is what is"" basis and that
therefore, a person who participated in the auction subject to such terms and conditions, cannot go back and seek refund of the part payment.
In the light of the rival contentions, the question that arises for consideration is as to whether the Earnest Money Deposit made by the writ
petitioner is liable to be refunded to the writ petitioner or forfeited by the Bank.
A perusal of the auction sale notice shows that five items of properties were brought to sale. The upset price in respect of item No. 1 was fixed
at Rs. 44,00,000/- and the Earnest Money Deposit for the same was fixed at Rs. 2,20,000/-. Similarly, the upset price for item No. 5 was fixed as
Rs. 27,40,000/- and the Earnest Money Deposit was fixed at Rs. 1,37,000/- lakhs. The auction sale notice states that tender forms and the
conditions could be obtained by the participants from the Bank by paying a non refundable fee of Rs. 500/- and that the interested parties were
also entitled to inspect the property between 10 am and 4 pm on 26.7.2010. Offers were to be made in sealed covers along with the demand draft
for Earnest Money Deposit on or before 31.7.2010 and the auction was proposed to be held at 11 am on 02.8.2010. The person whose offer is
accepted should pay 25% of the bid amount immediately and the balance of the amount within 15 days.
In the schedule to the auction sale notice, the Bank furnished a tabular statement containing the description of the property, upset price fixed,
Earnest Money Deposit to be made and prior encumbrances. The last column in the tabular statement of the schedule to the auction sale notice
related to prior encumbrances. Under the said column, it was indicated that the sale would be subject to a partition suit pending on the file of the
District Munsif Court, Erode, instituted by a minor son of one of the guarantors.
In the light of the contents of the auction sale notice, we must see if the forfeiture of the Earnest Money Deposit made by the respondent is right
or wrong.
In Chinnasamy Pillai and Others Vs. K. Marappan and Another, , Abdul Hadi, J, was concerned with suits for recovery of the advance
amounts paid under agreements of sale. In that context, the learned Judge referred to the decision of the Supreme Court in Shri Hanuman Cotton
Mills and Others Vs. Tata Air Craft Limited, and came to the conclusion that unless the term Earnest Money was used or there is a plea that the
money was a guarantee for the fulfilment of the contract, it cannot be forfeited. If money was given only as advance, the same cannot be forfeited.
In M/s. Gemini Foundation Vs. V.B. Giri and 13 others, an auction purchaser in respect of two properties, deposited 25% of the value of one
property and 100% of the bid amount in respect of another property. But, the balance amount was not paid within the time granted. Therefore, the
sale was cancelled by a single Judge and the application of the highest bidder for refund of 25% of the value deposited by him, was dismissed by
the single Judge. The highest bidder filed an appeal and the Division Bench was confronted with the question as to whether an auction purchaser
was entitled to refund of the said amount. Holding that the power of the Court under Order XXI, Rule 86, CPC, to forfeit the deposit money to
the Government, was a matter of discretion required to be exercised in a judicious manner, the Division Bench of this Court held that the entire
amount of Rs. 20,00,000/- could not have been forfeited. Therefore, the Division Bench directed refund of sum of Rs. 15,00,000/-, after
deducting a sum of Rs. 6,00,000/- towards loss by way of investment and interest.
In A. Murali and Co. Vs. State Trading Corporation of India Ltd., Prabha Sridevan, J, was confronted with a question relating to the validity
of the forfeiture of a part of the Earnest Money Deposit in proportion to the reduced off-take of material by the auction purchaser. After referring
to Sections 73 and 74 of the Contract Act and various decisions of this Court, the learned Judge held that the test to find out the validity of the
forfeiture is to see if the Earnest Money is a genuine pre-estimate of damages or only a stipulation in terrorem.
In Kamil and Brothers Registered partnership firm Vs. Central Dairy Farm U.P. Pashu Dhan Udyog Ltd. and Bank of India, a learned Judge
of the Allahabad High Court held that the security amount cannot be forfeited without proving any actual loss or damage. But, the said case arose
out of a contract for supply of some material and the deposit of an amount as security for the due performance of the said contract.
