AUTHORISED OFFICER, CENTRAL BANK OF INDIA versus SHANMUGAVELU
[2024] 2 S.C.R. 12, Supreme Court of India, 2024
Outcome: Disposed off
Segment: Issues
* Author
[2024] 2 S.C.R. 12 : 2024 INSC 80
The Authorised Officer, Central Bank of India 
v. 
Shanmugavelu
(Civil Appeal No(s). 235-236 of 2024)
02 February 2024
[Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala,* 
Manoj Misra, JJ.]
Issue for Consideration
(i)Whether, the underlying principle of Section(s) 73 & 74 respectively 
of the Contract Act, 1872 Act is applicable to forfeiture of earnest-
money deposit under Rule 9(5) of the SARFAESI Rules. In other 
words, whether the forfeiture of the earnest-money deposit under 
Rule 9(5) of the SARFAESI Rules can be only to the extent of 
loss or damages incurred by the Bank; (ii) Whether, the forfeiture 
of the entire amount towards the earnest-money deposit under 
Rule 9(5) of the Rules amounts to unjust enrichment. In other 
words, whether the quantum of forfeiture under the SARFAESI 
Rule is limited to the extent of debt owed; (iii) Whether a case of 
exceptionable circumstances could be said to have been made 
out by the respondent to set aside the order of forfeiture of the 
earnest money deposit.
Headnotes
Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 – Security Interest 
(Enforcement) Rules, 2002 – Contract Act, 1872 – ss. 73 and 
74 – Whether, the underlying principle of Section(s) 73 & 74 
respectively of the Contract Act, 1872 Act is applicable to 
forfeiture of earnest-money deposit under Rule 9(5) of the 
SARFAESI Rules:
Held: The SARFAESI Act is a special
legislation with an overriding 
effect on the general law, and only those legislations which are either 
specifically mentioned in Section 37 or deal with securitization will 
apply in addition to the SARFAESI Act – Being so, the underlying 
principle envisaged under Section(s) 73 & 74 of the 1872 Act which 
is a general law will have no application, when it comes to the 
SARFAESI Act more particularly the forfeiture of earnest-money 
deposit which has been statutorily provided under Rule 9(5) of the
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The Authorised Officer, Central Bank of India v. Shanmugavelu
SARFAESI Rules as a consequence of the auction purchaser’s 
failure to deposit the balance amount – The forfeiture can be justified 
if the terms of the contract are clear and explicit – If it is found that 
the earnest money was paid in accordance with the terms of the 
tender for the due performance of the contract by the Promisee, 
the same can be forfeited in case of non-performance by him or 
her – Since, the forfeiture under Rule 9(5) of the SARFAESI Rules 
is also taking place pursuant to the terms & conditions of a public 
auction – Suffice to say, Section(s) 73 and 74 of the 1872 Act will 
have no application whatsoever, when it comes to forfeiture of the 
earnest-money deposit under Rule 9 sub-rule (5) of the SARFAESI 
Rules. [Paras 68, 89, 91]
Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 – Security Interest 
(Enforcement) Rules, 2002 – Contract Act, 1872 – The High 
Court held that forfeiture of the entire deposit u/r. 9 sub-
rule (5) of the SARFAESI Rules by the appellant bank after 
having recovered its dues from the subsequent sale amounts 
to unjust enrichment – Whether, the forfeiture of the entire 
amount towards the earnest-money deposit under Rule 9(5) 
of the Rules amounts to unjust enrichment:
Held: The consequence of forfeiture of 25% of the deposit under 
Rule 9(5) of the SARFAESI Rules is a legal consequence that
has 
been statutorily provided in the event of default in payment of the 
balance amount – The consequence envisaged under Rule 9(5) 
follows irrespective of whether a subsequent sale takes place at a 
higher price or not, and this forfeiture is not subject to any recovery 
already made or to the extent of the debt owed – In such cases, 
no extent of equity can either substitute or dilute the statutory 
consequence of forfeiture of 25% of deposit under Rule 9(5) of 
the SARFAESI Rules – The High Court erred in law by holding 
that forfeiture of the entire deposit under Rule 9 sub-rule (5) of 
the SARFAESI Rules by the appellant bank after having already 
recovered its dues from the subsequent sale amounts to unjust 
enrichment. [Paras 111, 113]
Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 – Security Interest 
(Enforcement) Rules, 2002 – Contract Act, 1872 – Whether a 
case of exceptionable circumstances could be said to have 
been made out by the respondent to set aside the order of 
forfeiture of the earnest money deposit:
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Held: Where extraneous conditions exist that might have led to the 
inability of the successful auction purchaser despite best efforts 
from depositing the balance amount to no fault of its own, in such 
cases the earnest-money deposited by such innocent successful 
auction purchaser could certainly be asked to be refunded – In the 
instant case, it is the respondent’s case that he was unable to make 
the balance payment owing to the advent of the demonetization – 
The same led to a delay in raising the necessary finance – It has 
been pleaded by the respondent that the appellant bank failed to 
provide certain documents to him in time as a result of which he 
was not able to secure a term loan – However, the aforesaid by no 
stretch can be said to be an exceptional circumstance warranting 
judicial interference – Because demonetization had occurred much 
before the e-auction was conducted by the appellant bank – As 
regards the requisition of documents, the sale was confirmed on 
07.12.2016, and the respondent first requested for the documents 
only on 20.12.2016, and the said documents were provided to 
him by the appellant within a month’s time i.e., on 21.01.2017 – It 
may also not be out of place to mention that the respondent was 
granted an extension of 90-days’ time period to make the balance 
payment, and was specifically reminded that no further extension 
would be granted, in-spite of this the respondent failed to
make the 
balance payment – The e-auction notice inviting bids along with the 
correspondence between the appellant bank and the respondent 
are unambiguous and clearly spelt out the consequences of not 
paying the balance amount within the specified period. [Paras 
117, 118, 119, 120]
Doctrines/Principles – Principle of ‘Reading-Down’ a provision:
Held: The principle of “reading down” a provision refers to a legal 
interpretation approach where a court, while examining the validity 
of a statute, attempts to give a narrowed or restricted meaning to 
a particular provision in order to uphold its constitutionality – This 
principle is rooted in the idea that courts should make every effort 
to preserve the validity of legislation and should only declare a law 
invalid as a last resort – When a court encounters a provision that, 
if interpreted according to its plain and literal meaning, might lead 
to constitutional or legal issues, the court may opt to read down the 
provision –Reading down involves construing the language of the 
provision in a manner that limits its scope or application, making 
it consistent with constitutional or legal principles – The rationale
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The Authorised Officer, Central Bank of India v. Shanmugavelu
behind the principle of reading down is to avoid striking down an 
entire legislation – Courts generally prefer to preserve the intent 
of the legislature and the overall validity of a law by adopting an 
interpretation that addresses the specific constitutional concerns 
without invalidating the entire statute. [Paras 93, 94, 95]
Security Interest (Enforcement) Rules, 2002 – Rule 9 sub-rule 
(5) – Harshness of a provision is no reason to read down the 
same:
Held: Harshness of a provision is no reason to read down the 
same, if its plain meaning is unambiguous and perfectly valid – A 
law/rule should be beneficial in the sense that it should suppress 
the mischief and advance the remedy – The harsh consequence of 
forfeiture of the entire earnest-money deposit has been consciously 
incorporated by the legislature in Rule 9(5) of the SARFAESI 
Rules so as to sub-serve the larger object of the SARFAESI Act 
of timely resolving the bad debts of the country – The idea behind 
prescribing such a harsh consequence is not illusory, it is to attach 
a legal sanctity to an auction process once conducted under the 
SARFAESI Act from ultimately getting concluded – Any dilution of 
the forfeiture provided under Rule 9(5) of the SARFAESI Rules 
would result in the entire auction process under the SARFAESI 
Act being set at naught by mischievous auction purchaser(s) 
through sham bids, thereby undermining
the overall object of the 
SARFAESI Act of promoting financial stability, reducing NPAs and 
fostering a more efficient and streamlined mechanism for recovery 
of bad debts. [Paras 101 and 102]
Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 – Legislative History 
and scheme – Discussed.
Case Law Cited
Fateh Chand v. Balkishan Dass, [1964] SCR 515 : AIR 
1963 SC 1405 – followed.
Madras Petrochem Ltd. & Anr. v. Board for Industrial 
and Financial Reconstruction & Ors., [2016] 11 SCR 
419 : (2016) 4 SCC 1; Karsandas H. Thacker v. M/s. 
The Saran Engineering Co. Ltd., AIR 1965 SC 1981; 
K. P. Subbarama Sastri and others v. K. S. Raghavan 
& Ors., [1987] 2 SCR 767 : (1987) 2 SCC 424; Rakesh
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Birani (Dead) through LRs v. Prem Narain Sehgal & 
Anr., [2018] 3 SCR 750 : (2018) 5 SCC 543; Agarwal 
Tracom Private Limited v. Punjab National Bank & Ors., 
[2017] 11 SCR 164 : (2018) 1 SCC 626; Celir LLP. v. 
Bafna Motors (Mumbai) Pvt. Ltd. & Ors., 2023 SCC 
OnLine SC 1209; R.S. Joshi, Sales Tax Officer, Gujarat 
& Ors. v. Ajit Mills Limited & Anr., [1978] 1 SCR 338 : 
(1977) 4 SCC 98; Maula Bux v. Union of India, [1970] 1 
SCR 928 : 1969 (2) SCC 554; Kailash Nath Associates 
v. Delhi Development Authority & Anr., [2015] 1 SCR 
627 : (2015) 4 SCC 136; B.R. Enterprises v. State of 
U.P. & Ors., [1999] 2 SCR 1111 : (1999) 9 SCC 700; 
Calcutta Gujarati Education Society & Anr. v. Calcutta 
Municipal Corpn. & Ors., [2003] 2 Suppl. SCR 915 : 
(2003) 10 SCC 533; Sahakari Khand Udyog Mandal 
Ltd. v. Commissioner of Central Excise & Customs, 
[2005] 2 SCR 606 : (2005) 3 SCC 738; National Spot 
Exchange Ltd. v. Anil Kohli, Resolution Professional for 
Dunar Foods Ltd., [2021] 7 SCR 1024 : (2022) 11 SCC 
761; Alisha Khan v. Indian Bank (Allahabad Bank) & 
Ors, 2021 SCC OnLine SC 3340; Authorized Officer 
State Bank of India v. C. Natarajan, [2023] 5 SCR 1067: 
2023 SCC Online SC 510 – relied on.
Mardia Chemicals Ltd. & Ors. v. Union of India & Ors., 
[2004] 3 SCR 982 : (2004) 4 SCC 311; United Bank 
of India v. Satyawati Tondon & Ors., [2010] 9 SCR 1 : 
(2010) 8 SCC 110; Satish Batra v. Sudhir Rawal, [2012] 
9 SCR 662 : (2013) 1 SCC
345; Videocon Properties 
Ltd. v. Dr. Bhalchandra Laboratories & Ors., [2003] 6 
Suppl. SCR 1197 : (2004) 3 SCC 711; Shree Hanuman 
Cotton Mills & Ors. v. Tata Air Craft Limited, [1970] 
3 SCR 127 : (1969) 3 SCC 522; Delhi Development 
Authority v. Grihshapana Cooperative Group Housing 
Society Ltd., [1995] 2 SCR 115 : 1995 Supp (1) SCC 
751; V. Lakshmanan v. B.R. Mangalagiri & Ors., 1995 
Supp (2) SCC 33; HUDA v. Kewal Krishnan Goel, [1996] 
2 Suppl. SCR 587 : 1996 (4) SCC 249 – referred to.
Dinanath Damodar Kale v. Malvi Mody Ranchhoddas 
and Co., AIR 1930 Bom 213 – referred to.
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
Hadley & Anr. v. Baxendale & Ors., (1843-60) ALL E.R. 
Rep. 461; Victoria Laundry (Windsor) Ltd v. Newman 
Industrial Ltd., [1949] 2 K.B. 528; Kunwar Chiranjit 
Singh v. Har Swarup, (1926) 23 LW 172; Vide Howe 
v. Smith, (1884) 27 Ch.D. 89; Stockloser v. Johnson, 
(1954) 1 All. E.R. 630 – referred to.
Books and Periodicals Cited
Treatise on the Law of Sale of Personal Property by 
Benjamin, 1950, 8th Edition at page 946; Halsbury’s 
Laws of England, third edition, volume XXXIV, page 
118; G. C. Cheshire and C.H.S. Fifoot on the Law of 
Contracts (fifth edition) at pages 496- 497.
List of Acts
Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002; Security Interest 
(Enforcement) Rules, 2002; Contract Act, 1872.
List of Keywords
Simple mortgage; Default in payment; e-auction notice; Secured 
asset; Public auction; Auction purchaser; Failure in remitting balance 
amount; Cancellation of sale; Forfeiture under the SARFAESI 
Rules; Secured creditor; Earnest money; Law on forfeiture of 
earnest money; Principle of ‘Reading-Down’; Unjust enrichment; 
Compensation for loss or damage caused by breach of contract.
Case Arising From
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.235-236 of 
2024.
From the Judgment and Order dated 27.10.2021 of the High Court 
of Judicature at Madras in CRP Nos.1892 and 2282 of 2021.
Appearances for Parties
Dhruv Mehta,
Sr. Adv., Amit K. Nain, PBA Srinivasan, Keith Verghese, 
V. Aravind, Ms. Srishti Bansal, Sumit Swami, Ms. Pooja Kumari, 
Advs. for the Appellant.
Dr. S. Muralidhar, Sr. Adv., S. Sethuraman, M. A. Karthik, Ms. Aswathi 
M. K., Advs. for the Respondents.
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Judgment / Order of the Supreme Court
Judgment
J.B. Pardiwala, J.
For the convenience of exposition, this judgment is divided in the 
following parts:-
INDEX*
A.	
FACTUAL MATRIX.................................................................3
B.	
IMPUGNED ORDER.............................................................13
C.	
SUBMISSIONS OF THE APPELLANT................................17
D.	
SUBMISSIONS OF THE RESPONDENT.............................18
E.	
ANALYSIS (Points for Determination)...............................19
i)	
Legislative History and Scheme of the 
SARFAESI Act..............................................................20
ii)	
Applicability of Section(s) 73 & 74 of the 1872 
Act to Forfeiture under the SARFAESI Rules..........32
a.	
Forfeiture under the SARFAESI Rules.................44
b.	
Concept of Earnest-Money & Law on 
Forfeiture of Earnest-Money Deposit....................49
c.	
Law on the principle of 
‘Reading-Down’ a provision..................................66
iii)	
Whether, the forfeiture of the entire 
earnest-money deposit amounts to Unjust 
Enrichment?................................................................73
iv)	
Whether Exceptional Circumstances exist 
to set aside the forfeiture of the earnest 
money deposit?...........................................................77
F.	
CONCLUSION......................................................................81
* Ed. Note : Pagination
is as per the original judgment.
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The Authorised Officer, Central Bank of India v. Shanmugavelu
1.	
Since the issues raised in both the captioned appeals are the same, 
the parties are also the same and the challenge is also to the self-
same judgment and order passed by the High Court, those were 
taken up for hearing analogously and are being disposed of by this 
common judgment and order.
2.	
For the sake of convenience, the appellant shall hereinafter be referred 
to as the Bank being the Secured Creditor, and the respondent shall 
hereinafter be referred to as the original Auction-Purchaser.
3.	
These appeals are at the instance of a Nationalized Bank and are 
directed against the common judgment and order dated 27.10.2021 
passed by the High Court of judicature at Madras in C.R.P No(s). 
1892 & 2282 respectively of 2021 (“Impugned Order”) by which the 
High Court allowed the respondent’s writ petition and held that the 
forfeiture of the earnest money deposit by the appellant bank could 
only be to the extent of the loss suffered by it.
A.	
FACTUAL MATRIX
4.	
It appears from the materials on record that the appellant bank 
herein had sanctioned credit facilities to one ‘Best and Crompton 
Engineering Projects’ against a parcel of land admeasuring 10581 
sq.ft. (approx.) with superstructures situated in Survey Nos. 60 and 
65/2, Block 6, Alandur village, Mambalam-Guindy, Chennai (for short 
the, “Secured Asset”) as security interest in the form of a simple 
mortgage in lieu of the
sanctioned credit. Sometime thereafter the 
said borrowers defaulted and the said loan account was classified as 
a non-performing asset (“NPA”) by the appellant bank on 28.05.2013.
5.	
In order to recover its dues, the appellant bank took measures 
under the Securitization and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 (for short, the “SARFAESI 
Act”), more particularly under Section 13(4) by taking over the 
possession of the Secured Asset and putting the same for sale by 
way of public auction. 
6.	
Accordingly, on 24.10.2016 an e-auction notice for the sale of the 
Secured Asset at a reserve price of Rs. 9,62,00,000/- came to be 
issued by the appellant bank, with the following terms and conditions: -
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“TERMS & CONDITIONS
1.	
The e-Auction is being held on “AS IS WHERE IS” and “AS IS 
WHAT IS” basis and “NO COMPLAINT” condition.
2.	
The auction sale will be Online E-Auction/Bidding through 
website https://www.bankeauctions.com on 07-12-2016 from 
11.00 a.m. to 12. Noon
3.	
Intending bidders shall hold a valid Digital Signature Certificate, 
e-mail address and PAN number. For details with regard to 
Digital Signature Certificate please contact M/s C1 India Pvt. 
Ltd., E-Mail ID: support@bankeauctions.com or shankar.
ganesh@c1india.com
4.	
Bidders are required to go through the website https://www.
bankeauctions.com for detailed terms and conditions of auction 
sale before submitting their bids and taking part in the e- Auction 
sale proceedings.
5.	
To the best of knowledge and information of the Authorized 
Officer, there is no encumbrance on property affecting the 
security interest. However, the intending bidders should make 
their own independent inquiries regarding the encumbrances, 
title of property put on auction and claims / rights / dues 
affecting the property, prior to submitting their bid. The e-Auction 
advertisement does not constitute and will not be deemed to 
constitute any commitment or any representation of the bank. 
The property is being sold with all the existing and future 
encumbrances whether known or unknown to the bank. The 
Authorized Officer / Secured Creditor shall not be responsible 
in any
way for any third party claims / rights / dues.
6.	
It shall be the responsibility of the bidders to inspect and 
satisfy themselves about the asset and specification before 
submitting the bid. The inspection of property put on auction 
will be permitted to interested bidders at site on 23-11-2016 
from 10.00 a.m. to 5.00 p.m.
7.	
The above mentioned amount should be remitted towards EMD 
through RTGS/NEFT to Account No. 3227870680 of Central 
Bank of India, CFB, Chennai 600008 IFSC Code CBIN0283507. 
Cheques or demand draft shall not be accepted as EMD amount.
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
8.	
Prospective bidders are advised to obtain user id and password 
which are mandatory for bidding in the above e-auction from M/s 
C1India Pvt. Ltd., helpline 01244302020/2021/2022/2023/2024 
E - m a i l  s u p p o r t @ b a n k e r a u c t i o n s . c o m  o r  K . N . 
SHRINATH-9840446485. Passwords will be allotted only to 
those bidders who fulfil all the terms and conditions of e-auction 
and have deposited the requisite EMD. And for further property 
related query you may contact Mr. G.S. Prasad, Chief Manager, 
Central Bank of India, CFB, Chennai Tel. No. 044-42625259 
Mobile 9962029300 e-mail ID: bmchen3507@centralbank.co.in 
during officer hours i.e. 10 AM to 5 PM during the working days.
9.	
After Registration by the bidder in the Web-Portal, the intending 
bidder / purchaser is required to get the copies of the following 
documents uploaded in the Web Portal before last date of 
submission of the bid viz. i) Copy of the NEFT/RTGS Challan; 
ii) Copy of PAN Card; iii) Proof of Identification (KYC) viz. self-
attested copy of Voter ID Card / Driving License / Passport etc. 
iv) Copy of proof of address; without which the bid is liable to 
be rejected.
10.	 The interested bidders, who have submitted their bid not below 
the Reserve price through online mode before 4.00 p.m. on 
05-12-2016 shall be eligible for participating in the e-bidding 
process. The e-Auction of above properties
would be conducted 
exactly on the scheduled Date & Time as mentioned against 
each property by way of inter-se bidding amongst the bidders. 
The bidder shall improve their offer in multiple of the amount 
mentioned under the column “Bid Increase Amount”. In case 
bid is placed in the last 5 minutes of the closing time of the 
e-Auction, the closing time will automatically get extended for 
3 minutes (subject to maximum of unlimited extensions of 3 
minutes each). The bidder who submits the highest bid amount 
(not below the Reserve Price) on closure of e-Auction process 
shall be declared as Successful Bidder and a communication 
to that effect will be issued which shall be subject to approval 
by the Authorized Officer/Secured Creditor.
11.	 The Earnest Money Deposit (EMD) of the successful bidder 
shall be retained towards part sale consideration and the EMD 
of unsuccessful bidders shall be refunded. The Earnest Money 
Deposit shall not bear any interest. The successful bidder shall
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have to deposit 25% of the auction price less the EMD already 
paid, within 24 hours of the acceptance of bid price by the 
Authorized Officer and the balance 75% of the sale price on 
or before 15th day of sale or within such extended period as 
agreed upon in writing by and solely at the discretion of the 
Authorized Officer. If any such extension is allowed, the amount 
deposited by the successful bidder shall not carry any interest. 
In case of default in payment by the highest and successful 
bidder, the amount already deposited by the bidder shall be 
liable to be forfeited and property shall be put to re-auction 
and the defaulting bidder shall have no claim / right in respect 
of property/amount.
12.	 The authorized Officer is not bound to accept the highest offer 
and the authorized officer has absolute right to accept or reject 
any or all offer(s) or adjourn / postpone / cancel the e-auction 
without assigning any reasons thereof. ...”
7.	
Pursuant to the same, the e-auction was conducted on 07.12.2016 
and a total of four bids were received wherein the respondent also 
participated and submitted its bid to the tune of Rs. 12,27,00,000/-. 
The respondent’s bid was found to be the highest and was classified 
as H1 and accordingly, the respondent was declared as the successful 
auction purchaser. 
8.	
Pursuant to the aforesaid, the respondent on the same day deposited 
25% of the bid amount i.e., Rs. 3,06,75,000/- as
the earnest money 
deposit upon which, the appellant confirmed the sale of the Secured 
Asset in favour of the respondent vide its letter dated 07.12.2016 
which inter-alia stipulated that in the event of default in payment of 
the balance amount, the sale shall be liable to be cancelled and the 
earnest money would be forfeited. The said sale confirmation letter 
is being reproduced below: -
“CFB/CHEN/2016-17/685
December 7, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
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The Authorised Officer, Central Bank of India v. Shanmugavelu
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI 
Act 2002 in our borrowal account M/s Best & Crompton 
Engineering Projects Limited – E Auction of property held on 
07/12/2016.
We have to inform you that in the E auction held on 07/12/2016 
pursuant to the E-auction sale notice dated 24/10/2016 issued by 
the Authorized Officer. In respect of Schedule property covered 
in the E auction sale notice i.e., 
Lot no. 1: Property belonging to M/s Futuretech Industries Ltd. 
presently known as Candid Industries Ltd. All that piece and 
parcel of the immovable property being industrial land together 
with the superstructure/shed standing thereon admeasuring 
10581 sq. ft. or thereabouts comprised in survey nos. 60 part 
and 65/2, Block no. 6, Alandur village, Mambalam-Guindy Taluk, 
sub-registration district Alandur, registration district Chennai 
South presently situated at plot no. A-19, Thiru Vi Ka Industrial 
Estate, South by: Plot no. A-18, Thiru Vi Ka Industrial Estate 
East by: 80 feet Road, West by: Service Road.
You have been declared as successful bidder at the sale price 
of Rs. 12,27,00,000/- (Rupees Twelve Crore Twenty Seven 
Lac only). You are now required to remit as per E auction 
Sale notice 25% of the sale price less Earnest Money Deposit 
amount already remitted by you i.e., Rs. 3,06,75,000/- minus 
EMD remitted Rs. 96,20,000/- = Rs. 2,10,55,000/- (Rupees 
Two Crore
Ten Lac Fifty Five Thousand only) by RTGS/NEFT 
to the same account number to which you have remitted the 
Earnest Money Deposit within 24 hours of acceptance of bid.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees 
Nine Crore Twenty Lac Twenty Five Thousand Only) is to be 
remitted by you by RTGS to the same account number on or 
before 15 days from today; failing which the sale is liable to be 
cancelled and the EMD will be forfeited.
Please note that the E Auction sale has been conducted strictly 
as per the terms and conditions spelt out in the E Auction notice 
dated 24/10/2016.
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Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
9.	
The respondent vide its email dated 19.12.2016, requested the 
appellant bank for grant of extension of three-months’ time for the 
payment of the balance amount on the ground that its term-loan 
was still under-process. 
10.	 The appellant bank vide its letter dated 20.12.2016, acceded to 
the request of the respondent and granted a further extension of 
three-months’ time i.e., till 07.03.2017 in terms of Rule 9(4) of the 
Security Interest (Enforcement) Rules, 2002 (for short, the “SARFAESI 
Rules”). The said letter also stated that no further extension of time 
shall be granted and in the event the respondent fails to pay the 
balance amount, the sale shall be cancelled and the amount already 
paid shall be forfeited. The said letter is being reproduced below: -
“CFB/CHEN/2016-17/718
December 20, 2016
Mr. R Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No – 4, Readymade Garment Complex
SIDCO Industrial Estate, Guindy
Chennai-600032
Sir,
Reg: Recovery Proceedings under the provision of SARFAESI 
Act 2002 in the account M/s Best & Crompton Engineering 
Projects Limited – E Auction of property held on 07/12/2016.
We may once again inform you that in the E auction held 
on 07/12/2016 pursuant to the E-auction sale notice dated 
24/10/2016 issued by the Authorized Officer in respect of 
Schedule property covered in the E auction sale
notice i.e., 
Property belonging to M/s Futuretech Industries Ltd. presently 
known as Candid Industries Ltd. Al that piece and parcel of 
the immovable property being industrial land together with the 
superstructure/shed standing thereon admeasuring 10581 sq.
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The Authorised Officer, Central Bank of India v. Shanmugavelu
ft. or thereabouts comprised in survey nos. 60 part and 65/2 
part, Block no. 6, Alandur village, Mambalam-Guindy Taluk, sub-
registration district Alandur, registration district Chennai South 
presently situated at plot no. A-19, Thiru Vi Ka Industrial Estate, 
South by: Plot no. A-18, Thiru Vi Ka Industrial Estate East by: 
80 feet Road, West by: Service Road, you have been declared 
as successful bidder at the sale price of Rs. 12,27,00,000/- 
(Rupees Twelve Crore Twenty Seven Lac only). 
You had remitted Rs. 2,10,55,000/- (Rupees Two Crore Ten Lac 
Fifty Five Thousand only) as per E auction Sale notice 25% 
of the sale price less Earnest Money Deposit amount already 
remitted by you (i.e., Rs. 3,06,75,000/- minus Rs.96,20,000/-) 
on 08/12/2016 as per the bid terms.
The balance amount amounting to Rs. 9,20,25,000/- (Rupees 
Nine Crore Twenty Lac Twenty Five Thousand Only) was to be 
remitted by you before 15 days from the date of bid failing which 
the sale is liable to be cancelled and the EMD will be forfeited.
However, you had vide your mail dated 19/12/2016 requested to 
give you three (3) months time to pay the balance 75% payment 
of the bid amount and also assured that you will honour the 
offer in the time frame.
After carefully going through your request, the Authorized 
officer hereby permit/ allow you to pay the balance amount of 
Rs 9,20,25,000/- (Rupees Nine crore Twenty Lac
Twenty Five 
Thousand Only) within 90 days from the date of BID. Further 
we may also inform you that no further extension of time will 
be granted and if you fail to pay the balance sale amount the 
sale will be cancelled and the amount already paid will be 
forfeited by the Bank.
Thanking You
Yours sincerely,
Sd/-
AUTHORIZED OFFICER”
11.	 The respondent being unable to pay the balance amount within 
the extended period sought an additional 15-days for making the 
balance-payment vide its letter dated 06.03.2017.
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12.	 However, the appellant vide its letter dated 27.03.2017 turned down 
the said request for further extension and intimated the respondent that 
due to its failure in remitting the balance amount within the stipulated 
time, the sale is cancelled and the amount already deposited stands 
forfeited. The said sale cancellation letter is being reproduced below: -
“CFB/CHEN/2016-17/919
March 27, 2017
Mr. R. Shanmugavelu
Managing Director
M/s Sunbright Designers Private Limited
Module No.-4, Readymade Garment Complex
SIDCO Industrial Estates, Guindy
Chennai-600032
Sir, 
Reg: Recovery Proceedings under the provision of SARFAESI 
Act 2002 in the account M/s Best & Crompton Engineering 
Projects Limited
Ref: E Auction of property held on 07/12/2016
You were declared as successful bidder at the sale price of Rs. 
12,27,00,000/- (Rupees Twelve Crore Twenty Seven Lac only) 
in the E auction held on 07/12/2016 pursuant to the E auction 
sale notice dated 24/10/2016 issued by the Authorised Officer 
in respect of Schedule property covered in the E auction sale 
notice i.e., mortgaged property belonging to M/s Futuretech 
Industries Ltd presently known as Candid Industries Ltd. 
Schedule
All that place and parcel of the immovable property being 
industrial land together with the superstructure/shed standing 
thereon admeasuring 10581 sq.ft. or thereabouts comprised in 
survey nos. 60 part and 65/2 part. Block no. 6, Alandur village,
Mambalam-Guindy Taluk, sub-registration district Alandur, 
registration district Chennai South presently situated at plot 
no. A-19. Thiru Vi Ka Industrial Estate, South by: Plot no. A-18, 
Thiru Vi Ka Industrial Estate, and East by: 80 feet Road, West 
by: Service Road.
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
You had remitted a total of Rs. 3,06,75,000 towards 25% of the 
sale price on (i.e. Rs. 96,20,000 on 7-12-2016 towards EMD 
and Rs. 2,10,55,000 on 08/12/2016 as per the terms of the bid.
The balance sale price amount to Rs. 9,20,25,000/- (Rupees 
Nine Crore Twenty Lac Twenty Five Thousand only) was to be 
remitted by you before 15 days from the date of bid failing which 
the sale was liable to be cancelled and the amount deposited 
by you had to be forfeited. However, you had vide your mail 
dated 19/12/2016 requested to give you three (3) months’ time 
to pay the balance 75% payment of the bid amount and also 
assured that you will honour the offer in the time frame.
After carefully going through your request, the Authorized 
officer permitted/allowed you to pay the balance amount of 
Rs.9,20,25,000/-( Rupees Nine crore Twenty Lac Twenty Five 
Thousand Only) within 90 days from the date of BID vide our 
letter No. CFB/CHEN/2016-17/718 dated 20/12/2016. Further 
we also informed you that no further extension of time will be 
granted and if you fail to pay the balance sale amount the sale 
will be cancelled and the amount already paid was liable to be 
forfeited by the Bank. 
You had again requested for extension of time for another 15 
days vide your letter dated 06/03/2017. After going through your 
representation/request, we permitted you to remit the balance 
of Rs. 9,20,25,000/- (Rupees
Nine Crore Twenty Lac Twenty 
Five Thousand Only) by 22/03/2017 thereby giving three months 
time from the 15th day of confirmation of sale as per the Security 
Interests (Enforcement) Rules, 2002.
We hereby inform you that as you have failed to remit the balance 
amount of Rs. 9,20,25,000/- (Rupees Nine crore Twenty Lac 
Twenty Five Thousand Only) by 22/03/2017, the amount of Rs. 
3,06,75,000/- which was already paid by you stands forfeited. 
This letter issued without prejudice to the bank’s rights to bring 
the property for fresh auction sale. 
Thanking you
Yours sincerely,
Sd/-
AUTHORISED OFFICER”
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13.	 Despite the aforesaid letter, the respondent on 05.04.2017 addressed 
one another letter to the appellant seeking further extension of 90 
days for making the balance sale payment by enclosing a cheque 
of Rs.50,00,000/- to show its bona fides. However, the appellant 
returned the cheque and declined the said request vide its letter 
dated 06.04.2017.
14.	 Aggrieved by the aforesaid, the respondent filed an application being 
SA No. 143 of 2018 before the Debts Recovery Tribunal-II (“DRT”) 
assailing the appellant’s sale cancellation and forfeiture letters dated 
27.03.2017 and 06.04.2017 respectively. 
15.	 During the pendency of the proceedings before the DRT as aforesaid 
a fresh auction of the Secured Asset was conducted by the appellant 
bank on 13.03.2019, and it appears that pursuant to the same the 
sale was completed at an enhanced price of Rs. 14.76 crore i.e., 
more than the price fetched in the previous auction.
16.	 The DRT-II vide its order dated 06.05.2019 allowed the application 
being SA No. 143 of 2018 and directed the appellant bank to refund 
the earnest money deposited by the respondent after deducting a 
sum of Rs. 5,00,000/- towards the expenditure incurred. The DRT-II 
in its order observed that the respondent had requested the appellant 
bank to provide certain documents required for the grant of term loan 
which was not provided, as a result of which the term loan was not 
granted and the
respondent failed to remit the balance amount. It 
further observed that as the Secured Asset had been sold for an 
amount higher than the initial bid, no loss was caused to the appellant.
17.	 The aforesaid order was challenged by the appellant before the Debt 
Recovery Appellate Tribunal, Chennai (“DRAT”) by way of RA(SA) 
No. 119 of 2019. The DRAT vide its order dated 30.07.2021 observed 
that the secured creditor was not entitled to forfeit the entire amount 
deposited, but partly allowed the appeal and enhanced the forfeiture 
from Rs. 5 Lac to Rs. 55 Lac.
B.	
IMPUGNED ORDER
18.	 Aggrieved with the aforesaid, both the appellant and the respondent 
approached the High Court of judicature at Madras by way of 
C.R.P. No(s). 1892 & 2282 of 2021 respectively, assailing the 
order dated 30.07.2021 passed by the DRAT, Chennai, wherein
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The Authorised Officer, Central Bank of India v. Shanmugavelu
the High Court vide the impugned judgment and final order dated 
27.10.2021 allowed the respondent’s civil revision petition. The 
operative portion is reproduced below: -
“19. For the reasons aforesaid, the enhancement of 
the quantum of forfeiture as permitted by the Appellate 
Tribunal in the impugned order of July 30, 2021 cannot 
be sustained and the same is set aside. The quantum 
as awarded by the DRT-II, Chennai in its order of May 
06, 2019 is restored and to such extent the order of the 
appellate authority is set aside.”
19.	 The impugned judgment of the High Court is in two-parts. In other 
words, the High Court allowed the respondent’s civil revision petition 
setting aside the DRAT’s order on two grounds: -
(i)	
First, the High Court took the view that the forfeiture of an amount 
or deposit by a secured creditor under the SARFAESI Rules 
cannot be more than the loss or damage suffered by it. The 
High Court held that Rule 9 sub-rule (5) of the SARFAESI Rules 
which provides for forfeiture cannot override the underlying ethos 
of Section 73 of the Indian Contract Act, 1872 (for short, “the 
1872 Act”). The relevant observations are reproduced below: -
“10. Section 74 of the Contract Act, 1872 provides for 
compensation for breach of contract where the penalty is 
stipulated. Section 73 of the Contract Act is the general 
rule that provides for compensation for loss or damage
caused by breach of contract and Section 74 is where 
the quantum is specified. What Section 73 of the Contract 
Act mandates is that a party who suffers as a result of 
a breach committed by the other party to the contract 
“is entitled to receive from the party who has broken the 
contract, compensation for any loss or damage caused to 
him thereby, which naturally arose in the usual course of 
things from such breach, or which the parties knew, when 
they made the contract, to be likely to result from the breach 
of it.” Any detailed discussion on such provision would 
be beyond the scope of the present lis and may require 
many more sheets that may be conveniently expended in 
the present exercise. Indeed, Section 73 of the Contract 
Act is in the nature of a jurisprudential philosophy that is
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accepted as a part of the law in this country. In short, it 
implies that only such of the loss or damage suffered by 
the party not in breach, may be recovered from the party 
in breach, as a consequence of the breach. It is possible 
that as a result of the breach, the party not in breach does 
not suffer any adverse impact. It is also possible, as in the 
present case, that as a consequence of the breach, the 
party not in breach obtains a benefit, in such cases, where 
no loss or damage has been occasioned to the party not 
in breach, such party cannot extract any money merely 
on account of such breach, as the entitlement in law to 
compensation is not upon the commission of breach, but 
only upon any loss or damage suffered as a consequence 
thereof. That is elementary.
xxx

