The Karnataka High Court delivered a significant ruling restricting a bank’s right to forfeit over 25% of an auction purchaser’s deposit, providing relief to Kalyanamurthy K against the State Bank of India (SBI). In a writ petition (No. 23327/2022), Justice K V Aravind clarified that the bank cannot forfeit amounts exceeding 25% of the deposit, as per Rule 9 of the Security Interest (Enforcement) Rules, 2002. The ruling addressed Kalyanamurthy’s plea for a refund of Rs. 31,73,750 forfeited due to non-compliance with the sale conditions outlined in a notice dated 16.12.2021.

Kalyanamurthy, having participated in an auction and secured the highest bid of Rs. 86,95,000, deposited 25% of the total amount as per the auction’s terms. Despite initial extensions granted by SBI for payment, subsequent requests due to health issues related to age and kidney disease were made by Kalyanamurthy, citing challenges exacerbated by the COVID-19 pandemic.

However, despite these difficulties, the bank proceeded to forfeit the excess amount paid beyond the 25% threshold, amounting to Rs. 10,00,000. The High Court underscored that this surplus payment couldn’t be considered as part of the deposit, thereby ruling in favor of Kalyanamurthy’s refund for the excess amount, emphasizing the statutory limitations imposed by Rule 9 of the Rules.

The bank defended its actions, asserting compliance with Rule 9(5) in forfeiting the amount, attributing the forfeiture to the petitioner’s failure to adhere to auction terms, irrespective of subsequent sale of the property at a higher value.

The High Court, after examining the records and recognizing the three-month limit provided for payment extension under Rule 9, stressed the statutory nature of the secured creditor’s discretion in such matters. It emphasized the statutory empowerment conferred by Rule 9(5) on the secured creditor to forfeit, negating grounds for judicial review in this context.

The Court maintained that the health condition of the petitioner, while unfortunate, couldn’t impede the correctness of the forfeiture under Rule 9(5), thereby rejecting its relevance in this specific context.

Conclusively, the Court partly allowed the plea, determining that the 25% payment could be regarded as a deposit, while any amount exceeding this threshold constituted the balance consideration and couldn’t be categorized as a deposit. Hence, the petition was partially upheld in favor of Kalyanamurthy.

Advocate D.V. Venkatesh represented the petitioner, Kalyanamurthy K, while Advocate Chithra Nirmala P appeared for the respondent, State Bank of India.

This landmark ruling by the Karnataka High Court exemplifies the stringent adherence to statutory rules governing auction purchase, limiting a bank’s discretion in forfeiting amounts beyond the specified threshold and considering exceptional circumstances, albeit with limitations, such as those posed by the COVID-19 pandemic, in such transactions.