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TMI Blog2024 (2) TMI 291X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Enrich ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. - CJI. ( Dr. Dhananjaya Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as the original Auction-Purchaser. 3. These appeals are at the instance of a Nationalized Bank and are directed against the common judgment and order dated 27.10.2021 passed by the High Court of judicature at Madras in C.R.P No(s). 1892 2282 respectively of 2021 ( Impugned Order ) by which the High Court allowed the respondent s writ petition and held that the forfeiture of the earnest money deposit by the appellant bank could only be to the extent of the loss suffered by it. A. FACTUAL MATRIX 4. It appears from the materials on record that the appellant bank herein had sanctioned credit facilities to one Best and Crompton Engineering Projects against a parcel of land admeasuring 10581 sq.ft. (approx.) with superstructures situated in Survey Nos. 60 and 65/2, Block 6, Alandur village, Mambalam- Guindy, Chennai (for short the, Secured Asset ) as security interest in the form of a simple mortgage in lieu of the sanctioned credit. Sometime thereafter the said borrowers defaulted and the said loan account was classified as a nonperforming asset ( NPA ) by the appellant bank on 28.05.2013. 5. In order to recover its dues, the appellant bank took measures under the Securitizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d draft shall not be accepted as EMD amount. 8. Prospective bidders are advised to obtain user id and password which are mandatory for bidding in the above e-auction from M/s C1India Pvt. Ltd., helpline 01244302020/2021/2022/2023/2024 E-mail [email protected] or K.N. SHRINATH-9840446485. Passwords will be allotted only to those bidders who fulfil all the terms and conditions of e-auction and have deposited the requisite EMD. And for further property related query you may contact Mr. G.S. Prasad, Chief Manager, Central Bank of India, CFB, Chennai Tel. No. 044- 42625259 Mobile 9962029300 e-mail ID: [email protected] during officer hours i.e. 10 AM to 5 PM during the working days. 9. After Registration by the bidder in the Web-Portal, the intending bidder / purchaser is required to get the copies of the following documents uploaded in the Web Portal before last date of submission of the bid viz. i) Copy of the NEFT/RTGS Challan; ii) Copy of PAN Card; iii) Proof of Identification (KYC) viz. self-attested copy of Voter ID Card / Driving License / Passport etc. iv) Copy of proof of address; without which the bid is liable to be rejected. 10. The interested bidders, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as H1 and accordingly, the respondent was declared as the successful auction purchaser. 8. Pursuant to the aforesaid, the respondent on the same day deposited 25% of the bid amount i.e., Rs. 3,06,75,000/- as the earnest money deposit upon which, the appellant confirmed the sale of the Secured Asset in favour of the respondent vide its letter dated 07.12.2016 which inter-alia stipulated that in the event of default in payment of the balance amount, the sale shall be liable to be cancelled and the earnest money would be forfeited. The said sale confirmation letter is being reproduced below: - CFB/CHEN/2016-17/685 December 7, 2016 Mr. R Shanmugavelu Managing Director M/s Sunbright Designers Private Limited Module No 4, Readymade Garment Complex SIDCO Industrial Estate, Guindy Chennai-600032 Sir, Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in our borrowal account M/s Best Crompton Engineering Projects Limited E Auction of property held on 07/12/2016. We have to inform you that in the E auction held on 07/12/2016 pursuant to the E-auction sale notice dated 24/10/2016 issued by the Authorized Officer. In respect of Schedule property covered in the E auction sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : - CFB/CHEN/2016-17/718 December 20, 2016 Mr. R Shanmugavelu Managing Director M/s Sunbright Designers Private Limited Module No 4, Readymade Garment Complex SIDCO Industrial Estate, Guindy Chennai-600032 Sir, Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in the account M/s Best Crompton Engineering Projects Limited E Auction of property held on 07/12/2016. We may once again inform you that in the E auction held on 07/12/2016 pursuant to the E-auction sale notice dated 24/10/2016 issued by the Authorized Officer in respect of Schedule property covered in the E auction sale notice i.e., Property belonging to M/s Futuretech Industries Ltd. presently known as Candid Industries Ltd. Al that piece and parcel of the immovable property being industrial land together with the superstructure/shed standing thereon admeasuring 10581 sq. ft. or thereabouts comprised in survey nos. 60 part and 65/2 part, Block no. 6, Alandur village, Mambalam-Guindy Taluk, sub-registration district Alandur, registration district Chennai South presently situated at plot no. A-19, Thiru Vi Ka Industrial Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate East by: 80 feet Road, Wes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore Twenty Seven Lac only) in the E auction held on 07/12/2016 pursuant to the E auction sale notice dated 24/10/2016 issued by the Authorised Officer in respect of Schedule property covered in the E auction sale notice i.e., mortgaged property belonging to M/s Futuretech Industries Ltd presently known as Candid Industries Ltd. Schedule All that place and parcel of the immovable property being industrial land together with the superstructure/shed standing thereon admeasuring 10581 sq.ft. or thereabouts comprised in survey nos. 60 part and 65/2 part. Block no. 6, Alandur village, Mambalam-Guindy Taluk, sub-registration district Alandur, registration district Chennai South presently situated at plot no. A-19. Thiru Vi Ka Industrial Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate, and East by: 80 feet Road, West by: Service Road. You had remitted a total of Rs. 3,06,75,000 towards 25% of the sale price on (i.e. Rs. 96,20,000 on 7-12-2016 towards EMD and Rs. 2,10,55,000 on 08/12/2016 as per the terms of the bid. The balance sale price amount to Rs. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand only) was to be remitted by you before 15 days from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.03.2019, and it appears that pursuant to the same the sale was completed at an enhanced price of Rs. 14.76 crore i.e., more than the price fetched in the previous auction. 16. The DRT-II vide its order dated 06.05.2019 allowed the application being SA No. 143 of 2018 and directed the appellant bank to refund the earnest money deposited by the respondent after deducting a sum of Rs. 5,00,000/- towards the expenditure incurred. The DRT-II in its order observed that the respondent had requested the appellant bank to provide certain documents required for the grant of term loan which was not provided, as a result of which the term loan was not granted and the respondent failed to remit the balance amount. It further observed that as the Secured Asset had been sold for an amount higher than the initial bid, no loss was caused to the appellant. 17. The aforesaid order was challenged by the appellant before the Debt Recovery Appellate Tribunal, Chennai ( DRAT ) by way of RA(SA) No. 119 of 2019. The DRAT vide its order dated 30.07.2021 observed that the secured creditor was not entitled to forfeit the entire amount deposited, but partly allowed the appeal and enhanced the forfeiture fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Contract Act is in the nature of a jurisprudential philosophy that is accepted as a part of the law in this country. In short, it implies that only such of the loss or damage suffered by the party not in breach, may be recovered from the party in breach, as a consequence of the breach. It is possible that as a result of the breach, the party not in breach does not suffer any adverse impact. It is also possible, as in the present case, that as a consequence of the breach, the party not in breach obtains a benefit, in such cases, where no loss or damage has been occasioned to the party not in breach, such party cannot extract any money merely on account of such breach, as the entitlement in law to compensation is not upon the commission of breach, but only upon any loss or damage suffered as a consequence thereof. That is elementary. xxx xxx xxx 12. Rule 9(5) of the said Rules of 2002 has to be seen as an enabling provision that permits forfeiture in principle. However, such Rule cannot be conferred an exalted status to override the underlying ethos of Section 73 of the Contract Act. In other words, Rule 9(5) has to yield to the principle recognised in Section 73 of the Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support thereof, which is completely lacking in the judgment and order impugned dated July 30, 2021 passed by the appellate authority in the present case. xxx xxx xxx 20. Before parting, there is another aspect that has to be referred to for the completeness of the discussion. The purpose of the Act of 2002 is to ensure speedy recovery of the debt due to secured creditors covered by such statute. Towards such end, the provisions of the said Act and the Rules made thereunder give primacy to the secured creditor in initially assessing the quantum of debt due and in proceeding against the securities furnished for realising such debt due. However, no secured creditor, not even by embracing the provisions of the said Act of 2002, can unjustly enrich itself or obtain any more by way of resorting to any of the measures contemplated under Section 13(4) of the Act or otherwise than the debt that is due to it and the costs that may have been incurred in course of trying to recover the debt due. In a sense, if the forfeiture provision in Rule 9(5) of the said Rules is ready to imply what the secured creditor in this case seeks to, it may result in a secured creditor unjustly enriching itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the borrowers use subversive methods to hinder the auction process which may lead to erosion of the secured asset s value in light of reauctions. 27. In the last, Mr. Mehta submitted that clause 11 of the e-auction notice dated 24.10.2016 explicitly provided that the failure of the auction purchaser in paying the balance amount would result in forfeiture of the earnest-money deposit. 28. In such circumstances referred to above, the learned Senior Counsel prayed that there being merit in his appeals, the same be allowed and the impugned judgment and order of the High Court be set aside. D. SUBMISSIONS OF THE RESPONDENT 29. Dr. S. Muralidhar, the learned Senior Counsel appearing for the respondent on the other hand vehemently submitted that no error not to speak of any error of law could be said to have been committed by the High Court in passing the impugned judgment and order. 30. It was submitted that Section 35 of the SARFAESI Act only gives the Act an overriding effect over other laws, and is not applicable to the SARFAESI Rules made under it. Therefore Rule 9(5) of SARFASI Rules is only an enabling provision and cannot override the statutory provisions of the 1872 Act. 31. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a position to cope up with the speed in the adjudication of recovery cases. In the light of recommendations of the Tiwari Committee the special tribunals came to be set up under the provisions of the RDBFI Act referred to above for the recovery of huge accumulated NPA of the Bank loans. 37. On the continuing rise in number of Non-Performing Assets (NPA) at banks and other financial institutions in India; a poor rate of loan recovery and the failure of the existing legislation in redressing the difficulties of recovery by banks; the Narasimham Committee I II and Andyarujina Committee were constituted by the Government for examining and suggesting banking reforms in India. These Committees in their reports observed that one out of every five borrower was a defaulter, and that due to the long and tedious process of existing frame work of law and the overburdening of existing forums including the specialised tribunals under the 1993 Act, any attempt of recovery with the assistance of court/tribunal often rendered the secured asset nearly worthless due to the long delays. In this background the Committees thus, proposed new laws for securitisation in order to permit banks and financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce nonperforming assets by adopting measures for recovery or reconstruction. 40. This Court in Mardia Chemicals Ltd. Ors. v. Union of India Ors. reported in (2004) 4 SCC 311, examined the history and legislative backdrop that ultimately led to the enactment of the SARFAESI Act as under: - 34. Some facts which need to be taken note of are that the banks and the financial institutions have heavily financed the petitioners and other industries. It is also a fact that a large sum of amount remains unrecovered. Normal process of recovery of debts through courts is lengthy and time taken is not suited for recovery of such dues. For financial assistance rendered to the industries by the financial institutions, financial liquidity is essential failing which there is a blockade of large sums of amounts creating circumstances which retard the economic progress followed by a large number of other consequential ill effects. Considering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As an illustration, we could look at the scheme of mortgage in the Transfer of Property Act, which is critical to the work of financial intermediaries . One of the measures recommended in the circumstances was to vest the financial institutions through special statutes, the power of sale of the assets without intervention of the court and for reconstruction of assets. It is thus to be seen that the question of non-recoverable or delayed recovery of debts advanced by the banks or financial institutions has been attracting attention and the matter was considered in depth by the Committees specially constituted consisting of the experts in the field. In the prevalent situation where the amounts of dues are huge and hope of early recovery is less, it cannot be said that a more effective legislation for the purpose was uncalled for or that it could not be resorted to. It is again to be noted that after the Report of the Narasimham Committee, yet another Committee was constituted headed by Mr Andhyarujina for bringing about the needed steps within the legal framework. We are therefore, unable to find much substance in the submission made on behalf of the petitioners that while the Reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nths and conferment of power upon the Recovery Officer for expeditious execution of orders made by adjudicating bodies. 42. 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. 43. Rules 8 and 9 respectively of the SARFAESI Rules prescribe the procedure and formalities to be followed for the sale of immovable secured asset as per Section 13 of the SARFAESI Act. In the present lis, we are concerned with Rule 9 more particularly sub-rule (5) of the SARFAESI Rules which provides for forfeiture of 25% of the deposit made under sub-rule (3) in the event the successful auction purchaser fails to pay the balance amount within the stipulated time period under sub-rule (4). The said Rule reads as under: - 9. Time of sale, issue of sale certificate and delivery of possession, etc. (1) No sale of immovable property under these rules, in first instance shall take place before the expiry of thirty days from the date on which the public notice of sale is published in newspapers as referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him. Provided that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen days, from date of finalisation of the sale. (8) On such deposit of money for discharge of the encumbrances, the authorised officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly. (9) The authorised officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7) above. (10) The certificate of sale issued under sub-rule (6) shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard being had to the present economic scenario in the country, as reflected in parliamentary legislation. xxx xxx xxx 19. While this Act had worked for a period of about 7 years, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was brought into force, pursuant to various committee reports. The Statement of Objects and Reasons for this Act reads as follows: Statement of Objects and Reasons of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 1. Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to the banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. The Committee on the Financial System headed by Shri M. Narasimham has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provisions) Act, 1985. Clearly, therefore, the object of the 2000 Amendment to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 was to make the Sick Industrial Companies (Special Provisions) Act, 1985 prevail over it. 21. Regard being had to the poor working of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was brought into force in the year 2002. 