In Jai Logistics Vs. The Authorized Officer Syndicate Bank, , a Division Bench of this Court, to which one of us was a party (D.Murugesan,J),
had an occasion to consider the effect of Rule 8(6)(f) of the Security Interest (Enforcement) Rules, 2002. It was held therein that the auction
purchasers should also be put on notice of the encumbrances relating to the property, in the light of the said rule. Therefore, on the basis of the
aforesaid decisions, it is contended by the Learned Counsel for the writ petitioner that the forfeiture of the Earnest Money Deposit by the
respondent-Bank was illegal.
But, in the case on hand, we have seen from the auction sale notice that in the last column of the table under the schedule to the notice, the
Bank has indicated the pendency of a partition suit at the instance of a minor son of one of the guarantors on the file of the District Munsif Court,
Erode. The auction sale notice was issued on 28.6.2010. The last date for submission of tender forms was 31.7.2010 and the tenders were to be
opened and auction conducted only on 02.8.2010. Therefore, all the participants had a time of more than 30 days to undertake a search in the
records of the Sub-Registrar and conduct an enquiry that was required to be made by a prudent purchaser, especially in the light of the disclosure
made in the auction notice that there was a partition suit pending at the instance of a minor son of one of the guarantors. The petitioner relies upon
two encumbrance certificates, one dated 09.8.2010 relating to item No. 1 and another dated 04.8.2010 relating to item No. 5. It appears that the
mortgage was created in favour of the respondent-Bank in December 2000. The encumbrance certificate relating to item No. 1 dated 09.8.2010
does not disclose any encumbrance before the date of creation of mortgage. It appears that there was a sale agreement dated 22.01.1997, but the
same was cancelled on 19.01.1998. Therefore, as on the date of creation of the mortgage, namely 08.12.2000, there was no encumbrance insofar
as item No. 1 is concerned.
Insofar as item No. 5 is concerned, the borrower Nagarajan got the property only on 13.12.2000 under a sale deed dated 08.11.2000.
Therefore, even in respect of this property, namely item No. 5, there was no encumbrance on the date of creation of mortgage. After the creation
of mortgage in favour of the bank, the borrower appears to have created certain encumbrances in respect of both the properties. It would be
useful to extract the encumbrances so created, in respect of each of these properties, in the form of a tabular statement, for easy appreciation.
Therefore, they are presented as follows:
Sl. No. Nature of the document and By whom In favour of Remarks
date
1 Partition deed dated Ganesan and Nagarajan Ganesan and Nagarajan
17.10.2003 Both Nagarajan and Ganesan are indebted to the
Bank. Therefore, this partition deed did not make
any difference.
2 Mortgage deed dated K.P. Ganesan Chithode Uzhavar Pani Co-
29.10.2003 operative Society Though this mortgage is only a
second mortgage, it was also discharged by K.P.
Ganesan on 22.02.2006, as seen from a receipt,
which is also registered and reflected in the
encumbrance certificate.
3 Mortgage deed dated P. Nagarajan Chithode Uzhavar Pani Co-
29.10.2003 operative Society Though this mortgage is only a
second mortgage, it was also discharged by K.P.
Ganesan on 22.02.2006, as seen from a receipt,
which is also registered and reflected in the
encumbrance certificate. (Discharged on the same
day).
4 Conveyance deed dated K.P. Ganesan, Kuzhandaisamy Gounder and
29.3.2007 others R. Sivaraman The sale is long after the
mortgage in favour of the Bank.
