Minor Shortfall In Earnest Money Deposit Does Not Vitiate Auction Sale If It Causes No Prejudice: Supreme Court

"The non-conformity of the bid of the auction-purchasers insofar as it pertains to deposit of EMD has not resulted in any prejudice or injustice to the other bidder much less to the borrower." Supreme Court, in a significant ruling, held that a minor shortfall in the Earnest Money Deposit (EMD) does not automatically invalidate an auction sale under the SARFAESI Act, provided there is substantial compliance and no resultant prejudice to the borrower.

A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed that the requirement to deposit EMD is a non-statutory condition intended to filter out non-serious bidders and should not be enforced with such rigidity as to frustrate the auction process when the successful bidder has otherwise fulfilled their financial obligations.

The dispute arose from an auction conducted by the United Bank of India (now Punjab National Bank) to sell a secured asset after the borrower defaulted on a cash-credit facility. The auction purchasers submitted a bid with a marginal shortfall in the stipulated EMD, yet their offer was the highest and they subsequently deposited the full 25 percent of the sale price as mandated by the Security Interest (Enforcement) Rules, 2002. The borrower challenged the sale on grounds of non-compliance with the auction notice, leading to conflicting orders from the Debt Recovery Tribunal and the Appellate Tribunal before the matter reached the Supreme Court.

The primary question before the court was whether a marginal deviation from the EMD amount stipulated in a tender notice renders a bid invalid and vitiates the subsequent auction sale. The court also examined whether such a requirement constitutes an essential condition of eligibility or an ancillary administrative condition. Additionally, the court addressed the borrower’s contention regarding the timeline for the payment of the balance sale consideration.

The court reiterated the well-settled legal position that conditions in a tender notice are classified into essential conditions of eligibility and ancillary conditions. While authorities must enforce essential conditions rigidly, they retain the discretion to relax ancillary or subsidiary conditions if no substantial prejudice or injustice is caused to the parties or public interest.

Court Distinguishes Between Essential and Ancillary Conditions

The bench observed that the requirement for the EMD was meant to filter out non-serious participants, not to create a trap for technical disqualification. Since the Bank chose to entertain the bids and the successful bidder complied with the statutory 25 percent deposit requirement on the date of the auction, the earlier shortfall in the EMD was rendered insignificant.

"Therefore, any anterior shortfall in deposit of EMD pales into insignificance, the moment the 25% of the sale price was deposited."

Analysis of Prejudice and Statutory Compliance

The court held that the non-conformity did not result in any prejudice to the borrower or other participants, particularly because all bidders were placed in a similar position. The court emphasized that the SARFAESI Act and the Rules must be interpreted in a manner that balances the rights of the secured creditor with those of the borrower, without allowing technical irregularities to derail the entire recovery process.

Bank's Failure to Act Diligently

Regarding the balance sale consideration, the court noted that the Bank had effectively extended the timeline due to ongoing litigation, a fact the borrower had tried to leverage. However, the court sternly noted that the Bank failed to act as a prudent custodian regarding the excess sale proceeds. By retaining the surplus amount in a non-interest-bearing account despite the borrower’s refusal to accept it, the Bank committed an administrative omission for which the borrower should not be penalized.

The Supreme Court set aside the contrary orders of the DRAT and the High Court, effectively upholding the auction sale. In a critical move to ensure equity, the court directed the Bank to refund the excess sale proceeds to the borrower along with interest at 7 percent per annum, calculated from the date the funds were left in the non-interest-bearing account. This ensures that the borrower is made whole while the auction remains valid, bringing a definitive end to years of protracted litigation.

Date of Decision: 21 August 2026