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TMI Blog2025 (3) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... in the process of e-auction, the respondent did not suffer any loss upon sale of the said property in the subsequent auction. It was contended that in absence of any loss actually incurred, the respondent is not entitled to impose penalty or forfeit the earnest money or the money paid by the appellants, even if such forfeiture was permitted under the terms of e-auction notice. To such proposition, learned senior advocate for the appellant relied upon (2015) 4 Supreme Court Cases 136 (Kailash Nath Association vs. Delhi Development Authority & Anr). 3. Learned senior advocate contended that a party complaining of breach can claim compensation of such liquidated amount which is genuine pre-estimate of damages determined on the basis of the principles enunciated in Section 73 and 74 of Indian Contract Act, 1872. According to learned senior advocate, the decision to forfeit the entire amount of deposited money is wholly arbitrary and illegal, without determining the actual loss or damage suffered on the part of the respondent. Mere existence of a forfeiture clause does not imply that for every breach the earnest money deposit is automatically liable to be forfeited irrespective of act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to forfeiture and that it should be based on genuine and reasonable pre-estimate. 8. Per contra, learned advocate for the respondent submitted that the appellant agreed for the forfeiture of the earnest money deposit in case of default. He has defaulted in payment of the remaining 75% of the consideration money within the time stipulated in the agreement. As such, the entire money of earnest deposit is liable to forfeiture in terms of the specific terms of agreement entered into between the parties. 9. Relying upon (2024) 6 Supreme Court Cases 641 (Authorized Officer, Central Bank of India Vs Shanmugavelu), learned advocate for the respondent submitted that since the appellant defaulted in payment of the remaining 75% of the consideration money, in terms of Rule 58 of Second Schedule of Income Tax Act, the entire deposit made in terms of Rule 57 thereof is liable to be attached. Therefore, according to the learned advocate for the respondent, the respondent, Securities and Exchange Board of India (SEBI), was quite justified in forfeiting the earnest money deposits made by the appellant at the time of confirmation of sale. 10. In pursuance to an e-auction notice dated January 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to clause 6 of the e-auction notice which provides that, the successful bidder shall have to deposit 25% of the successful bid amount (inclusive of EMD amount), immediately after the close of the auction and the balance amount with 1% of highest bid amount as poundage fee within 15 (fifteen) days from close of auction. It also provided that if the said amount is not paid with the specified time, the cost of the auction shall be recovered from the deposit money and the balance shall be forfeited. 15. On the contrary, it was contended on behalf of the appellant that the respondent was not justified in forfeiting the entire amount of deposit without quantifying the actual loss incurred by the SEBI on account of default made by the appellant in depositing the consideration money. According to appellant, forfeiture must be limited to the amount of loss actually suffered by the respondent quantified in accordance with the provisions contained in Section 73 and 74 of the Indian Contract Act, 1872. The appellant is ready and willing to make good the loss incurred by SEBI on account of failure of the appellant to pay the balance consideration money within the stipulated time. 16. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 visualised by the lawmakers 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. 28. At the cost of repetition, it must not be forgotten that the Sarfaesi Act was enacted because the general laws were not found to be workable and efficient enough to ensure liquidity of finances and flow of money essential for any healthy and growth-oriented economy. The decision of this Court in Mardia Chemicals Ltd. v. Union of India [Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311], while o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orcement 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." 17. The Hon'ble Supreme Court, in the aforesaid decision also considered the rationale behind exclusion of the provisions of Section 73 and Section 74 of the Indian Contract Act in SARFAESI proceeding in the following terms: "65. If Sections 73 and 74, respectively of the 1872 Act are interpreted so as to be made applicable to a breach in payment of balance amount by the successful auction-purchaser, it would lead to a chilling effect in the following ways: 65.1. First, it would be quite preposterous to suggest that in an auction which is a process meant for recovery of debt due to default of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly sold. (6)............................................................. (7)............................................................. (8)............................................................. (9)............................................................. (10)............................................................. 