Supreme Court Orders Punjab National Bank to Refund Forfeited Auction Deposit

The Supreme Court of India recently delivered a ruling in favor of Mohd. Shariq, ordering Punjab National Bank (PNB) to refund an auction deposit amounting to Rs. 50.25 lakh that was forfeited during a contentious re-auction process. The case revolved around a failed auction purchase due to ongoing proceedings before the Debt Recovery Tribunal (DRT), which the highest bidder was unaware of at the time of bidding. The Court found that PNB had failed to disclose material facts and that forfeiture of the deposit was unjustified.

Background of the Case

The case originated from an auction conducted by PNB for a mortgaged property belonging to a defaulter. The auction was held under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, after the borrower’s accounts were classified as a Non-Performing Asset (NPA).

Pursuant to an auction notice dated June 18, 2013, the appellant, Mohd. Shariq, submitted the highest bid of Rs. 2.01 crore for the property and deposited the requisite earnest money of Rs. 11.19 lakh. As per auction terms, he further deposited 25% of the bid amount, totaling Rs. 50.25 lakh, on July 27, 2013.

However, it later came to light that the borrower had filed a case before the Debt Recovery Tribunal (DRT), challenging the auction process. On July 26, 2013, a day before the appellant deposited 25% of the bid amount, the DRT issued an interim order stating that while the auction could proceed, confirmation of the sale should be kept in abeyance until further orders. Mohd. Shariq was not informed of this order at the time of making his bid and deposit.

When the DRT vacated its interim order on October 14, 2013, PNB asked Mohd. Shariq to deposit the remaining balance. However, he requested clarity on the ongoing DRT proceedings before proceeding with payment. Instead of resolving the matter, PNB re-auctioned the property on March 5, 2014, without refunding Shariq’s previously deposited amount. His attempts to seek redress were unsuccessful, leading him to file a writ petition before the Uttarakhand High Court.

Petitioner’s Arguments (Mohd. Shariq)

The bank failed to disclose the pending DRT case, which materially affected his ability to proceed with the transaction.
He was never informed about the DRT’s interim order before depositing the bid amount.
He repeatedly expressed his willingness to pay the balance amount provided the DRT case was resolved.
His bid amount was significantly higher than the subsequent re-auction price, showing that the bank suffered no financial loss.
The forfeiture of his deposit violated the principles of fairness and natural justice.

Respondent’s Arguments (Punjab National Bank)

The appellant failed to deposit the balance amount within the stipulated time.
As per Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, if a successful bidder defaults in making the final payment, the deposit can be forfeited.
The re-auction was conducted lawfully, and any losses suffered by the appellant were due to his failure to comply with the auction conditions.

Supreme Court’s Observations

The Court found that Mohd. Shariq had acted in good faith and had been ready to complete the purchase once the DRT proceedings were resolved.
The bank failed to inform the appellant about the interim order passed by the DRT, which was a crucial factor affecting the completion of the sale.
The fact that Shariq had deposited Rs. 50.25 lakh before learning about the pending litigation demonstrated his bona fide intentions.
The principle of fairness required that the bank either disclose ongoing litigation at the time of auction or refund the amount upon failure of the transaction due to undisclosed legal impediments.
Forfeiture of the deposit was found to be unfair, as the bank later sold the property at a lower price in a re-auction.

Key Judicial Findings

The Court held that forfeiture of an auction deposit is not justified when the bidder is unaware of pending legal proceedings affecting the transaction.
The judgment reinforced that banks conducting auctions must ensure full disclosure of any legal disputes related to the property.
The Court emphasized that equity and fairness must guide forfeiture decisions, especially in cases where the bidder is acting in good faith.
The ruling highlighted that Rule 9(5) of the Security Interest (Enforcement) Rules, 2002, does not apply where external legal factors prevent the completion of an auction sale.

Final Judgment

The Supreme Court ruled in favor of Mohd. Shariq:

PNB was directed to refund the forfeited amount of Rs. 50.25 lakh to the appellant.
The bank was given a period of two months to comply with the order.
Failure to refund the amount within the stipulated time would result in an interest penalty of 12% per annum until payment is made.

Implications of the Judgment

The ruling has significant implications for financial institutions conducting auctions:

Transparency in Auctions: Banks and financial institutions must disclose any pending litigation that may affect the buyer’s rights.
Fair Treatment of Bidders: Institutions cannot forfeit deposits if bidders were not given complete information at the time of auction.
Legal Accountability: The judgment ensures that banks cannot use forfeiture provisions unfairly to retain funds from unsuccessful auctions.
Precedent for Auction Disputes: The case sets a legal precedent that will help future bidders contest unfair forfeitures in similar scenarios.

Conclusion

The Supreme Court’s ruling in Mohd. Shariq v. Punjab National Bank & Ors. underscores the principle that financial institutions must act fairly in auction proceedings. The decision protects bidders from unjust forfeitures when legal obstacles arise due to non-disclosure by the auctioning entity. By ordering the refund of the forfeited deposit, the Court has reinforced the need for accountability and transparency in bank-led auction sales.

Petitioner Name: Mohd. Shariq.
Respondent Name: Punjab National Bank & Others.
Judgment By: Justice Ajay Rastogi, Justice Bela M. Trivedi.
Place Of Incident: Uttarakhand, India.
Judgment Date: 11-04-2023.

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