Madras High Court Upholds Forfeiture of 25% Bid Amount in SARFAESI Auction Case

On 4 June, the Madras High Court dismissed a writ petition and held that a defaulting auction purchaser cannot claim refund of the 25% deposit when he repeatedly fails to pay the balance sale consideration despite extensions, and the rules permit forfeiture of the amount in such circumstances.

A Division Bench comprising Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan rejected Kamal's challenge to the order of the DRAT Chennai, which had upheld the dismissal of his securitisation application by the DRT. It observed:

“... it is clear that when relevant rule permits forfeiture of 25% of the sale consideration in case of non-payment of balance sale consideration within the time stipulated, that too, after grant of sufficient time, the petitioner has no right to seek refund of 25% of the sale consideration deposited by him.”

Kamal, son of S. Mani and Krishnaveni (respondents 3 and 4), participated in the auction of mortgaged property belonging to Krishna Constructions, a partnership firm. He emerged as the highest bidder in the first auction held on 12 September 2017 and deposited Rs 30 lakh, but failed to pay the balance Rs 72.37 lakh within time despite extension. The bank therefore forfeited the deposit and re-auctioned the property.

Again, Kamal emerged as the highest bidder in the second auction held on 20 January 2018 and deposited Rs 12.72 lakh, representing 25% of the sale consideration. He again defaulted on the balance Rs 65.17 lakh despite notices and extensions. The bank forfeited the deposit and conducted a fresh auction on 29 May 2018, in which a third party purchased the property.

Kamal then approached the DRT seeking to set aside the third auction sale, but the Tribunal dismissed his application. The DRAT upheld that decision, leading to the present writ petition.

Before the High Court, Kamal argued that he had deposited nearly 75% of the property value across both auctions and contended that the appellate authority failed to consider his case properly.

The High Court rejected the argument, holding that Rule 9(3) to 9(5) of the Security Interest (Enforcement) Rules, 2002 clearly permits forfeiture of the 25% deposit when the bidder fails to pay the balance consideration within the stipulated time, even after extensions. It also relied on the Supreme Court ruling in Authorised Officer, Central Bank of India v. Shanmugavelu (2024) to hold that forfeited amounts cannot be refunded, even if subsequent sales fetch higher prices.

The Bench further held that Kamal failed to produce any material before the DRT to show illegality in the subsequent auction and also failed to implead the auction purchaser, who constituted a necessary party, which weakened his challenge.

Accordingly, the High Court dismissed the writ petition with no order as to costs after finding no illegality in the DRAT's order.

For Petitioners: G Senthilkumar