Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 : ss. 13(4), 17 – Security Interest (Enforcement) Rules, 2002 – r. 9 – Contract Act – ss. 73, 74 – Power of forfeiture by the Authorized Officer – Exercise of – Interference with the forfeiture order by the High Court – Justification of – On facts, default committed by one in discharging its debts to the Bank and declared as non-performing asset – Eauction held by the Authorized Officer for secured asset of the defaulter– Respondent declared the highest bidder and paid the earnest money and 25% of the sale price – However, could not pay the balance 75% within the stipulated period and sought extension of timeand the same was granted – Respondent further sought extension and the same was rejected– Thereafter, the Authorized Officer cancelled the e-auction sale concluded in favour of respondent and forfeited the amount deposited– Respondent applied before the DRT for the extension of time to deposit the balance amount – DRT directed the Authorized officer to maintain status quo – In appeal, the DRAT permitted the Authorized Officer to proceed with fresh auction without, however, vacating the order of status quo passed earlier – Writ petition by the respondent seeking refund of the forfeited amount – Meanwhile, the secured asset was put up for auction and was sold to another auction-purchaser for the same amount– High Court directed refund of forfeited amount on the ground that the Bank should not be permitted to enrich by forfeiting the amount from the respondent– On appeal, held: Power of forfeiture is statutorily conferred – Nothing prevented the respondent from making full payment of the balance amount and have the sale certificate issued in his favour – Respondent not genuinely interested in proceeding with his part of obligations – Counsel for the respondent has not shown how the Authorized Officer acted in derogation of the statute – While dealing with a case covered by r. 9, an order of forfeiture of sale price should not be lightly interfered – Thus, no arbitrariness or unreasonableness in the action of the Authorized Officer found in forfeiting 25% of the sale price – Furthermore, there being no enrichment of the Bank by reason of the forfeiture, the High Court not justified in directing a refund of 25% of the sale price – Thus, the order passed by the High Court set aside.
Words and Phrases:”Forfeiture” – Meaning of.
Allowing the appeal, the Court
HELD: 1.1The bare perusal of the provisions reveals an ordainment in sub–rule (4) of r. 9 of the Security Interest (Enforcement) Rules, 2002 that on mutual agreement, the time for making deposit of the balance amount of sale price can be extended for a period not exceeding ninety days; but, extension beyond ninety days is not permissible on any count. Since grant of extension for intermittent periods so that the duration of such periods taken together does not exceed ninety days would suggest some element of discretion being reserved unto the authorized officer of a secured creditor under sub–rule (5) of rule
9. However, there can be no gainsaying that such discretion has to be exercised reasonably and not on whims or caprice; at the same time, no auction purchaser can claim extension as a matter of right and that too beyond the statutorily prescribed period. Whether or not a case for extension does exist would depend upon the peculiar facts of each case and no strait–jacket formula can ever be laid down therefor. If, however, circumstances are shown to exist where a bidder is faced with such a grave disability that he has no other option but to seek extension of time on genuine grounds so as not to exceed the stipulated period of ninety days and the prayer is rejected without due consideration of all facts and circumstances, refusal of the prayer for extension could afford a ground for a judicial review of the decision-making process on valid ground(s). [Para 13][1080-A-E]
1.2. Sub-rule (5) of rule 9 does envisage forfeiture, should there be a default in payment of the balance amount of purchase price within the period mentioned in sub–rule (4). The power of forfeiture is, therefore, statutorily conferred. The express power conferred on a secured creditor by sub-rule (5) of rule 9 to forfeit the initial deposit made by the bidder in case he commits any default in paying installments of the sale price to the secured creditor is an action which is part of the measures specified in section 13(4) of the SARFAESI Act and, therefore, amenable to challenge on valid ground(s) in an application under section 17(1) thereof. [Para 14][1080-F-G]
1.3. 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. 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. Sub-rule (5) of rule 9 cannot but be interpreted pragmatically to serve twin purposes-first, to facilitate due enforcement of security interest by the secured creditor (one of the objects of the SARFAESI Act); and second, to prohibit wrong doers from being benefitted by a liberal construction thereof. [Paras 18, 19][1081-G-H; 1082-A-C, F] 1.4As regards the question 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, 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. [Para 22][1084-E-H]
1.5 Whenever a challenge is laid to an order of forfeiture made by an authorized officer under sub–rule (5) of rule 9 of the Rules by a bidder, who has failed to deposit the entire sale price within ninety days, the tribunals/courts ought to be extremely reluctant to interfere unless, of course, a very exceptional case for interference is set up. What would constitute a very exceptional case, however, must be determined by the tribunals/courts on the facts of each case and by recording cogent reasons for the conclusion reached. Insofar as challenge to an order of forfeiture that is made upon rejection of an application for extension of time prior to expiry of ninety days and within the stipulated period is concerned, the scrutiny could be a bit more intrusive for ascertaining whether any patent arbitrariness or unreasonableness in the decision making process has had the effect of vitiating 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 interpretation of the relevant laws should not be lost sight of. Losing sight thereof may not be in the larger interest of the nation and susceptible to interference. [Para 24][1085-F-H; 1086-A-E]
1.6 There is no reason to hold that there has either been any manifest arbitrariness or unreasonableness, which warranted interdiction with the order of forfeiture. [Para 26][1087-B-C]
