The Authorised Officer, Central Bank of India v. Shanmugavelu

Judgment / Order of the Supreme Court

Judgment J.B. Pardiwala, J. For the convenience of exposition, this judgment is divided in the following parts:- INDEX* A. FACTUAL MATRIX..................................................................3

B. IMPUGNED ORDER.............................................................13

C. SUBMISSIONS OF THE APPELLANT.................................17

D. SUBMISSIONS OF THE RESPONDENT.............................18

E. ANALYSIS (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

* Ed. Note : Pagination is as per the original judgment.

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1Copy pinpoint1. Since the issues raised in both the captioned appeals are the same, the parties are also the same and the challenge is also to the self- same judgment and order passed by the High Court, those were taken up for hearing analogously and are being disposed of by this common judgment and order.

2Copy pinpoint2. For the sake of convenience, the appellant shall hereinafter be referred to as the Bank being the Secured Creditor, and the respondent shall hereinafter be referred to as the original Auction-Purchaser.

3Copy pinpoint3. 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

4Copy pinpoint4. 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 non-performing asset (“NPA”) by the appellant bank on 28.05.2013.

5Copy pinpoint5. In order to recover its dues, the appellant bank took measures under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the “SARFAESI Act”), more particularly under Section 13(4) by taking over the possession of the Secured Asset and putting the same for sale by way of public auction.

6Copy pinpoint6. Accordingly, on 24.10.2016 an e-auction notice for the sale of the Secured Asset at a reserve price of Rs. 9,62,00,000/- came to be issued by the appellant bank, with the following terms and conditions: -

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“TERMS & CONDITIONS

1. The e-Auction is being held on “AS IS WHERE IS” and “AS IS WHAT IS” basis and “NO COMPLAINT” condition.

2. The auction sale will be Online E-Auction/Bidding through website https://www.bankeauctions.com on 07-12-2016 from 11.00 a.m. to 12. Noon

3. Intending bidders shall hold a valid Digital Signature Certificate, e-mail address and PAN number. For details with regard to Digital Signature Certificate please contact M/s C1 India Pvt. Ltd., E-Mail ID: support@bankeauctions.com or shankar. ganesh@c1india.com

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 / dues.

6. It shall be the responsibility of the bidders to inspect and satisfy themselves about the asset and specification before submitting the bid. The inspection of property put on auction will be permitted to interested bidders at site on 23-11-2016 from 10.00 a.m. to 5.00 p.m.

7Copy pinpoint7. The above mentioned amount should be remitted towards EMD through RTGS/NEFT to Account No. 3227870680 of Central Bank of India, CFB, Chennai 600008 IFSC Code CBIN0283507. Cheques or demand draft shall not be accepted as EMD amount.

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8Copy pinpoint8. 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 support@bankerauctions.com 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: bmchen3507@centralbank.co.in during officer hours i.e. 10 AM to 5 PM during the working days.

9Copy pinpoint9. 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.

10Copy pinpoint10. The interested bidders, who have submitted their bid not below the Reserve price through online mode before 4.00 p.m. on 05-12-2016 shall be eligible for participating in the e-bidding process. The e-Auction of above properties would be conducted exactly on the scheduled Date & Time as mentioned against each property by way of inter-se bidding amongst the bidders. The bidder shall improve their offer in multiple of the amount mentioned under the column “Bid Increase Amount”. In case bid is placed in the last 5 minutes of the closing time of the e-Auction, the closing time will automatically get extended for 3 minutes (subject to maximum of unlimited extensions of 3 minutes each). The bidder who submits 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.

11Copy pinpoint11. 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

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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 of property/amount.

12Copy pinpoint12. The authorized Officer is not bound to accept the highest offer and the authorized officer has absolute right to accept or reject any or all offer(s) or adjourn / postpone / cancel the e-auction without assigning any reasons thereof. ...”

7. Pursuant to the same, the e-auction was conducted on 07.12.2016 and a total of four bids were received wherein the respondent also participated and submitted its bid to the tune of Rs. 12,27,00,000/-. The respondent’s bid was found to be the highest and was classified 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

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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 notice i.e., Lot no. 1: Property belonging to M/s Futuretech Industries Ltd. presently known as Candid Industries Ltd. All 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, 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, 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.