22. This 2002 Act was brought into force as a result of two committee reports which opined that recovery of debts due to banks and financial institutions was not moving as speedily as expected, and that, therefore, certain other measures would have to be put in place in order that these banks and financial institutions would better be able to recover debts owing to them. xxx xxx xxx 24. The pivotal provision, namely, Section 13 of the said Act makes it clear that banks and financial institutions would now no longer have to wait for a tribunal judgment under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to be able to recover debts owing to them. They could, by f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract. When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. Explanation. In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. 49. The principles underlying Section 73 of the 1872 Act are well settled. The classic case dealing with remoteness of damages is Hadley Anr. v. Baxendale Ors. reported in (1843-60) ALL E.R. Rep. 461, wherein it was observed: Where two parties have made a contract which one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that ordinary course. This is the subject matter of the first rule in Hadley v. Baxendale 9 Exch. 341. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the ordinary course of things, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the second rule so as to make additional loss also recoverable. (5.) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result . (6.) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge the defendant could, as a reasonable man, foresee that a breach must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to pay to the other party the difference between the contract price of the articles agreed to be sold and the sum paid by the other party for purchasing another article on account of the default of the first party, but the first party has not to pay the compensation which the second party had to pay to third parties as he had not been told at the time of the contract that the second party was making the purchase of the article for delivery to such third parties. 52. Damages can be awarded only for the loss directly suffered on account of the breach and not for any remote or indirect loss sustained by reason of the breach of contract. The general rule is that where two parties enter into a contract and one of them commits breach, the other party will be entitled to receive as damages in respect of such breach of contract, such sum as may fairly and reasonably be considered arising naturally, that is according to the usual course of things, from such breach of contract itself or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it. If any special circumstances about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after, the sale of immovable property can take place. Under Rule 9(2) of the 2002 Rules, the sale is required to be confirmed in favour of the purchaser who has offered the highest sale price to the authorised officer and shall be subject to confirmation by the secured creditor. The proviso makes it clear that sale under the said Rule would be confirmed if the amount offered and the whole price is not less than the reserved price as specified in Rule 9(5). It is apparent that Rule 9(1) does not deal with the confirmation by the authorised officer. It only provides confirmation by the secured creditor. 9. Rule 9(3) makes it clear that on every sale of immovable property, the purchaser on the same day or not later than next working day, has to make a deposit of twenty-five per cent of the amount of the sale price, which is inclusive of earnest money deposited if any. Rule 9(4) makes it clear that balance amount of the purchase price payable shall be paid by the purchaser to the authorised officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the purchaser and the secured creditor. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deposited and on failure to deposit the amount, twenty-five per cent amount has to be forfeited and property has to be resold . ( Emphasis supplied ) 56. In Agarwal Tracom Private Limited v. Punjab National Bank Ors. reported in (2018) 1 SCC 626, this Court held that the act of forfeiture of the earnest money deposit by the secured creditor is a measure under Section 13(4) of the SARFAESI Act and thus, challengeable before the DRT under Section 17 of the SARFAESI Act. The relevant observations are reproduced below: - 28. We also notice that Rule 9(5) confers express power on the secured creditor to forfeit the deposit made by the auction purchaser in case the auction-purchaser commits any default in paying instalment of sale money to the secured creditor. Such action taken by the secured creditor is, in our opinion, a part of the measures specified in Section 13(4) and, therefore, it is regarded as a measure taken Under Section 13(4) read with Rule 9(5) . ( Emphasis supplied ) 57. 