1.7 It has to be held that the transaction fell through by reason of the default or failure of the contesting respondent to deposit 75% of the sale price by 23rd October, 2017, as per the terms of rule 9(4). On facts, the contesting respondent was arranging for funds when he received the summons from the DRT on 10th October, 2017. It is, therefore, clear that at least till that date, the contesting respondent was lacking in financial resources to make payment of the entire sale price. Although it is not always necessary for an auction purchaser to arrange for funds and be ready to pay the entire sale price within 15 days of confirmation of sale, since extension of time is contemplated in rule 9, it is beyond comprehension why the contesting respondent while applying for an extension of time on 27th September, 2017 sought for only 25 days’ time and not for more time, at least up to the entire period of ninety days, being the maximum time that he could have asked for and made available to him in terms of rule 9(4). He had also moved the DRT for extension of time, which was not granted. The DRT, however, granted him liberty to participate in the auction to be held on 5th January, 2018 but without waiving any condition. These are circumstances which certainly are adverse to the contesting respondent. [Para 27][1087-G-H; 1088-A-C]
1.8 The terms of the auction notice made it clear that the auction sale would be conducted in terms of the provisions contained in the SARFAESI Act. All prospective bidders were, therefore, put on guard as to what could follow in case of a default or neglect. Notwithstanding the proceedings that were initiated before the DRT by defaults of which the contesting respondent became aware on 10th October, 2017, nothing prevented him from making full payment of the balance amount and have the sale certificate issued in his favour. It can be inferred from the facts and circumstances that the contesting respondent was seeking to buy time. Counsel for the contesting respondent has not shown how the Authorized Officer acted in derogation of the statute. Indeed, it was open to the Authorized Officer to extend the time further; equally, he was also free not to grant further extension having regard to the conduct of the contesting respondent. When two options are legally open to be exercised in a given set of facts and circumstances and one option is exercised, which does not appear to be wholly unreasonable, it is not for the writ court to find fault on the specious ground that the secured creditor has not suffered any financial loss. That such creditor had not suffered financial loss cannot be the sole determinative factor in view of the special law that the SARFAESI Act is. Efforts made by recalcitrant borrowers to stall sale proceedings at any costs is not uncommon. Many a time, when a sale does not fructify because of an injunction, the time taken and efforts made together with costs incurred by the secured creditor to put up the secured asset (immovable property) for sale once again and close the transaction by itself may result in prejudicial affectation of its interest in enforcement of the security interest. While dealing with a case covered by rule 9 of the Rules, an order of forfeiture of sale price should not be lightly interfered. The contesting respondent was not genuinely interested in proceeding with his part of his obligations and there is no arbitrariness in the action of the Authorized Officer in forfeiting Rs. 30,75,000/– being 25% of the sale price. [Para 28][1088-DH; 1089-A-B]
1.9 The High Court committed an error of law in directing refund on the ground that the Bank “should not be permitted to enrich by forfeiting the amount from the writ petitioner”. It is not a question of the Bank’s enrichment or deriving any undue advantage that the Court was really concerned with. It seems to have posed a wrong question for being answered. [Para 30][1089C]
1.10 The Bank has not been enriched, much less unjustly enriched, by reason of the impugned forfeiture. Receipt of 25% of the sale price by the Bank from the contesting respondent was not the outcome of any private negotiation or arrangement between them. It was pursuant to a public auction, involving a process of offer and acceptance, and it was in terms of statutory provisions contained in the Rules, particularly rule 9(3), that money changed hands for a definite purpose. Receipt of 25% of the sale price does not constitute a benefit, a fortiori, retention thereof by forfeiture cannot be termed unjust or inequitable, so as to attract the doctrine of unjust enrichment. The Bank, as a secured creditor, is entitled in law to enforce the security interest and in the process to initiate all such steps and take all such measures for protection of public interest by recovering the public money, lent to a borrower and who has squandered it, in a manner authorized by law. The contesting respondent participated in the auction well and truly aware of the risk of having 25% of the sale price forfeited in case of any default or failure on his part to make payment of the balance amount of the sale price. Question of the Bank being enriched by a forfeiture, which is in the nature of a statutory penalty, does not and cannot therefore arise in the circumstances. [Para 35][1090-B-F]
1.11 The High Court failed to bear in mind that the power of judicial review of a writ court will not be permitted to be invoked to protect private interest at the cost of public interest, or to decide contractual disputes, unless a clear–cut case of arbitrariness or mala fides or bias or irrationality is made out. On the pleadings, this was not one such case where the High Court should have interfered. [Para 36][1090-F-G]
1.12 In the present case, the Authorized Officer had adhered to the statutory rules. If by such adherence any amount is required to be forfeited as a consequence, the same cannot be scrutinized wearing the glasses of misplaced sympathy. [Para 37][1090-H; 1091-A]
1.13 There being no enrichment of the Bank by reason of the forfeiture. The High Court was not justified in exercising writ jurisdiction and directing a refund of 25% of the sale price. The impugned judgment and order of the High Court is set aside. [Para 38][1091-A]
Alisha Khan vs Indian Bank (Allahabad Bank) 2021 SCC OnLine SC 3340 ; Agarwal Tracom Private Ltd vs Punjab National Bank and Ors (2018) 1 SCC 626 : [2017] 11 SCR 164 ; R.S. Joshi vs Ajit Mills Ltd (1977)
4 SCC 98 : [1978] 1 SCR 338 ; BankuraMunicipality vs Lalji Raja & Sons AIR 1953 SC 248 : [1953] SCR
767 ; Mardia Chemicals vs Union of India (2004) 4 SCC 311 : [2004] 3 SCR 982; Mahabir Kishore vs. State of Madhya Pradesh (1989) 4 SCC 1 : [1989] 3 SCR 596; Sahakari Khand Udyog Mandal Ltd. vs.CCE & Customs (2005) 3 SCC 738 : [2005] 2 SCR 606; Indian Council for Enviro Legal Action vs. Union of India (2011) 8 SCC 161 : [2011] 9 SCR 146 ; Martin Burn Ltd vs The Corporation of Calcutta (1966) 1 SCR
543 –referred to.
Black’s Law Dictionary – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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