A three-judge bench of the Supreme Court comprising Dr. Dhananjaya Y. Chandrachud, CJI and Justices J.B. Pardiwala and Manoj Misra, held that Section 73 and 74 of the Indian Contract Act, 1872, regarding compensation for breach of contract, do not apply to the forfeiture of earnest money under Rule 9(5) of the SARFAESI Rules.
The Apex Court observed that the SARFAESI Act is a special enactment with overriding effect over general laws and that the Act's rules validly framed under it become part of the statute. Therefore, the principles of unjust enrichment and compensation under the Contract Act do not govern the forfeiture of earnest money under the SARFAESI Act. The Court also emphasized that equity cannot supplant the law, and the statutory consequence of forfeiture must be upheld.
The Supreme Court, in a case concerning the forfeiture of earnest money deposit by a Nationalized Bank in a property auction, upheld the High Court's decision to set aside the Debt Recovery Appellate Tribunal's order and restore the Debt Recovery Tribunal-II's decision on forfeiture. The bank had conducted an e-auction of property and declared the respondent as the successful bidder. However, the respondent failed to pay the balance amount within the stipulated time, leading to the cancellation of the sale and forfeiture of the earnest money.
The Debt Recovery Tribunal-II directed the bank to refund the earnest money after deducting a sum for expenses. The DRT-II noted that the respondent had requested documents for a term loan, which the bank did not provide, leading to the failure of the loan and the respondent's inability to pay the balance amount. The DRT-II also observed that the bank did not incur any loss as the property was sold for a higher price in the subsequent auction.
The Supreme Court considered the legislative history and scheme of the SARFAESI Act and held that the Act should not be used to unjustly enrich creditors. It analyzed the High Court's judgment, which set aside the DRAT's order based on the grounds of forfeiture limitation and unjust enrichment, and framed questions for consideration regarding the application of the principles of the Indian Contract Act to forfeiture under the SARFAESI Rules.
The Apex Court emphasized the importance of enforcing contractual obligations and clarified that the SARFAESI Act's rules do not dilute the Contract Act's provisions. It held that only the deposit given as earnest money for the due performance of the obligation is liable to be forfeited in the event of a breach. The Court also addressed exceptional circumstances to set aside forfeiture, stating that such circumstances must be very rare and exceptional.
Ultimately, the Supreme Court upheld the High Court's decision to set aside the Debt Recovery Appellate Tribunal's order and restore the Debt Recovery Tribunal's decision on forfeiture.
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