xxx
xxx
12. Rule 9(5) of the said Rules of 2002 has to be seen as 
an enabling provision that permits forfeiture in principle. 
However, such Rule cannot be conferred an exalted status 
to override the underlying ethos of Section 73 of the 
Contract Act. In other words, Rule 9(5) has to yield to the 
principle recognised in Section 73 of the Contract Act or 
it must be read down accordingly. Thus, notwithstanding 
the wide words used in Rule 9(5) of the said Rules, a 
secured creditor may not forfeit any more than the loss 
or damage suffered by such creditor as a consequence of 
the failure on the part of a bidder to make payment of the 
consideration or the balance consideration in terms of the 
bid. It is only if such principle as embodied in Section 73 of 
the Contract Act, is read into Rule 9(5) of the said Rules, 
would there be an appropriate answer to the conundrum 
as to whether a colossal default of the entirety of the 
consideration or the mere default of one rupee out of the 
consideration would result in the identical consequence 
of forfeiture as indicated in the provision.
13. In any event, notwithstanding the reference to Section 
35 of the Act of 2002, the apparent overriding effect of 
the provisions of the Act of 2002 has to be tempered in 
the light of Section 37 of the Act. Though Section 37 of
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31
The Authorised Officer, Central Bank of India v. Shanmugavelu
the Act refers to several statutes by name, the residual 
limb of such provision recognises “or any other law for the 
time being in force”, which would embrace the Contract 
Act within its fold. It is completely unacceptable that by 
virtue of the delegated legislation as in the Rules of 2002, 
the fundamental principle envisaged in the Contract Act 
would get diluted or altogether disregarded.”
(Emphasis supplied)
(ii)	
Secondly, the High Court was of the view that the forfeiture of 
the entire earnest money deposit by the appellant amounts to 
unjust enrichment which is not permissible. It observed that 
under the SARFAESI Act, a secured creditor is not entitled to 
obtain any amount more than the debt due to it, and as such 
any forfeiture under the SARFAESI Act ought to be assessed 
by computing damages on the basis of evidence. The relevant 
observations are reproduced below: -
“18. It was completely open to the appellate authority 
to enhance the quantum as awarded by the DRT. 
However, such exercise could have been undertaken by 
inviting evidence in such regard. The appellate authority 
purported to enhance the quantum from Rs 5 lakh to 
Rs 55 lakh without indicating any or cogent grounds for 
such enhancement. Though an element of guesstimation 
is permitted while assessing damages, when an initial 
authority has indicated a ballpark figure, any tinkering with 
such figure at the
appellate stage would require material in 
support thereof, which is completely lacking in the judgment 
and order impugned dated July 30, 2021 passed by the 
appellate authority in the present case.

