TaxTMI 
TaxTMI 
2024 (2) TMI 291
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....YSIS (Points for Determination) .............................................. 19 i) Legislative History and Scheme of the SARFAESI Act ..................... 20 ii) Applicability of Section(s) 73 & 74 of the 1872 Act to Forfeiture under the SARFAESI Rules. ............................................................... 32 a. Forfeiture under the SARFAESI Rules ........................................... 44 b. Concept of Earnest-Money & Law on Forfeiture of Earnest-Money Deposit ............................................................................................ 49 c. Law on the principle of 'Reading-Down' a provision ...................... 66 iii) Whether, the forfeiture of the entire earnest-money deposit amounts to Unjust Enrichment? ........................................................................ 73 iv) Whether Exceptional Circumstances exist to set aside the forfeiture of the earnest money deposit? .................................................................. 77 F. CONCLUSION .................................................................................... 81 1. Since the issues raised in both the captioned appeals are the same....
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.... bidders shall hold a valid Digital Signature Certificate, email address and PAN number. For details with regard to Digital Signature Certificate please contact M/s C1 India Pvt. Ltd., E-Mail ID: [email protected] or [email protected] 4. Bidders are required to go through the website https://www.bankeauctions.com for detailed terms and conditions of auction sale before submitting their bids and taking part in the e- Auction sale proceedings. 5. To the best of knowledge and information of the Authorized Officer, there is no encumbrance on property affecting the security interest. However, the intending bidders should make their own independent inquiries regarding the encumbrances, title of property put on auction and claims / rights / dues affecting the property, prior to submitting their bid. The e-Auction advertisement does not constitute and will not be deemed to constitute any commitment or any representation of the bank. The property is being sold with all the existing and future encumbrances whether known or unknown to the bank. The Authorized Officer / Secured Creditor shall not be responsible in any way for any third party claims / rights /....
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....bmits the highest bid amount (not below the Reserve Price) on closure of e-Auction process shall be declared as Successful Bidder and a communication to that effect will be issued which shall be subject to approval by the Authorized Officer/Secured Creditor. 11. The Earnest Money Deposit (EMD) of the successful bidder shall be retained towards part sale consideration and the EMD of unsuccessful bidders shall be refunded. The Earnest Money Deposit shall not bear any interest. The successful bidder shall have to deposit 25% of the auction price less the EMD already paid, within 24 hours of the acceptance of bid price by the Authorized Officer and the balance 75% of the sale price on or before 15th day of sale or within such extended period as agreed upon in writing by and solely at the discretion of the Authorized Officer. If any such extension is allowed, the amount deposited by the successful bidder shall not carry any interest. In case of default in payment by the highest and successful bidder, the amount already deposited by the bidder shall be liable to be forfeited and property shall be put to re-auction and the defaulting bidder shall have no claim / right in respect ....
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....ot no. A-18, Thiru Vi Ka Industrial Estate East by: 80 feet Road, West by: Service Road. You have been declared as successful bidder at the sale price of Rs. 12,27,00,000/- (Rupees Twelve Crore Twenty Seven Lac only). You are now required to remit as per E auction Sale notice 25% of the sale price less Earnest Money Deposit amount already remitted by you i.e., Rs. 3,06,75,000/- minus EMD remitted Rs. 96,20,000/- = Rs. 2,10,55,000/- (Rupees Two Crore Ten Lac Fifty Five Thousand only) by RTGS/NEFT to the same account number to which you have remitted the Earnest Money Deposit within 24 hours of acceptance of bid. The balance amount amounting to Rs. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) is to be remitted by you by RTGS to the same account number on or before 15 days from today; failing which the sale is liable to be cancelled and the EMD will be forfeited. Please note that the E Auction sale has been conducted strictly as per the terms and conditions spelt out in the E Auction notice dated 24/10/2016. Thanking You Yours sincerely, Sd/- AUTHORIZED OFFICER" 9. The respondent vide its email dated 19....