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Thanking You Yours sincerely, Sd/- AUTHORIZED OFFICER”

9. The respondent vide its email dated 19.12.2016, requested the appellant bank for grant of extension of three-months’ time for the payment of the balance amount on the ground that its term-loan was still under-process.

10. The appellant bank vide its letter dated 20.12.2016, acceded to the request of the respondent and granted a further extension of three-months’ time i.e., till 07.03.2017 in terms of Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (for short, the “SARFAESI Rules”). The said letter also stated that no further extension of time shall be granted and in the event the respondent fails to pay the balance amount, the sale shall be cancelled and the amount already paid shall be forfeited. The said letter is being reproduced below: - “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.

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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, 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 had remitted Rs. 2,10,55,000/- (Rupees Two Crore Ten Lac Fifty Five Thousand only) 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 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 balance-payment vide its letter dated 06.03.2017.

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12. However, the appellant vide its letter dated 27.03.2017 turned down the said request for further extension and intimated the respondent that due to its failure in remitting the balance amount within the stipulated time, the sale is cancelled and the amount already deposited stands forfeited. The said sale cancellation letter is being reproduced below: - “CFB/CHEN/2016-17/919 March 27, 2017 Mr. R. Shanmugavelu Managing Director M/s Sunbright Designers Private Limited Module No.-4, Readymade Garment Complex SIDCO Industrial Estates, Guindy Chennai-600032 Sir, Reg: Recovery Proceedings under the provision of SARFAESI Act 2002 in the account M/s Best & Crompton Engineering Projects Limited Ref: E Auction of property held on 07/12/2016 You were declared as successful bidder at the sale price of Rs. 12,27,00,000/- (Rupees Twelve 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.

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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 date of bid failing which the sale was liable to be cancelled and the amount deposited by you had to 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 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 Twenty Five Thousand Only) by 22/03/2017, the amount of Rs. 3,06,75,000/- which was already paid by you stands forfeited. This letter issued without prejudice to the bank’s rights to bring the property for fresh auction sale. Thanking you Yours sincerely, Sd/- AUTHORISED OFFICER”

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13Copy pinpoint13. Despite the aforesaid letter, the respondent on 05.04.2017 addressed one another letter to the appellant seeking further extension of 90 days for making the balance sale payment by enclosing a cheque of Rs.50,00,000/- to show its bona fides. However, the appellant returned the cheque and declined the said request vide its letter dated 06.04.2017.

14Copy pinpoint14. Aggrieved by the aforesaid, the respondent filed an application being SA No. 143 of 2018 before the Debts Recovery Tribunal-II (“DRT”) assailing the appellant’s sale cancellation and forfeiture letters dated 27.03.2017 and 06.04.2017 respectively.

15Copy pinpoint15. During the pendency of the proceedings before the DRT as aforesaid a fresh auction of the Secured Asset was conducted by the appellant bank on 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.

16Copy pinpoint16. 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.

17Copy pinpoint17. 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 from Rs. 5 Lac to Rs. 55 Lac. B. IMPUGNED ORDER

18Copy pinpoint18. Aggrieved with the aforesaid, both the appellant and the respondent 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

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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.”

19Copy pinpoint19. 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 for forfeiture cannot override the underlying ethos of Section 73 of the Indian Contract Act, 1872 (for short, “the 1872 Act”). The relevant observations are reproduced below: - “10. Section 74 of the Contract Act, 1872 provides for compensation for breach of contract where the penalty is stipulated. Section 73 of the Contract Act is the general rule that provides for compensation for loss or damage caused by breach of contract and Section 74 is where the quantum is specified. What Section 73 of the Contract Act mandates is that a party who suffers as a result of a breach committed by the other party to the contract “is entitled to receive from the party who has broken the contract, compensation for any loss 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.” Any detailed discussion on such provision would be beyond the scope of the present lis and may require many more sheets that may be conveniently expended in the present exercise. Indeed, Section 73 of the Contract Act is in the nature of a jurisprudential philosophy that is

