The Learned Counsel-Newsletter

The Authorised Officer, Central Bank of India v. Shanmugavelu [2024 INSC 80]

The dispute was essentially between a secured creditor and the auction-purchaser.

In short, the bank sanctioned a loan against a secured asset, and later the loan became an NPA. The bank then issued a notice for the sale of the asset with a prescribed reserve price, with a set a terms and conditions.

The bid of the respondent was a the highest, and the respondent deposited 25% of the bid amount as earnest money deposit upon which the bank confirmed the sale. This was qualified by a condition that in the event of default in payment of the balance amount, the sale shall be liable to be cancelled and the earnest money shall be forfeited.

The respondent later requested for a three month extension, and the bank acceded to the request. Similarly another extension was also given, as in SARFAESI Rules, with a warning that no further extension can be given.

The respondent further requested an extension of 15 days. This was turned down, and the sale was cancelled and the deposit was forfeited.

The respondent approached the DRT against the action of the bank, and while the decision was pending, a fresh auction was conducted by the bank and the sale was completed.

The DRT later directed the bank to refund the earnest money. The appeal filed by the bank against the decision of the DRT was partly allowed by the DRAT against which both parties filed an appeal at the Madras High Court.

The High Court allowed the civil revision petition of the respondent person on th e ground that:

1.Forfeiture cannot be of an amount more than the loss or damage suffered by it.i.e Rule 9 of the SARFAESI cannot override the ethos of Section 73 of the Indian Contract Act.

2.Forfeiture of entire earnest money amounts to unjust enrichment.

The Bank in its submission relied on: AO SBI v. C Natarajan 2023 SCCOnline SC 510 to assert that statutory sale overrides the ethos of Section 73 of the Indian Contract Act. It was also argued that SARFAESI has to be strictly interpreted.

The respondent Section 35 of SARFAESI only gives the act an over riding effect over other legislations, and the same is not with SARFAESI rules. It was also argued that the rule 9 (5) must be held unconstitutional.

So earnest money is something given by the promisee to the promisor to mark the conclusiveness of the contact. This is apart from the price.

The Court also explained the case of Kailash Nath Associates v. DDA 2015 4 SCC 136, where it was held that in a forfeiture that takes place under the T&C of a public auction, Section 74 of the ICA will have no application.

The Court finally held that the forfeiture of 25% deposit under the SARFAESI Act is a legal consequence, as held in C Natarajan is not an unjust enrichment.

The Court went on to explain the circumstances under which the forfeiture of earnest money can be set aside. And that it says - very rare and exceptional circumstance, and explained the instances like demonetisation, covid etc.

Thus the appeal was allowed.

Wadhwa Group Housing Ltd. v. Vijay Choksi [2024:BHC-AS:9311]

The appellant and the R2 entered into a joint development agreement to develop a project. The appellant and the R2 segregated the area amongst themselves for being sold to the customers.

R1 then booked an apartment, and a consideration was paid. R2 issued the allotment letter, and the R1 is said to have followed the payment schedule. The project however remained incomplete till the enforcement of RERA. R2 was registered as the promoter under RERA.

R1 later approached the Maharashtra RERA seeking refund, but was rejected on technical grounds which inter alia includes unwillingness to pay stamp duty, registration charges by R1. Furthermore RERA directed to execute a fresh sale agreement failing which the entire amount was to be refunded to R1.

The appellate tribunal partially allowed the appeal, allowing a refund of a meager amount.

The High Court of Bombay inter-alia considered the following question of law:

Can a promoter who has not received any consideration from the allottee be held liable for refund ?

The Bombay High Court here held against the promoter. Reliance was placed on a circular dated 4 Dec 2017. Additionally the court interpreted Section 18 of the RERA Act, and concluded that the appellant was covered by the definition of the promoter.

The court also held that the Section 18 cannot be narrowly interpreted to include only that promoter who actually received the amount.

Suzuki Parasrampuria Suitings Pvt. Ltd v. The Official Liquidator of Mahendra Petrochemicals Ltd [CA No.10322 of 2018]

The appellant in this case was the assignee of the debt for the outstandings of the M/s. Mahendra Petrochemicals Ltd. At the appellant, initially took a stand that they be considered as a secured creditor under the SARFAESI Act. This claim of the appellant company was rejected. And now at the appellant contends that they never sought the status of secure d creditor under the SARFAESI Act.

The new stand of the appellant company was found to be against its own pleadings.

The 3 Judge bench held that a litigant can take different stands, but cannot take contradictory stands, and the appeal was dismissed on those grounds.

The bench relied on Amar Singh v. Union of India [2011 7 SCC 69] and the Joint Action Committee of Airline Pilots Association of India v. DGCA [2011 5 SCC 435] in the said conclusion.

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