Bank hid DRT case, forfeited bidder's Rs 50 lakh. Supreme Court says: refund

He paid Rs 50 lakh for a property. The bank took his money, then sold the property to someone else. The reason? A secret court case the bank never mentioned.

Mohd. Shariq thought he had bought a piece of real estate. He had won a public auction conducted by Punjab National Bank (PNB), deposited Rs 50.25 lakh as earnest money and 25% of the bid amount, and waited for the sale to be confirmed. What he did not know — and what the bank never told him — was that the original borrower had already filed a case before the Debt Recovery Tribunal (DRT, a specialised court that handles bank loan recovery disputes) challenging the auction itself. The DRT had passed an interim order directing that the sale confirmation be kept in abeyance (temporarily paused). Shariq found out only later, through his own efforts.

When he did, he told the bank he would pay the remaining balance once the DRT matter was resolved. The bank refused to wait. It forfeited his entire deposit, conducted a fresh auction, and sold the property for Rs 1.70 crore — Rs 30.5 lakh less than Shariq's winning bid. Then it told him to go to another court to get his money back.

The question that reached the Supreme Court was simple: Could a bank keep a bidder's deposit when it had hidden a pending legal challenge to the very auction the bidder had won?

When the auction notice went out

In June 2013, Punjab National Bank published an auction notice — a printed sheet listing the reserve price of Rs 1.19 crore for a mortgaged property belonging to a defaulting borrower. Mohd. Shariq emerged as the highest bidder at Rs 2.01 crore. Under the rules of the auction, he deposited Rs 50.25 lakh — the earnest money plus 25% of the bid amount — as required under Rule 9(4) of the Security Interest (Enforcement) Rules, 2002 (the rule that governs how much a winning bidder must pay upfront in a bank auction).

What Shariq did not know was that the borrower had already approached the DRT in Lucknow, challenging the auction. On July 26, 2013 — while Shariq was preparing to pay the balance — the DRT passed an interim order on a typed page bearing its seal: the auction could proceed, but the confirmation of sale would be kept in abeyance. The bank knew about this order. It never told Shariq.

The DRT hearing itself would have been a tense affair — the borrower's counsel arguing that the auction was flawed, the bank's representative insisting it was valid, the presiding officer scribbling notes before dictating the interim order. The room, likely filled with the rustle of case files and the low hum of a ceiling fan, fell silent as the order was read out. The bank's officers, sitting in the back, heard every word. They returned to their desks and said nothing to Shariq.

The secret that broke the deal

When Shariq eventually discovered the DRT proceedings, he approached the bank and said he would pay the remaining Rs 1.50 crore once the tribunal decided the matter. The bank rejected his request. It invoked Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 (the rule that allows a bank to forfeit a bidder's deposit if the bidder fails to pay the balance on time) and forfeited his Rs 50.25 lakh. The bank sent a formal forfeiture notice, informing Shariq his money was gone. Then it re-auctioned the property. The second auction fetched only Rs 1.70 crore — a loss of over Rs 30 lakh compared to Shariq's bid.

Shariq challenged the forfeiture and the re-auction before the Uttarakhand High Court under Article 226 of the Constitution (the High Court's power to review decisions of government bodies and tribunals).

Two judges, two answers

On July 21, 2015, a Single Judge of the High Court ruled in Shariq's favour. The courtroom in Nainital, with its high wooden benches and the faint smell of old case files, saw the judge lean forward as he heard the arguments. The judge set aside the re-auction and directed the bank to execute the sale deed in Shariq's favour. The bank appealed. On March 10, 2016, a Division Bench (two judges sitting together) reversed the Single Judge's order. It upheld the re-auction and told Shariq that if he wanted his money back, he would have to file a separate case before the appropriate forum — not the High Court.

Shariq appealed to the Supreme Court.

Why the forfeiture rule could not save the bank

Before the Supreme Court, the bank argued that Rule 9(5) gave it an absolute right to forfeit the deposit when the bidder failed to pay the balance within the stipulated time. Shariq's counsel argued that the rule could not apply because the default was not Shariq's fault — the bank had concealed the DRT proceedings, making it impossible for Shariq to know whether the sale would ever be confirmed.

The bench — Justice Ajay Rastogi and Justice Bela M. Trivedi — agreed with Shariq. The court held that Rule 9(5) "could not be pressed into service" in this case. The reason: this was not a case of simple default. The bank had failed to disclose a material fact — the pending DRT case and the interim order keeping sale confirmation in abeyance. That non-disclosure, the court said, "vitiated the basis" for forfeiture. The court's full reasoning was clear: where an auction purchaser is not informed about proceedings pending before the DRT at the time of auction or thereafter, such non-disclosure means the case is not one of simple default, and the forfeiture rule cannot be invoked.

The court also noted a practical reality: there is always a significant gap between the market value of a property and the distress sale price fetched at a bank auction. A bidder takes a calculated risk. But that risk must be based on full information. The bank, by hiding the DRT proceedings, had denied Shariq the chance to make an informed decision.

The Supreme Court's judgment, delivered on April 11, 2023, in Civil Appeal No. 2724 of 2023, went deeper into the legal architecture. The court examined Section 13(2) and Section 13(4) of the SARFAESI Act — the provisions that allow a bank to issue a notice to a defaulting borrower and then take possession of the secured assets. These provisions, the court noted, create a framework where the bank acts as both a secured creditor and a quasi-public authority conducting a sale. That dual role imposes a duty of transparency. The bank cannot cherry-pick what information to share with a bidder. When the DRT had already passed an interim order on July 26, 2013 — a fact recorded in the bank's own files — the bank was under a positive obligation to disclose it.

The court also distinguished the application of Rule 9(5) from its typical use. In ordinary cases, a bidder who fails to pay the balance amount within the stipulated time loses the deposit. But here, the "default" was not a failure of funds or intent. Shariq had repeatedly stated his willingness to pay — once the legal cloud over the auction was cleared. The bank's decision to forfeit, therefore, was not a response to default but a punitive measure against a bidder who had asked for information the bank had withheld.

The High Court's duty to decide

The Supreme Court also addressed the Division Bench's decision to send Shariq to a separate forum for recovery. The court held that where the facts are undisputed and the legal issue is clear, the High Court under Article 226 should resolve the dispute itself rather than push the litigant into a fresh round of litigation. "Where the factual matrix is undisputed and the issue is crystallized," the bench observed, "the High Court under Article 226 should resolve the dispute rather than relegate the petitioner to pursue separate remedial mechanisms."

This part of the judgment is significant for practitioners: it reaffirms that writ courts should not abdicate their duty to do justice when the facts are clear, even if alternative remedies exist. The stack of papers on the judge's desk — the auction notice, the DRT order, the forfeiture letter, the re-auction results — told a complete story. There was no disputed fact left to be examined by a civil court. The only question was legal: could the bank keep the money? The Supreme Court said no, and it said the High Court should have said the same thing.

What the court ordered

The Supreme Court allowed Shariq's appeal on April 11, 2023. It directed Punjab National Bank to refund the full Rs 50.25 lakh within two months. If the bank failed to pay within that period, the amount would carry interest at 12% per annum until the date of payment. The court did not award interest for the period before the two-month deadline, but the threat of 12% interest after that was a clear signal: no more delays.

THE PLAY: Before depositing earnest money in a SARFAESI auction, demand a written disclosure from the bank about any pending proceedings — DRT, civil court, or otherwise — that could affect the sale confirmation. If the bank conceals such proceedings, the forfeiture rule under Rule 9(5) cannot be used against you.

The bank kept the secret. The bidder paid the price. And the Supreme Court said: not anymore.