Introduction
In Lakshmi Mohan (Dead) Through LRs. v. M/s. Airtech Projects Engineers Pvt. Ltd. (2026 INSC 909), decided on 21 August 2026, the Supreme Court restored a SARFAESI auction that had been set aside because the successful bidders’ earnest money deposit was ₹35,000 short of the amount stated in the sale notice. A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that the EMD condition was a non-statutory requirement set by the bank. Because the purchasers had deposited 25% of the sale price on the day of the auction, as Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 requires, the shortfall had no effect on the validity of the bid.
Background of the Dispute
After the borrower’s cash-credit account with United Bank of India (now merged with Punjab National Bank) was classified as a Non-Performing Asset, the bank issued a demand notice on 1 August 2008 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act). The notice demanded ₹88,52,741. The bank then issued a possession-cum-sale notice dated 18 March 2009 for the borrower’s property in Chetpet, Chennai. Clause 7 of that notice required each bidder to deposit an EMD of ₹21,50,000 and stated that any offer without the EMD would be rejected.
Two bidders took part, and each deposited only ₹21,15,000. The appellants’ bid of ₹2,17,40,000 was the highest. On the day of the auction they deposited enough to bring their total payment to 25% of the bid amount. The Debts Recovery Tribunal dismissed the borrower’s challenge to the sale, after which the purchasers paid the balance and a sale certificate was issued and registered in October 2009.
The Debts Recovery Appellate Tribunal later held that the auction was vitiated by non-compliance with Rule 8(5) of the Rules and with the terms of the sale notice, and directed that possession be restored to the borrower. The Madras High Court upheld the DRAT’s view in its judgment of 22 March 2013, and that judgment was challenged before the Supreme Court.
Essential and Ancillary Conditions in an Auction Notice
The borrower argued that without the full EMD there was no valid bid at all. The Supreme Court rejected this by applying the settled distinction between an essential condition of eligibility, which must be strictly enforced, and an ancillary condition, which the authority may relax. This principle comes from Poddar Steel Corporation v. Ganesh Engineering Works (1991) 3 SCC 273 and Central Coalfields Ltd. v. SLL-SML (Joint Venture Consortium) (2016) 8 SCC 622. The Court also relied on National High Speed Rail Corporation Ltd. v. Monte Carlo Ltd. (2022) 6 SCC 401, which held that relaxing a condition is not unlawful unless it causes substantial prejudice to a party or to the public interest.
The Court noted that the proviso to Rule 8(6) of the Rules leaves the amount of earnest money to be “stipulated by the secured creditor.” The EMD in Clause 7 was therefore a condition the bank had set to filter out non-serious bidders. It was not a requirement imposed by statute.
Why the EMD Shortfall Did Not Vitiate the SARFAESI Auction
Applying these principles, the Court held that the EMD of ₹21,50,000 in Clause 7 of the notice of 18 March 2009 was non-statutory and had been included to filter out non-serious bidders. Both bidders had deposited ₹21,15,000, and the bank had considered both bids. The two bidders were therefore treated alike, and no bidder was preferred over another because of the shortfall.
The decisive point was the 25% deposit. The auction purchasers’ bid of ₹2,17,40,000 was the highest, and on the day of the auction they deposited 25% of the bid price, including the EMD, as Rule 9(3) requires. In the Court’s words, any earlier shortfall in the EMD “pales into insignificance” once the statutory 25% has been paid.
The purpose of the EMD was to ensure that bidders were serious, and that purpose was fully served when the purchasers met their larger statutory obligation the same day. The Court found that the non-conformity caused no prejudice or injustice to the other bidder, “much less to the borrower.” It therefore held that the shortfall did not affect the validity of the bid in any way and rejected the borrower’s argument that the EMD was an essential condition of eligibility.
The reasoning separates the conditions that the SARFAESI framework itself makes mandatory from the procedural safeguards a secured creditor adds to its own sale notice. Under the Rules, the secured creditor stipulates the EMD, while the deposit and payment obligations in Rule 9 are fixed by law. Where the statutory obligations have been met and the auction has realised a price well above the outstanding dues, a borrower cannot use a small departure from a creditor-imposed condition to undo a completed and registered sale.
Delay in Payment of the Balance Sale Consideration
The Court also rejected the borrower’s argument that the balance consideration had been paid after the fifteen-day period under Rule 9(4). It first noted that this plea had not been raised before either the DRT or the DRAT. On the merits, Clause 7 of the sale notice expressly allowed the balance to be paid within fifteen days or within any extended period the bank permitted, which matches the flexibility in Rule 9(4) itself.
The record showed that the bank had in fact extended the time. In an affidavit dated 2 September 2012, Mr. M. Premkumar stated that when the auction purchasers approached the bank to pay the remaining 75%, the bank wrote to them on 4 June 2009 saying that, because court proceedings were pending, it would inform them of the payment date in due course.
The Court inferred from this letter that the bank had agreed to extend the time. It also noted that the borrower itself had sought to stop the auction purchasers from depositing the balance. Since the DRT dismissed the borrower’s application on 1 October 2009 and the balance was paid on 5 October 2009, the Court found no default that could justify forfeiture or resale under Rule 9(5).
Surplus Sale Proceeds and the Bank’s Obligation to Pay Interest
After the sale proceeds were appropriated towards the debt, the bank was left with a surplus of ₹1,33,94,054. It had offered this amount to the borrower by demand draft, but the borrower declined it, apparently because the litigation was pending. The bank then kept the money in a non-interest-bearing account. The Court held that the bank should have kept the surplus in an interest-bearing account, and that the borrower could not be penalised for the bank’s failure to do so. The borrower was held entitled to a refund of the surplus with interest.
This part of the ruling reflects the principle behind Section 13 of the SARFAESI Act: enforcement of a security interest is a way of recovering the secured debt, not a way for the creditor to keep value that belongs to the borrower. A secured creditor holding surplus proceeds holds money that is due to the borrower, and leaving that money idle while litigation drags on is the creditor’s own failure.
Final Directions
The Supreme Court set aside the High Court’s judgment of 22 March 2013 and the DRAT’s order of 20 June 2011, which upheld the auction sale in the purchasers’ favour. It directed the bank to refund the surplus of ₹1,33,94,054 to the borrower with interest at 7% per annum from 23 March 2010 until the date of payment. The judgment confirms that a SARFAESI auction is judged by compliance with the statutory requirements and by whether anyone suffered real prejudice. Strict adherence to every condition the secured creditor writes into its own sale notice is not the test.
Conclusion
The ruling in Lakshmi Mohan v. Airtech Projects Engineers confirms that the validity of a SARFAESI auction depends on compliance with the statutory requirements of the Security Interest (Enforcement) Rules, 2002, and on the absence of real prejudice, not on strict literal compliance with every condition a secured creditor puts in its sale notice.
By treating the EMD as an ancillary condition whose purpose was met once 25% of the sale price was deposited under Rule 9(3), the Supreme Court protected an auction sale that had been completed and registered in 2009 and had stayed in litigation for seventeen years. At the same time, the order to refund the surplus with interest makes clear that the court’s support for completed sales comes with an expectation that secured creditors deal fairly with money that belongs to the borrower.
The Supreme Court’s ruling further clarifies how SARFAESI Act: Statutory Powers & Constitutional Limits apply to compliance requirements in auction proceedings.