xxx

xxx

xxx
20. Before parting, there is another aspect that has to be 
referred to for the completeness of the discussion. The 
purpose of the Act of 2002 is to ensure speedy recovery 
of the debt due to secured creditors covered by such 
statute. Towards such end, the provisions of the said 
Act and the Rules made thereunder give primacy to the 
secured creditor in initially assessing the quantum of debt
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due and in proceeding against the securities furnished for 
realising such debt due. However, no secured creditor, 
not even by embracing the provisions of the said Act of 
2002, can unjustly enrich itself or obtain any more by way 
of resorting to any of the measures contemplated under 
Section 13(4) of the Act or otherwise than the debt that 
is due to it and the costs that may have been incurred in 
course of trying to recover the debt due. In a sense, if the 
forfeiture provision in Rule 9(5) of the said Rules is ready 
to imply what the secured creditor in this case seeks to, it 
may result in a secured creditor unjustly enriching itself, 
which is not permissible.”
(Emphasis supplied)
20.	 The plain reading of the aforesaid findings recorded by the High 
Court lays down three propositions of law as follows:
(1)	 Rule 9(5) of the SARFAESI Rules is merely an enabling 
provision that permits forfeiture in principle. It cannot override 
the underlying ethos of Section 73 of the 1872 Act. It should 
yield to the principle recognised in Section 73 of the 1872 Act 
or must be read down accordingly.
(2)	 By virtue of the delegated legislation as in the SARFAESI Rules, 
the fundamental principle envisaged in the 1872 Act should not 
be permitted to be diluted or altogether disregarded.
(3)	 Rule 9(5) of the SARFAESI Rules if not read along with the 
principle recognised in Section 73 of the 1872 Act, the same 
may result in a
secured creditor unjustly enriching itself which 
is not permissible.
21.	 In view of the aforesaid, the Bank being aggrieved with the impugned 
order passed by the High Court is here before this Court with the 
present appeals.
C.	
SUBMISSIONS OF THE APPELLANT
22.	 Mr. Dhruv Mehta, the learned Senior Counsel appearing for the 
appellants submitted that the issue framed by the High Court in its 
Impugned Judgment is wholly alien to the sale conducted under the 
SARFAESI Rules, more particularly Rule 9.
[2024] 2 S.C.R. 
33
The Authorised Officer, Central Bank of India v. Shanmugavelu
23.	 It was submitted that the High Court was not correct in reading down 
Rule 9(5) and holding that the same must yield to the principles 
recognized in Section 73 of the 1872 Act, notwithstanding the wide 
words used in Rule 9(5) of SARFAESI Rules.
24.	 It was further submitted that the High Court failed to appreciate that 
the auction sale under consideration was a statutory sale conducted 
by the appellant in accordance with the SARFAESI Rules and as 
Section 35 of the SARFAESI Act gives an overriding effect, this would 
not be a case of breach of contract which would attract principles 
underlying Section 73 of the 1872 Act.
25.	 Mr. Mehta placed strong reliance on a recent decision of this Court 
in Authorized Officer State Bank of India v. C. Natarajan reported 
in 2023 SCC Online SC 510, wherein whilst dealing with a similar 
issue, it was held that Rule 9 which is part of a special enactment 
will have precedence over Sections 73 and 74 respectively of the 
1872 Act which is a general provision. 
26.	 It was further submitted that Rule 9(5) of the SARFAESI Rules, ought 
to be interpreted strictly because often the borrowers use subversive 
methods to hinder the auction process which may lead to erosion 
of the secured asset’s value in light of reauctions.
27.	 In the last, Mr. Mehta submitted that clause 11 of the e-auction notice 
dated 24.10.2016 explicitly provided that the
failure of the auction 
purchaser in paying the balance amount would result in forfeiture 
of the earnest-money deposit.
28.	 In such circumstances referred to above, the learned Senior Counsel 
prayed that there being merit in his appeals, the same be allowed 
and the impugned judgment and order of the High Court be set aside.
D.	
SUBMISSIONS OF THE RESPONDENT
29.	 Dr. S. Muralidhar, the learned Senior Counsel appearing for the 
respondent on the other hand vehemently submitted that no error not 
to speak of any error of law could be said to have been committed 
by the High Court in passing the impugned judgment and order.
30.	 It was submitted that Section 35 of the SARFAESI Act only gives the 
Act an overriding effect over other laws, and is not applicable to the 
SARFAESI Rules made under it. Therefore Rule 9(5) of SARFASI 
Rules is only an enabling provision and cannot override the statutory 
provisions of the 1872 Act.
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31.	 It was submitted that the High Court committed no error in holding 
that the appellant bank could not have forfeited the amount deposited 
by a third party being the auction purchaser without any real damage 
or loss being caused to it. 
32.	 It was further submitted that under the SARFAESI Rules, the 
authorized officer is left with an unguided power of forfeiture. Such 
unguided power conferred on a delegated authority like the authorized 
officer in a bank is opposed to public policy and would result in unjust 
enrichment. Therefore, the said Rule 9(5) is liable to be struck down 
as unconstitutional being opposed to public policy and principles of 
fair play and unreasonableness.
33.	 In such circumstances referred to above, it was prayed on behalf of 
the respondent that there being no merit in the appeals, the same 
may be dismissed.
E.	
ANALYSIS (Points for Determination)
34.	 Having heard the learned counsel appearing for the parties and 
having gone through the materials on record, the following questions 
fall for our consideration: -
I.	
Whether, the underlying principle of Section(s) 73 & 74 
respectively of the 1872 Act is applicable to forfeiture of earnest-
money deposit under Rule 9(5) of the SARFAESI Rules? In 
other words, whether the forfeiture of the earnest-money deposit 
under Rule 9(5) of the SARFAESI Rules can be only to the 
extent of loss or damages incurred by the Bank?
II.	
Whether, the
forfeiture of the entire amount towards the earnest-
money deposit under Rule 9(5) of the Rules amounts to unjust 
enrichment? In other words, whether the quantum of forfeiture 
under the SARFAESI Rule is limited to the extent of debt owed?
III.	
Whether a case of exceptionable circumstances could be said 
to have been made out by the respondent to set aside the order 
of forfeiture of the earnest money deposit?
i)	
Legislative History and Scheme of the SARFAESI Act
35.	 Till early 1990s, the civil suits were being filed for recovery of the 
dues of banks and financial institutions under the Act 1882 and the 
Code of Civil Procedure, 1908 (“CPC”). Due to various difficulties the
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
banks and financial institutions had to face in recovering loans and 
enforcement of securities, the Parliament enacted the Recovery of 
Debts Due to Banks and Financial Institutions Act, 1993 (for short, 
the “RDBFI Act”). 
36.	 On account of lack of infrastructure and manpower, the regular 
civil courts were not in a position to cope up with the speed in the 
adjudication of recovery cases. In the light of recommendations of 
the Tiwari Committee the special tribunals came to be set up under 
the provisions of the RDBFI Act referred to above for the recovery 
of huge accumulated NPA of the Bank loans. 
37.	 On the continuing rise in number of Non-Performing Assets (NPA) 
at banks and other financial institutions in India; a poor rate of loan 
recovery and the failure of the existing legislation in redressing the 
difficulties of recovery by banks; the Narasimham Committee I & II 
and Andyarujina Committee were constituted by the Government 
for examining and suggesting banking reforms in India. These 
Committees in their reports observed that one out of every five 
borrower was a defaulter, and that due to the long and tedious 
process of existing frame work of law and the overburdening of 
existing forums including the specialised tribunals under the 1993 
Act, any attempt of recovery with the assistance of court/tribunal 
often rendered the secured asset nearly worthless due to the long
delays. In this background the Committees thus, proposed new laws 
for securitisation in order to permit banks and financial institutions 
to hold securities and sell them in a timely manner without the 
involvement of the courts.
38.	 On the recommendations of the Narasimham Committee and 
Andyarujina Committee, the SARFAESI Act was enacted to empower 
the banks and financial institutions to take possession of the securities 
and to sell them without intervention of the court. 
39.	 The statement of objects and reasons for which the Act has been 
enacted reads as under: -
“STATEMENT OF OBJECTS AND REASONS
The financial sector has been one of the key drivers in India’s 
efforts to achieve success in rapidly developing its economy. 
While the banking industry in India is progressively complying 
with the international prudential norms and accounting practices
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there are certain areas in which the banking and financial 
sector do not have a level playing field as compared to other 
participants in the financial markets in the world. There is no 
legal provision for facilitating securitisation of financial assets 
of banks and financial institutions. Further, unlike international 
banks, the banks and financial institutions in India do not have 
power to take possession of securities and sell them. Our existing 
legal framework relating to commercial transactions has not 
kept pace with the changing commercial practices and financial 
sector reforms. This has resulted in slow pace of recovery of 
defaulting loans and mounting levels of non-performing assets 
of banks and financial institutions. Narasimham Committee I 
and II and Andhyarujina Committee constituted by the Central 
Government for the purpose of examining banking sector reforms 
have considered the need for changes in the legal system in 
respect of these areas. These Committees, inter alia, have 
suggested enactment of a new legislation for securitisation and 
empowering banks and financial institutions to take possession 
of the securities and to sell them without the intervention of 
the court. Acting on these suggestions, the Securitisation and 
Reconstruction of Financial Assets and Enforcement of Security 
Interest Ordinance, 2002 was promulgated on the 21st June, 
2002 to regulate securitisation and reconstruction
of financial 
assets and enforcement of security interest and for matters 
connected therewith or incidental thereto. The provisions of the 
Ordinance would enable banks and financial institutions to realise 
long-term assets, manage problem of liquidity, asset liability 
mismatches and improve recovery by exercising powers to take 
possession of securities, sell them and reduce nonperforming 
assets by adopting measures for recovery or reconstruction.”
40.	 This Court in Mardia Chemicals Ltd. & Ors. v. Union of India & Ors. 
reported in (2004) 4 SCC 311, examined the history and legislative 
backdrop that ultimately led to the enactment of the SARFAESI Act 
as under: -
“34. Some facts which need to be taken note of are that the 
banks and the financial institutions have heavily financed the 
petitioners and other industries. It is also a fact that a large sum 
of amount remains unrecovered. Normal process of recovery 
of debts through courts is lengthy and time taken is not suited 
for recovery of such dues. For financial assistance rendered
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
to the industries by the financial institutions, financial liquidity 
is essential failing which there is a blockade of large sums of 
amounts creating circumstances which retard the economic 
progress followed by a large number of other consequential ill 
effects. Considering all these circumstances, the Recovery of 
Debts Due to Banks and Financial Institutions Act was enacted 
in 1993 but as the figures show it also did not bring the desired 
results. Though it is submitted on behalf of the petitioners that 
it so happened due to inaction on the part of the Governments 
in creating Debts Recovery Tribunals and appointing presiding 
officers, for a long time. Even after leaving that margin, it is 
to be noted that things in the spheres concerned are desired 
to move faster. In the present-day global economy it may be 
difficult to stick to old and conventional methods of financing 
and recovery of dues. Hence, in our view, it cannot be said that 
a step taken towards securitisation of the debts and to evolve 
means for faster recovery of NPAs was not called for or that 
it was superimposition of undesired law since one legislation 
was already operating in the field, namely, the Recovery of 
Debts Due to Banks and Financial Institutions Act. It is also 
to be noted that the idea has not erupted abruptly to resort to 
such a legislation. It appears that a thought was given to the 
problems
and the Narasimham Committee was constituted 
which recommended for such a legislation keeping in view the 
changing times and economic situation whereafter yet another 
Expert Committee was constituted, then alone the impugned 
law was enacted. Liquidity of finances and flow of money is 
essential for any healthy and growth-oriented economy. But 
certainly, what must be kept in mind is that the law should 
not be in derogation of the rights which are guaranteed to the 
people under the Constitution. The procedure should also be 
fair, reasonable and valid, though it may vary looking to the 
different situations needed to be tackled and object sought to 
be achieved.

xxx

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xxx
36. In its Second Report, the Narasimham Committee observed 
that NPAs in 1992 were uncomfortably high for most of the 
public sector banks. In Chapter VIII of the Second Report 
the Narasimham Committee deals about legal and legislative 
framework and observed:
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“8.1. A legal framework that clearly defines the rights and 
liabilities of parties to contracts and provides for speedy 
resolution of disputes is a sine qua non for efficient trade 
and commerce, especially for financial intermediation. In 
our system, the evolution of the legal framework has not 
kept pace with changing commercial practice and with 
the financial sector reforms. As a result, the economy 
has not been able to reap the full benefits of the reforms 
process. As an illustration, we could look at the scheme of 
mortgage in the Transfer of Property Act, which is critical 
to the work of financial intermediaries….”
One of the measures recommended in the circumstances was to 
vest the financial institutions through special statutes, the power 
of sale of the assets without intervention of the court and for 
reconstruction of assets. It is thus to be seen that the question 
of non-recoverable or delayed recovery of debts advanced by 
the banks or financial institutions has been attracting attention 
and the matter was considered in depth by the Committees 
specially constituted consisting of the experts in the field. In the 
prevalent situation where the amounts of dues are huge and 
hope of early recovery is less, it cannot be said that a more 
effective legislation for the purpose was uncalled for or that it 
could not be resorted to. It is again to be noted that after the 
Report of the Narasimham Committee, yet
another Committee 
was constituted headed by Mr Andhyarujina for bringing about 
the needed steps within the legal framework. We are therefore, 
unable to find much substance in the submission made on 
behalf of the petitioners that while the Recovery of Debts Due 
to Banks and Financial Institutions Act was in operation it was 
uncalled for to have yet another legislation for the recovery of 
the mounting dues. Considering the totality of circumstances 
and the financial climate world over, if it was thought as a 
matter of policy to have yet speedier legal method to recover 
the dues, such a policy decision cannot be faulted with nor is 
it a matter to be gone into by the courts to test the legitimacy 
of such a measure relating to financial policy.”
41.	 In this regard, reference may be made to the following observations 
of this Court in the case of United Bank of India v. Satyawati 
Tondon & Ors. reported in (2010) 8 SCC 110. The relevant paras 
are being reproduced hereunder:
[2024] 2 S.C.R. 
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The Authorised Officer, Central Bank of India v. Shanmugavelu
“1. … With a view to give impetus to the industrial 
development of the country, the Central and State 
Governments encouraged the banks and other financial 
institutions to formulate liberal policies for grant of loans 
and other financial facilities to those who wanted to set 
up new industrial units or expand the existing units. Many 
hundred thousand took advantage of easy financing by the 
banks and other financial institutions but a large number 
of them did not repay the amount of loan, etc. Not only 
this, they instituted frivolous cases and succeeded in 
persuading the civil courts to pass orders of injunction 
against the steps taken by banks and financial institutions 
to recover their dues. Due to lack of adequate infrastructure 
and non-availability of manpower, the regular courts could 
not accomplish the task of expeditiously adjudicating the 
cases instituted by banks and other financial institutions for 
recovery of their dues. As a result, several hundred crores 
of public money got blocked in unproductive ventures.
2. In order to redeem the situation, the Government of India 
constituted a committee under the Chairmanship of Shri T. 
Tiwari to examine the legal and other difficulties faced by 
banks and financial institutions in the recovery of their dues 
and suggest remedial measures. The Tiwari Committee noted 
that the existing procedure for recovery was very cumbersome
and suggested that special tribunals be set up for recovery 
of the dues of banks and financial institutions by following a 
summary procedure. The Tiwari Committee also prepared a 
draft of the proposed legislation which contained a provision 
for disposal of cases in three months and conferment of 
power upon the Recovery Officer for expeditious execution 
of orders made by adjudicating bodies.” 
42.	 Section 13 of the SARFAESI Act contains the provisions relating to 
the enforcement of the security interest and the manner in which the 
same may be done by the secured creditor without the intervention 
of the court or ribunal in accordance with its provisions. 
43.	 Rules 8 and 9 respectively of the SARFAESI Rules prescribe the 
procedure and formalities to be followed for the sale of immovable 
secured asset as per Section 13 of the SARFAESI Act. In the present
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lis, we are concerned with Rule 9 more particularly sub-rule (5) of 
the SARFAESI Rules which provides for forfeiture of 25% of the 
deposit made under sub-rule (3) in the event the successful auction 
purchaser fails to pay the balance amount within the stipulated time 
period under sub-rule (4). The said Rule reads as under: -
“9. Time of sale, issue of sale certificate and delivery 
of possession, etc.–(1) No sale of immovable property 
under these rules, in first instance shall take place before 
the expiry of thirty days from the date on which the public 
notice of sale is published in newspapers as referred to in 
the proviso to sub-rule (6) of rule 8 or notice of sale has 
been served to the borrower:
Provided further that if sale of immovable property by 
any one of the methods specified by sub-rule (5) of rule 
8 fails and sale is required to be conducted again, the 
authorised officer shall serve, affix and publish notice of 
sale of not less than fifteen days to the borrower, for any 
subsequent sale.
(2) The sale shall be confirmed in favour of the purchaser 
who has offered the highest sale price in his bid or tender 
or quotation or offer to the authorised officer and shall be 
subject to confirmation by the secured creditor:
Provided that no sale under this rule shall be confirmed, if 
the amount offered by sale price is less than the reserve 
price, specified under sub-rule (5) of rule 8:
Provided further that
if the authorised officer fails to obtain 
a price higher than the reserve price, he may, with the 
consent of the borrower and the secured creditor effect 
the sale at such price.
(3) On every sale of immovable property, the purchaser 
shall immediately, i.e. on the same day or not later than 
next working day, as the case may be, pay a deposit 
of twenty five per cent. of the amount of the sale price, 
which is inclusive of earnest money deposited, if any, to 
the authorised officer conducting the sale and in default 
of such deposit, the property shall be sold again;
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The Authorised Officer, Central Bank of India v. Shanmugavelu
(4) The balance amount of purchase price payable shall be 
paid by the purchaser to the authorised officer on or before 
the fifteenth day of confirmation of sale of the immovable 
property or such extended period as may be agreed upon 
in writing between the purchaser and the secured creditor, 
in any case not exceeding three months.
(5) In default of payment within the period mentioned in 
sub-rule (4), the deposit shall be forfeited to the secured 
creditor and the property shall be resold and the defaulting 
purchaser shall forfeit all claim to the property or to any 
part of the sum for which it may be subsequently sold.
(6) On confirmation of sale by the secured creditor and 
if the terms of payment have been complied with, the 
authorised officer exercising the power of sale shall issue a 
certificate of sale of the immovable property in favour of the 
purchaser in the Form given in Appendix V to these rules.
(7) Where the immovable property sold is subject to any 
encumbrances, the authorised officer may, if he thinks 
fit, allow the purchaser to deposit with him the money 
required to discharge the encumbrances and any interest 
due thereon together with such additional amount that 
may be sufficient to meet the contingencies or further 
cost, expenses and interest as may be determined by him.
Provided that if after meeting the cost of removing 
encumbrances and contingencies there is
any surplus 
available out of money deposited by the purchaser such 
surplus shall be paid to the purchaser within fifteen days, 
from date of finalisation of the sale.
(8) On such deposit of money for discharge of the 
encumbrances, the authorised officer shall issue or cause 
the purchaser to issue notices to the persons interested 
in or entitled to the money deposited with him and take 
steps to make, the payment accordingly.
(9) The authorised officer shall deliver the property to the 
purchaser free from encumbrances known to the secured 
creditor on deposit of money as specified in sub-rule (7) 
above.
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(10) The certificate of sale issued under sub-rule (6) 
shall specifically mention that whether the purchaser has 
purchased the immovable secured asset free from any 
encumbrances known to the secured creditor or not.”
44.	 Section 35 of the SARFAESI Act contains the overriding clause and 
provides that the Act shall override any other law which is inconsistent 
with its provisions, and reads as under: -
“35. The provisions of this Act to override other laws.–
The provisions of this Act shall have effect, notwithstanding 
anything inconsistent therewith contained in any other law 
for the time being in force or any instrument having effect 
by virtue of any such law.” 
45.	 Section 37 of the SARFAESI Act provides that the provisions of the 
SARFAESI Act shall be in addition to the Acts mentioned in or and 
any other law for the time being in force and that the other laws 
shall also be applicable alongside the SARFAESI Act, and reads 
as under: -
“37. Application of other laws not barred.–The provisions 
of this Act or the rules made thereunder shall be in addition 
to, and not in derogation of, the Companies Act, 1956 (1 
of 1956), the Securities Contracts (Regulation) Act, 1956 
(42 of 1956), the Securities and Exchange Board of India 
Act, 1992 (15 of 1992), the Recovery of Debts Due to 
Banks and Financial Institutions Act, 1993 (51 of 1993) 
or any other law for the time being in force.”
46.	 This Court in Madras
Petrochem Ltd. & Anr. v. Board for Industrial 
and Financial Reconstruction & Ors. reported in (2016) 4 SCC 1, 
recapitulated the object behind the enactment of the SARFAESI Act 
and in that context examined the purpose of Sections 13, 35 and 37 
respectively of the SARFAESI Act with the following observations 
given as under: -
“16. It is important at this stage to refer to the genesis of these 
three legislations. Each of them deals with different aspects of 
recovery of debts due to banks and financial institutions. Two 
of them refer to creditors’ interests and how best to deal with 
recovery of outstanding loans and advances made by them on 
the one hand, whereas the Sick Industrial Companies (Special