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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 Contract Act or it must be read down accordingly. Thus, notwithstanding 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

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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 the Rules of 2002, the fundamental principle envisaged in the Contract Act would get diluted or altogether disregarded.” (Emphasis supplied) (ii) Secondly, the High Court was of the view that the forfeiture of the entire earnest money deposit by the appellant amounts to unjust enrichment which is not permissible. It observed that under the SARFAESI Act, a secured creditor is not entitled to obtain any amount more than the debt due to it, and as such any forfeiture under the SARFAESI Act ought to be assessed by computing damages on the basis of evidence. The relevant observations are reproduced below: - “18. It was completely open to the appellate authority to enhance the quantum as awarded by the DRT. However, such exercise could have been undertaken by inviting evidence in such regard. The appellate authority purported to enhance the quantum from Rs 5 lakh to Rs 55 lakh without indicating any or cogent grounds for such enhancement. Though an element of guesstimation is permitted while assessing damages, when an initial authority has indicated a ballpark figure, any tinkering with such figure at the appellate stage would require material in 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

20Copy pinpoint20. 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

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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, 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.

21Copy pinpoint21. 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

22Copy pinpoint22. Mr. Dhruv Mehta, the learned Senior Counsel appearing for the appellants submitted that the issue framed by the High Court in its Impugned Judgment is wholly alien to the sale conducted under the SARFAESI Rules, more particularly Rule 9.

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23Copy pinpoint23. It was submitted that the High Court was not correct in reading down Rule 9(5) and holding that the same must yield to the principles recognized in Section 73 of the 1872 Act, notwithstanding the wide words used in Rule 9(5) of SARFAESI Rules.

24Copy pinpoint24. It was further submitted that the High Court failed to appreciate that the auction sale under consideration was a statutory sale conducted by the appellant in accordance with the SARFAESI Rules and as Section 35 of the SARFAESI Act gives an overriding effect, this would not be a case of breach of contract which would attract principles underlying Section 73 of the 1872 Act.

25Copy pinpoint25. Mr. Mehta placed strong reliance on a recent decision of this Court in Authorized Officer State Bank of India v. C. Natarajan reported in 2023 SCC Online SC 510, wherein whilst dealing with a similar issue, it was held that Rule 9 which is part of a special enactment will have precedence over Sections 73 and 74 respectively of the 1872 Act which is a general provision.

26Copy pinpoint26. It was further submitted that Rule 9(5) of the SARFAESI Rules, ought to be interpreted strictly because often 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.

27Copy pinpoint27. 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.

28Copy pinpoint28. 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

29Copy pinpoint29. 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.

30Copy pinpoint30. 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.

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31Copy pinpoint31. 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.

32Copy pinpoint32. 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.

33Copy pinpoint33. 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)

34Copy pinpoint34. 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 & 74 respectively of the 1872 Act is applicable to forfeiture of earnest- money deposit under Rule 9(5) of the SARFAESI Rules? In other words, whether the forfeiture of the earnest-money deposit under Rule 9(5) of the SARFAESI Rules can be only to the extent of loss or damages incurred by the Bank? II. Whether, the forfeiture of the entire amount towards the earnest- money deposit under Rule 9(5) of the Rules amounts to unjust enrichment? In other words, whether the quantum of forfeiture under the SARFAESI Rule is limited to the extent of debt owed? III. Whether a case of exceptionable circumstances could be said to have been made out by the respondent to set aside the order of forfeiture of the earnest money deposit?

i) Legislative History and Scheme of the SARFAESI Act

35Copy pinpoint35. Till early 1990s, the civil suits were being filed for recovery of the dues of banks and financial institutions under the Act 1882 and the Code of Civil Procedure, 1908 (“CPC”). Due to various difficulties the

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banks and financial institutions had to face in recovering loans and enforcement of securities, the Parliament enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (for short, the “RDBFI Act”).

36Copy pinpoint36. On account of lack of infrastructure and manpower, the regular civil courts were not in 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.

37Copy pinpoint37. 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 institutions to hold securities and sell them in a timely manner without the involvement of the courts.

