Technical Default or Fatal Defect? Supreme Court Draws the Line in SARFAESI Auctions

A shortfall of ₹35,000 in an earnest money deposit led to nearly seventeen years of litigation over a property sold for more than ₹2.17 crore. In Lakshmi Mohan (Dead) Through LRs. & Anr. v. M/s Airtech Projects Engineers Pvt. Ltd. & Anr., 2026 INSC 909, the Supreme Court was called upon to decide whether this deficiency invalidated the auction altogether. The Court held that the shortfall was only a technical deviation from the auction notice, not a breach of a statutory requirement.

The borrower’s account had been classified as a non-performing asset, following which the bank initiated enforcement proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. A fresh possession-cum-sale notice issued in March 2009 fixed the earnest money deposit (“EMD”) at ₹21.50 lakh and stated that bids submitted without the EMD would be rejected.

Two bidders participated in the auction. Both deposited ₹21.15 lakh, resulting in an identical shortfall of ₹35,000. The appellants emerged as the highest bidders with an offer of ₹2.174 crore. On the date of the auction, they deposited a further ₹33.20 lakh, taking their total payment to ₹54.35 lakh, which represented 25% of the sale price. The balance consideration was subsequently paid, and the sale certificate was issued and registered in October 2009.

Although the Debts Recovery Tribunal upheld the auction, the Debts Recovery Appellate Tribunal found that the bank had failed to comply with the auction notice and directed restoration of the property to the borrower. The Madras High Court ultimately affirmed that conclusion. The auction purchasers and the bank therefore approached the Supreme Court.

Not every tender condition carries the same consequence

The Court began by revisiting the settled distinction between conditions that constitute essential eligibility requirements and those that are ancillary or subsidiary to the principal object of a tender. Essential conditions ordinarily require strict enforcement. A deviation from a subsidiary condition, however, may be permissible where the purpose underlying it has been substantially fulfilled and no prejudice or injustice has resulted.

The Court relied upon established tender jurisprudence, including Poddar Steel Corporation v. Ganesh Engineering Works, B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. and National High Speed Rail Corporation Ltd. v. Montecarlo Ltd. These decisions recognise that a tender process should not ordinarily be disturbed for every literal departure from its terms. The nature of the condition, the purpose it serves and the consequences of the deviation must all be examined.

Applying these principles, the Supreme Court held that the EMD requirement contained in the bank’s auction notice was non-statutory and had principally been introduced to screen out non-serious bidders. In the facts before it, both bidders had deposited precisely the same amount and were equally deficient by ₹35,000. The bank had entertained both bids, and neither bidder had obtained an unfair advantage.

More importantly, Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 required the successful purchaser to immediately deposit 25% of the sale price. That statutory obligation was fully satisfied on the auction date. Once the purchasers deposited the requisite 25%, the Court held that the earlier EMD shortfall “pales into insignificance”. The deviation had neither defeated the purpose of the EMD requirement nor caused prejudice to the competing bidder or the borrower.

The judgment should not, however, be understood as dispensing with EMD conditions across SARFAESI auctions. Its reasoning is closely tied to the particular facts: the small shortfall, the identical position of both bidders, the bank’s acceptance of both bids, timely compliance with Rule 9(3), and the absence of prejudice. A material deficiency that affects eligibility, distorts competition or compromises the fairness of the auction may still have very different consequences.

Delay in payment of the balance consideration

The borrower also contended that the remaining 75% of the sale consideration had not been paid within the period prescribed under Rule 9(4). The Court rejected this challenge on the facts.

The issue had not been raised before the DRT or the DRAT. Further, the bank had informed the purchasers that, owing to the pending proceedings, the date for payment of the balance would be communicated separately. The purchasers paid the balance within four days of the borrower’s securitisation application being dismissed. The Court accordingly inferred that the bank had extended the time for payment in terms of the auction conditions.

This aspect remains fact-specific and does not dilute the mandatory character of Rule 9(4). Where time is extended, the extension must satisfy the requirements of the applicable rule. The decision cannot be treated as a general licence to accept delayed payment of the balance sale price.

The bank’s obligation towards surplus proceeds

The auction sale was restored, but the bank’s conduct did not escape scrutiny. After adjusting its dues, the bank was left with surplus proceeds of ₹1,33,94,054. Although the borrower declined to accept the demand draft during the pendency of the litigation, the bank retained the amount in a non-interest-bearing account.

The Supreme Court held that the borrower could not be made to suffer for this omission. It directed the bank to refund the surplus together with interest at 7% per annum from 23 March 2010 until payment.

The ruling therefore strikes a measured balance. It protects a completed auction from being unravelled for an inconsequential defect, while holding the secured creditor accountable for money belonging to the borrower. The controlling question is not simply whether there was a departure from the auction terms, but whether the departure concerned a statutory command, undermined the object of the condition, or caused actual prejudice. On the facts of this case, the ₹35,000 shortfall did none of these.