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....- minus Rs.96,20,000/-) on 08/12/2016 as per the bid terms. The balance amount amounting 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 date of bid failing which the sale is liable to be cancelled and the EMD will be forfeited. However, you had vide your mail dated 19/12/2016 requested to give you three (3) months time to pay the balance 75% payment of the bid amount and also assured that you will honour the offer in the time frame. After carefully going through your request, the Authorized officer hereby permit/ allow you to pay the balance amount of Rs 9,20,25,000/- (Rupees Nine crore Twenty Lac Twenty Five Thousand Only) within 90 days from the date of BID. Further we may also inform you that no further extension of time will be granted and if you fail to pay the balance sale amount the sale will be cancelled and the amount already paid will be forfeited by the Bank. Thanking You Yours sincerely, Sd/- AUTHORIZED OFFICER" 11. The respondent being unable to pay the balance amount within the extended period sought an additional 15-days for making the bala....
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....months' time to pay the balance 75% payment of the bid amount and also assured that you will honour the offer in the time frame. After carefully going through your request, the Authorized officer permitted/allowed you to pay the balance amount of Rs.9,20,25,000/-( Rupees Nine crore Twenty Lac Twenty Five Thousand Only) within 90 days from the date of BID vide our letter No. CFB/CHEN/2016-17/718 dated 20/12/2016. Further we also informed you that no further extension of time will be granted and if you fail to pay the balance sale amount the sale will be cancelled and the amount already paid was liable to be forfeited by the Bank. You had again requested for extension of time for another 15 days vide your letter dated 06/03/2017. After going through your representation/request, we permitted you to remit the balance of Rs. 9,20,25,000/- (Rupees Nine Crore Twenty Lac Twenty Five Thousand Only) by 22/03/2017 thereby giving three months time from the 15th day of confirmation of sale as per the Security Interests (Enforcement) Rules, 2002. We hereby inform you that as you have failed to remit the balance amount of Rs. 9,20,25,000/- (Rupees Nine crore Twenty Lac ....
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....ondent approached the High Court of judicature at Madras by way of C.R.P. No(s). 1892 & 2282 of 2021 respectively, assailing the order dated 30.07.2021 passed by the DRAT, Chennai, wherein the High Court vide the impugned judgment and final order dated 27.10.2021 allowed the respondent's civil revision petition. The operative portion is reproduced below: - "19. For the reasons aforesaid, the enhancement of the quantum of forfeiture as permitted by the Appellate Tribunal in the impugned order of July 30, 2021 cannot be sustained and the same is set aside. The quantum as awarded by the DRT-II, Chennai in its order of May 06, 2019 is restored and to such extent the order of the appellate authority is set aside." 19. The impugned judgment of the High Court is in two-parts. In other words, the High Court allowed the respondent's civil revision petition setting aside the DRAT's order on two grounds: - (i) First, the High Court took the view that the forfeiture of an amount or deposit by a secured creditor under the SARFAESI Rules cannot be more than the loss or damage suffered by it. The High Court held that Rule 9 sub-rule (5) of the SARFAESI Rules which provides fo....
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....withstanding the wide words used in Rule 9(5) of the said Rules, a secured creditor may not forfeit any more than the loss or damage suffered by such creditor as a consequence of the failure on the part of a bidder to make payment of the consideration or the balance consideration in terms of the bid. It is only if such principle as embodied in Section 73 of the Contract Act, is read into Rule 9(5) of the said Rules, would there be an appropriate answer to the conundrum as to whether a colossal default of the entirety of the consideration or the mere default of one rupee out of the consideration would result in the identical consequence of forfeiture as indicated in the provision. 13. In any event, notwithstanding the reference to Section 35 of the Act of 2002, the apparent overriding effect of the provisions of the Act of 2002 has to be tempered in the light of Section 37 of the Act. Though Section 37 of the Act refers to several statutes by name, the residual limb of such provision recognises "or any other law for the time being in force", which would embrace the Contract Act within its fold. It is completely unacceptable that by virtue of the delegated legislation as in ....
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....elf, which is not permissible." ( Emphasis supplied ) 20. The plain reading of the aforesaid findings recorded by the High Court lays down three propositions of law as follows: (1) Rule 9(5) of the SARFAESI Rules is merely an enabling provision that permits forfeiture in principle. It cannot override the underlying ethos of Section 73 of the 1872 Act. It should yield to the principle recognised in Section 73 of the 1872 Act or must be read down accordingly. (2) By virtue of the delegated legislation as in the SARFAESI Rules, the fundamental principle envisaged in the 1872 Act should not be permitted to be diluted or altogether disregarded. (3) Rule 9(5) of the SARFAESI Rules if not read along with the principle recognised in Section 73 of the 1872 Act, the same may result in a secured creditor unjustly enriching itself which is not permissible. 21. In view of the aforesaid, the Bank being aggrieved with the impugned order passed by the High Court is here before this Court with the present appeals. C. SUBMISSIONS OF THE APPELLANT 22. Mr. Dhruv Mehta, the learned Senior Counsel appearing for the appellants submitted that the issue frame....