38Copy pinpoint38. 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.

39Copy pinpoint39. 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

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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, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable banks and financial institutions to realise long-term assets, manage problem 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.”

40Copy pinpoint40. 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

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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 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 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. xxx xxx xxx

36. In its Second Report, the Narasimham Committee observed that NPAs in 1992 were uncomfortably high for most of the public sector banks. In Chapter VIII of the Second Report the Narasimham Committee deals about legal and legislative framework and observed:

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“8.1. A legal framework that clearly defines the rights and liabilities of parties to contracts and provides for speedy resolution of disputes is a sine qua non for efficient trade and commerce, especially for financial intermediation. In our system, the evolution of the legal framework has not kept pace with changing commercial practice and with the financial sector reforms. As a result, the economy has not been able to reap the full benefits of the reforms process. 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 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.”

41Copy pinpoint41. 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:

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“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 facilities to those who wanted to set up new industrial units or expand the existing units. Many hundred thousand took advantage of easy financing by the banks and other financial institutions but a large number of them did not repay the amount of loan, etc. Not only this, they instituted frivolous cases and succeeded in persuading the civil courts to pass orders of injunction against the steps taken by banks and financial institutions to recover their dues. Due to lack of adequate infrastructure and non-availability of manpower, the regular courts could not accomplish the task of expeditiously adjudicating the cases instituted by banks and other financial institutions for recovery of their dues. As a result, several hundred crores of public money got blocked in unproductive ventures.

2. In order to redeem the situation, the Government of India constituted a committee under the Chairmanship of Shri T. Tiwari to examine the legal and other difficulties faced by banks and financial institutions in the recovery of their dues and suggest remedial measures. The Tiwari Committee noted that the existing procedure for recovery was very cumbersome and suggested that special tribunals be set up for recovery of the dues of banks and financial institutions by following a summary procedure. The Tiwari Committee also prepared a draft of the proposed legislation which contained a provision for disposal of cases in three months and conferment of power upon the Recovery Officer for expeditious execution of orders made by adjudicating bodies.”

42Copy pinpoint42. 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.

43Copy pinpoint43. 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

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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 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 consent of the borrower and the secured creditor effect the sale at such price. (3) On every sale of immovable property, the purchaser shall immediately, i.e. on the same day or not later than next working day, as the case may be, pay a deposit of twenty five per cent. of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorised officer conducting the sale and in default of such deposit, the property shall be sold again;

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(4) The balance amount of 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, in any case not exceeding three months. (5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold. (6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the Form given in Appendix V to these rules. (7) Where the immovable property sold is subject to any encumbrances, the authorised officer may, if 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.

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(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.”

44Copy pinpoint44. 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.”

45Copy pinpoint45. 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 made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.”

46Copy pinpoint46. This Court in Madras Petrochem Ltd. & Anr. v. Board for Industrial and Financial Reconstruction & Ors. reported in (2016) 4 SCC 1, recapitulated the object behind the enactment of the SARFAESI Act and in that context examined the purpose of Sections 13, 35 and 37 respectively of the SARFAESI Act with the following observations given as under: - “16. It is important at this stage to refer to the genesis of these three legislations. Each of them deals with different aspects of recovery of debts due to banks and financial institutions. Two of them refer to creditors’ interests and how best to deal with recovery of outstanding loans and advances made by them on the one hand, whereas the Sick Industrial Companies (Special

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Provisions) Act, 1985, on the other hand, deals with certain debtors which are sick industrial companies [i.e. companies running industries named in the Schedule to the Industries (Development and Regulation) Act, 1951] and whether such “debtors” having become “sick”, are to be rehabilitated. The question, therefore, is whether the public interest in recovering debts due to banks and financial institutions is to give way to the public interest in rehabilitation of sick industrial companies, 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 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

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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 filed by the financial institutions were pending in various courts, recovery of debts involved more than Rs 5622 crores in dues of public sector banks and about Rs 391 crores of dues of the financial institutions. The locking up of such huge amount of public money in litigation prevents proper utilisation and recycling of the funds for the development of the country.

