Introduction

The case of State Bank of India v. Anil Kumar Shukla and Others adjudicated by the Debts Recovery Appellate Tribunal (DRAT) on January 24, 2020, addresses critical issues surrounding the forfeiture of auction deposits under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This case involves the State Bank of India (SBI) as the secured creditor and Anil Kumar Shukla along with other parties as borrowers and auction purchasers.

The core issues revolve around the proper forfeiture of earnest money deposits (EMD) when auction purchasers fail to comply with the stipulated payment timelines, and who is rightfully entitled to the forfeited amounts—whether it be the borrower or the secured creditor.

Summary of the Judgment

In this case, SBI had granted a housing loan to Anil Kumar Shukla, secured by a mortgage on immovable property. Breach of the repayment plan led SBI to classify the account as a Non-Performing Asset (NPA) and initiate recovery proceedings under the SARFAESI Act. Following default, SBI issued possession and auction sale notices. Two auction sales were conducted; however, in both instances, the bidders failed to deposit the remaining 75% of the sale price within the stipulated 15-day period after making the initial 25% EMD. Consequently, SBI forfeited the EMD amounts.

The auction purchasers challenged the forfeiture, arguing procedural lapses and misapplication of rules. The DRAT examined whether the forfeiture was lawful and determined the rightful beneficiary of the forfeited amounts.

The Tribunal concluded that, under the SARFAESI Act provisions prior to the amendment on November 4, 2016, the forfeited amount should benefit the borrower after deducting actual expenses incurred by the secured creditor. Furthermore, the Tribunal found that SBI's forfeiture of the EMD was premature as the sale was not confirmed by the secured creditor, rendering the forfeiture invalid.

Consequently, the DRAT dismissed SBI's appeal and directed the bank to refund the forfeited amounts to the auction purchasers, less the expenses incurred.

Analysis

Precedents Cited

The Judgment extensively references pivotal legal precedents to substantiate its conclusions:

• Haryana Financial Corporation and another Vs. Rajesh Gupta, (2010) 1 SCC 655: This Supreme Court decision emphasized that forfeiture cannot stand if the seller fails to disclose material defects in the property. However, in the current case, the Tribunal found no evidence of such non-disclosure.
• Rakesh Birani (D) through LRS Vs. Prem Narain Sehgal and Anr., Civil Appeal No. 3156 of 2018: This Supreme Court judgment established that forfeiture of the 25% EMD cannot occur unless the sale is confirmed by the secured creditor. The DRAT applied this principle meticulously, highlighting SBI's failure to confirm the sale before forfeiture.
• The Authorized Officer, Indian Bank Vs. Tetrahedron Ltd., 2013(1) CTC 353: This Madras High Court decision reinforced the notion that forfeited amounts post-auction should benefit the borrower after adjusting for actual expenses, aligning with the Tribunal's interpretation in the present case.

Legal Reasoning

The Tribunal's legal reasoning hinges on the interpretation of the SARFAESI Act and the associated Rules 2002:

• Rule 9(5) of the Rules, 2002: This rule pertains to the forfeiture of the EMD in case the auction purchaser fails to deposit the remaining amount within the stipulated time. The Tribunal noted that the amendment inserting the term “secured creditor” into this rule was not retroactive. Therefore, for auctions conducted before the amendment date, the rule did not specify the beneficiary of the forfeited amount.
• Section 13(7) of the SARFAESI Act, 2002: The Tribunal interpreted this section to mean that any amount received should first cover the costs and expenses incurred by the secured creditor, with the residual amount benefiting the borrower. This interpretation was pivotal in determining the entitlement of the forfeited EMD.
• Confirmation of Sale: The Tribunal underscored that Rule 9(2) mandates confirmation of the sale by the secured creditor before forfeiture can be lawfully enforced. SBI's lack of confirmation prior to forfeiture was deemed a procedural lapse, invalidating the forfeiture.

Impact

This Judgment holds significant implications for future cases involving auction forfeitures under the SARFAESI Act:

• Clarification on Beneficiary of Forfeited Amounts: It establishes that, unless explicitly stated otherwise, forfeited EMDs should benefit the borrower after adjusting for legitimate expenses, especially in the absence of specific provisions or amendments.
• Emphasis on Procedural Compliance: Secured creditors must adhere strictly to procedural requirements, such as confirming the sale prior to forfeiture, to ensure the legality of the forfeiture action.
• Non-Retroactive Application of Amendments: Amendments to procedural rules are not retroactively applicable unless expressly stated, affecting cases where defaults occurred prior to amendments.
• Due Diligence for Auction Purchasers: Auction purchasers are reminded of the necessity to conduct thorough due diligence regarding property titles and compliance with local regulations to avoid forfeiture scenarios.

Complex Concepts Simplified

SARFAESI Act

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) empowers financial institutions to recover non-performing assets (NPAs) by enforcing their security interests without the need for court intervention, provided certain conditions are met.

Earnest Money Deposit (EMD)

An EMD is a deposit made by a bidder to demonstrate their serious intent to purchase a property during an auction. Typically, it constitutes a percentage of the bid amount.

Forfeiture

Forfeiture refers to the cancellation of the EMD (or other deposits) when the bidder fails to comply with the auction terms, such as not depositing the remaining sale price within the specified timeframe.

Secured Creditor

A secured creditor is a lender or financial institution that has collateral (security interest) against the borrower's assets to secure the repayment of the loan.

Confirmation of Sale

Confirmation of sale is a procedural step where the secured creditor verifies and approves the auction sale before it becomes final. This step is crucial to legitimizing the auction and any consequent actions like forfeiture.

Conclusion