Does a forfeiture clause imply that the entire deposit amount can be forfeited? Madras HC elaborates

Madras High Court: Sanjib Banerjee, J., addressed whether this Court is the appropriate forum to decide the quantum that can be forfeited and elaborated more of right to forfeit.

Instant petition was filed for issuance of a Writ of Certiorarified Mandamus calling for the records of the impugned letter issued by the respondent under Rule 9 (5) of the Security Interest (Enforcement) Rules, 2002 and quash the same and reasonable time frame to be fixed by this Court for paying the balance amount towards 75% of the balance purchase price by the petitioner.

Petitioner’s grievance was that the respondent secured creditor did not inform the petitioner of certain encumbrance pertaining to the asset sold under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

At the bid, the petitioner had deposited only 25% of the consideration and did not pay any further.

Further, the petitioner’s case was that she tried to obtain loans to finance the purchase but was impeded by the property standing encumbered in some third party’s favour.

Another grievance of the petitioner was that the bank had purported to forfeit the consideration tendered without affording the petitioner a chance to pay the balance amount, particularly since the second surge of the pandemic stood in the way of the petitioner arranging for money.

Secured Creditor submitted that, notices were issued to the petitioner, and they had no authority to extend the payment period beyond 90 days from the date of the auction.

Adding to the above, secured creditor submitted that it had duly forfeited the amount which has been tendered by the petitioner and no question arises of the sale going through or of the consideration being returned.

Bench stated that, writ court is not the appropriate forum to adjudicate as to whether the forfeiture or the quantum thereof is appropriate and as to whether the secured creditor in this case is obliged to extend the time for making the balance payment by the petitioning-auction purchaser.

Right to Forfeit

Right to Forfeit has to be balanced against the rule against unjust enrichment.

Merely because there is a forfeiture clause does not imply that the entire amount deposited has to be forfeited.

Further, the High Court elaborating more, added that,

Forfeiture clause, like an earnest money deposit clause or a liquidated damages clause, has to be regarded as a genuine pre-estimate of the loss that may have been incurred, but when a forfeiture clause does not indicate an amount but provides that the entire amount tendered would be forfeited, it may not be permissible to forfeit, say 99% of the payment made for the default in depositing the balance 1%.

Thus, the quantum that can be forfeited will depend on the extent of the loss or damage suffered by the party, not in breach and this is, essentially, a question of fact that has to be adjudicated by an appropriate forum. The High Court, in exercise of the jurisdiction under Article 226 of the Constitution, is not such forum.

In view of the above, petition was disposed of.[Rubina v. Axis Bank Ltd., 2021 SCC OnLine Mad 2349, decided on 2-07-2021]


Advocates before the Court:

For Petitioner: Mr. Adithya
For Respondent: Mr. R. Sreedhar

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