5 Conveyance deed dated Venkatesh R. Sivaraman
14.11.2007
6 Conveyance deed dated R. Sivaraman S. Nirmala
27.02.2009
7 Conveyance deed dated R. Sivaraman A. Palanisamy
03.9.2009
8 Conveyance deed dated R. Sivaraman Neelaveni
03.9.2009
9 Conveyance deed dated R. Sivaraman Stalin
16.9.2009
10 Conveyance deed dated R. Sivaraman R. Lalithamani
28.10.2009
11 Conveyance deed dated R. Sivaraman M. Kasinathan
27.11.2009
12 Conveyance deed dated R. Sivaraman S. Kalaiselvi
22.01.2010
13 Conveyance deed dated R. Sivaraman A. Chitra
14.6.2010
These are sales by subsequent purchaser R.Sivaraman. The conveyance covered several items of properties ,one of which is the land in survey
No. 166/10. This survey No. 166/10 alone was the mortgaged property in favour of the bank. Therefore, these conveyances are only subject to
the mortgage and the rights of the Bank. More over, these sales are actually after the notice dated 27.8.2009 u/s 13(2) and after the possession
notice dated 28.02.2009. Therefore, they are null and void.
Encumbrances in respect of item No. 5
Sl. No. Nature of the document and By whom In favour of Remarks
date
1 Settlement deed dated P. Nagarajan Papathi The settle
03.11.2003 is the mother of the settlor, who
is the mortgagor.
2 Mortgage deed dated Papathi Chithode Uzhavar Pani
24.11.2003 Co-operative Society
3 Agreement dated 27.5.2005 Between R. Loganathan and L.
Mohan Kumar
4 Conveyance deed dated Papathi T.M. Ramasamy
14.9.2005
5 Gift deed dated 16.9.2005 Papathi Gangapuram Panchayat
Union
6 Conveyance deed dated Papathi Rajaji
16.9.2005
7 Conveyance deed dated Papathi C. Jaganathan and G.
07.11.2005 Selvakumar
8 Conveyance deed dated Papathi G. Sampathkumar
07.11.2005
9 Conveyance deed dated Papathi T. Sekar
07.11.2005
10 Conveyance deed dated Papathi T. Venugopal
07.11.2005
11 Conveyance deed dated Papathi T. Iyappan and others
24.11.2005
12 Discharge of mortgage dated Chithode Uzhavar Pani Co-
05.9.2006 operative Society Papathi
13 Conveyance deed dated M. Ponnusamy K.P. Ganesan
20.12.2007
14 Gift deed dated 30.6.2008 E. Ganesan Tamil Nadu
Governor/Gangapuram
Panchayat President
15 Conveyance deed dated E. Ganesan K.A. Manikandan
04.7.2008
16 Conveyance deed dated Papathi & Others Poovathal
31.8.2009
17 Conveyance deed dated Papathi & Others A.
31.8.2009 Thilagavathy
18 Conveyance deed dated Papathi & Others A.
12.11.2009 Thilagavathy
19 Conveyance deed dated Papathi & Others G. Murugesan
06.01.2010 & V. Chitra
20 Mortgage deed dated Papathi & Others P.
25.3.2010 Kuppusamy
21 Agreement dated 06.4.2010 Between Papathi, Ganesan,
Kavya, Nagarajan, Gopika,
Thilgavathy, Vijayakumar and
Thulasimani
22 Conveyance deed dated Papathi & Others Velumani,
23.4.2010 Shanti, R. Kumaran & K.
Kalyani
The settlement of the property by a borrower in favour of his own mother is after the mortgage in favour of the Bank. All other transactions are by
the mother. Some of the conveyances are even after the possession notice by the Bank.
It is interesting to note that the certificate of encumbrances obtained by the writ petitioner in respect of item No. 5 is dated 04.8.2010, which
was just two days after the auction sale. Similarly, the certificate of encumbrance in respect of item No. 1 was applied on 09.8.2010 by the writ
petitioner, 5 days after the auction sale. There is no explanation in the affidavit as to why the writ petitioner did not take care to apply for the
encumbrance certificate from the date of the advertisement, namely 28.6.2010, till he submitted his tender on 31.7.2010. What the writ petitioner
had done within 2 days of the date of the auction, could have been and should have been done by him, when he had 33 days time from the date of
the paper publication upto the date of auction.
