Karnataka High Court upholds bank's decision to not return Rs 3.25 cr earnest money deposit in e-auction

When a bidder fails to deposit the balance amount within the statutory period, despite having been granted extension, the forfeiture of the earnest money deposit is a statutory consequence, according to the High Court of Karnataka. 

A division bench of Chief Justice N V Anjaria and Justice K V Aravind ruled this while allowing a writ appeal filed by Canara Bank, which challenged the single-bench order that directed it to refund Rs 3.25 crore to K Subramanya Rao and his wife H M Nagarathna, residents of Karkala in Udupi district. 

On November 29, 2021, the bank conducted the e-auction of a property in Wilson Garden, Bengaluru, as part of loan recovery proceedings. 

Rao and his wife were the successful bidders and paid Rs.3.25 crore, which was 25 per cent of the bid amount. 

The balance amount - Rs 9.75 crore - was to be paid within 15 days as per the condition of the bid towards final bid amount. 

On January 13, 2022, the couple sent a communication to the bank, seeking another 30 days to pay the amount. After providing time till February 10, 2022, the bank sold the property at a lower price of Rs 11 crore. 

The Raos moved the single bench, stating that the Security Interest (Enforcement) Rules, 2002, provide for extension of up to three months, which was not considered by Canara Bank.

They further stated that the bank neither responded nor disclosed anything about the proceedings under which the property was sold in the other auction.

The single bench had said that the first auction purchasers were entitled to the refund of the amount deposited on the date of auction. 

The division bench cited Supreme Court judgement in Central Bank of India vs Shanmugavelu case where it was held that Rule 9(5) of the Security Interest (Enforcement) Rules 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 the installment of sale money to the secured creditor. 

“In the facts of the case, no special circumstance exists which would justify the demand for 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 having been granted extension, the forfeiture of his earnest money deposit was a statutory consequence,” the bench said.