Karnataka High Court Upholds Canara Bank’s Right to Forfeit Earnest Money for Payment Default
Bengaluru: The High Court of Karnataka has ruled that the forfeiture of an earnest money deposit (EMD) is a statutory consequence when a bidder fails to pay the balance amount within the stipulated period, even if an extension has been granted. This decision came from a division bench comprising Chief Justice N V Anjaria and Justice K V Aravind, while allowing a writ appeal filed by Canara Bank.
The appeal challenged a previous single-bench order that directed the bank to refund Rs 3.25 crore to K Subramanya Rao and his wife, H M Nagarathna, residents of Karkala in Udupi district. The couple had participated in an e-auction held by Canara Bank on November 29, 2021, for a property in Wilson Garden, Bengaluru, as part of loan recovery proceedings.
Rao and his wife were the highest bidders, depositing Rs 3.25 crore, which was 25% of the total bid amount. However, they failed to pay the remaining Rs 9.75 crore within the required 15-day period. On January 13, 2022, they requested an additional 30 days to make the payment. The bank extended the deadline to February 10, 2022, but when the couple still failed to pay, the property was sold in a subsequent auction for a lower price of Rs 11 crore.
Rao and his wife filed a petition with the single bench, arguing that under the Security Interest (Enforcement) Rules, 2002, they were entitled to a three-month extension, which Canara Bank had not considered. They also claimed that the bank did not properly disclose the proceedings of the subsequent auction.
The single bench had ruled that the couple was entitled to a refund of their deposit. However, the division bench overturned this decision, citing a Supreme Court ruling in the Central Bank of India vs Shanmugavelu case, which held that under Rule 9(5) of the Security Interest (Enforcement) Rules, the secured creditor has the right to forfeit the auction purchaser’s deposit if they fail to pay the balance.
“In this case, no special circumstances justify the demand for the return of the earnest money. There is no unjust enrichment by the bank. The petitioner-bidder failed to deposit the balance amount within the statutory period despite receiving an extension, and therefore, the forfeiture of the deposit was a statutory consequence,” the bench concluded.