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The Authorised Officer, Central Bank of India v. Shanmugavelu
Provisions) Act, 1985, on the other hand, deals with certain 
debtors which are sick industrial companies [i.e. companies 
running industries named in the Schedule to the Industries 
(Development and Regulation) Act, 1951] and whether such 
“debtors” having become “sick”, are to be rehabilitated. The 
question, therefore, is whether the public interest in recovering 
debts due to banks and financial institutions is to give way to 
the public interest in rehabilitation of sick industrial companies, 
regard being had to the present economic scenario in the 
country, as reflected in parliamentary legislation.

xxx

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xxx
19. While this Act had worked for a period of about 7 years, 
the Recovery of Debts Due to Banks and Financial Institutions 
Act, 1993 was brought into force, pursuant to various committee 
reports. The Statement of Objects and Reasons for this Act 
reads as follows:
Statement of Objects and Reasons of the Recovery of 
Debts Due to Banks and Financial Institutions Act, 1993
“1. Banks and financial institutions at present experience 
considerable difficulties in recovering loans and enforcement 
of securities charged with them. The existing procedure 
for recovery of debts due to the banks and financial 
institutions has blocked a significant portion of their funds 
in unproductive assets, the value of which deteriorates 
with the passage of time. The Committee on the Financial 
System headed by Shri M. Narasimham has considered the 
setting up of the Special Tribunals with special powers for 
adjudication of such matters and speedy recovery as critical 
to the successful implementation of the financial sector 
reforms. An urgent need was, therefore, felt to work out a 
suitable mechanism through which the dues to the banks 
and financial institutions could be realised without delay. 
In 1981, a Committee under the Chairmanship of Shri T. 
Tiwari had examined the legal and other difficulties faced 
by banks and financial institutions and suggested remedial 
measures including changes in law. The Tiwari Committee 
had also suggested setting up of Special Tribunals for
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recovery of dues of the banks and financial institutions by 
following a summary procedure. The setting up of Special 
Tribunals will not only fulfil a long-felt need, but also will 
be an important step in the implementation of the Report 
of Narasimham Committee. Whereas on 30-9-1990 more 
than fifteen lakhs of cases filed by the public sector banks 
and about 304 cases filed by the financial institutions were 
pending in various courts, recovery of debts involved more 
than Rs 5622 crores in dues of public sector banks and 
about Rs 391 crores of dues of the financial institutions. 
The locking up of such huge amount of public money in 
litigation prevents proper utilisation and recycling of the 
funds for the development of the country.
2. The Bill seeks to provide for the establishment of Tribunals 
and Appellate Tribunals for expeditious adjudication and 
recovery of debts due to banks and financial institutions. 
Notes on clauses explain in detail the provisions of the Bill.”
20. The Recovery of Debts Due to Banks and Financial 
Institutions Act, 1993 took away the jurisdiction of the courts 
and vested this jurisdiction in tribunals established by the Act 
so as to ensure speedy recovery of debts due to the banks 
and financial institutions mentioned therein. This Act also 
included one appeal to the Appellate Tribunal, and transfer 
of all suits or other proceedings pending before any court 
to tribunals set up under
the Act. The Act contained a non 
obstante clause in Section 34 stating that its provisions will 
have effect notwithstanding anything inconsistent contained in 
any other law for the time being in force or in any instrument 
having effect by virtue of any other law. In the year 2000, this 
Act was amended so as to incorporate a new sub-section (2) in 
Section 34 together with a saving provision in sub-section (1). 
It is of some interest to note that this Act was to be in addition 
to and not in derogation of various Financial Corporation Acts 
and the Sick Industrial Companies (Special Provisions) Act, 
1985. Clearly, therefore, the object of the 2000 Amendment to 
the Recovery of Debts Due to Banks and Financial Institutions 
Act, 1993 was to make the Sick Industrial Companies (Special 
Provisions) Act, 1985 prevail over it.
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The Authorised Officer, Central Bank of India v. Shanmugavelu
21. Regard being had to the poor working of the Recovery 
of Debts Due to Banks and Financial Institutions Act, 1993, 
the Securitisation and Reconstruction of Financial Assets and 
Enforcement of Security Interest Act, 2002 was brought into 
force in the year 2002. …
22. This 2002 Act was brought into force as a result of two 
committee reports which opined that recovery of debts due to 
banks and financial institutions was not moving as speedily as 
expected, and that, therefore, certain other measures would 
have to be put in place in order that these banks and financial 
institutions would better be able to recover debts owing to them.