2. The Bill seeks to provide for the establishment of Tribunals and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill.”

20. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 took away the jurisdiction of the courts and vested this jurisdiction in tribunals established by the Act so as to ensure speedy recovery of debts due to the banks and financial institutions mentioned therein. This Act also included one appeal to the Appellate Tribunal, and transfer of all suits or other proceedings pending before any court to tribunals set up under the Act. The Act contained a non obstante clause in Section 34 stating that its provisions will have effect notwithstanding anything inconsistent contained in any other law for the time being in force or in any instrument having effect by virtue of any other law. In the year 2000, this Act was amended so as to incorporate a new sub-section (2) in Section 34 together with a saving provision in sub-section (1). It is of some interest to note that this Act was to be in addition to and not in derogation of various Financial Corporation Acts and the Sick Industrial Companies (Special 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.

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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 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 Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Act contains a non obstante clause in Section 35 and also contains various Acts in Section 37 which are to be in addition to and not in derogation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Three of these Acts, namely, the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act,

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1992, relate to securities generally, whereas the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 relates to recovery of debts due to banks and financial institutions. Significantly, under Section 41 of this Act, three Acts are, by the Schedule to this Act, amended. We are concerned with the third of such Acts, namely, the Sick Industrial Companies (Special Provisions) Act, 1985, in Section 15(1) of which two provisos have been added. It is the correct interpretation of the second of these provisos on which the fate of these appeals ultimately hangs.” (Emphasis supplied)

ii) Applicability of Section(s) 73 & 74 of the 1872 Act to Forfeiture under the SARFAESI Rules.

47Copy pinpoint47. Before we proceed to answer the first question formulated by us in para 34 of this judgment, we must look into the principles underlying Section 73 of the 1872 Act.

48Copy pinpoint48. Section 73 of the 1872 Act deals with the compensation for loss or damage caused by breach of contract. The same is extracted below: “73. Compensation for loss or damage caused by breach of contract. — When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss 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.

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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.”

49Copy pinpoint49. 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 resulting from the breach of such a contract which they would reasonably contemplate would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the circumstances been known, the parties might have provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.”

50Copy pinpoint50. The above principles were explained and clarified by the Court of Appeal in Victoria Laundry (Windsor) Ltd v. Newman Industrial Ltd., [1949] 2 K.B. 528 as under:

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“(1.) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed: … (2.) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. (3.) What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach. (4.) For this purpose, knowledge “possessed” is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the “ordinary course of things” and consequently what loss is liable to result from a breach of contract in 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

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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.” …”

51Copy pinpoint51. 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 1965 SC 1981. The Court held that when a party commits breach of contract, the other party is entitled to receive compensation for any loss by the damage caused to him which naturally arose in the usual course of business from such breach or which the parties knew when they made the contract to be likely to result from the breach of it. Remote and indirect loss or damage sustained by reason of the breach will not entitle the party complaining breach, to any compensation. Referring to the facts of the case and Illustration (k) to Section 73 of the 1872 Act, the Court held: “13. …On account of the non-delivery of scrap iron, he could have purchased the scrap iron from the market at the same controlled price and similar incidental charges. This means that he did not stand to pay a higher price than what he was to pay to the respondent and therefore he could not have suffered any loss on account of the breach of contract by the respondent. The actual loss, which, according to the appellant, he suffered on account of the breach of contract by the respondent was the result of his contracting to sell 200 tons of scrap iron for export to the Export Corporation. It may be assumed that, as stated, the market price of scrap iron for export on January 30, 1953, was the price paid by the Export Corporation for the purchase of scrap iron that day. As the parties did not know and could not have known when the contract was made in July 1952 that the scrap iron would be ultimately sold by the appellant to the Export Corporation, the parties could not have known of the likelihood of the loss actually suffered by the appellant, according to him, on account of the failure of the respondent to fulfil the contract.

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14. Illustration (k) to S. 73 of the Contract Act is apt for the purpose of this case. According to that illustration, the person committing breach of contract 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.”