Keeping the above facts in mind, let us now turn to the statutory provisions. Section 13(4)(a) of the Act empowers the secured creditors to
take possession of the secured assets and also sell the same for realising their dues. The procedure for the sale of a secured asset, if it is an
immovable property, is detailed in Rule 8 of the Security Interest (Enforcement) Rules, 2002. Sub-rule (6) of Rule 8 obliges the Authorised Officer
to serve on the borrower, a notice of 30 days, for the sale of the secured asset. The proviso to Sub-rule (6) imposes yet another obligation on the
Authorised Officer, namely, to cause a publication in two leading newspapers, if the sale of the secured asset is effected either by inviting tenders
from the public or by holding public auction. The proviso also details the matters that should be included in the public notice.
The matters that require to be mentioned in the public notice issued in terms of the proviso to Rule 8(6) are as follows:-
(i) The description of the property including the details of the encumbrances known to the secured creditor.
(ii) The secured debt for recovery of which the property is to be sold.
(iii) Reserve price.
(iv) Time and place of public auction.
(v) Deposit of Earnest Money and
(vi) Any other thing that the Authorised Officer considers material for a purchaser to know in order to judge the nature and value of the property.
The obligation of the Authorised Officer to include in the public notice issued under Rule 8(6), the details of the encumbrances known to the
secured creditor, is actually traceable to Clause (a) under the proviso to Rule 8(6). Since the obligation to disclose encumbrances is inbuilt in
Clause (a) of the proviso itself, there is no necessity even to fall back upon Clause (f) under the proviso to Rule 8(6). Clause (f) may relate to
matters other than encumbrances, such as pendency of suits etc., subject to the condition that the secured creditor is aware of the same. In this
case, the secured creditor appears to be aware of the pendency of a partition suit and they have disclosed the same in the last column of the table
given in the auction sale notice. Therefore, the secured creditor has actually fulfilled the requirement of Clause (f) under the proviso to Rule 8(6).
In so far as the ratio laid down in Jai Logistics Jai Logistics Vs. The Authorized Officer Syndicate Bank, is concerned, it must be clarified that
the obligation on the part of the Authorised Officer to disclose the encumbrances, is limited only to ""those encumbrances known to the secured
creditor"". Since the very wording of Clause (a) under the proviso to Rule 8(6) is of a restrictive nature, there is no scope for expanding the same to
all kinds of encumbrances created by the borrower or guarantor behind the back of the secured creditor. The ratio laid down in Jai Logistics,
cannot be understood to mean that the secured creditor as an obligation to obtain an encumbrance certificate upto the period one day preceding
the date of publication of the auction sale notice. Reading such an obligation into Clause (a) under the proviso to Rule 8(6) would actually
tantamount to some kind of a tacit approval of all illegal alienations made or encumbrances created by the mortgagor after the creation of the
security interest.
As a matter of fact, the statutory provisions make it clear that a sale could take place only after the expiry of 30 days from the date of the
public notice. This 30 days time is intended to serve two purposes. One for the borrower to gather resources and repay the loan and another for
all intending purchasers to make sufficient enquiries as a person of normal diligence and ordinary prudence would do while buying any immovable
property. The purport of Rule 8(6) cannot be extended to such an extent that it obliterates the liability of the purchaser to undertake due diligence
and to scrutinise the title to the property. Therefore, the obligation of the Authorised Officer is only to disclose the encumbrance that had come to
the notice of the secured creditor. It is for the auction purchaser to apply for encumbrance certificates, in the time of 30 days made available to the
intending buyers to see if there are any encumbrances.
Having clarified the legal position on the purport of Rule 8(6), we must now pass on to what happened on the date of the auction viz.,
2.8.2010 with reference to the provisions of Rule 9 of the Security Interest (Enforcement) Rules, 2002. Rule 9(2) of the Rules require the sale to
be confirmed in favour of the purchaser who has offered the highest sale price. However, this confirmation by the Authorised Officer is subject to
the confirmation by the secured creditor. In other words, Rule 9(2) speaks of two confirmations. The first confirmation is by the Authorised Officer
and the next confirmation is by the secured creditor. The first confirmation can be taken to be provisional and the next confirmation can be taken to
be final, since the first confirmation by the Authorised Officer is made, by the very language of Rule 9(2), as subject to the next confirmation by the
secured creditor.