xxx

xxx
xxx
24. The “pivotal” provision, namely, Section 13 of the said 
Act makes it clear that banks and financial institutions would 
now no longer have to wait for a tribunal judgment under the 
Recovery of Debts Due to Banks and Financial Institutions 
Act, 1993 to be able to recover debts owing to them. They 
could, by following the procedure laid down in Section 13, 
take direct action against the debtors by taking possession of 
secured assets and selling them; they could also take over the 
management of the business of the borrower. They could also 
appoint any person to manage the secured assets possession 
of which has been taken over by them, and could require, at 
any time by notice in writing to any person who has acquired 
any of the secured assets from the borrower and from whom 
any money is due or may become due from the borrower, to 
pay the secured creditor so much of the money as is sufficient 
to pay the secured debt.
25. In order to further the objects of the Securitisation and 
Reconstruction of Financial Assets and Enforcement of Security 
Interest Act, 2002, the Act contains a non obstante clause in 
Section 35 and also contains various Acts in Section 37 which 
are to be in addition to and not in derogation of the Securitisation 
and Reconstruction of Financial Assets and Enforcement of 
Security Interest Act, 2002. Three of these Acts, namely, the 
Companies Act, 1956, the Securities Contracts (Regulation) 
Act, 1956 and the Securities and Exchange Board
of India Act,
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1992, relate to securities generally, whereas the Recovery of 
Debts Due to Banks and Financial Institutions Act, 1993 relates 
to recovery of debts due to banks and financial institutions. 
Significantly, under Section 41 of this Act, three Acts are, by 
the Schedule to this Act, amended. We are concerned with 
the third of such Acts, namely, the Sick Industrial Companies 
(Special Provisions) Act, 1985, in Section 15(1) of which two 
provisos have been added. It is the correct interpretation of the 
second of these provisos on which the fate of these appeals 
ultimately hangs.” 
(Emphasis supplied)
ii)	
Applicability of Section(s) 73 & 74 of the 1872 Act to 
Forfeiture under the SARFAESI Rules.
47.	 Before we proceed to answer the first question formulated by us in 
para 34 of this judgment, we must look into the principles underlying 
Section 73 of the 1872 Act.
48.	 Section 73 of the 1872 Act deals with the compensation for loss or 
damage caused by breach of contract. The same is extracted below:
“73. Compensation for loss or damage caused by 
breach of contract. — When a contract has been broken, 
the party who suffers by such breach is entitled to receive, 
from the party who has broken the contract, compensation 
for any loss or damage caused to him thereby, which 
naturally arose in the usual course of things from such 
breach, or which the parties knew, when they made the 
contract, to be likely to result from the
breach of it.
Such compensation is not to be given for any remote and 
indirect loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation 
resembling those created by contract. — When an 
obligation resembling those created by contract has been 
incurred and has not been discharged, any person injured 
by the failure to discharge it is entitled to receive the same 
compensation from the party in default, as if such person 
had contracted to discharge it and had broken his contract.
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The Authorised Officer, Central Bank of India v. Shanmugavelu
Explanation. In estimating the loss or damage arising from 
a breach of contract, the means which existed of remedying 
the inconvenience caused by the non-performance of the 
contract must be taken into account.”
49.	 The principles underlying Section 73 of the 1872 Act are well settled. 
The classic case dealing with remoteness of damages is Hadley & 
Anr. v. Baxendale & Ors. reported in (1843-60) ALL E.R. Rep. 461, 
wherein it was observed:
“Where two parties have made a contract which one of 
them has broken, the damages which the other party ought 
to receive in respect of such breach of contract should 
be such as may fairly and reasonably be considered 
as either arising naturally, i.e., according to the usual 
course of things, from such breach of contract itself, or 
such as may reasonably be supposed to have been in 
the contemplation of both parties at the time they made 
the contract as the probable result of the breach of it. 
If special circumstances under which the contract was 
actually made were communicated by the plaintiffs to the 
defendants, and thus known to both parties, the damages 
resulting from the breach of such a contract which they 
would reasonably contemplate would be the amount 
of injury which would ordinarily follow from a breach of 
contract under these special circumstances so known and 
communicated. But, on the other hand, if these special 
circumstances
were wholly unknown to the party breaking 
the contract, he, at the most, could only be supposed to 
have had in his contemplation the amount of injury which 
would arise generally, and in the great multitude of cases 
not affected by any special circumstances, from such a 
breach of contract. For, had the circumstances been known, 
the parties might have provided for the breach of contract 
by special terms as to the damages in that case; and of 
this advantage it would be very unjust to deprive them.”
50.	 The above principles were explained and clarified by the Court of 
Appeal in Victoria Laundry (Windsor) Ltd v. Newman Industrial 
Ltd., [1949] 2 K.B. 528 as under:
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“(1.) It is well settled that the governing purpose of damages 
is to put the party whose rights have been violated in the 
same position, so far as money can do so, as if his rights 
had been observed: …
(2.) In cases of breach of contract the aggrieved party 
is only entitled to recover such part of the loss actually 
resulting as was at the time of the contract reasonably 
foreseeable as liable to result from the breach.
(3.) What was at that time reasonably so foreseeable 
depends on the knowledge then possessed by the parties 
or, at all events, by the party who later commits the breach.
(4.) For this purpose, knowledge “possessed” is of two 
kinds; one imputed, the other actual. Everyone, as a 
reasonable person, is taken to know the “ordinary course of 
things” and consequently what loss is liable to result from 
a breach of contract in that ordinary course. This is the 
subject matter of the “first rule” in Hadley v. Baxendale 9 
Exch. 341. But to this knowledge, which a contract-breaker 
is assumed to possess whether he actually possesses 
it or not, there may have to be added in a particular 
case knowledge which he actually possesses, of special 
circumstances outside the “ordinary course of things,” of 
such a kind that a breach in those special circumstances 
would be liable to cause more loss. Such a case attracts 
the operation of the “second rule” so as to make additional 
loss also recoverable.
(5.) In order
to make the contract-breaker liable under 
either rule it is not necessary that he should actually have 
asked himself what loss is liable to result from a breach. 
As has often been pointed out, parties at the time of 
contracting contemplate not the breach of the contract, but 
its performance. It suffices that, if he had considered the 
question, he would as a reasonable man have concluded 
that the loss in question was liable to result ….
(6.) Nor, finally, to make a particular loss recoverable, 
need it be proved that upon a given state of knowledge 
the defendant could, as a reasonable man, foresee that
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The Authorised Officer, Central Bank of India v. Shanmugavelu
a breach must necessarily result in that loss. It is enough 
if he could foresee it was likely so to result. It is indeed 
enough, to borrow from the language of Lord du Parcq in 
the same case, at page 158, if the loss (or some factor 
without which it would not have occurred) is a “serious 
possibility” or a “real danger.” …”
51.	 The above principles apply to grant of compensation under Section 
73 of the 1872 Act. This is clear from the decision of this Court in 
Karsandas H. Thacker v. M/s. The Saran Engineering Co. Ltd. 
reported in AIR 1965 SC 1981. The Court held that when a party 
commits breach of contract, the other party is entitled to receive 
compensation for any loss by the damage caused to him which 
naturally arose in the usual course of business from such breach 
or which the parties knew when they made the contract to be likely 
to result from the breach of it. Remote and indirect loss or damage 
sustained by reason of the breach will not entitle the party complaining 
breach, to any compensation. Referring to the facts of the case and 
Illustration (k) to Section 73 of the 1872 Act, the Court held:
“13. …On account of the non-delivery of scrap iron, he 
could have purchased the scrap iron from the market at 
the same controlled price and similar incidental charges. 
This means that he did not stand to pay a higher price than 
what he was to pay to the respondent and
therefore he 
could not have suffered any loss on account of the breach 
of contract by the respondent. The actual loss, which, 
according to the appellant, he suffered on account of the 
breach of contract by the respondent was the result of his 
contracting to sell 200 tons of scrap iron for export to the 
Export Corporation. It may be assumed that, as stated, 
the market price of scrap iron for export on January 30, 
1953, was the price paid by the Export Corporation for 
the purchase of scrap iron that day. As the parties did not 
know and could not have known when the contract was 
made in July 1952 that the scrap iron would be ultimately 
sold by the appellant to the Export Corporation, the parties 
could not have known of the likelihood of the loss actually 
suffered by the appellant, according to him, on account of 
the failure of the respondent to fulfil the contract.
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14. Illustration (k) to S. 73 of the Contract Act is apt for 
the purpose of this case. According to that illustration, 
the person committing breach of contract has to pay to 
the other party the difference between the contract price 
of the articles agreed to be sold and the sum paid by the 
other party for purchasing another article on account of 
the default of the first party, but the first party has not to 
pay the compensation which the second party had to pay 
to third parties as he had not been told at the time of the 
contract that the second party was making the purchase 
of the article for delivery to such third parties.”
52.	 Damages can be awarded only for the loss directly suffered on account 
of the breach and not for any remote or indirect loss sustained by 
reason of the breach of contract. The general rule is that where 
two parties enter into a contract and one of them commits breach, 
the other party will be entitled to receive as damages in respect of 
such breach of contract, such sum as may fairly and reasonably be 
considered arising naturally, that is according to the usual course of 
things, from such breach of contract itself or such as may reasonably 
be supposed to have been in the contemplation of both parties 
at the time they made the contract, as the probable result of the 
breach of it. If any special circumstances about the dependency of 
the performance of other contract(s) by the party
complaining of the 
breach, on the performance of the contract in dispute by the party 
in breach, had been communicated to the party in breach, and thus 
known to both parties at the time of entering into the contract, then 
the damages for the breach of the contract in dispute, may include the 
compensation for the loss suffered in regard to such other dependent 
contracts. But, on the other hand, if the special circumstances were 
not made known to the party breaking the contract, the party breaking 
the contract, at the most, could only be supposed to have had in its 
contemplation the amount of injury which would arise generally and 
directly and not any remote or unknown loss or damage.
53.	 What would be a ‘penalty’ under Section 74 of the 1872 Act was 
explained by this Court in K. P. Subbarama Sastri and others v. 
K. S. Raghavan & Ors. reported in (1987) 2 SCC 424 as under:
“5. …The question whether a particular stipulation in a 
contractual agreement is in the nature of a penalty has to be 
determined by the court against the background of various
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relevant factors, such as the character of the transaction 
and its special nature, if any, the relative situation of the 
parties, the rights and obligations accruing from such a 
transaction under the general law and the intention of 
the parties in incorporating in the contract the particular 
stipulation which is contended to be penal in nature. If on 
such a comprehensive consideration, the court finds that 
the real purpose for which the stipulation was incorporated 
in the contract was that by reason of its burdensome or 
oppressive character it may operate in terrorem over the 
promiser so as to drive him to fulfil the contract, then the 
provision will be held to be one by way of penalty.”
54.	 The SARFAESI Rules, more particularly Rule 9 was first examined 
by this Court in Rakesh Birani (Dead) through LRs v. Prem 
Narain Sehgal & Anr. reported in (2018) 5 SCC 543, wherein the 
entire auction process under Rule 9 was explained. The relevant 
observations read as under: -
“8. In order to comprehend the rival submissions, it is 
necessary to ponder as to intendment of Rule 9 of the 
2002 Rules which deals with the time of sale, issues of sale 
certificate and delivery of possession, etc. Public notice 
of sale is to be published in the newspaper and only after 
thirty days thereafter, the sale of immovable property can 
take place. Under Rule 9(2) of the 2002 Rules, the sale is
required to be confirmed in favour of the purchaser who 
has offered the highest sale price to the authorised officer 
and shall be subject to confirmation by the secured creditor. 
The proviso makes it clear that sale under the said Rule 
would be confirmed if the amount offered and the whole 
price is not less than the reserved price as specified in 
Rule 9(5). It is apparent that Rule 9(1) does not deal with 
the confirmation by the authorised officer. It only provides 
confirmation by the secured creditor.
9. Rule 9(3) makes it clear that on every sale of immovable 
property, the purchaser on the same day or not later than 
next working day, has to make a deposit of twenty-five per 
cent of the amount of the sale price, which is inclusive of 
earnest money deposited if any. Rule 9(4) makes it clear
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that balance amount of the purchase price payable shall be 
paid by the purchaser to the authorised officer on or before 
the fifteenth day of “confirmation of sale of the immovable 
property” or such extended period as may be agreed upon 
in writing between the purchaser and the secured creditor. 
Thus, Rule 9(2) makes it clear that after confirmation by 
the secured creditor the amount has to be deposited. Rule 
9(3) also makes it clear that period of fifteen days has to 
be computed from the date of confirmation.”
55.	 This Court in Rakesh Birani (supra) while interpreting Rule 9(5) of 
the SARFAESI Rules made the following pertinent observations: -
a.	
That, the liability of a successful auction purchaser to deposit 
the requisite amount begins from the date when the sale is 
confirmed by the secured creditor and communicated to the 
auction purchaser, wherein 25% of the amount has to be 
deposited as earnest money no later than the next working day 
from the date of confirmation and the balance amount within 
15 days from the said date.
b.	
That for forfeiture of the 25% earnest money deposit of the 
auction purchaser, twin conditions have to be satisfied being (i) 
First, that the sale must have been confirmed by the secured 
creditor and (ii) second, there is a default in payment of the 
balance 75% of the amount. 
c.	
Once the afore-stated conditions are satisfied i.e., the auction 
purchaser after confirmation of
sale fails to deposit the balance 
amount within the stipulated time, the secured creditor is required 
to forfeit the original auction purchaser’s earnest money deposit 
and the secured assets have to be resold.
d.	
The relevant observations are being reproduced below: -
“10. In this case, confirmation has been made and 
communicated on 27-2- 2013 and within fifteen days 
thereof i.e. on 13-3-2018, the amount of twenty-five per 
cent had been deposited. Thereafter, sale certificate 
has been issued under Rule 9(6). Rule 9(5) also makes 
it clear that in default of payment within the period 
mentioned in Rule 9(4), the deposit shall be forfeited. 
There cannot be any forfeiture of the amount of 25%
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The Authorised Officer, Central Bank of India v. Shanmugavelu
in deposit until and unless the sale is confirmed by the 
secured creditor and there is a default of payment of 
75% of the amount. The interpretation made by the 
High Court thus cannot be accepted. 
11. If we read the provisions otherwise then we find 
even before the confirmation of sale within fifteen days, 
the amount would be forfeited by the authorised officer 
who may decide not to confirm the sale that would 
be a result not contemplated in Rules 9(2), 9(4) and 
9(5) which fortify our conclusion that it is only after the 
confirmation is made under Rule 9(4) that amount has 
to be deposited and on failure to deposit the amount, 
twenty-five per cent amount has to be forfeited and 
property has to be resold….”
(Emphasis supplied)
56.	 In Agarwal Tracom Private Limited v. Punjab National Bank & 
Ors. reported in (2018) 1 SCC 626, this Court held that the act of 
forfeiture of the earnest money deposit by the secured creditor is 
a measure under Section 13(4) of the SARFAESI Act and thus, 
challengeable before the DRT under Section 17 of the SARFAESI 
Act. The relevant observations are reproduced below: -
“28. We also notice that Rule 9(5) confers express power 
on the secured creditor to forfeit the deposit made by the 
auction-purchaser in case the auction-purchaser commits 
any default in paying instalment of sale money to the 
secured creditor. Such action taken by the secured
creditor 
is, in our opinion, a part of the measures specified in 
Section 13(4) and, therefore, it is regarded as a measure 
taken Under Section 13(4) read with Rule 9(5)….”
 (Emphasis supplied)
57.	 It appears that the High Court whilst passing the impugned order was 
of the view that the legislature had provided for forfeiture under the 
SARFAESI Rules as a relief to the secured creditor for the breach 
of obligation by the auction purchaser. Thus, it was of the view that 
Section 73 of the 1872 Act will be applicable to forfeiture under Rule 
9(5) of the SARFAESI Rules and any forfeiture will only be allowed 
to the extent of the loss or damage suffered by the secured creditor.
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58.	 This Court in C. Natarajan (supra) whilst dealing with a similar issue 
pertaining to the applicability of Section(s) 73 and 74 of the 1872 Act 
on forfeiture under Rule 9(5) of the SARFAESI Rules, answered the 
same in a negative. The said decision is in two parts: -
a)	
It held that as the SARFAESI Act is a special enactment with 
overriding effect over other laws by virtue of Section(s) 35 and 
37, the 1872 Act more particularly Section(s) 73 and 74 will not 
be applicable to Rule 9(5) of the SARFAESI Rules especially 
since the rules framed under a statute become part of the statute.
“20. In terms of the Indian Contract Act, 1872 (for brevity 
“Contract Act”, hereafter), a person can withdraw his offer 
before acceptance. However, once a party expresses 
willingness to enter into a contractual relationship subject 
to terms and conditions and makes an offer which is 
accepted but thereafter commits a breach of contract, he 
does so at his own risk and peril and naturally has to suffer 
the consequences. We are not oblivious of the terms of 
section 73 and section 74 of the Contract Act, being part 
of Chapter VI thereof titled “Of the Consequence of Breach 
of Contract”. These sections, providing for compensation 
for breach of contract and for liquidated damages, have 
remained on the statute book for generations and permit 
the party suffering the breach to recover such quantum of 
loss or damage from the party in
breach. However, with 
changing times, the minds of people are also changing. 
The judiciary, keeping itself abreast of the changes that 
are bound to occur in an evolving society, must interpret 
new laws that are brought in operation to suit the situation 
appropriately. In the current era of globalization, the entire 
philosophy of society, mainly on the economic front is 
making rapid strides towards changes. Unscrupulous 
people have been inventing newer modes and mechanisms 
for defrauding and looting the nation. It is in such a scenario 
that provisions of enactments, particularly those provisions 
which have a direct bearing on the economy of the nation, 
must receive such interpretation so that it not only fosters 
economic growth but is also in tune with the intention of the 
law-makers in introducing a provision such as sub-rule (5) 
of rule 9, which though harsh in its operation, is intended to
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The Authorised Officer, Central Bank of India v. Shanmugavelu
suppress the mischief and advance the remedy. If indeed 
section 73 and section 74, which are part of the general 
law of contract, were sufficient to cater to the remedy, the 
need to make sub-rule (5) of rule 9 as part of the Rules 
might not have arisen. Additionally, insertion of sub-rule 
(5) with such specificity regarding forfeiture must not have 
been thought of only for reiterating what is already there. 
It was visualized by the law makers that there was a need 
to arrest cases of deceptive manipulation of prices at the 
instance of unscrupulous borrowers by thwarting sale 
processes and this was the trigger for insertion of such 
a provision with wide words conferring extensive powers 
of forfeiture. The purpose of such insertion must have 
also been aimed at instilling a sense of discipline in the 
intending purchasers while they proceed to participate in 
the auction-sale process. At the cost of repetition, it must 
not be forgotten that the SARFAESI Act was enacted 
because the general laws were not found to be workable 
and efficient enough to ensure liquidity of finances and 
flow of money essential for any healthy and growth-
oriented economy. The decision of this Court in Mardia 
Chemicals v. Union of India [(2004) 4 SCC 311], while 
outlawing only a part of the SARFAESI Act and upholding 
the rest, has traced the history of this legislation and the 
objects that Parliament
had in mind in sufficient detail. 
Apart from the law laid down in such decision, these are 
the other relevant considerations which ought to be borne 
in mind while examining a challenge to a forfeiture order.
21. There is one other aspect which is, more often than not, 
glossed over. In terms of sub-rule (5) of rule 9, generally, 
forfeiture would be followed by an exercise to resell the 
immovable property. On the date an order of forfeiture is 
in contemplation of the authorized officer of the secured 
creditor for breach committed by the bidder, factually, the 
position is quite uncertain for the former in that there is 
neither any guarantee of his receiving bids pursuant to a 
future sale, much to the satisfaction of the secured creditor, 
nor is there any gauge to measure the likely loss to be 
suffered by it (secured creditor) if no bidders were interested 
to purchase the immovable property. Since the extent of
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loss cannot be immediately foreseen or calculated, such 
officers may not have any option but to order forfeiture of 
the amount deposited by the defaulting bidder in an attempt 
to recover as much money as possible so as to reduce the 
secured debt. That the immovable property is later sold 
at the same price or at a price higher than the one which 
was offered by the party suffering the forfeiture is not an 
eventuality that occurs in each and every case. Sections 
73 and 74 of the Contract Act would not, therefore, be 
sufficient to take care of the interest of the secured creditor 
in such a case and that also seems to be another reason 
for bringing in the provision for forfeiture in rule 9. Ordinarily, 
therefore, validity of an order of forfeiture must be judged 
considering the circumstances that were prevailing on the 
date it was made and not based on supervening events.
22. Does sub-rule (5) of rule 9, which is part of a delegated 
legislation, i.e., the Rules, have the effect of diluting 
section 73 and section 74 of the Contract Act? We have 
considered it necessary to advert to this question as it 
is one of general importance and are of the considered 
opinion that the answer must be in the negative. While 