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 br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that it not only fosters economic growth but is also in tune with the intention of the law-makers in introducing a provision such as sub-rule (5) of rule 9, which though harsh in its operation, is intended to suppress the mischief and advance the remedy. If indeed section 73 and section 74, which are part of the general law of contract, were sufficient to cater to the remedy, the need to make sub-rule (5) of rule 9 as part of the Rules might not have arisen. Additionally, insertion of sub-rule (5) with such specificity regarding forfeiture must not have been thought of only for reiterating what is already there. It was visualized by the law makers that there was a need to arrest cases of deceptive manipulation of prices at the instance of unscrupulous borrowers by thwarting sale processes and this was the trigger for insertion of such a provision with wide words conferring extensive powers of forfeiture. The purpose of such insertion must have also been aimed at instilling a sense of discipline in the intending purchasers while they proceed to participate in the auction-sale process. At the cost of repetition, it must not be forgotten that the SARFAESI Act was enacted because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to advert to this question as it is one of general importance and are of the considered opinion that the answer must be in the negative. While the Contract Act embodies the general law of contract, the SARFAESI Act is a special enactment, inter alia, for enforcement of security interest without intervention of court. Rule 9(5) providing for forfeiture is part of the Rules, which have validly been framed in exercise of statutory power conferred by section 38 of the SARFAESI Act. Law is well settled that rules, when validly framed, become part of the statute. Apart from the presumption as to constitutionality of a statute, the contesting respondent did not mount any challenge to sub-rule (5) of rule 9 of the Rules. The applicability and enforcement of sub-rule (5) of rule 9 on its terms, therefore, has to be secured in appropriate cases. ( Emphasis supplied ) b) That if Rule 9(5) is interpreted in light of Section(s) 73 and 74 of the 1872 Act, then the very auction process could be set at naught by a mischievous or devious borrower by gaming the auction through sham bids. 18. Having regard to the terms of rule 9, the notice for auction constitutes the invitation to offer ; the bids ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SARFAESI Act); and second, to prohibit wrong doers from being benefitted by a liberal construction thereof. ( Emphasis supplied ) a. Forfeiture under the SARFAESI Rules: 59. We, first come to the aspect of applicability of Section 73 of the 1872 Act vis- -vis the SARFAESI Act, more particularly Rule 9(5) of the SARFAESI Rules. In Madras Petrochem (supra) 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 relevant portion is reproduced as under: - 39. This is what then brings us to the doctrine of harmonious construction, which is one of the paramount doctrines that is applied in interpreting all statutes. Since neither Section 35 nor Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 is subject to the other, we think it is necessary to interpret the expression or any other law for the time being in force in Section 37. If a literal meaning is given to the said expression, Section 35 will become completely otiose as all other laws will t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Suffice to say, that in view of the above discussion, the statutory right of redemption under the Act, 1882 will not be applicable to the SARFAESI Act at least in view of the amended Section 13(8) and any right of redemption of a borrower must be found within the SARFAESI Act in terms of the amended Section 13(8). ( Emphasis supplied ) 61. The legislature through Rule 9(5) of the SARFAESI Rules, has made a conscious departure from the general law by statutorily providing for the forfeiture of earnest-money deposit of the successful auction purchaser for its failure in depositing the balance consideration within the statutory period. No doubt, the forfeiture is a result of a breach of obligation, but the consequence of forfeiture in such case is taking place not because of the breach but because of operation of the statutory provision providing for forfeiture that is attracted as a result of the breach. 62. If the consequence of forfeiture was purely a matter of breach of contract, then there would have been no occasion for the legislature to specifically provide for forfeiture through the statutory provisions, and it would have simpliciter relegated the consequences of such brea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, we are not impressed with such submission. First, there was no challenge to the constitutional validity of Rule 9 sub-rule (5) of the SARFAESI Rules. Secondly, even as per Agarwal Tracom (supra) it is always open for a person aggrieved by an order of forfeiture under the SARFAESI Rules to challenge the same before the DRT under Section 17 of the SARFAESI Act. 67. As regards the contention that the SARFAESI Rules being a delegated legislation cannot override the substantive provisions of a statutory enactment more particularly Section(s) 73 74 of the 1872 Act, the same was negatived by this Court in C. Natarajan (supra) with the following observations: - 22. .... We have considered it necessary to advert to this question as it is one of general importance and are of the considered opinion that the answer must be in the negative. While the Contract Act embodies the general law of contract, the SARFAESI Act is a special enactment, inter alia, for enforcement of security interest without intervention of court. Rule 9(5) providing for forfeiture is part of the Rules, which have validly been framed in exercise of statutory power conferred by section 38 of the SARFAESI Act. Law is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f it is penal, it falls within implied powers. If it is an act of mere transference of money from the dealer to the State, then it falls outside the legislative entry. Such is the essence of the decisions which we will presently consider. There was a contention that the expression 'forfeiture' did not denote a penalty. This, perhaps, may have to be decided in the specific setting of a statute. But, speaking generally and having in mind the object of Section 37 read with Section 46, we are inclined to the view that forfeiture has a punitive impact. Black's Legal Dictionary states that 'to forfeit' is 'to lose, or lose the right to, by some error, fault, offence or crime' 'to incur a penalty.' 