Rs 35,000 EMD Shortfall Does Not Void SARFAESI Auction When 25% Rule Is Satisfied, Supreme Court Holds

A Supreme Court bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe held that a minor earnest money shortfall cannot invalidate a SARFAESI auction where the statutory 25% deposit was fully met on auction day.

A thirteen-year dispute over a Chennai property auction has ended with the Supreme Court restoring the sale certificate issued to the successful bidders and directing United Bank of India (now Punjab National Bank) to refund a surplus of Rs 1,33,94,054 with interest at 7% per annum. The Court, in Lakshmi Mohan (Dead) Through LRs v M/s Airtech Projects Engineers Pvt Ltd (2026 INSC 909), decided on 21 August 2026, held that the earnest money deposit condition in a SARFAESI possession-cum-sale notice is non-statutory and was incorporated only to filter non-serious bidders. Where both bidders fell short by the same amount and the successful bidders deposited the full statutory 25% of the sale price on auction day itself, the shortfall carried no legal consequence.

How the Dispute Reached the Supreme Court

M/s Airtech Projects Engineers Pvt Ltd, the borrower, had availed a cash-credit facility from United Bank of India. By 31 July 2008 its dues stood at Rs 88,52,741 against a sanctioned limit of Rs 85 lakhs, and the account was declared a Non-Performing Asset. On 1 August 2008 the Bank issued a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 calling upon the borrower to pay within sixty days.

The secured asset was land of approximately 4,900 square feet with a ground and first floor building at Door No. 32, McNichols Road, Chetpet, Chennai. A first possession-cum-sale notice fixed 4 January 2009 — a Sunday — as the auction date. The Debts Recovery Tribunal-II, Chennai (DRT) quashed that notice precisely because it fell on a Sunday. The High Court of Judicature at Madras set aside the DRT's order on the ground that it had been passed without notice to the Bank, and remitted the matter.

A fresh notice issued on 18 March 2009 fixed 24 April 2009 as the auction date. Clause 7 of that notice required bidders to submit sealed offers by 23 April 2009 accompanied by a demand draft of Rs 21,50,000 as earnest money deposit (EMD), with the explicit warning that “the offer without earnest money deposit will be rejected.”

Two bidders responded. Both deposited Rs 21,15,000 — Rs 35,000 short of the stipulated EMD. The auction-purchasers, Mrs Lakshmi Mohan and her son Mr M Premkumar, submitted the highest bid of Rs 2,17,40,000. On the auction date itself they deposited a further Rs 33,20,000, bringing the total to Rs 54,35,000, which was exactly 25% of the bid price as required by Rule 9(3) of the Security Interest (Enforcement) Rules, 2002. The DRT dismissed the borrower's challenge in October 2009. The auction-purchasers paid the balance sale consideration on 5 October 2009. A sale certificate was issued on 10 October 2009 and registered on 15 October 2009.

The Debts Recovery Appellate Tribunal (DRAT) reversed the DRT in June 2011, holding the auction vitiated by non-compliance with Rule 8(5) of the Rules and the express terms of the notice. The High Court remitted the matter to DRAT after finding that the non-compliance ground had never been raised in the memorandum of appeal. On remand, DRAT reaffirmed its earlier findings in August 2012. Fresh writ petitions to the High Court were dismissed by a common judgment dated 22 March 2013. That judgment, along with DRAT's order of June 2011, was what the Supreme Court ultimately set aside.

The Core Question: Essential Condition or Mere Technicality?

The borrower's case, argued by senior counsel Mr Jayanth Bhushan, was straightforward: without the full EMD there was no valid bid at all. The condition, he contended, was mandatory and went to the eligibility of bidders. He further argued that the balance sale consideration had been paid some five months after the auction, well beyond the fifteen-day window in Clause 7.

Senior counsel Mr Niranjan Reddy, for the auction-purchasers, and Mr Dhruv Mehta, for the Bank, countered that the EMD requirement was non-statutory and meant only to weed out frivolous bidders. Both bidders had the same shortfall. The statutory obligation under Rule 9(3) — to deposit 25% of the sale price immediately on the day of the auction — had been met in full. No prejudice had been caused to anyone.