the Contract Act embodies the general law of contract, 
the SARFAESI Act is a special enactment,  inter alia, 
for enforcement of security interest without intervention 
of court. Rule 9(5) providing for
forfeiture is part of the 
Rules, which have validly been framed in exercise of 
statutory power conferred by section 38 of the SARFAESI 
Act. Law is well settled that rules, when validly framed, 
become part of the statute. Apart from the presumption as 
to constitutionality of a statute, the contesting respondent 
did not mount any challenge to sub-rule (5) of rule 9 of 
the Rules. The applicability and enforcement of sub-rule 
(5) of rule 9 on its terms, therefore, has to be secured in 
appropriate cases.”
(Emphasis supplied)
b)	
That if Rule 9(5) is interpreted in light of Section(s) 73 and 74 
of the 1872 Act, then the very auction process could be set at 
naught by a mischievous or devious borrower by ‘gaming’ the 
auction through sham bids.
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“18. Having regard to the terms of rule 9, the notice 
for auction constitutes the ‘invitation to offer’; the bids 
submitted by the bidders constitute the ‘offer’ and upon 
confirmation of sale in favour of the highest bidder under 
sub-rule (2) of rule 9, the contract comes into existence. 
Once the contract comes into existence, the bidder is bound 
to honour the terms of the statute under which the auction 
is conducted and suffer consequences for breach, if any, 
as stipulated. Rule 9(5) legislatively lays down a penal 
consequence. ‘Forfeiture’ referred to in sub-rule (5) of rule 
9, in the setting of the SARFAESI Act and the Rules, has 
to be construed as denoting a penalty that the defaulting 
bidder must suffer should he fail to make payment of the 
entire sale price within the period allowed to him by the 
authorized officer of a secured creditor.
19. Though it is true that the power conferred by sub-
rule (5) of rule 9 of the Rules ought not to be exercised 
indiscriminately without having due regard to all relevant 
facts and circumstances, yet, the said sub-rule ought also 
not be read in a manner so as to render its existence 
only on paper. Drawing from our experience on the 
Bench, it can safely be observed that in many a case 
the borrowers themselves, seeking to frustrate auction 
sales, use their own henchmen as intending purchasers to 
participate in the auction but
thereafter they do not choose 
to carry forward the transactions citing issues which are 
hardly tenable. This leads to auctions being aborted and 
issuance of fresh notices. Repetition of such a process 
of participation-withdrawal for a couple of times or more 
has the undesirable effect of rigging of the valuation of the 
immovable property. In such cases, the only perceivable 
loss suffered by a secured creditor would seem to be 
the extent of expenses incurred by it in putting up the 
immovable property for sale. However, what does generally 
escape notice in the process is that it is the mischievous 
borrower who steals a march over the secured creditor by 
managing to have a highly valuable property purchased by 
one of its henchmen for a song, thus getting such property 
freed from the clutches of mortgage and by diluting the
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security cover which the secured creditor had for its loan 
exposure. Bearing in mind such stark reality, sub-rule (5) of 
rule 9 cannot but be interpreted pragmatically to serve twin 
purposes — first, to facilitate due enforcement of security 
interest by the secured creditor (one of the objects of the 
SARFAESI Act); and second, to prohibit wrong doers from 
being benefitted by a liberal construction thereof.”
(Emphasis supplied)
a.	
Forfeiture under the SARFAESI Rules:
59.	 We, first come to the aspect of applicability of Section 73 of the 
1872 Act vis-à-vis the SARFAESI Act, more particularly Rule 9(5) 
of the SARFAESI Rules. In Madras Petrochem (supra) this Court 
made a pertinent observation that Sections 35 and 37 respectively 
of the SARFAESI Act form a unique scheme of overriding provisions, 
however the scope and ambit of Section 37 is restricted only to the 
securities law. The relevant portion is reproduced as under: -
“39. This is what then brings us to the doctrine of 
harmonious construction, which is one of the paramount 
doctrines that is applied in interpreting all statutes. Since 
neither Section 35 nor Section 37 of the Securitisation 
and Reconstruction of Financial Assets and Enforcement 
of Security Interest Act, 2002 is subject to the other, we 
think it is necessary to interpret the expression “or any 
other law for the time being in force” in Section 37. If a 
literal meaning is given to the said
expression, Section 35 
will become completely otiose as all other laws will then 
be in addition to and not in derogation of the Securitisation 
and Reconstruction of Financial Assets and Enforcement 
of Security Interest Act, 2002. Obviously this could not 
have been the parliamentary intendment, after providing 
in Section 35 that the Securitisation and Reconstruction of 
Financial Assets and Enforcement of Security Interest Act, 
2002 will prevail over all other laws that are inconsistent 
therewith. A middle ground has, therefore, necessarily to 
be taken. According to us, the two apparently conflicting 
sections can best be harmonised by giving meaning to 
both. This can only be done by limiting the scope of the 
expression “or any other law for the time being in force”
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The Authorised Officer, Central Bank of India v. Shanmugavelu
contained in Section 37. This expression will, therefore, 
have to be held to mean other laws having relation to 
the securities market only, as the Recovery of Debts 
Due to Banks and Financial Institutions Act, 1993 is the 
only other special law, apart from the Securitisation and 
Reconstruction of Financial Assets and Enforcement of 
Security Interest Act, 2002, dealing with recovery of debts 
due to banks and financial institutions. On this interpretation 
also, the Sick Industrial Companies (Special Provisions) 
Act, 1985 will not be included for the obvious reason 
that its primary objective is to rehabilitate sick industrial 
companies and not to deal with the securities market.”
(Emphasis supplied)
60.	 The aforesaid view came to be reaffirmed by this Court in another 
decision in Celir LLP. v. Bafna Motors (Mumbai) Pvt. Ltd. & Ors. 
reported in 2023 SCC OnLine SC 1209, wherein it was held that only 
those laws which have been either enumerated in Section 37 of the 
SARFAESI Act or which occupy and deal with the same field as the 
SARFAESI Act will be applicable in addition to the SARFAESI Act. 
The relevant observations are being reproduced below: -
“72. Thus, it appears from a combined reading of 
the decisions rendered by this Court in  Madras 
Petrochem (supra) and M.D. Frozen Foods Exports (supra) 
that this Court has consistently construed that only those 
laws which have either
been enumerated in Section 37 
SARFAESI Act or similar to it would be applicable in 
addition to the SARFAESI Act i.e., laws which deal with 
securities or occupy the same field as the SARFAESI Act. 
Thus, even on this aspect, we are of the view that the Act, 
1882 would not be applicable in addition to the SARFAESI 
Act. Suffice to say, that in view of the above discussion, 
the statutory right of redemption under the Act, 1882 will 
not be applicable to the SARFAESI Act at least in view of 
the amended Section 13(8) and any right of redemption 
of a borrower must be found within the SARFAESI Act in 
terms of the amended Section 13(8).”
(Emphasis supplied)
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61.	 The legislature through Rule 9(5) of the SARFAESI Rules, has made 
a conscious departure from the general law by statutorily providing 
for the forfeiture of earnest-money deposit of the successful auction 
purchaser for its failure in depositing the balance consideration 
within the statutory period. No doubt, the forfeiture is a result of a 
breach of obligation, but the consequence of forfeiture in such case 
is taking place not because of the breach but because of operation 
of the statutory provision providing for forfeiture that is attracted as 
a result of the breach.
62.	 If the consequence of forfeiture was purely a matter of breach of 
contract, then there would have been no occasion for the legislature 
to specifically provide for forfeiture through the statutory provisions, 
and it would have simpliciter relegated the consequences of such 
breach to already existing general law under Section(s) 73 and 74 
of the 1872 Act. [See C. Natarajan (supra) at Para 20]
63.	 However, the legislature has consciously provided for only one 
consequence in the event of failure of the successful auction purchaser 
in depositing the balance amount i.e., forfeiture and has not provided 
for imposition of any other stipulation by the secured creditor in the 
event of a breach. This has been done, keeping in mind the larger 
object of the SARFAESI Act, which is to facilitate recovery of debt in 
a time-bound manner by giving
teeth to the measures enumerated 
within Section 13 of the SARFAESI Act, more particularly sale of 
the secured asset in the event the borrower fails to repay the debt.
64.	 If Section(s) 73 and 74 respectively of the 1872 Act are interpreted so 
as to be made applicable to a breach in payment of balance amount 
by the successful auction purchaser, it would lead to a chilling effect 
in the following ways: -
(i)	
First, it would be quite preposterous to suggest that in an auction 
which is a process meant for recovery of debt due to default of 
the borrower, the balance amount if not paid by the successful 
auction purchaser, another recovery proceeding would have 
to be initiated by the secured creditor in terms of Section(s) 
73 and 74 of the 1872 Act to recoup the loss and expenditure 
occasioned to it by the defaulting successful auction purchaser.
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The Authorised Officer, Central Bank of India v. Shanmugavelu
(ii)	
Secondly, such an interpretation would allow unscrupulous 
borrowers being hands-in-glove with the auction purchasers to 
use subversive methods to participate in an auction only to not 
pay the balance amount at the very end and escape relatively 
unscathed under the guise of Section(s) 73 and 74 of the 1872 
Act, thereby gaming the entire auction process and leaving any 
possibility of recoveries under the SARFAESI Act at naught. 
[See; C. Natarajan (supra) at Para 19]
65.	 Thus, such an interpretation would completely defeat the very purpose 
and object of the SARFAESI Act and would reduce the measures 
provided under Section 13 of the SARFAESI Act to a farce and 
thereby undermine the country’s economic interest. 
66.	 At this stage, we may also answer the submission of the respondent 
that the authorised officer under Rule 9(5) of the SARFAESI Rules 
has been conferred with unguided and unfettered power of forfeiture 
and as such the said rule is liable to be struck down. However, 
we are not impressed with such submission. First, there was no 
challenge to the constitutional validity of Rule 9 sub-rule (5) of the 
SARFAESI Rules. Secondly, even as per Agarwal Tracom (supra) 
it is always open for a person aggrieved by an order of forfeiture 
under the SARFAESI Rules to challenge the same before the DRT 
under Section 17 of the SARFAESI Act.
67.	 As regards the contention that the
SARFAESI Rules being a delegated 
legislation cannot override the substantive provisions of a statutory 
enactment more particularly Section(s) 73 & 74 of the 1872 Act, the 
same was negatived by this Court in C. Natarajan (supra) with the 
following observations: -
“22. .... We have considered it necessary to advert to 
this question as it is one of general importance and are 
of the considered opinion that the answer must be in the 
negative. While the Contract Act embodies the general 
law of contract, the SARFAESI Act is a special enactment, 
inter alia, for enforcement of security interest without 
intervention of court. Rule 9(5) providing for forfeiture 
is part of the Rules, which have validly been framed in 
exercise of statutory power conferred by section 38 of the 
SARFAESI Act. Law is well settled that rules, when validly 
framed, become part of the statute. …”
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68.	 What can be discerned from the above is that the SARFAESI Act 
is a special legislation with an overriding effect on the general law, 
and only those legislations which are either specifically mentioned 
in Section 37 or deal with securitization will apply in addition to the 
SARFAESI Act. Being so, the underlying principle envisaged under 
Section(s) 73 & 74 of the 1872 Act which is a general law will have 
no application, when it comes to the SARFAESI Act more particularly 
the forfeiture of earnest-money deposit which has been statutorily 
provided under Rule 9(5) of the SARFAESI Rules as a consequence 
of the auction purchaser’s failure to deposit the balance amount.
b.	
Concept of Earnest-Money & Law on Forfeiture of Earnest-
Money Deposit:
69.	 This aforesaid aspect may be looked at from another angle. 
Section(s) 73 and 74 of the 1872 Act deal with the consequences 
and compensation for a breach of contract. It enables a suffering 
party to recover such quantum of loss or liquidated damages from 
a party in breach so as to make good the loss incurred by it and be 
put in the same position prior to its losses. 
70.	 At this juncture, it would be apposite to refer to the meaning of 
‘forfeiture’. The word forfeiture is derived from the French word 
‘forfaiture’ which means the loss of property by violation of his own 
duty. The Black’s Law Dictionary defines ‘forfeiture’ as follows [See: 
Henry Campbell Black on
“Black’s Law Dictionary”, 1968, 4th Edition]: - 
“the loss of a right, privilege, or property because of a 
crime, breach of obligation, or neglect of duty.”
“something (especially money or property) lost or 
confiscated by this process; a penalty”
“a destruction or deprivation of some estate or right because 
of the failure to perform some obligation or condition 
contained in a contract”
71.	 This Court in R.S. Joshi, Sales Tax Officer, Gujarat & Ors. v. Ajit 
Mills Limited & Anr. reported in (1977) 4 SCC 98, while explaining 
the true purport and meaning of the term ‘forfeiture’ observed that 
whether a forfeiture clause is penal in nature must be decided in 
the specific setting of a statute. The relevant observations read as 
under: -
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The Authorised Officer, Central Bank of India v. Shanmugavelu
“18. Coming to ‘forfeiture’, what is the true character of a 
‘forfeiture’ ? Is it punitive in infliction, or merely another form 
of exaction of money by one from another? If it is penal, it 
falls within implied powers. If it is an act of mere transference 
of money from the dealer to the State, then it falls outside the 
legislative entry. Such is the essence of the decisions which 
we will presently consider. There was a contention that the 
expression ‘forfeiture’ did not denote a penalty. This, perhaps, 
may have to be decided in the specific setting of a statute. But, 
speaking generally and having in mind the object of Section 37 
read with Section 46, we are inclined to the view that forfeiture 
has a punitive impact. Black’s Legal Dictionary states that ‘to 
forfeit’ is ‘to lose, or lose the right to, by some error, fault, 
offence or crime’ ‘to incur a penalty.’ ‘Forfeiture’, as judicially 
annotated, is ‘a punishment annexed by law to some illegal act 
or negligence. . . .’; ‘something imposed as a punishment for an 
offence or delinquency.’ The word, in this sense, is frequently 
associated with the word ‘penalty’, According to Black’s Legal 
Dictionary.
The terms ‘fine’, ‘forfeiture’ and ‘penalty’, are often used loosely 
and even confusedly; but when a discrimination is made, the 
word ‘penalty’ is found to be generic in its character, including 
both fine and forfeiture. A
‘fine’ is a pecuniary penalty and is 
commonly (perhaps always) to be collected by suit in some 
form. A ‘forfeiture’ is a penalty by which one loses his rights 
and interest in his property. 
More explicitly, the U. S. Supreme Court has explained the 
concept of ‘forfeiture’ in the context of statutory construction. 
Chief Justice Taney, in the State of Maryland v. The Baltimore 
& Ohio RR Co. 11 L ED. 714, 712 observed:
And a provision, as in this case, that the party shall forfeit a 
particular sum, in case he does not perform an act required 
by law, has always, in the construction of statutes, been 
regarded not as a contract with the delinquent party, but 
as the punishment for an offence. Undoubtedly, in the 
case of individuals, the word forfeit is construed to be the 
language of contract, because contract is the only mode
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in which one person can become liable to pay a penalty 
to another for breach of duty, or the failure to perform 
an obligation. In legislative proceedings, however, the 
construction is otherwise and a forfeiture is always to be 
regarded as a punishment inflicted for a violation of some 
duty enjoined upon the party by law; and such, very clearly, 
is the meaning of the word in the act in question
19. The same connotation has been imparted by our Court 
too. A Bench has held: Bankura Municipality v. Lalji Raja and 
Sons, 1953 Cri LJ 1101: 
According to the dictionary meaning of the word ‘forfeiture’ 
the loss or the deprivation of goods has got to be in 
consequence of a crime, offence or breach of engagement 
or has to be by way of penalty of the transgression or a 
punishment for an offence. Unless the loss or deprivation 
of the goods is by way of a penalty or punishment for a 
crime, offence or breach of engagement it would not come 
within the definition of forfeiture
This word ‘forfeiture’ must bear the same meaning of a penalty 
for breach of a prohibitory direction. The fact that there is 
arithmetical identity, assuming it to be so, between the figures 
of the illegal collections made by the dealers and the amounts 
forfeited to the State cannot create a conceptual confusion 
that what is provided is not punishment but a transference of 
funds. If this view be correct, and we hold so, the legislature, by
inflicting the forfeiture, does not go outside the crease when it 
hits out against the dealer and deprives him, by the penalty of 
the law, of the amount illegally gathered from the customers….”
(Emphasis supplied)
72.	 The privy council in Kunwar Chiranjit Singh v. Har Swarup reported 
in (1926) 23 LW 172, while dealing with the concept of earnest 
money, had observed as follows: -
“Earnest money is part of the purchase price when the 
transaction goes forward: it is forfeited when the transaction 
falls through, by reason of the fault or failure of the vendee.”
(Emphasis supplied)
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The Authorised Officer, Central Bank of India v. Shanmugavelu
73.	 The above referred decision of the Privy Council has been referred to 
and relied upon by the High Court of Bombay in the case of Dinanath 
Damodar Kale v. Malvi Mody Ranchhoddas and Co. reported in 
AIR 1930 Bom 213. The Court observed as under: -
“Turning to the law in England we have a series of decisions 
showing that a deposit by way of earnest in a contract for 
the sale of land is distinguishable from a penalty for breach 
of the contract. The cases cited to us by the appellant’s 
counsel are all cases in which either an instalment of the 
price or a part payment was by the terms of the contract to 
be forfeited on breach by the purchaser. If any authority be 
needed to show what the law in England is, it may be found 
in the passage in Halsbury, Vol. 25, p. 398, para 681, which 
was cited to us by respondents’ counsel. There it is clearly 
laid down that there is a distinction between a deposit and 
a penalty. This distinction was referred to by the majority of 
the Bench in the case of Bishan Chand v. Radha Kishan 
Das [(1897) 19 All. 489 = (1897) A.W.N. 123], where it was 
stated that a deposit is a payment actually made or advanced 
and therefore Ss. 73 and 74 of the Contract Act, have no 
application in such a case and are not intended to apply to it. 
These sections show what is the compensation to the seller, 
who is not responsible for the breach. They contemplate a 
case
in which he is seeking to recover compensation for the 
breach. They do not contemplate a case in which a sum of 
money has been paid by way of earnest. Nor is the Contract 
Act necessarily exhaustive: see P. R. & Co. v. Bhagwandas 
[(1909) 34 Bom. 192, = 2 I.C. 475 = 11 Bom. L.R. 335].
Furthermore, it is to be noted that in this particular contract 
there was a specific condition of the sale by auction that the 
deposit was to be forfeited in case of default by the purchaser 
and we think that such a clause is not unreasonable and 
must be given effect to. Our own High Court rules regarding 
the sale by the Sheriff’s office (R. 391) specifically allow a 
deposit to be forfeited and the mere fact that the word “may” 
is used in that Rule cannot be taken to mean that only such 
sum out of the deposit can be forfeited as the Court may 
think proper as damages following the failure of the buyer 
to complete the sale.”
(Emphasis supplied)
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74.	 Subsequently, a 5-Judge Bench of this Court in its decision in 
Fateh Chand v. Balkishan Dass reported in AIR 1963 SC 1405, 
held that a forfeiture clause in an ordinary contract would fall within 
the meaning of the words “any other stipulation by way of penalty” 
of Section 74 of the 1872 Act, and thus only a reasonable amount 
can be forfeited. The relevant observations are reproduced below: -
“(10) Section 74 of the Indian Contract Act deals with the 
measure of damages in two classes of cases (i) where the 
contract names a sum to be paid in case of breach and (ii) 
where the contract contains any other stipulation by way 
of penalty. We are in the present case not concerned to 
decide whether a covenant of forfeiture of deposit for due 
performance of a contract falls within the first class. The 
measure of damages in the case of breach of a stipulation 
by way of penalty is by S. 74 reasonable compensation 
not exceeding the penalty stipulated for. In assessing 
damages the Court has, subject to the limit of the penalty 
stipulated, jurisdiction to award such compensation as it 
deems reasonable having regard to all the circumstances of 
the case. Jurisdiction of the Court to award compensation 
in case of breach of contract is unqualified except as to 
the maximum stipulated; but compensation has to be 
reasonable, and that imposes upon the Court duty to award 
compensation according to settled principles. The
section 
undoubtedly says that the aggrieved party is entitled to 
receive compensation from the party who has broken the 
contract, whether or not actual damage or loss is proved 
to have been caused by the breach. Thereby it merely 
dispenses with proof of “actual loss or damages”; it does 
not justify the award of compensation when in consequence 
of the breach no legal injury at all has resulted, because 
compensation for breach of contract can be awarded to 
make good loss or damage which naturally arose in the 
usual course of things, or which the parties knew when they 
made the contract, to be likely to result from the breach.
(11) Before turning to the question about the compensation 
which may be awarded to the plaintiff, it is necessary to 
consider whether S. 74 applies to stipulations for forfeiture 
of amounts deposited or paid under the contract. It was
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The Authorised Officer, Central Bank of India v. Shanmugavelu
urged that the section deals in terms with the right to 
receive from the party who has broken the contract 
reasonable compensation and not the right to forfeit what 
has already been received by the party aggrieved. There 
is however no warrant for the assumption made by some 
of the High Courts in India, that S. 74 applies only to 
cases where the aggrieved party is seeking to receive 
some amount on breach of contract and not to cases 
where upon breach of contract an amount received under 
the contract is sought to be forfeited. In our judgment the 
expression “the contract contains any other stipulation by 
way of penalty” comprehensively applies to every covenant 
involving a penalty whether it is for payment on breach 
of contract of money or delivery of property in future, or 
for forfeiture of right to money or other property already 
delivered. Duty not to enforce the penalty clause but only 
to award reasonable compensation is statutorily imposed 
upon Courts by S. 74. In all cases, therefore, where there 
is a stipulation in the nature of penalty for forfeiture of an 
amount deposited pursuant to the terms of contract which 
expressly provides for forfeiture, the court has jurisdiction 
to award such sum only as it considers reasonable, but not 
exceeding the amount specified in the contract as liable to 
forfeiture. We may briefly refer to certain illustrative cases 
decided by
the High Courts in India which have expressed 
a different view.