52Copy pinpoint52. 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 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 were not made known to the party breaking the contract, the party breaking the contract, at the most, could only be supposed to have had in its contemplation the amount of injury which would arise generally and directly and not any remote or unknown loss or damage.

53Copy pinpoint53. What would be a ‘penalty’ under Section 74 of the 1872 Act was explained by this Court in K. P. Subbarama Sastri and others v. K. S. Raghavan & Ors. reported in (1987) 2 SCC 424 as under: “5. …The question whether a particular stipulation in a contractual agreement is in the nature of a penalty has to be determined by the court against the background of various

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relevant factors, such as the character of the transaction and its special nature, if any, the relative situation of the parties, the rights and obligations accruing from such a transaction under the general law and the intention of the parties in incorporating in the contract the particular stipulation which is contended to be penal in nature. If on such a comprehensive consideration, the court finds that the real purpose for which the stipulation was incorporated in the contract was that by reason of its burdensome or oppressive character it may operate in terrorem over the promiser so as to drive him to fulfil the contract, then the provision will be held to be one by way of penalty.”

54Copy pinpoint54. The SARFAESI Rules, more particularly Rule 9 was first examined by this Court in Rakesh Birani (Dead) through LRs v. Prem Narain Sehgal & Anr. reported in (2018) 5 SCC 543, wherein the entire auction process under Rule 9 was explained. The relevant observations read as under: - “8. In order to comprehend the rival submissions, it is necessary to ponder as to intendment of Rule 9 of the 2002 Rules which deals with the time of sale, issues of sale certificate and delivery of possession, etc. Public notice of sale is to be published in the newspaper and only after thirty days thereafter, 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

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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.”

55Copy pinpoint55. 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 requisite amount begins from the date when the sale is confirmed by the secured creditor and communicated to the auction purchaser, wherein 25% of the amount has to be deposited as earnest money no later than the next working day from the date of confirmation and the balance amount within 15 days from the said date. b. That for forfeiture of the 25% earnest money deposit of the auction purchaser, twin conditions have to be satisfied being (i) First, that the sale must have been confirmed by the secured creditor and (ii) second, there is a default in payment of the balance 75% of the amount. c. Once the afore-stated conditions are satisfied i.e., the auction purchaser after confirmation of sale fails to deposit the balance amount within the stipulated time, the secured creditor is required to forfeit the original auction purchaser’s earnest money deposit and the secured assets have to be resold. d. The relevant observations are being reproduced below: - “10. In this case, confirmation has been made and communicated on 27-2- 2013 and within fifteen days thereof i.e. on 13-3-2018, the amount of twenty-five per cent had been deposited. Thereafter, sale certificate has been issued under Rule 9(6). Rule 9(5) also makes it clear that in default of payment within the period mentioned in Rule 9(4), the deposit shall be forfeited. There cannot be any forfeiture of the amount of 25%

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in deposit until and unless the sale is confirmed by the secured creditor and there is a default of payment of 75% of the amount. The interpretation made by the High Court thus cannot be accepted.

11. If we read the provisions otherwise then we find even before the confirmation of sale within fifteen days, the amount would be forfeited by the authorised officer who may decide not to confirm the sale that would be a result not contemplated in Rules 9(2), 9(4) and 9(5) which fortify our conclusion that it is only after the confirmation is made under Rule 9(4) that amount has to 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)

56Copy pinpoint56. 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)

57Copy pinpoint57. 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.

