2024 (2) TMI 291 - SC - Indian Laws

Forfeiture of the earnest money deposit by the appellant bank - Applicability of underlying principle of Section(s) 73 74 respectively of the Indian Contract Act, 1872 - principles of unjust enrichment - quantum of forfeiture under the SARFAESI Rule is limited to the extent of debt owed or not - case of exceptionable circumstances or not. Legislative History and Scheme of the SARFAESI Act - HELD THAT - Section 13 of the SARFAESI Act contains the provisions relating to the enforcement of the security interest and the manner in which the same may be done by the secured creditor without the intervention of the court or ribunal in accordance with its provisions - This Court in M/S MADRAS PETROCHEM LTD. AND ANR. VERSUS BIFR ORS. 2016 (2) TMI 132 - SUPREME COURT , recapitulated the object behind the enactment of the SARFAESI Act and in that context examined the purpose of Sections 13, 35 and 37 respectively of the SARFAESI Act and held that In conclusion, it is held that the interim order dated 17.1.2004 by the Delhi High Court would not have the effect of reviving the reference so as to thwart taking of any steps by the respondent creditors in this case under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This is because the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 prevails over the Sick Industrial Companies (Special Provisions) Act, 1985 to the extent of inconsistency therewith. Section 15(1) proviso 3 covers all references pending before the BIFR, no matter whether such reference is at the inquiry stage, scheme stage, or winding up stage. The Orissa High Court is not correct in its conclusion on the interpretation of Section 15(1) proviso 3 of the Sick Industrial Companies (Special Provisions) Act, 1985. Applicability of Section(s) 73 74 of the 1872 Act to Forfeiture under the SARFAESI Rules - HELD THAT - It appears that the High Court whilst passing the impugned order was of the view that the legislature had provided for forfeiture under the SARFAESI Rules as a relief to the secured creditor for the breach of obligation by the auction purchaser. Thus, it was of the view that Section 73 of the 1872 Act will be applicable to forfeiture under Rule 9(5) of the SARFAESI Rules and any forfeiture will only be allowed to the extent of the loss or damage suffered by the secured creditor - This Court in C. Natarajan 2023 (4) TMI 1232 - SUPREME COURT whilst dealing with a similar issue pertaining to the applicability of Section(s) 73 and 74 of the 1872 Act on forfeiture under Rule 9(5) of the SARFAESI Rules, answered the same in a negative. Forfeiture under the SARFAESI Rules - HELD THAT - In Madras Petrochem 2016 (2) TMI 132 - SUPREME COURT this Court made a pertinent observation that Sections 35 and 37 respectively of the SARFAESI Act form a unique scheme of overriding provisions, however the scope and ambit of Section 37 is restricted only to the securities law. The SARFAESI Act is a special legislation with an overriding effect on the general law, and only those legislations which are either specifically mentioned in Section 37 or deal with securitization will apply in addition to the SARFAESI Act. 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. Concept of Earnest-Money Law on Forfeiture of Earnest-Money Deposit - HELD THAT - A 5-Judge Bench of this Court in its decision in Fateh Chand v. Balkishan Dass 1963 (1) TMI 46 - SUPREME COURT , held that a forfeiture clause in an ordinary contract would fall within the meaning of the words any other stipulation by way of penalty of Section 74 of the 1872 Act, and thus only a reasonable amount can be forfeited. This Court in Satish Batra 2012 (10) TMI 595 - SUPREME COURT after taking note of the decisions in Delhi Development Authority v. Grihshapana Cooperative Group Housing Society Ltd. 1995 (2) TMI 457 - SUPREME COURT , V. Lakshmanan v. B.R. Mangalagiri Ors. 1994 (12) TMI 322 - SUPREME COURT and HUDA v. Kewal Krishnan Goel 1996 (5) TMI 439 - SUPREME COURT 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. The difference between an earnest or deposit and an advance part payment of price is now well established in law. Earnest is something given by the Promisee to the Promisor to mark the conclusiveness of the contract. This is quite apart from the price. It may also avail as a part payment if the contract goes through. But even so it would not lose its character as earnest, if in fact and in truth it was intended as mere evidence of the bargain. An advance is a part to be adjusted at the time of the final payment. 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. Earnest need not be money but may be some gift or token given. It denotes a thing of value usually a coin of the realm given by the Promisor to indicate that the bargain is concluded between them and as tangible proof that he means business. 