The Supreme Court Bench comprising Justices Ajay Rastogi and Bela M. Trivedi was hearing an appeal and ruled in favour of the appellant, declaring that the auction proceedings conducted by the secured creditor were invalid and ordering a fresh auction to be conducted.
The case involves a borrower who defaulted on a loan from Punjab National Bank (the first respondent). The bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 to take possession of the borrower's assets. The bank published an auction notice for the mortgaged property of the borrower with a reserve price of Rs. 1.19 crores.
The appellant participated in the auction and submitted the highest bid of Rs. 2,01,00,000/-, depositing earnest money of Rs. 11,19,000/-. However, the borrower appealed to the Debt Recovery Tribunal (DRT) against the auction notice, and an interim order was passed allowing the auction to proceed but keeping the confirmation of the sale in abeyance.
The appellant was unaware of the interim order and deposited 25% of the bid amount on July 27, 2013. Later, the DRT vacated the interim order, but the appellant was not informed of this development. Only on October 18, 2013, the appellant was informed that the balance amount needed to be paid, as the interim relief had been rejected. The appellant offered to pay the balance amount if the matter pending with the DRT was decided.
The first respondent informed the appellant on October 28, 2013, that failure to deposit the balance amount may result in the forfeiture of the earnest money. Without waiting for further action, the first respondent initiated re-auction proceedings. When the appellant became aware of this, they approached the High Court seeking to withhold the re-auction proceedings and requested the first respondent to execute the sale deed or refund the amount deposited.
The High Court allowed the re-auction proceedings to continue but made it subject to the outcome of the writ proceedings. The appellant was directed to deposit Rs. 1.77 crores with 10% interest. The subsequent auction was confirmed, and the sale deed was executed in favour of the subsequent purchaser. The High Court set aside the subsequent auction proceedings and directed the first respondent to execute the sale deed in favour of the appellant, with the deposited amount adjusted and returned to the subsequent auction purchaser with interest.
The subsequent auction purchaser challenged the High Court's order before the Division Bench, which upheld the re-auction proceedings but directed the first respondent to return the deposited amount to the appellant with accrued interest. The Division Bench left it open for the appellant to seek appropriate remedy for the amount forfeited.
The Supreme Court heard the appeal and considered the arguments presented by both parties. The appellant argued that they were entitled to a refund of the forfeited amount as there was no dispute that they were qualified to claim it. The first respondent argued that the forfeiture was justified under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 and that the appellant's actions deflated the distress value of the property.
After considering the facts and arguments, the Supreme Court found that the appellant was not informed of the pending proceedings before the DRT at the time of the auction and deposit. The Supreme Court also noted that the appellant had consistently expressed a willingness to pay the balance amount if the matter with the DRT was decided. The Apex Court held that the first respondent's decision to forfeit the earnest money was not supported by any evidence or order. The Supreme Court further observed that the subsequent auction's lower bid was a result of the appellant's involvement and that they should not be held solely responsible for the loss.
The Supreme Court Bench allowed the appeal and directed the first respondent to refund the forfeited amount to the appellant.