Reinitiation of SARFAESI Proceedings Not a Valid Ground to Claim Refund of Forfeited Earnest Money under Rule 9(5)
- REEDLAW
- May 11
- 3 min read
High Court held that the reinitiation of SARFAESI proceedings by the bank does not constitute a valid ground to seek refund of forfeited earnest money under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002.
The Division Bench of the Allahabad High Court comprising Justice Shekhar B. Saraf and Justice (Dr.) Y.K. Srivastava held that the forfeiture of 25% of the bid amount under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, is a mandatory statutory consequence upon the auction purchaser's default in depositing the balance amount. Such forfeiture cannot be reversed on equitable grounds unless exceptional or extraneous circumstances demonstrably prevented compliance. The Court further clarified that the mere withdrawal and reinitiation of SARFAESI proceedings by the bank does not constitute such an “exceptional circumstance”.
The High Court considered a writ petition filed under Article 226 of the Constitution of India, in which the petitioner challenged the forfeiture of ₹17.49 lakhs—representing 25% of the bid amount deposited in an e-auction held on 29.12.2023—by the respondent Bank under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002. The petitioner admitted that he failed to deposit the remaining 75% of the consideration within the stipulated time but argued that the forfeiture was unjust, especially since the Bank later withdrew the SARFAESI action and reinitiated fresh proceedings on the same property on 18.11.2024.
The petitioner relied on equitable principles, asserting that the forfeiture amounted to unjust enrichment and referred to the Supreme Court’s judgment in The Authorised Officer, Central Bank of India v. Shanmugavelu, REEDLAW 2024 SC 02201, specifically paragraphs 108–118, to argue for refund in exceptional circumstances. It was contended that since the original SARFAESI action was withdrawn, the forfeiture lacked legal justification.
In response, the Bank argued that the forfeiture was a direct consequence of the petitioner’s default and that The Authorised Officer, Central Bank of India v. Shanmugavelu, REEDLAW 2024 SC 02201, made it clear that equity cannot override the express statutory provision under Rule 9(5). The Bank highlighted that exceptional circumstances under which a refund may be warranted only arise when external, uncontrollable factors prevent the auction purchaser from making the payment, not actions taken by the Bank after the default.
The Court examined the relevant portions of The Authorised Officer, Central Bank of India v. Shanmugavelu, REEDLAW 2024 SC 02201, particularly paragraphs 112 and 113, which reiterated that forfeiture under Rule 9(5) is a legal consequence unaffected by later developments or equitable arguments. Citing other Supreme Court precedents, the Court underscored that where statutory provisions are explicit, equity cannot dilute or displace them.
Ultimately, the Court held that the re-initiation of SARFAESI proceedings by the Bank did not constitute an "exceptional circumstance" under which the forfeiture could be reversed. Since the petitioner failed to demonstrate any extenuating factors that caused the default, the High Court concluded there was no scope for interference. Accordingly, the writ petition was dismissed.
Mr. Vipul Pandey, Advocate, represented the Petitioner.
Mr. Anil Kumar Bajpayee and Mr. Ashish Agrawal, Advocates, appeared for the Respondents.
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