19. Therefore, from the purport of Rule 9 (5) of SARFAESI Rules, 2002, it is explicit that in case of default in payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the secured creditor. The property shall be resold and the defaulting purchaser shall forfeit all claims to the property or to any part of the sum for which it may be subsequently sold. The provision does not leave any discretion with the authorities to determine and quantify the actual loss or damages incurred. 20. Section 28A of the Securities and Exchange Board of India Act, 1992 provides that if a person fails to pay the penalty imposed, it shall be recovered by resorting to any of the methods specified in such provision like attachment and sale of the moveable or immoveable properties belonging to such person. The provision also provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the quantum of consideration for which default was made. 23. In Kailash Nath Associates (Supra), the Hon'ble Supreme Court laid down that, 43. On a conspectus of the above authorities, the law on compensation for breach of contract under Section 74 can be stated to be as follows: 43.1. Where a sum is named in a contract as a liquidated amount payable by way of damages, the party complaining of a breach can receive as reasonable compensation such liquidated amount only if it is a genuine pre-estimate of damages fixed by both parties and found to be such by the court. In other cases, where a sum is named in a contract as a liquidated amount payable by way of damages, only reasonable compensation can be awarded not exceeding the amount so stated. Similarly, in cases where the amount fixed is in the nature of penalty, only reasonable compensation can be awarded not exceeding the penalty so stated. In both cases, the liquidated amount or penalty is the upper limit beyond which the court cannot grant reasonable compensation. 43.2. Reasonable compensation will be fixed on well-known principles that are applicable to the law of contract, which are to be found inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of cancellation of the contract by the petitioner." 25. Similarly, in MBL INFRASTRUCTURE LIMITED (Supra), a Division Bench of this High Court observed the following: 26. In a claim for damages there is first the factum that has to be established before the quantum of damages can be assessed. When the breach is of the kind as complained in the present case - of nondisclosure of material facts or concealment thereof - the extent of damages that may have been suffered would depend on how far the bid had progressed and at what stage the discovery of the breach was made or at what stage such discovery could be made upon exercise of ordinary diligence. The legal issue has to be answered with reference to Sections 73 and 74 of the Act of 1872 and cannot be seen to be beyond the pale of such provisions. Notwithstanding the stray lines in some of the judgments cited that there may not have been any concluded contract for Section 74 of the Act of 1872 to come into play, it has already been discussed above that there was an enforceable agreement in place upon there being a notice inviting tender and a bid being deposited in terms thereof. The breach is established and unquestionable but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court noted that since Rule 86 of Order XXI, Civil Procedure Code and Rule 58 in Schedule II to the Act are identically worded, the principle of the said decision applies squarely therein. If so, it must be held that the forfeiture was not automatic but that it was a matter of discretion with the Tax Recovery Officer. A perusal of the impugned order shows that the Tax Recovery Officer proceeded on the footing as if the forfeiture is automatic. On such considerations, the High Court directed the Tax Recovery Officer to consider afresh whether, in the facts and circumstances of the case, it was a proper case where the amount deposited by the petitioners should be forfeited and if it is to be forfeited to what extent. While determining the said question, the Tax Recovery Officer was also directed to take into consideration the objection/explanations filed by the petitioners and any further representation that the petitioners may make hereafter within three weeks from today addressed to him. 29. Monni Aidruz (Supra) was rendered by the Madras High Court where it said that, "It seems to me that under O. 21, R. 86, if there is default in payment of the balance of the purchase money a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent owing to the default on the part of the appellants in making the payment of balance consideration money. 34. In course of hearing of the instant appeal, the appellants never endeavored to challenge the finding of learned Single Judge whereby learned Single Judge disbelieved the case of the appellant to the effect that he was prevented by the intervention of COVID-19 in making payment of the balance consideration money within time specified in the contract. We, therefore, have no justification to interfere with such finding of learned Single Judge. Accordingly, we uphold the same. 35. In the light of discussions made hereinbefore, we, however, set aside the impugned judgment and order so far as it relates to the rejection of the prayer of the appellant for return of EMD. The respondent shall proceed to determine the nature and extent of forfeiture of the EMD amount afresh. In doing so, the respondent shall provide sufficient opportunity of being heard to the appellant. The respondent is at liberty to hear any other parties and consult any document as it deems necessary. The respondent shall take a decision in this regard within 8 weeks from date and communicate its de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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