Auction purchaser will loseEMD on default, says HC

Bengaluru: When the auction purchaser of a property fails to make the balance payment within the mandated time despite being granted an extension, the forfeiture of the earnest money deposit (EMD) is a statutory consequence, the high court has ruled.
A division bench comprising Chief Justice NV Anjaria and Justice KV Aravind made the observation in a recent judgment while allowing a writ appeal filed by Canara Bank.The lender had challenged a single bench's order directing it to refund Rs 3.3 crore to K Subramanya Rao and his wife HM Nagarathna, residents of Karkala, Udupi district.
In Nov 2021, the bank conducted an e-auction of a property situated on 11th Cross, Wilson Garden, Bengaluru, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, seeking to recover a due.
The Raos, who emerged as successful bidders, paid an EMD of Rs 3.3 crore and were to pay the balance of Rs 9.7 crore towards the final bid amount as per the auction condition.
On Jan 13, 2022, the couple sought 30 more days to pay the amount and the bank gave time till Jan 28 of that year. However, the couple sought a further 30-day extension, stating that they were in the process of securing a loan to make the payment. The bank told them if the balance was not paid by Feb 10, 2022, the sale would be cancelled and the EMD forfeited.
As the couple filed a writ petition seeking an extension of time, the division bench noted that the Supreme Court had clearly held the Security Interest (Enforcement) Rules confers express powers on the secured creditor to forfeit the deposit made by a defaulting auction purchaser and the same cannot be regarded as a penal provision.
It was held that the legislature consciously provided for forfeiture of the EMD in the event of the auction purchaser failing to deposit the balance amount as a larger object of the SARFAESI Act is to facilitate the recovery of debt in a time-bound manner, the division bench added while setting aside the order passed by the single bench.
"In the facts of the case, no special circumstance exists which would justify the demand for the return of earnest money by the petitioner. There is no unjust enrichment on the part of the bank. When the petitioner-bidder failed to deposit the balance amount within the statutory period despite being granted an extension, the forfeiture of their earnest money deposit is a statutory consequence," the bench observed.
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How the case proceeded
-Karkala couple emerges as successful bidders for a Wilson Garden property auctioned by Canara Bank in 2021
-The duo pays an EMD of Rs 3.3 crore and seeks time for clearing the remaining Rs 9.7 crore
-Bank grants one extension but declines when the couple seeks more time
-Single bench tells the bank to refund the EMD
-Division bench sets aside the single bench order saying forfeiture of EMD is a statutory consequence in case of default