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58Copy pinpoint58. This Court in C. Natarajan (supra) whilst dealing with a similar issue pertaining to the applicability of Section(s) 73 and 74 of the 1872 Act on forfeiture under Rule 9(5) of the SARFAESI Rules, answered the same in a negative. The said decision is in two parts: - a) It held that as the SARFAESI Act is a special enactment with overriding effect over other laws by virtue of Section(s) 35 and 37, the 1872 Act more particularly Section(s) 73 and 74 will not be applicable to Rule 9(5) of the SARFAESI Rules especially since the rules framed under a statute become part of the statute. “20. In terms of the Indian Contract Act, 1872 (for brevity “Contract Act”, hereafter), a person can withdraw his offer before acceptance. However, once a party expresses willingness to enter into a contractual relationship subject to terms and conditions and makes an offer which is accepted but thereafter commits a breach of contract, he does so at his own risk and peril and naturally has to suffer the consequences. We are not oblivious of the terms of section 73 and section 74 of the Contract Act, being part of Chapter VI thereof titled “Of the Consequence of Breach of Contract”. These sections, providing for compensation for breach of contract and for liquidated damages, have remained on the statute book for generations and permit the party suffering the breach to recover such quantum of loss or damage from the party in breach. However, with changing times, the minds of people are also changing. The judiciary, keeping itself abreast of the changes that are bound to occur in an evolving society, must interpret new laws that are brought in operation to suit the situation appropriately. In the current era of globalization, the entire philosophy of society, mainly on the economic front is making rapid strides towards changes. Unscrupulous people have been inventing newer modes and mechanisms for defrauding and looting the nation. It is in such a scenario that provisions of enactments, particularly those provisions which have a direct bearing on the economy of the nation, must receive such interpretation so 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

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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 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 the rest, has traced the history of this legislation and the objects that Parliament had in mind in sufficient detail. Apart from the law laid down in such decision, these are the other relevant considerations which ought to be borne in mind while examining a challenge to a forfeiture order.

21. There is one other aspect which is, more often than not, glossed over. In terms of sub-rule (5) of rule 9, generally, forfeiture would be followed by an exercise to resell the immovable property. On the date an order of forfeiture is in contemplation of the authorized officer of the secured creditor for breach committed by the bidder, factually, the position is quite uncertain for the former in that there is neither any guarantee of his receiving bids pursuant to a future sale, much to the satisfaction of the secured creditor, nor is there any gauge to measure the likely loss to be suffered by it (secured creditor) if no bidders were interested to purchase the immovable property. Since the extent of

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loss cannot be immediately foreseen or calculated, such officers may not have any option but to order forfeiture of the amount deposited by the defaulting bidder in an attempt to recover as much money as possible so as to reduce the secured debt. That the immovable property is later sold at the same price or at a price higher than the one which was offered by the party suffering the forfeiture is not an eventuality that occurs in each and every case. Sections 73 and 74 of the Contract Act would not, therefore, be sufficient to take care of the interest of the secured creditor in such a case and that also seems to be another reason for bringing in the provision for forfeiture in rule 9. Ordinarily, therefore, validity of an order of forfeiture must be judged considering the circumstances that were prevailing on the date it was made and not based on supervening events.

22. Does sub-rule (5) of rule 9, which is part of a delegated legislation, i.e., the Rules, have the effect of diluting section 73 and section 74 of the Contract Act? 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. 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.

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“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 statute under which the auction is conducted and suffer consequences for breach, if any, as stipulated. Rule 9(5) legislatively lays down a penal consequence. ‘Forfeiture’ referred to in sub-rule (5) of rule 9, in the setting of the SARFAESI Act and the Rules, has to be construed as denoting a penalty that the defaulting bidder must suffer should he fail to make payment of the entire sale price within the period allowed to him by the authorized officer of a secured creditor.

19. Though it is true that the power conferred by sub- rule (5) of rule 9 of the Rules ought not to be exercised indiscriminately without having due regard to all relevant facts and circumstances, yet, the said sub-rule ought also not be read in a manner so as to render its existence only on paper. Drawing from our experience on the Bench, it can safely be observed that in many a case the borrowers themselves, seeking to frustrate auction sales, use their own henchmen as intending purchasers to participate in the auction but thereafter they do not choose to carry forward the transactions citing issues which are hardly tenable. This leads to auctions being aborted and issuance of fresh notices. Repetition of such a process of participation-withdrawal for a couple of times or more has the undesirable effect of rigging of the valuation of the immovable property. In such cases, the only perceivable loss suffered by a secured creditor would seem to be the extent of expenses incurred by it in putting up the immovable property for sale. However, what does generally escape notice in the process is that it is the mischievous borrower who steals a march over the secured creditor by managing to have a highly valuable property purchased by one of its henchmen for a song, thus getting such property freed from the clutches of mortgage and by diluting the