Even before or while crossing the stage of Rule 9(2), a contingency may arise in the form of the highest bidder not making the deposit of 25%
of the bid amount. That contingency is taken care of Rule 9(3). Rule 9(3) reads as follows:-
(3) On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty-five per cent of the amount of the sale price, to
the authorised officer conducting the sale and in default of such deposit, the property shall forthwith be sold again.
A reading of Rule 9(3) shows that if the highest bidder fails to pay a deposit of 25% of the amount to the Authorised Officer immediately, the
property should be forthwith sold again. It is not clear from Rule 9(3) whether it indicates a re-auction immediately at the same time or the
acceptance of the second highest offer. In either case, the margin or difference between the highest bid and the next highest bid or the margin
between the highest bid and the amount for which the property is sold will be immediately known. This difference can be taken to be a loss
suffered by the secured creditor on account of the failure of the auction purchaser to deposit the money. An Authorised Officer or a secured
creditor will be fully justified in forfeiting the Earnest Money to the extent of the loss so suffered by the Bank, since it will be in tune with Sections
73 and 74 of the Contract Act.
In the case on hand, the writ petitioner did not deposit 25% of the bid amount immediately in terms of Rule 9(3). Therefore, the Bank ought to
have sold the property forthwith as mandated by Rule 9(3). If this had been done, the question whether the Earnest Money Deposit could be
forfeited and the question as to what extent it could be forfeited could have been easily found out. But unfortunately, the Bank did not comply with
the second part of Rule 9(3). The Bank simply kept on demanding 25% of the bid amount. Therefore, it is not possible to know the extent of loss
that the Bank suffered on account of the failure of the purchaser to deposit 25% of the amount.
We also wish to point out that there are two kinds of default that the highest bidder in an auction could commit. The first type of default is when
he fails to deposit 25% of the bid amount immediately after being declared the highest bidder. The next or second type of default that could be
committed by the highest bidder is the stage at which he is required to pay 75% of the bid amount, after depositing 25% on the date of the auction.
If the default committed by the highest bidder falls under the first category, Rule 9(3) indicates the action to be taken. If the default falls under
the second category, Rule 9(5) prescribes the forfeiture of the entire deposit of 25%. Therefore, in cases falling under the second category, there is
no other option except forfeiture of the 25% of the bid amount. In other words, there is a distinction between forfeiture of the earnest money and
the forfeiture of the deposit of 25% made under Rule 9(3). The forfeiture of the deposit of 25% made under Rule 9(3), is taken care of by Rule
9(5). But the forfeiture of the earnest money deposit is not taken care of by the Rules and hence the Bank may have to fall back upon the terms
and conditions of sale.
In this case, the Bank has also failed to produce a copy of the terms and conditions of sale attached to the application. The public notice issued
on 28.6.2010 fixing the date of auction as 2.8.2010, does not contain an indication about the forfeiture. We do not know whether there was a
clause for forfeiture of the earnest money deposit in the terms and conditions of tender attached to the application forms. Therefore, in view of the
failure of the Bank to produce a copy of the tender conditions and also their failure to follow the second part of Rule 9(3), we have no alternative
except to grant relief to the writ petitioner, despite our finding that the Bank cannot be accused of non-disclosure of encumbrances and despite our
interpretation to Rule 8(6). In view of the above, the writ petition is allowed and a direction is issued to the respondent-Bank to refund the amount
of Rs. 3,57,000/- to the petitioners, within a period of 4 weeks from the date of receipt of a copy of this order. However, there shall be no order
as to costs. Consequently, M.P.Nos.1 and 2 of 2011 are closed.