'Forfeiture', as judicially annotated, is 'a punishment annexed by law to some illegal act or negligence. . . .'; 'something imposed as a punishment for an offence or delinquency.' The word, in this sense, is frequently associated with the word 'penalty', According to Black's Legal Dictionary. The terms 'fine', 'forfeiture' and 'penalty', are often used loosely and even confusedly; but when a discrim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, by inflicting the forfeiture, does not go outside the crease when it hits out against the dealer and deprives him, by the penalty of the law, of the amount illegally gathered from the customers . ( Emphasis supplied ) 72. The privy council in Kunwar Chiranjit Singh v. Har Swarup reported in (1926) 23 LW 172, while dealing with the concept of earnest money, had observed as follows: - Earnest money is part of the purchase price when the transaction goes forward: it is forfeited when the transaction falls through, by reason of the fault or failure of the vendee. ( Emphasis supplied ) 73. The above referred decision of the Privy Council has been referred to and relied upon by the High Court of Bombay in the case of Dinanath Damodar Kale v. Malvi Mody Ranchhoddas and Co. reported in AIR 1930 Bom 213. The Court observed as under: - Turning to the law in England we have a series of decisions showing that a deposit by way of earnest in a contract for the sale of land is distinguishable from a penalty for breach of the contract. The cases cited to us by the appellant's counsel are all cases in which either an instalment of the price or a part payment was by the terms of the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned to decide whether a covenant of forfeiture of deposit for due performance of a contract falls within the first class. The measure of damages in the case of breach of a stipulation by way of penalty is by S. 74 reasonable compensation not exceeding the penalty stipulated for. In assessing damages the Court has, subject to the limit of the penalty stipulated, jurisdiction to award such compensation as it deems reasonable having regard to all the circumstances of the case. Jurisdiction of the Court to award compensation in case of breach of contract is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award compensation according to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is proved to have been caused by the breach. Thereby it merely dispenses with proof of actual loss or damages ; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the stipulation must be one for rendering something after the contract is broken. There is no ground for holding that the expression contract contains any other stipulation by way of penalty is limited to cases of stipulation in the nature of an agreement to pay money or deliver property on breach and does not comprehend covenants under which amounts paid or property delivered under the contract, which by the terms of the contract expressly or by clear implication are liable to be forfeited. (15) Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of the parties predetermined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract pre-determining damages or providing for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. The jurisdiction of the Court is not de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id must bear the character of a deposit for due performance of the contract. ( Emphasis supplied ) 76. In another decision of this Court in Maula Bux v. Union of India reported in 1969 (2) SCC 554, a similar view was reiterated and it was held that forfeiture of earnest money is not a penalty and that Section 74 of the 1872 Act will only apply where the forfeiture is in the nature of a penalty. The relevant observations read as under: - 4. Under the terms of the agreements the amounts deposited by the plaintiff as security for due performance of the contracts were to stand forfeited in case the plaintiff neglected to perform his part of the contract. The High Court observed that the deposits so made may be regarded as earnest money. But that view cannot be accepted. According to Earl Jowitt in The Dictionary of English Law at p. 689; Giving an earnest or earnest-money is a mode of signifying assent to a contract of sale or the like, by giving to the vendor a nominal sum (e.g. a shilling) as a token that the parties are in earnest or have made up their minds . As observed by the Judicial Committee in Kunwar Chiranjit Singh v. Har Swarup: Earnest money is part of the purchase price w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest. 78. This Court in Satish Batra (supra) after taking note of the decisions in Delhi Development Authority v. Grihshapana Cooperative Group Housing Society Ltd. reported in 1995 Supp (1) SCC 751, V. Lakshmanan v. B.R. Mangalagiri Ors. reported in 1995 Supp (2) SCC 33 and HUDA v. Kewal Krishnan Goel reported in 1996 (4) SCC 249 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 relevant observations read as under: - 15. The law is, therefore, clear that to justify the forfeiture of advance money being part of 'earnest money' the terms of the contract should be clear and