xxx

xxx

xxx
(14) … The words “to be paid” which appear in the first 
condition do not qualify the second condition relating to 
stipulation by way of penalty. The expression “if the contract 
contains any other stipulation by way of penalty” widens 
the operation of the section so as to make it applicable to 
all stipulations by way of penalty, whether the stipulation 
is to pay an amount of money, or is of another character, 
as, for example, providing for forfeiture of money already 
paid. There is nothing in the expression which implies that 
the stipulation must be one for rendering something after 
the contract is broken. There is no ground for holding that 
the expression “contract contains any other stipulation
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by way of penalty” is limited to cases of stipulation in the 
nature of an agreement to pay money or deliver property on 
breach and does not comprehend covenants under which 
amounts paid or property delivered under the contract, 
which by the terms of the contract expressly or by clear 
implication are liable to be forfeited.
(15) Section 74 declares the law as to liability upon breach 
of contract where compensation is by agreement of the 
parties pre-determined, or where there is a stipulation by 
way of penalty. But the application of the enactment is 
not restricted to cases where the aggrieved party claims 
relief as a plaintiff. The section does not confer a special 
benefit upon any party; it merely declares the law that 
notwithstanding any term in the contract pre-determining 
damages or providing for forfeiture of any property by way 
of penalty, the Court will award to the party aggrieved 
only reasonable compensation not exceeding the amount 
named or penalty stipulated. The jurisdiction of the Court is 
not determined by the accidental circumstance of the party 
in default being a plaintiff or a defendant in a suit. Use of 
the expression “to receive from the party who has broken 
the contract” does not predicate that the jurisdiction of the 
Court to adjust amounts which have been paid by the party 
in default cannot be exercised in dealing with the claim 
of the party complaining of breach of contract. The
court 
has to adjudge in every case reasonable compensation 
to which the plaintiff is entitled from the defendant on 
breach of the contract. Such compensation has to be 
ascertained having regard to the conditions existing on 
the date of the breach.”
(Emphasis supplied)
75.	 It is apposite to mention that in Fateh Chand (supra) this Court had 
clarified that so far as forfeiture of earnest-money is concerned, 
Section 74 of the 1872 Act will not be applicable. The relevant 
observations are reproduced below: 
“(7) The Attorney-General appearing on behalf of the 
defendant has not challenged the plaintiff’s right to forfeit 
Rs. 1,000/- which were expressly named and paid as
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earnest money. He has, however, contended that the 
covenant which gave to the plaintiff the right to forfeit Rs. 
24,000/- out of the amount paid by the defendant was 
stipulation in the nature of penalty, and the plaintiff can 
retain that amount or part thereof only if he establishes 
that in consequence of the breach by the defendant, he 
suffered loss, and in the view of the Court the amount 
or part thereof is reasonable compensation for that loss. 
We agree with the Attorney-General that the amount of 
Rs. 24,000/- was not of the nature of earnest money. The 
agreement expressly provided for payment of Rs. 1,000/- as 
earnest money, and that amount was paid by the defendant. 
The amount of Rs. 24,000/- was to be paid when vacant 
possession of the land and building was delivered, and it 
was expressly referred to as “out of the sale price.” If this 
amount was also to be regarded as earnest money, there 
was no reason why the parties would not have so named 
it in the agreement of sale. We are unable to agree with 
the High Court that this amount was paid as security for 
due performance of the contract. No such case appears 
to have been made out in the plaint and the finding of 
the High Court on that point is based on no evidence. It 
cannot be assumed that because there is a stipulation for 
forfeiture the amount paid must bear the character of a 
deposit for due performance of the
contract.” 
(Emphasis supplied)
76.	 In another decision of this Court in Maula Bux v. Union of India 
reported in 1969 (2) SCC 554, a similar view was reiterated and it 
was held that forfeiture of earnest money is not a penalty and that 
Section 74 of the 1872 Act will only apply where the forfeiture is in 
the nature of a penalty. The relevant observations read as under: -
“4. Under the terms of the agreements the amounts deposited 
by the plaintiff as security for due performance of the contracts 
were to stand forfeited in case the plaintiff neglected to perform 
his part of the contract. The High Court observed that the 
deposits so made may be regarded as earnest money. But 
that view cannot be accepted. According to Earl Jowitt in “The 
Dictionary of English Law” at p. 689; “Giving an earnest or
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earnest-money is a mode of signifying assent to a contract of 
sale or the like, by giving to the vendor a nominal sum (e.g. 
a shilling) as a token that the parties are in earnest or have 
made up their minds”. As observed by the Judicial Committee 
in Kunwar Chiranjit Singh v. Har Swarup:
“Earnest money is part of the purchase price when the 
transaction goes forward; it is forfeited when the transaction 
falls through, by reason of the fault or failure of the vendee.”
In the present case the deposit was made not of a sum of money 
by the purchaser to be applied towards part payment of the price 
when the contract was completed and till then as evidencing 
an intention on the part of the purchaser to buy property or 
goods. Here the plaintiff had deposited the amounts claimed 
as security for guaranteeing due performance of the contracts. 
Such deposits cannot be regarded as earnest money. ...
5. Forfeiture of earnest money under a contract for sale 
of property — Movable or immovable — If the amount is 
reasonable, does not fall within Section 74. That has been 
decided in several cases: Kunwar Chiranjit Singh v. Har Swarup 
(supra); Roshan Lal v. Delhi Cloth and General Mills Company 
Ltd. Delhi, ILR 33 All. 166.; Muhammad Habibullah v. Muhammad 
Shafi, ILR 41 All. 324.; Bishan Chand v. Radhakishan Das, ILR 
19 All. 490. These cases are easily explained, for forfeiture of 
reasonable amount paid as earnest money does not
amount to 
imposing a penalty. But if forfeiture is of the nature of penalty, 
Section 74 applies. Where under the terms of the contract the 
party in breach has undertaken to pay a sum of money or to 
forfeit a sum of money which he has already paid to the party 
complaining of a breach of contract, the undertaking is of the 
nature of a penalty.”
(Emphasis supplied) 
77.	 In Satish Batra v. Sudhir Rawal reported in (2013) 1 SCC 345, 
this Court after a review of the entire case law starting from Fateh 
Chand (supra), Videocon Properties Ltd. v. Dr. Bhalchandra 
Laboratories & Ors. reported in (2004) 3 SCC 711 and Shree 
Hanuman Cotton Mills & Ors. v. Tata Air Craft Limited reported 
in (1969) 3 SCC 522, laid down the principles regarding earnest 
money, which read as under: -
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“9. … 
“21. From a review of the decisions cited above, the 
following principles emerge regarding ‘earnest’: 
‘(1) It must be given at the moment at which the contract 
is concluded. 
(2) It represents a guarantee that the contract will be fulfilled 
or, in other words, “earnest” is given to bind the contract. 
(3) It is part of the purchase price when the transaction 
is carried out. 
(4) It is forfeited when the transaction falls through by 
reason of the default or failure of the purchaser. 
(5) Unless there is anything to the contrary in the terms of 
the contract, on default committed by the buyer, the seller 
is entitled to forfeit the earnest.””
78.	 This Court in Satish Batra (supra) after taking note of the decisions 
in Delhi Development Authority v. Grihshapana Cooperative 
Group Housing Society Ltd. reported in 1995 Supp (1) SCC 751, 
V. Lakshmanan v. B.R. Mangalagiri & Ors. reported in 1995 Supp 
(2) SCC 33 and HUDA v. Kewal Krishnan Goel reported in 1996 (4) 
SCC 249 concluded that only that deposit which has been given as 
an earnest-money for the due performance of the obligation is liable 
to be forfeited in the event of a breach. The relevant observations 
read as under: -
“15. The law is, therefore, clear that to justify the forfeiture 
of advance money being part of ‘earnest money’ the terms 
of the contract should be clear and explicit. Earnest money 
is paid or given at
the time when the contract is entered 
into and, as a pledge for its due performance by the 
depositor to be forfeited in case of non-performance by 
the depositor. There can be converse situation also that if 
the seller fails to perform the contract the purchaser can 
also get double the amount, if it is so stipulated. It is also 
the law that part-payment of purchase price cannot be 
forfeited unless it is a guarantee for the due performance 
of the contract. In other words, if the payment is made only 
towards part-payment of consideration and not intended 
as earnest money then the forfeiture clause will not apply.”
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79.	 Since Rule 9 sub-rule (5) provides for the forfeiture of only the earnest-
money deposit of the successful auction purchaser i.e. only 25% of 
the total amount, by no stretch of imagination it can be regarded as 
a penal clause by virtue of the afore-stated decisions of this Court in 
Fateh Chand (supra), Maula Bux (supra) and Satish Batra and as 
such Section(s) 73 and 74 of the 1872 Act will have no application.
80.	 Even otherwise, what is discernible from the above referred decisions 
of Fateh Chand (supra), Maula Bux (supra) and Satish Batra (supra) 
is that there lies a difference between forfeiture of any amount and 
forfeiture of earnest money with the former being a penal clause and 
the latter a general forfeiture clause. A clause providing for forfeiture 
of an amount could fundamentally be in the nature of a penalty clause 
or a forfeiture clause in the strict sense or even both, and the same 
has to be determined in the facts of every case keeping in mind the 
nature of contract and the nature of consequence envisaged by it. 
81.	 Ordinarily, a forfeiture clause in the strict sense will not be a penal 
clause, if its consequence is intended not as a sanction for breach 
of obligation but rather as security for performance of the obligation. 
This is why Fateh Chand (supra) Maula Bux (supra) and Satish 
Batra (supra) held that forfeiture of earnest-money deposit is not a 
penal clause, as the deposit of
earnest money is intended to signify 
assent of the purchaser to the contract, and its forfeiture is envisaged 
as a deterrent to ensure performance of the obligation. 
82.	 We are conscious of the fact that in Maula Bux (supra) this Court 
observed that the deposit of a sum by the purchaser as security for 
guaranteeing due performance was held as a penalty. However, a 
close reading would reveal that the reason why this Court held the 
said deposit as a penal clause was because the said amount was 
paid over and above the earnest-money deposit already paid by the 
purchaser in the said case and more importantly the said sum was 
not liable to be adjusted against the total consideration. Hence, this 
Court held the same to be a penalty rather than earnest money. The 
relevant observation read as under: -
“4. ... In the present case the deposit was made not of a 
sum of money by the purchaser to be applied towards part 
payment of the price when the contract was completed 
and till then as evidencing an intention on the part of the 
purchaser to buy property or goods. Here the plaintiff had
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deposited the amounts claimed as security for guaranteeing 
due performance of the contracts. Such deposits cannot 
be regarded as earnest money. …” 
(Emphasis supplied)
83.	 The difference between an earnest or deposit and an advance part 
payment of price is now well established in law. Earnest is something 
given by the Promisee to the Promisor to mark the conclusiveness 
of the contract. This is quite apart from the price. It may also avail 
as a part payment if the contract goes through. But even so it 
would not lose its character as earnest, if in fact and in truth it was 
intended as mere evidence of the bargain. An advance is a part to 
be adjusted at the time of the final payment. If the Promisee defaults 
to carry out the contract, he loses the earnest but may recover the 
part payment leaving untouched the Promisor’s right to recover 
damages. Earnest need not be money but may be some gift or token 
given. It denotes a thing of value usually a coin of the realm given 
by the Promisor to indicate that the bargain is concluded between 
them and as tangible proof that he means business. Vide Howe v. 
Smith (1884) 27 Ch.D. 89.
84.	 The practice of giving earnest is current in the present day commercial 
contracts. An advance is made and accepted by way of deposit or 
guarantee for the due performance of the contract. The distinction 
between a deposit and a part payment is thus
described by Benjamin, 
in his book “Treatise on the Law of Sale of Personal Property”, 1950, 
8th Edition at page 946: -
“A deposit is not recoverable by the buyer, for a deposit 
is a guarantee that the buyer shall perform his contract 
and is forfeited on his failure to do so. As regards the 
recovery of part payments, the question must depend 
upon the terms of the particular contract. If the contract 
distinguishes between the deposit and instalments of price 
and the buyer is in default, the deposit is forfeited and that 
is all. And in ordinary circumstances, unless the contract 
otherwise provides, the seller, on rescission following the 
buyer’s default, becomes liable to repay the part of the 
part of the price paid.”
85.	 In Halsbury’s Laws of England, third edition, volume XXXIV, page 
118 the distinction between the two is thus pointed out: -
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“Part of the price may be payable as a deposit. A part 
payment is to be distinguished from a deposit or earnest.
A deposit is paid primarily as security that the buyer will 
duly accept and pay for the goods, but, subject thereto, 
forms part of the price. Accordingly, if the buyer is unable 
or unwilling to accept and pay for the goods, the seller 
may repudiate the contract and retain the deposit. If the 
seller is unable or unwilling to deliver the goods, or to 
pass a good title thereto, or the contract is voidable by the 
buyer for any reason, the buyer may repudiate the contract 
and recover the deposit. The buyer may also recover it 
where, without the default of either party, the contract is 
rescinded by either party pursuant to an express power 
in the contract in that behalf.”
86.	 In G. C. Cheshire and C.H.S. Fifoot on the Law of Contracts (fifth 
edition) at pages 496- 497, the position is thus summed up: -
“Where, therefore, it has been agreed that a sum of money 
shall be paid by the one to the other immediately or at 
certain stated intervals, the question whether in the event 
of rescission repayment will be compelled depends upon 
the proper construction of the contract. The object that 
the parties had in view in providing for the payment must 
first be ascertained. 
Where the intention was that the money should form a 
part payment of the full amount due, then, as we have 
seen, if the contract is
rescinded for the payer’s default 
the payee is required at law to restore the money, subject 
to a cross-claim for damages. If, on the other hand, the 
intention was that the money should be deposited as 
earnest or as a guarantee for the due performance of the 
payer’s obligation, the rule at common law is that if the 
contract is rescinded by reason of his default the deposit 
is forfeited to the payer and cannot be recovered. 
In the latter case, however, and also where it has been 
expressly agreed that a part payment shall be forfeited in 
the event of the payer’s default, equity is prepared within 
limits to grant relief against the forfeiture.”
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87.	 The observations of Mellish, L.J., in Ex parte Barrell: [L.R.] In Re. 
Parnell 10 Ch. App. 512 assume importance. The learned Judge 
observed that even when there is no clause in the contract as to 
the forfeiture of the deposit if the purchaser repudiates the contract, 
he cannot have back the money if it was a deposit, as the contract 
has gone off through his default. It is characteristic of a deposit to 
entail forfeiture if the depositor commits breach of his obligation. On 
the contrary it is inherent in a part payment of price in advance that 
it should be returned to the buyer if the sale does not fructify. The 
buyer is not disentitled to recover, even if he is the party in breach, 
because breach of contract on the part of the buyer would only 
entitle the seller to sue for damages but not to forfeit the advance. 
A specific forfeiture clause might operate to defeat the buyer’s right 
of recovery of even an advance payment. But equity might step in 
to relieve the buyer from forfeiture. If the amount forfeited cannot 
stand the test of a genuine pre-estimate of damages, it would be 
unconscionable for the seller to retain it. The question whether the 
amount is a deposit (earnest) or a part payment cannot be determined 
by the presence or absence of a forfeiture clause. Whether the sum 
in question is a deposit to ensure due performance of the contract or 
not is not dependent
on the phraseology adopted by the parties or 
by the presence or otherwise of a forfeiture clause. The proportion 
the amount bears to the total sale price, the need to take a deposit 
intended to act in terrorem, the nature of the contract and other 
circumstances which cannot be exhaustively listed have to be taken 
into account in ascertaining the true nature of the amount. In essence 
the question is one of proper interpretation of the terms of a contract.
88.	 We would like to refer to a decision of the Court of Appeal in England 
in Stockloser v. Johnson reported in (1954) 1 All. E.R. 630 and 
particularly to the observations of Denning, L.J., which, if we may 
say so with respect, has set out the legal position succinctly and 
with great clarity. The facts of that case need not be set out and 
it would be sufficient to refer only to the principle of law laid down 
by the Court of Appeal. At page 637 Denning L.J., observes thus:
“It seems to me that the cases show the law to be this. (i) 
When there is no forfeiture clause, if money is handed over 
in part payment of the purchase price, and then the buyer 
makes default as to the balance, then, so long as the seller 
keeps the contract open and available for performance,
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the buyer cannot recover the money, but once the seller 
rescinds the contract or treats it as at an end owing to 
the buyer’s default, then the buyer is entitled to recover 
his money by action at law, subject to a cross-claim by 
the seller for damages: see Palmer v. Temple 112 E.R. 
1304, Mayson v. Clouet (1924) A.C. 980, Dies v. British 
and International Mining and Finance Corporation Ltd. 
(1939) 1 .K.B. 724 and Williams on Vendor and Purchaser 
4th ed., vol. 2, p. 1006. (ii) But when there is a forfeiture 
clause or the money is expressly paid as a deposit (which 
is equivalent to a forfeiture clause) then the buyer who 
is in default cannot recover the money at law at all. He 
may, however, have a remedy in equity, for, despite the 
express stipulation in the contract, equity can relieve the 
buyer from forfeiture of the money and order the seller to 
repay it on such terms as the Court thinks fit.”
89.	 Therefore, it is clear that the forfeiture can be justified if the terms 
of the contract are clear and explicit. If it is found that the earnest 
money was paid in accordance with the terms of the tender for the 
due performance of the contract by the Promisee, the same can be 
forfeited in case of non-performance by him or her.
90.	 We are conscious of the decision of this Court in Kailash Nath 
Associates v. Delhi Development Authority & Anr. reported in 
(2015) 4 SCC 136 wherein it was held that Section 74 of the
1872 
Act will be applicable to cases of forfeiture of earnest-money deposit, 
however, where such forfeiture takes place under the terms and 
conditions of a public auction, Section 74 will have no application. 
The relevant observations are reproduced below: -
“43.1. Where a sum is named in a contract as a liquidated 
amount payable by way of damages, the party complaining 
of a breach can receive as reasonable compensation 
such liquidated amount only if it is a genuine pre-estimate 
of damages fixed by both parties and found to be such 
by the court. In other cases, where a sum is named in 
a contract as a liquidated amount payable by way of 
damages, only reasonable compensation can be awarded 
not exceeding the amount so stated. Similarly, in cases 
where the amount fixed is in the nature of penalty, only
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reasonable compensation can be awarded not exceeding 
the penalty so stated. In both cases, the liquidated amount 
or penalty is the upper limit beyond which the court cannot 
grant reasonable compensation. 
43.2. Reasonable compensation will be fixed on well-known 
principles that are applicable to the law of contract, which 
are to be found inter alia in Section 73 of the Contract Act. 
43.3. Since Section 74 awards reasonable compensation 
for damage or loss caused by a breach of contract, damage 
or loss caused is a sine qua non for the applicability of 
the Section. 
43.4. The Section applies whether a person is a plaintiff 
or a defendant in a suit. 
43.5. The sum spoken of may already be paid or be 
payable in future. 
43.6. The expression “whether or not actual damage or loss 
is proved to have been caused thereby” means that where 
it is possible to prove actual damage or loss, such proof 
is not dispensed with. It is only in cases where damage 
or loss is difficult or impossible to prove that the liquidated 
amount named in the contract, if a genuine pre-estimate 
of damage or loss, can be awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest 
money under a contract. Where, however, forfeiture takes 
place under the terms and conditions of a public auction 
before agreement is reached, Section 74 would have no 
application.”
(Emphasis supplied)
91.	 Since, the
forfeiture under Rule 9(5) of the SARFAESI Rules is also 
taking place pursuant to the terms & conditions of a public auction, we 
need not dwell any further on the decision of Kailash Nath (supra) 
and leave it at that. Suffice to say, in view of the above discussion, 
Section(s) 73 and 74 of the 1872 Act will have no application 
whatsoever, when it comes to forfeiture of the earnest-money deposit 
under Rule 9 sub-rule (5) of the SARFAESI Rules.
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c.	
Law on the principle of ‘Reading-Down’ a provision:
92.	 We must deal with yet one another aspect that weighed with the High 
Court while passing the Impugned Order. In the Impugned Order, 
the High Court also took the view that Rule 9(5) of the SARFAESI 
Rules must be read down so as to yield to the underlying principle 
recognized in Section(s) 73 & 74 of the 1872 Act. This reading down 
of the relevant rules in the opinion of the High Court was necessary, 
as otherwise irrespective of whether the default is of the entire 
balance amount or only one rupee, the same harsh consequence of 
forfeiture would ensue in both the cases. The relevant observations 
are reproduced below: -
“12. Rule 9(5) of the said Rules of 2002 has to be seen 
as an enabling provision that permits forfeiture in principle. 
However, such Rule cannot be conferred an exalted status 
to override the underlying ethos of Section 73 of the 
Contract Act. In other words, Rule 9(5) has to yield to the 
principle recognised in Section 73 of the Contract Act or 
it must be read down accordingly. Thus, notwithstanding 
the wide words used in Rule 9(5) of the said Rules, a 
secured creditor may not forfeit any more than the loss 
or damage suffered by such creditor as a consequence of 
the failure on the part of a bidder to make payment of the 
consideration or the balance consideration in terms of the 
bid. It is only if such principle as embodied in Section
73 of 
the Contract Act, is read into Rule 9 (5) of the said Rules, 
would there be an appropriate answer to the conundrum 
as to whether a colossal default of the entirety of the 
consideration or the mere default of one rupee out of the 
consideration would result in the identical consequence 
of forfeiture as indicated in the provision.”
(Emphasis supplied)
93.	 The principle of “reading down” a provision refers to a legal 
interpretation approach where a court, while examining the validity 
of a statute, attempts to give a narrowed or restricted meaning to 
a particular provision in order to uphold its constitutionality. This 
principle is rooted in the idea that courts should make every effort 
to preserve the validity of legislation and should only declare a law 
invalid as a last resort.
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94.	 When a court encounters a provision that, if interpreted according 
to its plain and literal meaning, might lead to constitutional or legal 
issues, the court may opt to read down the provision. Reading down 
involves construing the language of the provision in a manner that 
limits its scope or application, making it consistent with constitutional 
or legal principles.
95.	 The rationale behind the principle of reading down is to avoid striking 
down an entire legislation. Courts generally prefer to preserve the 
intent of the legislature and the overall validity of a law by adopting 
an interpretation that addresses the specific constitutional concerns 
without invalidating the entire statute.
96.	 It is a judicial tool used to salvage the constitutionality of a statute 
by giving a provision a narrowed or limited interpretation, thereby 
mitigating potential conflicts with constitutional or legal principles.
97.	 In B.R. Enterprises v. State of U.P. & Ors. reported in (1999) 9 
SCC 700, this Court observed that the principles such as “Reading 
Down” emerge from the concern of the courts towards salvaging a 
legislation to ensure that its intended objectives are achieved. The 
relevant observations read as under: -
“81.  … It is also well settled that first attempt should be 
made by the courts to uphold the charged provision and 
not to invalidate it merely because one of the possible
interpretations leads to such a result, howsoever attractive it 
may be. Thus, where there are two possible interpretations, 
one invalidating the law and the other upholding, the 
latter should be adopted. For this, the courts have been 
endeavouring, sometimes to give restrictive or expansive 
meaning keeping in view the nature of legislation, maybe 
beneficial, penal or fiscal etc. Cumulatively it is to subserve 
the object of the legislation. Old golden rule is of respecting 
the wisdom of legislature that they are aware of the law and 
would never have intended for an invalid legislation. This 
also keeps courts within their track and checks individual 
zeal of going wayward. Yet in spite of this, if the impugned 
legislation cannot be saved the courts shall not hesitate 
to strike it down. Similarly, for upholding any provision, if 
it could be saved by reading it down, it should be done, 
unless plain words are so clear to be in defiance of the
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Constitution. These interpretations spring out because of 
concern of the courts to salvage a legislation to achieve its 
objective and not to let it fall merely because of a possible 
ingenious interpretation. The words are not static but 
dynamic. This infuses fertility in the field of interpretation. 
This equally helps to save an Act but also the cause of 
attack on the Act. Here the courts have to play a cautious 
role of weeding out the wild from the crop, of course, 
without infringing the Constitution. For doing this, the 
courts have taken help from the Preamble, Objects, the 
scheme of the Act, its historical background, the purpose 
for enacting such a provision, the mischief, if any which 
existed, which is sought to be eliminated. …”
(Emphasis supplied)
98.	 A similar view was reiterated by this Court in its decision in Calcutta 
Gujarati Education Society & Anr. v. Calcutta Municipal Corpn. 
& Ors. reported in (2003) 10 SCC 533, wherein this Court observed 
that the rule of “Reading Down” is only for the limited purpose of 
making a provision workable so as to fulfil the purpose and object 
of the statute. The relevant observations read as under: -
“35. The rule of “reading down” a provision of law is now 
well recognised. It is a rule of harmonious construction in 
a different name. It is resorted to smoothen the crudities 
or ironing out the creases found in a statute to make it 
workable. In the garb of
“reading down”, however, it is not 
open to read words and expressions not found in it and 
thus venture into a kind of judicial legislation. The rule 
of reading down is to be used for the limited purpose of 
making a particular provision workable and to bring it in 
harmony with other provisions of the statute. It is to be 
used keeping in view the scheme of the statute and to 
fulfil its purposes. …”
(Emphasis supplied)
99.	 Thus, the principle of ‘Reading Down” a provision emanates from 
a very well settled canon of law, that is, the courts while examining 
the validity of a particular statute should always endeavour towards 
upholding its validity, and striking down a legislation should always 
be the last resort. “Reading Down” a provision is one of the many
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methods, the court may turn to when it finds that a particular provision 
if for its plain meaning cannot be saved from invalidation and so by 
restricting or reading it down, the court makes it workable so as to 
salvage and save the provision from invalidation. Rule of “Reading 
Down” is only for the limited purpose of making a provision workable 
and its objective achievable.
100.	The High Court in its Impugned Order resorted to reading down Rule 
9(5) of the SARFAESI Rules not because its plain meaning would 
result in the provision being rendered invalid or unworkable or the 
statute’s objective being defeated, but because it would result in the 
same harsh consequence of forfeiture of the entire earnest-money 
deposit irrespective of the extent of default in payment of balance 
amount.
101.	However, harshness of a provision is no reason to read down the 
same, if its plain meaning is unambiguous and perfectly valid. A 
law/rule should be beneficial in the sense that it should suppress 
the mischief and advance the remedy. The harsh consequence of 
forfeiture of the entire earnest-money deposit has been consciously 
incorporated by the legislature in Rule 9(5) of the SARFAESI Rules 
so as to sub-serve the larger object of the SARFAESI Act of timely 
resolving the bad debts of the country. The idea behind prescribing 
such a harsh consequence is not illusory, it is to attach a legal
sanctity to an auction process once conducted under the SARFAESI 
Act from ultimately getting concluded. 
102.	Any dilution of the forfeiture provided under Rule 9(5) of the SARFAESI 
Rules would result in the entire auction process under the SARFAESI 
Act being set at naught by mischievous auction purchaser(s) through 
sham bids, thereby undermining the overall object of the SARFAESI 
Act of promoting financial stability, reducing NPAs and fostering a 
more efficient and streamlined mechanism for recovery of bad debts.
103.	This Court in Mardia Chemical (supra) observed that the provisions 
of the SARFAESI Act & SARFAESI Rules must be interpreted keeping 
in mind the economic object which is sought to be achieved by the 
legislature, the relevant observations read as under: -
“34. Some facts which need to be taken note of are 
that the banks and the financial institutions have heavily 
financed the petitioners and other industries. It is also a 
fact that a large sum of amount remains unrecovered.
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Normal process of recovery of debts through courts is 
lengthy and time taken is not suited for recovery of such 
dues. For financial assistance rendered to the industries 
by the financial institutions, financial liquidity is essential 
failing which there is a blockade of large sums of amounts 
creating circumstances which retard the economic progress 
followed by a large number of other consequential ill effects. 
Considering all these circumstances, the Recovery of Debts 
Due to Banks and Financial Institutions Act was enacted 
in 1993 but as the figures show it also did not bring the 
desired results. Though it is submitted on behalf of the 
petitioners that it so happened due to inaction on the part 
of the Governments in creating Debts Recovery Tribunals 
and appointing presiding officers, for a long time. Even 
after leaving that margin, it is to be noted that things in 
the spheres concerned are desired to move faster. In the 
present day global economy it may be difficult to stick to 
old and conventional methods of financing and recovery 
of dues. Hence, in our view, it cannot be said that a step 
taken towards securitisation of the debts and to evolve 
means for faster recovery of NPAs was not called for or 
that it was superimposition of undesired law since one 
legislation was already operating in the field, namely, the 
Recovery of Debts Due to Banks and Financial Institutions 
Act. It is also to be noted that
the idea has not erupted 
abruptly to resort to such a legislation. It appears that a 
thought was given to the problems and the Narasimham 
Committee was constituted which recommended for 
such a legislation keeping in view the changing times 
and economic situation whereafter yet another Expert 
Committee was constituted, then alone the impugned law 
was enacted. Liquidity of finances and flow of money is 
essential for any healthy and growth-oriented economy. But 
certainly, what must be kept in mind is that the law should 
not be in derogation of the rights which are guaranteed to 
the people under the Constitution. The procedure should 
also be fair, reasonable and valid, though it may vary 
looking to the different situations needed to be tackled 
and object sought to be achieved.”
(Emphasis supplied)
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104.	Thus, the High Court committed an egregious error by proceeding 
to read down Rule 9(5) of the SARFAESI Rules in the absence of 
the said provision being otherwise invalid or unworkable in terms 
of its plain and ordinary meaning without appreciating the purpose 
and object of the said provision. 
iii)	
Whether, the forfeiture of the entire earnest-money deposit 
amounts to Unjust Enrichment?
105.	The High Court whilst passing the impugned order thought fit to 
reduce the extent of amount forfeited in view of the subsequent sale 
of the Secured Asset by the appellant bank at much higher price 
than the previous auction. This in the High Court’s opinion meant 
that no loss had been caused to the appellant bank, as it had duly 
recovered more than its dues from the subsequent sale and as such 
was not entitled to forfeit the entire amount of deposit as doing so 
would amount to unjust enrichment, which is not permissible by the 
SARFAESI Act. 
106.	However, we are not in agreement with the aforesaid observations 
of the High Court. When an auction fails and a fresh auction is 
required to be conducted in respect of the Secured Asset, there 
looms a degree of uncertainty as to the extent of bids that may be 
received in the future auction or whether the fresh auction would 
even be successful or not. More often than not, with the efflux of 
time, the value of the Secured Asset erodes. In
such a case it would 
be preposterous to tie or limit the forfeiture under Rule 9(5) of the 
SARFAESI Rules on an eventuality or a contingency of a subsequent 
sale of the secured asset if any. 
107.	As regards whether, the forfeiture of the entire amount of deposit even 
after having recovered the entire debt amounts to unjust enrichment 
or not? It would be apposite to understand what is meant by ‘unjust 
enrichment’.
108.	In Sahakari Khand Udyog Mandal Ltd. v. Commissioner of Central 
Excise & Customs reported in (2005) 3 SCC 738, the Court observed 
that the doctrine of unjust enrichment is based on equity and refers 
to the inequitable retention of a benefit. The relevant observations 
are reproduced below: -