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. Whether the sum in question is a deposit to ensure due performance of the contract or not is not dependent on the phraseology adopted by the parties or by the presence or otherwise of a forfeiture clause. The proportion the amount bears to the total sale price, the need to take a deposit intended to act in terrorem, the nature of the contract and other circumstances which cannot be exhaustively listed have to be taken into account in ascertaining the true nature of the amount. In essence the question is one of proper interpretation of the terms of a contract. The forfeiture under Rule 9(5) of the SARFAESI Rules is also taking place pursuant to the terms conditions of a public auction, it is not needed to dwell any further on the decision of Kailash Nath 2015 (1) TMI 1377 - SUPREME COURT 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. Law on the principle of Reading-Down a provision - HELD THAT - 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. This principle is rooted in the idea that courts should make every effort to preserve the validity of legislation and should only declare a law invalid as a last resort - When a court encounters a provision that, if interpreted according to its plain and literal meaning, might lead to constitutional or legal issues, the court may opt to read down the provision. Reading down involves construing the language of the provision in a manner that limits its scope or application, making it consistent with constitutional or legal principles. In B.R. Enterprises v. State of U.P. Ors. 1999 (5) TMI 498 - SUPREME COURT , this Court observed that the principles such as Reading Down emerge from the concern of the courts towards salvaging a legislation to ensure that its intended objectives are achieved. Thus, the principle of Reading Down a provision emanates from a very well settled canon of law, that is, the courts while examining the validity of a particular statute should always endeavour towards upholding its validity, and striking down a legislation should always be the last resort. Reading Down a provision is one of the many methods, the court may turn to when it finds that a particular provision if for its plain meaning cannot be saved from invalidation and so by restricting or reading it down, the court makes it workable so as to salvage and save the provision from invalidation. Rule of Reading Down is only for the limited purpose of making a provision workable and its objective achievable - 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. Thus, the High Court committed an egregious error by proceeding to read down Rule 9(5) of the SARFAESI Rules in the absence of the said provision being otherwise invalid or unworkable in terms of its plain and ordinary meaning without appreciating the purpose and object of the said provision. Whether, the forfeiture of the entire earnest-money deposit amounts to Unjust Enrichment? - HELD THAT - The concept of Unjust Enrichment is a by-product of the doctrine of equity and it is an equally well settled cannon of law that equity always follows the law. In other words, equity cannot supplant the law, equity has to follow the law if the law is clear and unambiguous - The consequence of forfeiture of 25% of the deposit under Rule 9(5) of the SARFAESI Rules is a legal consequence that has been statutorily provided in the event of default in payment of the balance amount. The consequence envisaged under Rule 9(5) follows irrespective of whether a subsequent sale takes place at a higher price or not, and this forfeiture is not subject to any recovery already made or to the extent of the debt owed. In such cases, no extent of equity can either substitute or dilute the statutory consequence of forfeiture of 25% of deposit under Rule 9(5) of the SARFAESI Rules. This Court in National Spot Exchange Ltd. v. Anil Kohli, Resolution Professional for Dunar Foods Ltd. 2021 (9) TMI 1156 - SUPREME COURT after referring to a catena of its other judgments, had held that where the law is clear the consequence thereof must follow. The High Court has no option but to implement the law. Thus, the High Court erred in law by holding that forfeiture of the entire deposit under Rule 9 sub-rule (5) of the SARFAESI Rules by the appellant bank after having already recovered its dues from the subsequent sale amounts to unjust enrichment. Whether Any Exceptional Circumstances exist to set aside the forfeiture of the earnest money deposit? - HELD THAT - This Court in its decision in ALISHA KHAN VERSUS INDIAN BANK (ALLAHABAD BANK) ORS 2021 (12) TMI 1483 - SUPREME COURT had directed the refund of the earnest-money deposit after forfeiture to the successful auction purchaser who was unable to pay the balance amount on account of the Pandemic. In C. Natarajan 2023 (4) TMI 1232 - SUPREME COURT , this Court while affirming the decision of Alisha Khan (supra) observed that after the earnest-money deposit is forfeited, the courts should ordinarily refrain from interfering unless the existence of very rare and exceptional circumstances are shown. In the case at hand, it is the respondent s case that he was unable to make the balance payment owing to the advent of the demonetisation. The same led to a delay in raising the necessary finance. It has been pleaded by the respondent that the appellant bank failed to provide certain documents to him in time as a result of which he was not able to secure a term loan - However, the aforesaid by no stretch can be said to be an exceptional circumstance warranting judicial interference. We say so because demonetization had occurred much before the e-auction was conducted by the appellant bank. As regards the requisition of documents, the sale was confirmed on 07.12.2016, and the respondent first requested for the documents only on 20.12.2016, and the said documents were provided to him by the appellant within a month s time i.e., on 21.01.2017. It may also not be out of place to mention that the respondent was granted an extension of 90-days time period to make the balance payment, and was specifically reminded that no further extension would be granted, in-spite of this the respondent failed to make the balance payment. Thus, the High Court committed an egregious error in passing the impugned judgment and order. There are no other option but to set aside the impugned judgment and order passed by the High Court. The appeals filed by the bank succeed and are hereby allowed.