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.... provision and cannot override the statutory provisions of the 1872 Act. 31. It was submitted that the High Court committed no error in holding that the appellant bank could not have forfeited the amount deposited by a third party being the auction purchaser without any real damage or loss being caused to it. 32. It was further submitted that under the SARFAESI Rules, the authorized officer is left with an unguided power of forfeiture. Such unguided power conferred on a delegated authority like the authorized officer in a bank is opposed to public policy and would result in unjust enrichment. Therefore, the said Rule 9(5) is liable to be struck down as unconstitutional being opposed to public policy and principles of fair play and unreasonableness. 33. In such circumstances referred to above, it was prayed on behalf of the respondent that there being no merit in the appeals, the same may be dismissed. E. ANALYSIS ( Points for Determination ) 34. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the following questions fall for our consideration: - I. Whether, the underlying principle of Section(s) 73 ....
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....ue to the long delays. In this background the Committees thus, proposed new laws for securitisation in order to permit banks and financial institutions to hold securities and sell them in a timely manner without the involvement of the courts. 38. On the recommendations of the Narasimham Committee and Andyarujina Committee, the SARFAESI Act was enacted to empower the banks and financial institutions to take possession of the securities and to sell them without intervention of the court. 39. The statement of objects and reasons for which the Act has been enacted reads as under: - "STATEMENT OF OBJECTS AND REASONS The financial sector has been one of the key drivers in India's efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, ....
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....ge 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 figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the Governments in creating Debts Recovery Tribunals and appointing presiding officers, for a long time. Even after leaving that margin, it is to be noted that things in the spheres concerned are desired to move faster. In the present-day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken 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 Commi....
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....ed 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 Recovery of Debts Due to Banks and Financial Institutions Act was in operation it was uncalled for to have yet another legislation for the recovery of the mounting dues. Considering the totality of circumstances and the financial climate world over, if it was thought as a matter of policy to have yet speedier legal method to recover the dues, such a policy decision cannot be faulted with nor is it a matter to be gone into by the courts to test the legitimacy of such a measure relating to financial policy." 41. In this regard, reference may be made to the following observations of this Court in the case of United Bank of India v. Satyawati Tondon & Ors. reported in (2010) 8 SCC 110. The relevant paras are being reproduced hereunder: "1. ... With a view to give impetus to the industrial development of the country, the Central and State Governments encouraged the banks and other financial institutions to formulate liberal policies for grant of loans and other financial....
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....le 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 to in the proviso to sub-rule (6) of rule 8 or notice of sale has been served to the borrower: Provided further that if sale of immovable property by any one of the methods specified by sub-rule (5) of rule 8 fails and sale is required to be conducted again, the authorised officer shall serve, affix and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale. (2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured creditor: Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of rule 8: Provided further that if the authorised officer fails to obtain a price higher than the reserve price, he may, with the c....
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.... 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 not." 44. Section 35 of the SARFAESI Act contains the overriding clause and provides that the Act shall override any other law which is inconsistent with its provisions, and reads as under: - "35. The provisions of this Act to override other laws.-The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." 45. Section 37 of the SARFAESI Act provides that the provisions of the SARFAESI Act shall be in addition to the Acts mentioned in or and any other law for the time being in force and that the other laws shall also be applicable alongside the SARFAESI Act, and reads as under: - "37. Application of other laws not barred.-The provisions of this Act or the rules ma....
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....ant 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 mechanism through which the dues to the banks and financial institutions could be realised without delay. In 1981, a Committee under the Chairmanship of Shri T. Tiwari had examined the legal and other difficulties faced by banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure. The setting up of Special Tribunals will not only fulfil a long-felt need, but also will be an important step in the implementation of the Report of Narasimham Committee. Whereas on 30-9-1990 more than fifteen lakhs of cases filed by the public sector banks and about 304 cases ....
