2021 (6) TMI 1161 - HC - Indian Laws

Secured Creditor Allowed New Auction After Pandemic Payment Default; Forfeiture Clause Must Reflect Actual Damages.

K. Kayalvizhi Versus The Branch Manager,

The HC ruled that the secured creditor could proceed with a fresh auction sale of the properties due to the petitioner's failure to pay the balance after ... Failure to make the balance payment for auction sale - right to forfeit - forfeiture clause to be used as a penalty or not - HELD THAT:- The right to forfeit must be balanced against the corresponding principle enshrined in the rule against unlawful enrichment. While an auction purchaser is liable for the further expenses incurred by the secured creditor in conducting a second auction sale, the secured creditor cannot forfeit the entire money that has been tendered without having suffered loss commensurate with the quantum of money deposited and proposed to be forfeited. A forfeiture clause, at the highest, may indicate the maximum amount that may be forfeited to compensate the other party for the breach committed by the party in default. But the amount of forfeiture, unless it is a small percentage of the total consideration, cannot be well in excess of the loss or damage suffered by the party not in breach. There are times that Courts presume that they have the extraordinary authority to enlarge the time. A kind of mercy jurisdiction is also resorted to at times without the Court being mindful of the fact that the exercise of such authority may prejudice another who may not be before the Court or may amount to granting undue favour to a person merely because he has approached the Court - The petitioner in either case should have been aware of his obligation to make the payment within the time the payment was due and merely because the second surge hit after February 18, 2021 or the lockdown was imposed sometime thereafter is not, by itself, enough ground to ignore the default committed by the petitioner. Accordingly, the secured creditor will be free to advertise for the fresh sale of the assets. It is made clear that the petitioner will be entitled to participate in the auction for such purpose. If the petitioner is successful once again, in respect of both the properties, and if the quantum of bid in either case is lower, it is the lower amounts that the petitioner would have to pay together with all expenses incurred by the secured creditor in conducting the fresh sale and the diminution of price together with the interest thereon from the date of the original auction - Even if the petitioner is not the highest bidder, if there is a lower amount at which either property is sold, the petitioner will have to make good the difference together with the interest from the date of the original auction till the date of payment and the reasonable costs that the secured creditor may have incurred for conducting a fresh auction. Petition disposed off. Issues:1. Failure to make balance payment post winning auction bid during pandemic lockdown.2. Interpretation of the forfeiture clause in auction sale rules.3. Authority of the Court to enlarge time for payment due to extraordinary circumstances like a pandemic lockdown.Analysis:1. The petitioner, the highest bidder at an auction, failed to make the balance payment due to the pandemic lockdown during the second surge. The auction sale took place on February 18, 2021. The secured creditor, represented by a bank, had the authority to extend the payment deadline to ninety days post-auction. Despite notices, the petitioner did not make the full payment, leading the bank to consider further auctioning the properties and potentially forfeiting the tendered money.2. The judgment emphasized that the forfeiture clause cannot be used as a penalty but should be balanced against the rule against unlawful enrichment. While the auction purchaser is liable for additional expenses incurred by the secured creditor in a second auction, the creditor cannot forfeit the entire amount tendered without proportional loss. The forfeiture amount should reasonably compensate for the breach committed by the defaulting party and not exceed the actual damages suffered by the non-breaching party.3. The Court deliberated on the authority to enlarge the payment time frame due to exceptional circumstances like a pandemic. It cautioned against granting undue favors or prejudicing other parties. Despite acknowledging the impact of the lockdown, the Court highlighted that financial transactions continued, and the petitioner should have been aware of the payment obligations. The judgment allowed the secured creditor to conduct a fresh sale of the assets, with the petitioner eligible to participate. If successful, the petitioner would need to pay the lower bid amounts, expenses, interest, and costs incurred by the creditor in the fresh sale.In conclusion, the petitions were disposed of, allowing the secured creditor to proceed with a fresh sale while outlining the petitioner's obligations in case of successful bids or lower sale amounts. No costs were awarded in the judgment.