explicit. Earnest money is paid or given at the time when the contract is entered into and, as a pledge for its due performance by the depositor to be forfeited in case of non performance by the depositor. There can be converse situation also that if the seller fails to perform the contract the purchaser can also get double the amount, if it is so stipulated. It is also the law that part-payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same to be a penalty rather than earnest money. The relevant observation read as under: - 4. ... In the present case the deposit was made not of a sum of money by the purchaser to be applied towards part payment of the price when the contract was completed and till then as evidencing an intention on the part of the purchaser to buy property or goods. Here the plaintiff had deposited the amounts claimed as security for guaranteeing due performance of the contracts. Such deposits cannot be regarded as earnest money. ( Emphasis supplied ) 83. 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 Promiso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be paid by the one to the other immediately or at certain stated intervals, the question whether in the event of rescission repayment will be compelled depends upon the proper construction of the contract. The object that the parties had in view in providing for the payment must first be ascertained. Where the intention was that the money should form a part payment of the full amount due, then, as we have seen, if the contract is rescinded for the payer's default the payee is required at law to restore the money, subject to a cross-claim for damages. If, on the other hand, the intention was that the money should be deposited as earnest or as a guarantee for the due performance of the payer's obligation, the rule at common law is that if the contract is rescinded by reason of his default the deposit is forfeited to the payer and cannot be recovered. In the latter case, however, and also where it has been expressly agreed that a part payment shall be forfeited in the event of the payer's default, equity is prepared within limits to grant relief against the forfeiture. 87. The observations of Mellish, L.J., in Ex parte Barrell: [L.R.] In Re. Parnell 10 Ch. App. 512 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the buyer makes default as to the balance, then, so long as the seller keeps the contract open and available for performance, the buyer cannot recover the money, but once the seller rescinds the contract or treats it as at an end owing to the buyer's default, then the buyer is entitled to recover his money by action at law, subject to a cross-claim by the seller for damages: see Palmer v. Temple 112 E.R. 1304, Mayson v. Clouet (1924) A.C. 980, Dies v. British and International Mining and Finance Corporation Ltd. (1939) 1 .K.B. 724 and Williams on Vendor and Purchaser 4th ed., vol. 2, p. 1006. (ii) But when there is a forfeiture clause or the money is expressly paid as a deposit (which is equivalent to a forfeiture clause) then the buyer who is in default cannot recover the money at law at all. He may, however, have a remedy in equity, for, despite the express stipulation in the contract, equity can relieve the buyer from forfeiture of the money and order the seller to repay it on such terms as the Court thinks fit. 89. Therefore, it is clear that the forfeiture can be justified if the terms of the contract are clear and explicit. If it is found that the earnest money was paid i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions of a public auction before agreement is reached, Section 74 would have no application. (Emphasis supplied) 91. Since, the forfeiture under Rule 9(5) of the SARFAESI Rules is also taking place pursuant to the terms conditions of a public auction, we need not dwell any further on the decision of Kailash Nath (supra) 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. c. Law on the principle of Reading-Down a provision: 92. We must deal with yet one another aspect that weighed with the High Court while passing the Impugned Order. In the Impugned Order, the High Court also took the view that Rule 9(5) of the SARFAESI Rules must be read down so as to yield to the underlying principle recognized in Section(s) 73 74 of the 1872 Act. This reading down of the relevant rules in the opinion of the High Court was necessary, as otherwise irrespective of whether the default is of the entire balance amount or only one rupee, the same harsh consequence of forfeiture would ensue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narrowed or limited interpretation, thereby mitigating potential conflicts with constitutional or legal principles. 97. In B.R. Enterprises v. State of U.P. Ors. reported in (1999) 9 SCC 700, 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. The relevant observations read as under: - 81. It is also well settled that first attempt should be made by the courts to uphold the charged provision and not to invalidate it merely because one of the possible interpretations leads to such a result, howsoever attractive it may be. Thus, where there are two possible interpretations, one invalidating the law and the other upholding, the latter should be adopted. For this, the courts have been endeavouring, sometimes to give restrictive or expansive meaning keeping in view the nature of legislation, maybe beneficial, penal or fiscal etc. Cumulatively it is to subserve the object of the legislation. Old golden rule is of respecting the wisdom of legislature that they are aware of the law and would never have intended for an invalid legislation. This also keeps court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iking 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. 