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....re, 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 following the procedure laid down in Section 13, take direct action against the debtors by taking possession of secured assets and selling them; they could also take over the management of the business of the borrower. They could also appoint any person to manage the secured assets possession of which has been taken over by them, and could require, at any time by notice in writing to any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due from the borrower, to pay the secured creditor so much of the money as is sufficient to pay the secured debt. 25. In order to further the objects of the Securitisation and Reconstr....
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.... 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 them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally, i.e., 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 special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resu....
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....le. (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 necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough, to borrow from the language of Lord du Parcq in the same case, at page 158, if the loss (or some factor without which it would not have occurred) is a "serious possibility" or a "real danger." ..." 51. The above principles apply to grant of compensation under Section 73 of the 1872 Act. This is clear from the decision of this Court in Karsandas H. Thacker v. M/s. The Saran Engineering Co. Ltd. reported in AIR ....
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....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 dependency of the performance of other contract(s) by the party complaining of the breach, on the performance of the contract in dispute by the party in breach, had been communicated to the party in breach, and thus known to both parties at the time of entering into the contract, then the damages for the breach of the contract in dispute, may include the compensation for the loss suffered in regard to such other dependent contracts. But, on the other hand, if the special circumstances ....
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.... 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, Rule 9(2) makes it clear that after confirmation by the secured creditor the amount has to be deposited. Rule 9(3) also makes it clear that period of fifteen days has to be computed from the date of confirmation." 55. This Court in Rakesh Birani (supra) while interpreting Rule 9(5) of the SARFAESI Rules made the following pertinent observations: - a. That, the liability of a successful auction purchaser to deposit the requisi....
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....ction 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 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. 58. This Court in C. Natarajan (supra) whilst dealing wi....
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....neral 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 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 v. Union of India [(2004) 4 SCC 311], while outlawing only a part of the SARFAESI Act and upholding t....
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....tervention 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 submitted by the bidders constitute the 'offer' and upon confirmation of sale in favour of the highest bidder under sub-rule (2) of rule 9, the contract comes into existence. Once the contract comes into existence, the bidder is bound to honour the terms of the statu....
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.... the 1872 Act vis-à-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 then be in addition to and not in derogation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Obviously this could not have been the parliamentary intendment, ....
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....on 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 breach to already existing general law under Section(s) 73 and 74 of the 1872 Act. [See C. Natarajan (supra) at Para 20] 63. However, the legislature has consciously provided for onl....
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....ules. 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 well settled that rules, when validly framed, become part of the statute. ..." 68. What can be discerned from the above is that the S....
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....n 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 discrimination is made, the word 'penalty' is f....
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....ure, 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 o....
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....act contains any other stipulation by way of penalty. We are in the present case not 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 le....
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....haracter, as, for example, providing for forfeiture of money already paid. There is nothing in the expression which implies 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 part....
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....nt and the finding of the High Court on that point is based on no evidence. It cannot be assumed that because there is a stipulation for forfeiture the amount paid 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....
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....s, "earnest" is given to bind the contract. (3) It is part of the purchase price when the transaction is carried out. (4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. (5) Unless there is anything to the contrary in the terms 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 contrac....
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....reading would reveal that the reason why this Court held the said deposit as a penal clause was because the said amount was paid over and above the earnest-money deposit already paid by the purchaser in the said case and more importantly the said sum was not liable to be adjusted against the total consideration. Hence, this Court held the 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 payme....
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.... contract and recover the deposit. The buyer may also recover it where, without the default of either party, the contract is rescinded by either party pursuant to an express power in the contract in that behalf." 86. In G. C. Cheshire and C.H.S. Fifoot on the Law of Contracts (fifth edition) at pages 496- 497, the position is thus summed up: - "Where, therefore, it has been agreed that a sum of money shall 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 i....
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....f we may say so with respect, has set out the legal position succinctly and with great clarity. The facts of that case need not be set out and it would be sufficient to refer only to the principle of law laid down by the Court of Appeal. At page 637 Denning L.J., observes thus: "It seems to me that the cases show the law to be this. (i) When there is no forfeiture clause, if money is handed over in part payment of the purchase price, and then 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....
