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Forfeiture Follows Default—Equity Can’t Rewrite SARFAESI Rules
In a recent decision, the Hon’ble Allahabad High Court in the case of Anil Kumar Jaiswal v. Union Bank of India and Another, (2025:AHC:72361DB), dated May 6, 2025, dismissed a writ petition seeking a refund of forfeited earnest money following a failed auction under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002, holding that statutory forfeiture under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, cannot be overridden on equitable grounds. The Court reiterated that equity cannot dilute the legal consequences expressly provided under the law.
The case arose out of an e-auction conducted by the Union Bank of India on December 29, 2023, under the provisions of the SARFAESI Act. The petitioner, having emerged as the successful bidder, deposited 25% of the bid amount. However, he failed to deposit the remaining 75% within the stipulated time. Consequently, the bank forfeited the earnest deposit as per Rule 9(5). Subsequently, on November 18, 2024, the bank withdrew the SARFAESI proceedings against the mortgaged property, reserving the right to re-initiate enforcement measures, a step which it did on the same date.
Relying on this subsequent withdrawal and re-initiation of SARFAESI proceedings, the petitioner approached the High Court under Article 226 of the Constitution, seeking directions for the bank to refund the forfeited earnest money. It was argued that the withdrawal of the SARFAESI action rendered the auction process void and the forfeiture unsustainable in law.
The High Court, however, found no merit in the plea and dismissed the petition. After considering the legal position, the Court observed that Rule 9(5) provides for a statutory consequence upon default in payment of the balance bid amount. Referring to case of Authorised Officer, Central Bank of India Vs. Shanmugavelu, [(2024) 6 SCC 641], dated February 2, 2024, the Court noted that the forfeiture of 25% of the sale price is automatic and unconditional once the successful bidder defaults in depositing the balance. This legal consequence is unaffected by whether a subsequent sale is conducted or whether the debt has been satisfied to any extent.
In the case of Shanmugavelu (supra), the Supreme Court recognized a narrow exception to forfeiture where extraneous, unavoidable factors beyond the purchaser’s control prevent payment. However, the High Court found no such circumstance in this case, noting that the petitioner’s default was not caused by any impediment, and the bank’s subsequent withdrawal and re-initiation of SARFAESI action had no bearing on the already-triggered statutory forfeiture.
The High Court, therefore, concluded that the forfeiture was a direct consequence of statutory mandate and could not be reversed on equitable grounds or on the basis of subsequent actions by the bank. The petitioner’s arguments were described as well-articulated but ultimately sophistic, lacking any substantive legal basis. Accordingly, the Court dismissed the writ petition, upholding the forfeiture of the earnest money.
This ruling underscores that statutory forfeiture under Rule 9(5) of the SARFAESI Rules operates independently of subsequent developments and cannot be reversed on equitable grounds. It reinforces the principle that equity cannot override clear legal mandates.
Supreme Court Holds Arbitration Mandatory Under Section 11 of SARFAESI Act for Inter-Creditor Disputes Involving Secured Assets.