100. 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. 101. However, harshness of a provision is no reason to read down the same, if its plain meaning is unambiguous and perfectly valid. A law/rule should be beneficial in the sense that it should suppress the mischief and advance the remedy. The harsh consequence of forfeiture of the entire earnest-money depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en towards securitisation of the debts and to evolve means for faster recovery of NPAs was not called for or that it was superimposition of undesired law since one legislation was already operating in the field, namely, the Recovery of Debts Due to Banks and Financial Institutions Act. It is also to be noted that the idea has not erupted abruptly to resort to such a legislation. It appears that a thought was given to the problems and the Narasimham Committee was constituted which recommended for such a legislation keeping in view the changing times and economic situation whereafter yet another Expert Committee was constituted, then alone the impugned law was enacted. Liquidity of finances and flow of money is essential for any healthy and growth-oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved. (Emphasis supplied) 104. Thus, the High Court committed an egregious error by proceeding to read down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of recovery under the doctrine of unjust enrichment arises where retention of a benefit is considered contrary to justice or against equity. xxx xxx xxx 45. From the above discussion, it is clear that the doctrine of unjust enrichment is based on equity and has been accepted and applied in several cases. ... (Emphasis supplied) 109. Thus, from the aforesaid, it is clear 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. 110. This Court in C. Natarajan (supra) had held that forfeiture of 25% of the deposit does not constitute as an unjust enrichment with the following relevant observations being reproduced below: - 35. In the light of guidance provided by the above decisions, what needs to be ascertained first is whether the Bank received or derived any benefit or advantage by forfeiture of 25% of the sale price. We do not think that the Bank has been enriched, much less unjustly enriched, by reason of the impugned forfeiture. Receipt of 25% of the sale p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lict. It is observed further that equity can only supplement the law and not supplant it. 15.2. In Raghunath Rai Bareja [Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230], in paras 30 to 37, this Court observed and held as under : (SCC pp. 242-43) 30. Thus, in Madamanchi Ramappa v. Muthaluru Bojjappa [AIR 1963 SC 1633] (vide para 12) this Court observed: (AIR p. 1637) 12. [W]hat is administered in Courts is justice according to law, and considerations of fair play and equity however important they may be, must yield to clear and express provisions of the law. 31. In Council for Indian School Certificate Examination v. Isha Mittal [(2000) 7 SCC 521] (vide para 4) this Court observed: (SCC p. 522) 4. Considerations of equity cannot prevail and do not permit a High Court to pass an order contrary to the law. 32. Similarly, in P.M. Latha v. State of Kerala [(2003) 3 SCC 541 : 2003 SCC (L S) 339] (vide para 13) this Court observed: (SCC p. 546) 13. Equity and law are twin brothers and law should be applied and interpreted equitably but equity cannot override written or settled law. 33. In Laxminarayan R. Bhattad v. State of Maharashtra [(2003) 5 SCC 413] (vide para 73) thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, as such, there is no loss caused to the respondents. 4. Considering the aforesaid facts and circumstances, we allow these appeals and set aside the order of forfeiture of 25% of the amount of auction sale consideration and direct the respondent Bank to refund/return the amount earlier deposited by the appellant, deposited as the part auction sale consideration (minus 50,000/- towards the expenditure which were required to be incurred by the respondent Bank for conducting the fresh auction) within a period of four weeks from today. 116. In C. Natarajan (supra), 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. The relevant observations read as under: - 13. ... If, however, circumstances are shown to exist where a bidder is faced with such a grave disability that he has no other option but to seek extension of time on genuine grounds so as not to exceed the stipulated period of ninety days and the prayer is rejected without due consideration of all facts and circumstances, refusal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he SARFAESI Act duly complimented by the Rules, which are geared towards efficient and speedy recovery of debts, together with the interpretation of the relevant laws by this Court should not be lost sight of. Losing sight thereof may not be in the larger interest of the nation and susceptible to interference. (Emphasis supplied) 117. Thus, this Court held that where extraneous conditions exist that might have led to the inability of the successful auction purchaser despite best efforts from depositing the balance amount to no fault of its own, in such cases the earnest-money deposited by such innocent successful auction purchaser could certainly be asked to be refunded. 118. 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. 119. However, the aforesaid by no stretch can be said to be an exceptional circumstance warranting judicial interference. We say so because demon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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