The Calcutta High Court has clarified that a bank cannot forfeit earnest money deposited by a buyer in a secured asset auction if the sale notice contains material misrepresentations about the property’s area, possession, or encumbrances. The judgment reinforces the duty of secured creditors to provide accurate disclosures under the SARFAESI Rules, placing the burden of truthful representation squarely on the bank.
Background & Facts
The Dispute
The State Bank of India initiated proceedings under the SARFAESI Act to recover a defaulted loan by auctioning mortgaged land. The sale notice dated December 16, 2014, described the property as comprising approximately 270.46 satak (1,17,814 sq. ft.) and stated that the bank was in physical possession of the entire land. It also declared the sale was on an "as is where is" basis. Respondent No. 1, Rajnish Infrastructure Private Limited, bid Rs. 7.81 Crores and deposited 25% earnest money - Rs. 1.95 Crores - on January 21, 2015.
Procedural History
- January 21, 2015: Respondent deposited Rs. 1.95 Crores as earnest money.
- February 4, 2015: Respondent requested inspection of title deeds and clarification on discrepancies; bank did not respond.
- March 17 - 23, 2015: Respondent sent follow-up notices.
- March 26, 2015: Bank replied, claiming documents were provided and extended payment deadline.
- April 21, 2015: Respondent identified multiple discrepancies: land area was only 242 satak, a portion was under land acquisition, chain of title was broken for 50 satak, and bank was not in actual possession.
- August 18, 2015: Bank forfeited the earnest money.
- 2015: Respondent filed IA before Debts Recovery Tribunal seeking refund; rejected.
- August 31, 2022: Debts Recovery Appellate Tribunal allowed appeal and ordered refund of Rs. 1.95 Crores with interest.
- 2023: State Bank filed writ petition under Article 226 challenging the Tribunal’s order.
Relief Sought
The State Bank sought to set aside the Appellate Tribunal’s order directing refund of the earnest money, arguing that the buyer’s failure to pay the balance amount justified forfeiture under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002.
The Legal Issue
The central question was whether a bank can forfeit earnest money under the SARFAESI Rules when the sale notice contains material misrepresentations regarding the property’s area, possession, and encumbrances, and the buyer, upon discovering these discrepancies, seeks clarification before making payment.
Arguments Presented
For the Appellant/Petitioner
The State Bank argued that Rule 9(5) of the SARFAESI Rules permits forfeiture of earnest money if the successful bidder fails to pay the balance within the stipulated time. It contended that the "as is where is" clause absolved it of liability for any undisclosed defects. It relied on Alisha Khan v. Indian Bank and Surya Dev Rai v. Ram Chander Rai to assert that the Appellate Tribunal committed a manifest error by disregarding these precedents and by interfering with a contractual forfeiture.
For the Respondent/State
Respondent No. 1 argued that Rule 8(6) and 8(7) of the SARFAESI Rules impose a statutory duty on the bank to disclose all known encumbrances and accurately describe the property. The April 21, 2015 letter detailed seven specific discrepancies, including land acquisition and broken title chains, which the bank ignored. The bank’s March 26, 2015 reply constituted acquiescence to delayed payment. Respondent relied on Radhey Shyam v. Chhabi Nath to argue that writ jurisdiction under Article 226 cannot be used to re-appreciate facts, and that the Tribunal’s findings were factually and legally sound.
The Court's Analysis
The Court emphasized that the SARFAESI Rules are not merely procedural but impose substantive obligations on secured creditors. Rule 8(7)(a) mandates disclosure of encumbrances known to the bank, and Rule 8(6) requires accurate description of the property. The sale notice’s assertion that the bank was in "physical possession" of 270.46 satak was demonstrably false, as a portion had already been acquired by the state. The discrepancy of 28.46 satak was not a minor error but a material misrepresentation affecting the very subject matter of the contract.
"The contract thus took off on a wrong footing, and not just on error of fact, but also on misrepresentation of facts."
The Court rejected the bank’s reliance on the "as is where is" clause, holding that such a caveat cannot override statutory disclosure obligations or permit fraudulent misrepresentation. The bank’s silence in response to the April 21, 2015 letter, followed by its written acknowledgment of extended payment terms on March 26, 2015, amounted to acquiescence. This rendered the buyer’s non-payment after February 4, 2015, non-defaulting.
The Court distinguished Alisha Khan as factually inapplicable and affirmed that the Appellate Tribunal’s reliance on precedent was neither ignorant nor perverse. It held that the Tribunal’s conclusion - that the bank, not the buyer, was the defaulting party - was supported by evidence and law. The Court further clarified that Article 226 cannot be invoked to re-examine factual findings unless there is a manifest error apparent on the face of the record, which was absent here.
The Verdict
The respondent won. The Calcutta High Court upheld the Debts Recovery Appellate Tribunal’s order, holding that a bank cannot forfeit earnest money when it misrepresents material facts about the property, and that statutory disclosure obligations under SARFAESI Rules override "as is where is" clauses. The Court directed the bank to refund Rs. 1.95 Crores with interest by February 26, 2026.
What This Means For Similar Cases
Misrepresentation Vitiates Forfeiture
- Practitioners must argue that forfeiture under SARFAESI Rules is invalid if the bank’s sale notice contains false or incomplete disclosures about area, possession, or encumbrances.
- The "as is where is" clause is not a shield against statutory violations under Rule 8(7).
Acquiescence Extends Payment Deadlines
- A bank’s written acknowledgment of delayed payment, even after the stipulated date, constitutes an implied modification of the contract.
- Oral assurances are insufficient; written communication must be scrutinized for acquiescence.
Statutory Disclosure Is Non-Negotiable
- Banks must maintain and disclose accurate records of encumbrances, land acquisition status, and title chains before initiating auctions.
- Failure to do so exposes the bank to refund liability, even if the buyer fails to pay on time.
- Legal due diligence by buyers must be documented; failure to respond to buyer’s queries may be deemed waiver of contractual rights.