Summary

Issues Involved:
1. Applicability of Section(s) 73 & 74 of the Indian Contract Act, 1872 to Forfeiture under the SARFAESI Rules.
2. Whether the forfeiture of the entire earnest-money deposit amounts to Unjust Enrichment.
3. Whether Exceptional Circumstances exist to set aside the forfeiture of the earnest money deposit.

Summary:

I. Applicability of Section(s) 73 & 74 of the Indian Contract Act, 1872 to Forfeiture under the SARFAESI Rules:
The court examined whether the principles of Section(s) 73 and 74 of the Indian Contract Act, 1872 (1872 Act) apply to the forfeiture of earnest-money deposit under Rule 9(5) of the SARFAESI Rules. It was concluded that the SARFAESI Act, being a special legislation with an overriding effect, does not allow the application of Section(s) 73 and 74 of the 1872 Act to forfeiture under Rule 9(5). The court emphasized that the legislature has explicitly provided for forfeiture under the SARFAESI Rules, which is not intended to be overridden by the general provisions of the 1872 Act. The court also noted that applying Section(s) 73 and 74 would undermine the effectiveness of the SARFAESI Act by allowing unscrupulous borrowers to game the auction process.

II. Whether the Forfeiture of the Entire Earnest-Money Deposit Amounts to Unjust Enrichment:
The High Court had reduced the forfeiture amount on the grounds of unjust enrichment, as the secured asset was sold at a higher price in a subsequent auction. However, the Supreme Court disagreed, stating that forfeiture under Rule 9(5) is a statutory consequence and not subject to the extent of recovery or subsequent sale prices. The court clarified that forfeiture does not constitute unjust enrichment as it is a legal consequence of the auction purchaser's default. The court emphasized that equity cannot override clear statutory provisions, and the forfeiture aims to ensure the sanctity and finality of the auction process under the SARFAESI Act.

III. Whether Exceptional Circumstances Exist to Set Aside the Forfeiture of the Earnest Money Deposit:
The court examined whether exceptional circumstances justified setting aside the forfeiture. The respondent's inability to pay the balance due to demonetization and delayed provision of documents by the appellant bank did not qualify as exceptional circumstances. The court noted that demonetization occurred before the auction, and the respondent was aware of the financial obligations and consequences. The court reiterated that only in very rare and exceptional cases, such as those involving unavoidable and unforeseen circumstances, should the forfeiture be set aside.

Conclusion:
The Supreme Court set aside the High Court's judgment, reinstating the forfeiture of the earnest-money deposit by the appellant bank. The appeals filed by the bank were allowed, and the respondent's application before the DRT-II was dismissed. The court emphasized the importance of adhering to the statutory provisions of the SARFAESI Act to ensure the effective recovery of debts and maintain the integrity of the auction process.