Is the Forfeiture of Deposit by the Bank in Default of Payment Under SARFAESI Mandatory?
The Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 lays down stringent conditions as follows:
“In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited and the property shall be resold and the defaulting purchaser shall forfeit, to the secured creditor, all claim to the property or to any part of the sum for which it may be subsequently sold.”
The following conditions have been stipulated under the above said Rule:
The auction purchaser or the successful tenderer fails to deposit the amounts within the period [Rule 9(3)] deposit of 25% which is inclusive of Earnest Money Deposit deposited to the authorised officer immediately on the same date of Sale of immovable property or not later than next working day, and the balance amount of purchased price payable on or before 15th day of confirmation of sale of immovable property or such extended period as maybe agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding 3 months [Rule 9(4)].
In the eventuality of default within the period mentioned as enumerated above, the deposit shall be forfeited and the property shall be resold and the defaulting purchaser not only shall forfeit all claims to the property or to any part of sum for which it may be subsequently sold [Rule 9(5)].
First of all, the meaning of forfeiture is to be understood as follows:
- Stroud’s Judicial Dictionary of Words and Phrases: Forfeiture is defined a mulct or fine, a punishment for an offence – the term ‘forfeit’ is ordinarily applied to the penalty of bond with a condition or to an estate held on condition but penalty of a bond when it is forfeited is never termed a forfeiture even in common parlance. Forfeiture means loss of all interest in the property and a clause effecting it must be construed strictly.
- Legal Thesaurus – William C. Burton: Forfeiture - Deprivation of a right, destruction of a right, involuntarily loss of right, seizure of a privilege, loss consequent to a default.
- Concise Law Dictionary – P. Ramanatha Iyer: Forfeiture is the divestiture of specific property without compensation in consequence of some default or some Act forbidden by Law.
Previously, many Hon'ble Courts in India were taking a stand as regards Rule 9(5) that the purpose of forfeiture is in the interest of the secured creditor to protect it for adverse loss. When there is no alleged loss to the Respondent Bank, the forfeited money may be refunded, in any case the respondent banks will be able to recoup and not suffer a loss in the event of return of Earnest Money Deposit, as they could recoup the amount from the subsequent re-auction [(2023 1 CTC 807 – Referring the Judgement of Hon'ble Apex Court M/s. Alisha Khan Vs. Indian Bank & others (C.A.Nos.7680-7681 of 2021))].
However, the order passed by the Hon'ble Supreme Court in 2021 6 CTC 257 was not considered or not placed before the Hon'ble High Court of Madras, wherein it was held that no secured creditor, not even by embracing provisions of the said Act of 2022, can unjustly enrich itself or obtain any more by way of resorting to any of the measures contemplated under section 13(4) of the SARFAESI Act or otherwise than debt that is due to it and cost that may have been incurred in course of trying to recover debt due. The secured creditor, in this case, is unjustly enriching itself, which is not permissible.
It was further pointed out that forfeiture of Earnest Money is not a penalty and Section 74 of the Indian Contract Act will apply only when forfeiture is like a penalty or not otherwise and therefore the forfeiture of Earnest Money Deposit of 25% of the total amount cannot be termed as a penalty within the meaning of Section 74 of the Indian Contract Act.
The issues involved in forfeiture of Deposit as laid down in Rule 9(5) of SARFAESI Interest (Enforcement) Rules, 2002 were taken into consideration by the Hon'ble Supreme Court and the matter of forfeiture was in detail discussed and deliberated by the Hon'ble Supreme Court in Authorised Officer, Central Bank of India Vs. Shanmugavelu reported in 2024 2 MLJ 65 (SC) wherein it was held that:
“Forfeiture contemplated by statute, Equitable considerations cannot supplant the consequences of a legal rule, Equity always follows the law and Equity cannot supplant the law, and equity has to follow the law, if the law is clear and unambiguous, the consequence of forfeiture of 25% of the deposit under Rule 9(5) of the Security Interest (Enforcement) Rules is a legal consequence that has been statutory provided in the even 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 consequences of forfeiture of 25% of deposit under Rule 9(5) of the SARFAESI Rules.”
“Rule 9(5) of SARFAESI Rules prescribing forfeiture of EMD of 25% of the total amount cannot be termed as a penalty within the meaning of Section 74 of the Indian Contract Act.”
“The SARFAESI Act is a special legislation with an overriding effect on the general law and only those legislation 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 and 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.”
Following the above said judgement of Hon'ble Supreme Court, the Hon'ble Justice P. Dhanapal in A. Raja Vs. Indian Bank (2026 Supreme Mad 1380) held that the forfeiture of the Bank is as per Law and the consequences of forfeiture are legal and has been statutorily as envisaged under Rule 9(5) irrespective of whether a subsequent sale has taken place at a higher price or not and the forfeiture is not subject to any recovery already made or to the extent of the debt owned. The question of loss caused to the bank has no relevance and the bank has the power to forfeit the deposit money. Recently the Hon'ble First Bench of High Court of Madras has said that forfeiture of 25% of the sale consideration in case of non-payment of balance sale consideration within the time stipulated that to after grant of sufficient time, the petitioner has no right to seek refund of 25% of sale consideration deposited by him. (in WP No.313 of 2024 dated 23.07.2026)
WHETHER DRT HAS JURISDICTION TO DECIDE THE ISSUE OF FORFEITURE UNDER SECTION 17(1) OF SARFAESI ACT
In umpteen number of judgements, the Hon'ble High Court Judicature of Madras, i.e., 1st Division Bench, has held that an auction purchaser aggrieved by the forfeiture of bid deposited by a secured creditor under SARFAESI Act must seek remedy by filing an application under Section 17(1) of the Act before the Hon'ble DRT rather than filing Writ Petition (WP No.3944/2024 dated 30.06.2025, WP 2894 of 2023 dated 18.06.2026, WP No.10124 of 2024 dated 30.06.2026, WP No.26117 dated 2020 dated 15.07.2026, WP No.7450 of 2026 dated 21.07.2026).
In 2018 Supreme (online) Mad 214 (2018 KHC 2927), the Hon'ble High Court of Madras held that the bank must disclose encumbrances in public auction notice as part of fair procedure under SARFAESI Act and failure to do entitles the bidder to a refund of Earnest Money Deposit. The Hon'ble Chief Justice Bench of High Court of Madras in WP No.9666 of 2026 dated 04.06.2026 (2026 Supreme (Mad) 957) recorded that when relevant rule permits forfeiture of 25% of Sale consideration in case of non-payment of balance consideration within the time stipulated that too, grant of sufficient time, the petitioner has no right to seek refund of 25% sale consideration deposited by him and it is bounden duty of the petitioner to implead the auction purchaser as party respondent in the SA.
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