Supreme Court Validates Auction Sale Despite Earnest Money Shortfall, Auction Sale Under SARFAESI Act Upheld; Bank Directed to Refund Surplus with Interest
In a significant ruling, the Supreme Court of India has upheld the validity of an auction sale conducted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, despite a shortfall in the earnest money deposit (EMD) by the highest bidder. The bench, comprising Justices Pamidighantam Sri Narasimha and Alok Aradhe, delivered the verdict on August 21, 2026, allowing the appeals against the Madras High Court's earlier decision.
The case revolved around M/s. Airtech Projects Engineers Pvt. Ltd., which defaulted on a loan, leading the lender, United Bank of India (now merged with Punjab National Bank), to classify the account as a Non-Performing Asset (NPA) and initiate recovery proceedings. The auction sale of the secured asset was challenged due to a Rs. 35,000 shortfall in the required EMD of Rs. 21,50,000 by the successful bidder, Mrs. Lakshmi Mohan, now represented by her legal representatives.
The Supreme Court, analyzing the provisions of the Security Interest (Enforcement) Rules, 2002, particularly Rule 9(3), determined that the primary statutory requirement was the immediate deposit of 25% of the bid price, which was duly fulfilled. The court noted that the EMD clause was non-statutory, aimed at filtering non-serious bidders, and any shortfall adjusted with the 25% deposit did not undermine the auction's validity.
Furthermore, the court addressed the issue of delayed payment of the balance sale consideration. It concluded that the bank's written extension, due to pending litigation, was valid and did not render the sale illegal. Consequently, the auction was deemed compliant with the legal framework, causing no prejudice to the borrower.
In a relief to the borrower, the court directed the bank to refund the surplus sale proceeds amounting to Rs. 1,33,94,054, along with an interest of 7% per annum, acknowledging the bank's failure to maintain the surplus in an interest-bearing account.
The judgment reinforces the flexibility afforded to procedural norms in auctions, provided the core statutory conditions are met, and emphasizes the necessity for banks to manage surplus funds responsibly.
Bottom Line:
Auction sale under SARFAESI Act - Shortfall in earnest money deposit (EMD) does not vitiate the auction sale if 25% of bid price was deposited immediately as mandated by Rule 9(3) of Security Interest (Enforcement) Rules, 2002.
Statutory provision(s): SARFAESI Act, 2002, Security Interest (Enforcement) Rules, 2002, Rule 9(3), Rule 9(4).