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.... 43.6. The expression "whether or not actual damage or loss is proved to have been caused thereby" means that where it is possible to prove actual damage or loss, such proof is not dispensed with. It is only in cases where damage or loss is difficult or impossible to prove that the liquidated amount named in the contract, if a genuine pre-estimate of damage or loss, can be awarded. 43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the 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. W....
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....es construing the language of the provision in a manner that limits its scope or application, making it consistent with constitutional or legal principles. 95. The rationale behind the principle of reading down is to avoid striking down an entire legislation. Courts generally prefer to preserve the intent of the legislature and the overall validity of a law by adopting an interpretation that addresses the specific constitutional concerns without invalidating the entire statute. 96. It is a judicial tool used to salvage the constitutionality of a statute by giving a provision a 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 in....
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....ng down", however, it is not open to read words and expressions not found in it and thus venture into a kind of judicial legislation. The rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute. It is to be used keeping in view the scheme of the statute and to fulfil its purposes. ..." (Emphasis supplied) 99. 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. 100. The High Court in its Impugned Order resorte....
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....nsidering all these circumstances, the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993 but as the figures show it also did not bring the desired results. Though it is submitted on behalf of the petitioners that it so happened due to inaction on the part of the Governments in creating Debts Recovery Tribunals and appointing presiding officers, for a long time. Even after leaving that margin, it is to be noted that things in the spheres concerned are desired to move faster. In the present day global economy it may be difficult to stick to old and conventional methods of financing and recovery of dues. Hence, in our view, it cannot be said that a step taken 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 ....
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....erstand what is meant by 'unjust enrichment'. 108. In Sahakari Khand Udyog Mandal Ltd. v. Commissioner of Central Excise & Customs reported in (2005) 3 SCC 738, the Court observed that the doctrine of unjust enrichment is based on equity and refers to the inequitable retention of a benefit. The relevant observations are reproduced below: - "31. Stated simply, "unjust enrichment" means retention of a benefit by a person that is unjust or inequitable. "Unjust enrichment" occurs when a person retains money or benefits which in justice, equity and good conscience, belong to someone else. 32. The doctrine of "unjust enrichment", therefore, is that no person can be allowed to enrich inequitably at the expense of another. A right 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....
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....ce 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. 112. This Court in National Spot Exchange Ltd. v. Anil Kohli, Resolution Professional for Dunar Foods Ltd. reported in (2022) 11 SCC 761 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. The relevant observations made in it are being reproduced below: - "15.1. In Mishri Lal [BSNL v. Mishri Lal, (2011) 14 SCC 739 : (2014) 1 SCC (L&S) 387], it is observed that the law prevails over equity if there is a conflict. 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 C....
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....dent's earnest money deposit? 115. This Court in its decision in Alisha Khan v. Indian Bank (Allahabad Bank) & Ors. reported in 2021 SCC OnLine SC 3340 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. The relevant observations are being reproduced below: "3. Having gone through the impugned judgment and orders passed by the High Court, we are of the opinion that the High Court ought to have allowed the refund of the amount deposited being 25% of the auction sale consideration. Considering the fact that though initially the appellant deposited 25% of the auction sale consideration, however, subsequently she could not deposit balance 75% due to COVID-19 pandemic. It is required to be noted that subsequently the fresh auction has taken place and the property has been sold. It is not the case of the respondents that in the subsequent sale, lesser amount is received. Thus, 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 2....
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....ating the order under challenge. However, in course of such scrutiny, the tribunals/courts must be careful and cautious and direct their attention to examine each case in some depth to locate whether there is likelihood of any hidden interest of the bidder to stall the sale to benefit the defaulting borrower and must, as of necessity, weed out claims of bidders who instead of genuine interest to participate in the auctions do so to rig prices with an agenda to withdraw from the fray post conclusion of the bidding process. In course of such determination, the tribunals/courts ought not to be swayed only by supervening events like a subsequent sale at a higher price or at the same price offered by the defaulting bidder or that the secured creditor has not in the bargain suffered any loss or by sentiments and should stay at a distance since extending sympathy, grace or compassion are outside the scope of the relevant legislation. In any event, the underlying principle of least intervention by tribunals/courts and the overarching objective of the SARFAESI Act duly complimented by the Rules, which are geared towards efficient and speedy recovery of debts, together with the interpretatio....