Supreme Court of India· 22 August 2026

Does an earnest money shortfall vitiate an auction under the Security Interest (Enforcement) Rules, 2002?

Lakshmi Mohan (Dead) Through LRs. & Anr v. M/s. Airtech Projects Engineers Pvt. Ltd. & Anr

2026 INSC 909 · Civil Appeal Nos. 9228-9231 of 2013
Coram: Alok Aradhe; Pamidighantam Sri Narasimha

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Answer

No, where the condition is non-statutory. Clause 7 of the possession-cum-sale notice requiring the earnest money deposit was incorporated with an object to filter out non-serious bidders, so it is not an essential condition of eligibility. The auction-purchasers deposited twenty-five percent of the sale price in accordance with Rule 9(3) on the very next day, and any anterior shortfall in deposit of EMD therefore pales into insignificance and caused no prejudice to the other bidder or the borrower.

Headnote

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — Security Interest (Enforcement) Rules, 2002 — r.9(3) — Earnest money deposit — Essential condition of eligibility — Surplus sale proceeds — Security Interest (Enforcement) Rules, 2002 — r.9(3) — Non-statutory earnest money condition — Held: A non-statutory earnest money condition inserted in the sale notice to filter out non-serious bidders is not an essential condition of eligibility. Once twenty-five percent of the sale price is deposited under Rule 9(3), an anterior shortfall in earnest money does not affect the validity of the bid. (¶20, 21) Auction sale — Non-conformity causing no substantial prejudice — Sale not vitiated — Held further: Any non-conformity with, or relaxation in, the prescribed standard which results in no substantial prejudice or injustice to any party or to public interest in general would not be bad. (¶19, 21) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — Surplus sale proceeds — Interest-bearing account — Held further: A secured creditor ought to keep the surplus sale proceeds in an interest-bearing account; the borrower cannot be penalised for that omission and is entitled to refund with interest. Appeals allowed. (¶23, 24)

In the Court's own words

Paragraph 20In the backdrop of aforesaid well-settled principles, we may advert to the facts of the case in hand. Clause 7 of possession-cum-sale notice dated 18.03.2009 which requires the bidders to deposit EMD amount of Rs.21,50,000/- is non-statutory and has been incorporated in the possession-cum-sale notice with an object to filter out non-serious bidders. In the instant case, in response to the aforesaid notice two bidders had submitted their bids and both of them had deposited a sum of Rs.21,15,000/- (Rupees Twenty-One Lakhs Fifteen Thousand only) instead of Rs.21,50,000/- (Rupees Twenty-One Lakhs Fifty Thousand only). The Bank entertained and considered both the bids.

Paragraph 21The bid of the auction-purchasers which was submitted on 23.04.2009 for a sum of Rs.2,17,40,000/- (Rupees Two Crores Seventeen Lakhs Forty Thousand only) was found to be the highest. The auction-purchasers in accordance with Rule 9(3) of the Rules deposited 25% of the amount of bid price inclusive of EMD on the next day i.e., 24.04.2009. The auction-purchasers were statutorily obliged to comply with the 25% mark of the sale price on the same day which was made good. Therefore, any anterior shortfall in deposit of EMD pales into insignificance, the moment the 25% of the sale price was deposited. Thus, 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. Therefore, the shortfall in deposit of EMD as required by Clause 7 of possession-cum-sale notice dated 18.03.2009 does not affect the validity of the bid of the auctionpurchasers in any manner.

Acts & Sections

r.9(3) Security Interest (Enforcement) Rules, 2002r.8 Security Interest (Enforcement) Rules, 2002s.13(2) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002s.13(4) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

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Also decided in this judgment

Must a bank keep surplus sale proceeds in an interest-bearing account?

Plain-language answer prepared by the LexStreak Editorial Desk — verify against the judgment. Source: Supreme Court of India. Corrections