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“31. Stated simply, “unjust enrichment” means retention 
of a benefit by a person that is unjust or inequitable. 
“Unjust enrichment” occurs when a person retains money 
or benefits which in justice, equity and good conscience, 
belong to someone else.
32. The doctrine of “unjust enrichment”, therefore, is that 
no person can be allowed to enrich inequitably at the 
expense of another. A right of recovery under the doctrine 
of “unjust enrichment” arises where retention of a benefit 
is considered contrary to justice or against equity.

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45. From the above discussion, it is clear that the doctrine 
of “unjust enrichment” is based on equity and has been 
accepted and applied in several cases. ...”
(Emphasis supplied)
109.	Thus, from the aforesaid, it is clear that the concept of ‘Unjust 
Enrichment’ is a by-product of the doctrine of equity and it is an 
equally well settled cannon of law that equity always follows the law. 
In other words, equity cannot supplant the law, equity has to follow 
the law if the law is clear and unambiguous. 
110.	This Court in C. Natarajan (supra) had held that forfeiture of 25% 
of the deposit does not constitute as an unjust enrichment with the 
following relevant observations being reproduced below: -
“35. In the light of guidance provided by the above 
decisions, what needs to be ascertained first is whether 
the Bank received or derived any benefit or advantage 
by forfeiture of 25% of the sale price. We do not think 
that the Bank has been enriched, much less unjustly 
enriched, by reason of the impugned forfeiture. Receipt 
of 25% of the sale price by the Bank from the contesting 
respondent was not the outcome of any private negotiation 
or arrangement between them. It was pursuant to a public 
auction, involving a process of offer and acceptance, and 
it was in terms of statutory provisions contained in the 
Rules, particularly rule 9(3), that money changed hands 
for a definite purpose. Receipt of 25% of the sale price 
does not constitute a benefit, a fortiori,
retention thereof by
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forfeiture cannot be termed unjust or inequitable, so as to 
attract the doctrine of unjust enrichment. The Bank, as a 
secured creditor, is entitled in law to enforce the security 
interest and in the process to initiate all such steps and 
take all such measures for protection of public interest 
by recovering the public money, lent to a borrower and 
who has squandered it, in a manner authorized by law. 
The contesting respondent participated in the auction 
well and truly aware of the risk of having 25% of the sale 
price forfeited in case of any default or failure on his part 
to make payment of the balance amount of the sale price. 
Question of the Bank being enriched by a forfeiture, which 
is in the nature of a statutory penalty, does not and cannot 
therefore arise in the circumstances.”
(Emphasis supplied)
111.	 The consequence of forfeiture of 25% of the deposit under Rule 9(5) of 
the SARFAESI Rules is a legal consequence that has been statutorily 
provided in the event of default in payment of the balance amount. 
The consequence envisaged under Rule 9(5) follows irrespective 
of whether a subsequent sale takes place at a higher price or not, 
and this forfeiture is not subject to any recovery already made or to 
the extent of the debt owed. In such cases, no extent of equity can 
either substitute or dilute the statutory consequence of forfeiture of 
25% of deposit under Rule
9(5) of the SARFAESI Rules. 
112.	This Court in National Spot Exchange Ltd. v. Anil Kohli, Resolution 
Professional for Dunar Foods Ltd. reported in (2022) 11 SCC 761 
after referring to a catena of its other judgments, had held that where 
the law is clear the consequence thereof must follow. The High Court 
has no option but to implement the law. The relevant observations 
made in it are being reproduced below: -
“15.1. In Mishri Lal [BSNL v. Mishri Lal, (2011) 14 SCC 739 : 
(2014) 1 SCC (L&S) 387], it is observed that the law prevails 
over equity if there is a conflict. It is observed further that equity 
can only supplement the law and not supplant it.
15.2. In Raghunath Rai Bareja [Raghunath Rai Bareja v. Punjab 
National Bank, (2007) 2 SCC 230], in paras 30 to 37, this Court 
observed and held as under : (SCC pp. 242-43)
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“30. Thus, in Madamanchi Ramappa v. Muthaluru Bojjappa 
[AIR 1963 SC 1633] (vide para 12) this Court observed: 
(AIR p. 1637) 
‘12. … [W]hat is administered in Courts is justice 
according to law, and considerations of fair play and 
equity however important they may be, must yield to 
clear and express provisions of the law.’
31. In Council for Indian School Certificate Examination 
v. Isha Mittal [(2000) 7 SCC 521] (vide para 4) this Court 
observed: (SCC p. 522) 
‘4. … Considerations of equity cannot prevail and do 
not permit a High Court to pass an order contrary 
to the law.’ 
32. Similarly, in P.M. Latha v. State of Kerala [(2003) 3 
SCC 541 : 2003 SCC (L&S) 339] (vide para 13) this Court 
observed: (SCC p. 546) 
‘13. Equity and law are twin brothers and law should 
be applied and interpreted equitably but equity cannot 
override written or settled law.’ 
33. In Laxminarayan R. Bhattad v. State of Maharashtra 
[(2003) 5 SCC 413] (vide para 73) this Court observed: 
(SCC p. 436) 
‘73. It is now well settled that when there is a conflict 
between law and equity the former shall prevail.’ 
34. Similarly, in Nasiruddin v. Sita Ram Agarwal [(2003) 2 
SCC 577] (vide para 35) this Court observed: (SCC p. 588) 
‘35. In a case where the statutory provision is plain 
and unambiguous, the court shall not interpret the 
same in a different manner, only because of harsh 
consequences arising therefrom.’ 
35. Similarly, in E.
Palanisamy v. Palanisamy [(2003) 1 
SCC 123] (vide para 5) this Court observed: (SCC p. 127)
‘5. Equitable considerations have no place where the 
statute contained express provisions.’
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The Authorised Officer, Central Bank of India v. Shanmugavelu
36. In India House v. Kishan N. Lalwani [(2003) 9 SCC 
393] (vide para 7) this Court held that: (SCC p. 398)
‘7. … The period of limitation statutorily prescribed 
has to be strictly adhered to and cannot be relaxed 
or departed from for equitable considerations.’…”
113.	Thus, the High Court erred in law by holding that forfeiture of the 
entire deposit under Rule 9 sub-rule (5) of the SARFAESI Rules by 
the appellant bank after having already recovered its dues from the 
subsequent sale amounts to unjust enrichment.
iv)	
Whether Any Exceptional Circumstances exist to set aside 
the forfeiture of the earnest money deposit?
114.	The last aspect which remains to be determined is whether any 
exceptional circumstances exist to set aside the forfeiture of the 
respondent’s earnest money deposit?
115.	This Court in its decision in Alisha Khan v. Indian Bank (Allahabad 
Bank) & Ors. reported in 2021 SCC OnLine SC 3340 had directed 
the refund of the earnest-money deposit after forfeiture to the 
successful auction purchaser who was unable to pay the balance 
amount on account of the Pandemic. The relevant observations are 
being reproduced below:
“3.  Having gone through the impugned judgment and 
orders passed by the High Court, we are of the opinion 
that the High Court ought to have allowed the refund 
of the amount deposited being 25% of the auction sale 
consideration. Considering the fact that
though initially the 
appellant deposited 25% of the auction sale consideration, 
however, subsequently she could not deposit balance 
75% due to COVID-19 pandemic. It is required to be 
noted that subsequently the fresh auction has taken place 
and the property has been sold. It is not the case of the 
respondents that in the subsequent sale, lesser amount 
is received. Thus, as such, there is no loss caused to the 
respondents.
4. Considering the aforesaid facts and circumstances, we 
allow these appeals and set aside the order of forfeiture 
of 25% of the amount of auction sale consideration and 
direct the respondent Bank to refund/return the amount
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earlier deposited by the appellant, deposited as the part 
auction sale consideration (minus 50,000/- towards the 
expenditure which were required to be incurred by the 
respondent Bank for conducting the fresh auction) within 
a period of four weeks from today.”
116.	In C. Natarajan (supra), this Court while affirming the decision of 
Alisha Khan (supra) observed that after the earnest-money deposit 
is forfeited, the courts should ordinarily refrain from interfering unless 
the existence of very rare and exceptional circumstances are shown. 
The relevant observations read as under: -
“13. ... If, however, circumstances are shown to exist where 
a bidder is faced with such a grave disability that he has 
no other option but to seek extension of time on genuine 
grounds so as not to exceed the stipulated period of ninety 
days and the prayer is rejected without due consideration 
of all facts and circumstances, refusal of the prayer for 
extension could afford a ground for a judicial review of the 
decision-making process on valid ground(s). One such 
exceptional circumstance led to the decision in Alisha 
Khan v. Indian Bank (Allahabad Bank) [2021 SCC OnLine 
SC 3340], where this Court intervened and granted relief 
because, due to COVID complications, the appellant had 
failed to pay the balance amount.

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24. The up-shot of the aforesaid discussion is that whenever 
a challenge is laid to an order of forfeiture made by an 
authorized officer under sub-rule (5) of rule 9 of the Rules 
by a bidder, who has failed to deposit the entire sale 
price within ninety days, the tribunals/courts ought to be 
extremely reluctant to interfere unless, of course, a very 
exceptional case for interference is set up. What would 
constitute a very exceptional case, however, must be 
determined by the tribunals/courts on the facts of each 
case and by recording cogent reasons for the conclusion 
reached. Insofar as challenge to an order of forfeiture that 
is made upon rejection of an application for extension of 
time prior to expiry of ninety days and within the stipulated 
period is concerned, the scrutiny could be a bit more 
intrusive for ascertaining whether any patent arbitrariness
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or unreasonableness in the decision-making process 
has had the effect of vitiating the order under challenge. 
However, in course of such scrutiny, the tribunals/courts 
must be careful and cautious and direct their attention 
to examine each case in some depth to locate whether 
there is likelihood of any hidden interest of the bidder to 
stall the sale to benefit the defaulting borrower and must, 
as of necessity, weed out claims of bidders who instead 
of genuine interest to participate in the auctions do so 
to rig prices with an agenda to withdraw from the fray 
post conclusion of the bidding process. In course of such 
determination, the tribunals/courts ought not to be swayed 
only by supervening events like a subsequent sale at a 
higher price or at the same price offered by the defaulting 
bidder or that the secured creditor has not in the bargain 
suffered any loss or by sentiments and should stay at a 
distance since extending sympathy, grace or compassion 
are outside the scope of the relevant legislation. In any 
event, the underlying principle of least intervention by 
tribunals/courts and the overarching objective of the 
SARFAESI Act duly complimented by the Rules, which are 
geared towards efficient and speedy recovery of debts, 
together with the interpretation of the relevant laws by this 
Court should not be lost sight of. Losing sight thereof may 
not be in the larger
interest of the nation and susceptible 
to interference.”
(Emphasis supplied)
117.	Thus, this Court held that where extraneous conditions exist that 
might have led to the inability of the successful auction purchaser 
despite best efforts from depositing the balance amount to no fault 
of its own, in such cases the earnest-money deposited by such 
innocent successful auction purchaser could certainly be asked to 
be refunded. 
118.	In the case at hand, it is the respondent’s case that he was unable to 
make the balance payment owing to the advent of the demonetisation. 
The same led to a delay in raising the necessary finance. It has been 
pleaded by the respondent that the appellant bank failed to provide 
certain documents to him in time as a result of which he was not 
able to secure a term loan.
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119.	However, the aforesaid by no stretch can be said to be an 
exceptional circumstance warranting judicial interference. We say 
so because demonetization had occurred much before the e-auction 
was conducted by the appellant bank. As regards the requisition 
of documents, the sale was confirmed on 07.12.2016, and the 
respondent first requested for the documents only on 20.12.2016, 
and the said documents were provided to him by the appellant within 
a month’s time i.e., on 21.01.2017. It may also not be out of place to 
mention that the respondent was granted an extension of 90-days’ 
time period to make the balance payment, and was specifically 
reminded that no further extension would be granted, in-spite of this 
the respondent failed to make the balance payment.
120.	The e-auction notice inviting bids along with the correspondence 
between the appellant bank and the respondent are unambiguous 
and clearly spelt out the consequences of not paying the balance 
amount within the specified period. 
121.	Thus, what could be said is that the respondent being aware of his 
financial capacity, willingly participated in the e-auction and offered 
his bid fully knowing the reserve price of the Secured Asset and the 
consequences of its failure in depositing the balance amount.
F.	
CONCLUSION
122.	For all the foregoing reasons, we have reached to the conclusion 
that the High Court committed an egregious error in passing the
impugned judgment and order. We are left with no other option but 
to set aside the impugned judgment and order passed by the High 
Court.
123.	In the result, the appeals filed by the bank succeed and are hereby 
allowed. The impugned judgment and order passed by the High 
Court dated 27.10.2021 is hereby set aside. As a result, the SA No. 
143 of 2018 filed by the respondent before the DRT-II also stands 
dismissed. 
124.	The parties shall bear their own costs.
125.	Pending application(s), if any, also stand disposed of.
Headnotes prepared by: Ankit Gyan
 Result of the case: 
Appeals disposed of.