The Court's Reasoning on EMD Validity

Justice Alok Aradhe, writing for the bench, began from settled law on tender conditions. Requirements in a tender or auction notice fall into two categories: those that constitute essential conditions of eligibility, which must be enforced rigidly, and those that are ancillary or subsidiary to the main object, from which the authority may deviate without vitiating the process. Non-conformity with an ancillary condition that causes no substantial prejudice to any party does not ordinarily invalidate the auction.

Applying that framework to Clause 7, the Court found the EMD requirement to be non-statutory. The Rules under the SARFAESI Act oblige a secured creditor issuing a public auction notice to include the EMD amount in the public notice, but they do not prescribe the quantum or make pre-deposit of the exact amount a condition going to the validity of the bid. Clause 7 was inserted by the Bank to filter out non-serious participants — an internal safeguard, not a statutory threshold.

The Court identified two facts as decisive. First, both bidders had identically fallen short by Rs 35,000. The Bank had entertained and considered both bids. There was thus no selective relaxation in favour of one party over another. Second, and more importantly, the auction-purchasers had deposited the full 25% of Rs 2,17,40,000 on 24 April 2009 — the auction day itself — in compliance with Rule 9(3). The Court held that once the statutory 25% threshold was met, “any anterior shortfall in deposit of EMD pales into insignificance.” The shortfall had caused no prejudice to the rival bidder and none to the borrower.

The borrower's contention that the EMD condition was an essential eligibility condition was accordingly rejected.

The Delayed Balance Payment Argument

The borrower also pressed that the balance 75% of the sale consideration had been paid only in October 2009, roughly five months after the auction, when Clause 7 required payment within fifteen days. The Court disposed of this argument on two grounds.

First, the plea had not been taken before the DRT or the DRAT. It was being raised for the first time in the High Court proceedings, which ordinarily disentitles a party from relying on it.

Second, on the facts, the delay was entirely explicable. Mr M Premkumar, one of the auction-purchasers, stated on affidavit that when they approached the Bank to pay the 75% balance, the Bank itself wrote on 4 June 2009 that in view of the pending court proceedings the date for balance payment would be intimated in time. Clause 7 expressly authorised the Bank to extend the payment deadline in writing. The Court found that the Bank had done exactly that. When the borrower's appeal before the DRT was dismissed on 1 October 2009, the auction-purchasers paid the balance four days later on 5 October 2009. The Court noted that the borrower had itself raised pleas to prevent the auction-purchasers from depositing the balance consideration, making it untenable to now complain about the consequent delay.

The Surplus Amount and Interest Direction

After appropriating the sale proceeds against the borrower's dues, the Bank was left with a surplus of Rs 1,33,94,054. The Bank had offered this sum to the borrower by demand draft, which the borrower declined, apparently because of the ongoing litigation. However, the Bank had kept the surplus in a non-interest-bearing account instead of an interest-bearing one. The Court held that the borrower could not be penalised for the Bank's failure to keep the surplus in an appropriate account. The borrower was entitled to the refund together with interest.

The Bank was directed to refund Rs 1,33,94,054 with interest at 7% per annum from 23 March 2010 — the date when the surplus was placed in a non-interest-bearing account — until actual payment.

Order

The Supreme Court quashed and set aside the High Court's common judgment dated 22 March 2013 in Writ Petition Nos. 24241–24244, 32610 and 32611 of 2012, as well as DRAT's order dated 20 June 2011. Civil Appeal Nos. 9228–9231 of 2013 (filed by the auction-purchasers' legal representatives) and the Civil Appeal arising from Diary No. 31322 of 2018 (filed by the Bank) were allowed. The Civil Appeals arising from SLP (Civil) Nos. 1441–1446 of 2014 (filed by the borrower M/s Airtech Projects Engineers Pvt Ltd) were disposed of. There was no order as to costs.