Allahabad High Court Upholds Bank’s Right to Forfeit Auction Deposit: Reaffirms Strict Three-Month Payment Deadline Under SARFAESI Act, Rejects Bidder’s Plea for Further Extension, and Strengthens Legal Certainty in Time-Bound Asset Recovery Processes

1. Court’s Decision

• The writ petition was dismissed because the petitioners had already been given the maximum three-month extension to pay the balance of the auction price.
• The court upheld the bank’s decision to forfeit the petitioners’ deposit, stating that it was lawful and in line with the SARFAESI Act and its rules.
• The court emphasized that auction sales must be time-bound to ensure financial discipline and efficiency.

2. Facts of the Case

• A mortgaged property was auctioned under the SARFAESI Act, 2002 because the borrower defaulted on a bank loan.
• The petitioners were the highest bidders in the auction held on 23.10.2024.
• As per auction rules, the petitioners paid 25% of the bid amount within the stipulated time.
• They needed to pay the remaining 75% within 15 days or request an extension from the bank.
• The petitioners applied for a loan from the same bank to cover this amount, but the loan request was rejected.
• They then requested multiple extensions, and the bank granted them an extension until 23.1.2025, which is the maximum limit allowed by law (3 months from auction date).
• Even after this extended period, the petitioners failed to pay the balance amount.
• The bank notified them that their deposit (25%) would be forfeited, and the property would be re-auctioned.
• The petitioners then filed this writ petition, seeking either another extension or a refund of their deposit.

3. Issues Considered by the Court

1. Can the court order a further extension beyond the statutory limit of three months for auction payment?
2. Was the bank justified in forfeiting the petitioners’ deposit after they failed to meet the deadline?
3. Are the petitioners entitled to a refund of their 25% deposit?

4. Petitioners’ Arguments

• Loan rejection caused the delay: They claimed that since the bank rejected their loan application, they were unable to arrange funds for the remaining 75% of the bid amount.
• Extensions should be granted: They pointed out that the bank had already given them extensions, so it should allow more time.
• Cited a previous High Court case (Gaurav Garg v. Syndicate Bank, 2019), where a bidder was granted extra time under similar circumstances.
• Claimed re-auction would harm their interests: If the property was sold again, they would lose both the property and their deposit.

5. Respondent’s Arguments (Bank’s Position)

• Auction sales are strictly time-bound: As per Rule 9(4) of the Security Interest (Enforcement) Rules, 2002, successful bidders must pay the balance amount within 15 days or a maximum extension of three months.
• No further extensions allowed: The three-month extension already granted was the legal maximum, and further time could not be granted by the bank or the court.
• The petitioners knew the rules before bidding: They agreed to these terms when they participated in the auction and should not be allowed to change them later.
• Gaurav Garg case is outdated: The petitioners relied on an older judgment that was based on pre-2016 rules, which did not have a strict three-month extension limit. The law has since been amended, so that precedent does not apply.
• Forfeiture of the deposit is legally justified: Since the petitioners failed to pay on time, the bank was obligated to re-auction the property and retain the initial deposit as per the law.

6. Analysis of the Law

(i) SARFAESI Act, 2002

• Empowers banks to recover loans without court intervention.
• Allows banks to auction assets if borrowers default.

(ii) Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (as amended in 2016)

• The balance 75% of the auction price must be paid within 15 days.
• The maximum extension allowed is three months.
• No extension beyond three months is legally permissible.

(iii) Key Precedents Cited

• Union Bank of India v. Rajat Infrastructure (2023): Clarified that courts cannot override the three-month deadline.
• Authorized Officer, SBI v. C. Natarajan (2024): Emphasized that forfeiture clauses exist to prevent manipulation of auction sales.
• Mardia Chemicals Ltd. v. Union of India (2004): Confirmed that the SARFAESI Act was enacted to ensure quick financial recoveries.

(iv) Court’s Stance on the Gaurav Garg Case

• That ruling was based on pre-2016 rules when extensions had no upper limit.
• Since the law has changed, that precedent no longer applies.

7. Court’s Reasoning

1. Strict compliance with statutory provisions is mandatory – Since Rule 9(4) clearly limits extensions to three months, courts cannot override this limit.
2. Bank’s actions were reasonable – The petitioners were given every possible chance to pay but still failed.
3. Forfeiture of deposit was justified – As per Rule 9(5), failure to pay the full amount within the prescribed time automatically results in forfeiture.
4. No unfairness or arbitrariness by the bank – The bank followed legal procedures correctly.
5. Policy consideration – Extending time further would defeat the purpose of the SARFAESI Act, which aims for quick and efficient recovery of debts.

8. Conclusion

• The petitioners failed to pay the balance auction amount within the extended deadline.
• The bank was legally correct in forfeiting the 25% deposit.
• The court dismissed the writ petition and refused to grant further extensions.

9. Implications of the Judgment

1. Auction bidders must adhere to statutory deadlines – No further extensions will be allowed beyond three months.
2. Forfeiture provisions will be strictly enforced – If a bidder fails to pay, they lose their deposit permanently.
3. Courts will not interfere in time-bound auction processes – Unless exceptional circumstances exist, the judiciary will not extend payment deadlines.
4. Strengthens financial institutions – Banks can confidently enforce security interests without unnecessary delays.

Also Read – Supreme Court Restores Second Appeals, Holds Procedural Lapses Should Not Defeat Justice: “Order XXII CPC Must Be Applied Liberally to Prevent Injustice”