Borrowers challenging SARFAESI sales often hunt for procedural foot-faults, and auction purchasers live for years under the resulting cloud. In Lakshmi Mohan (Dead) Through LRs. & Anr. v. M/s Airtech Projects Engineers Pvt. Ltd. & Anr., Civil Appeal Nos. 9228-9231 of 2013 with connected matters, decided on 21 August 2026 (2026 INSC 909), a Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe upheld an auction conducted in 2009 despite the successful bidders having deposited earnest money ₹35,000 short of the stipulated ₹21,50,000 — because they deposited the mandatory twenty-five per cent of the sale price under Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 the very day, and no prejudice resulted to anyone. The Court simultaneously made the bank answer for its own lapse, directing refund of the surplus sale proceeds of over ₹1.33 crores with interest.
The transaction and the objection
A cash-credit facility went bad, the bank issued its demand notice for ₹88,52,741, and the secured asset went to auction in April 2009 with an earnest money requirement of ₹21,50,000. The successful bidders tendered ₹21,15,000 — thirty-five thousand rupees short — but deposited a further ₹33,20,000 the same day, satisfying the requirement of Rule 9(3) of the Security Interest (Enforcement) Rules, 2002 that twenty-five per cent of the sale price be paid immediately. The borrower attacked the sale on the EMD shortfall, and the litigation consumed the better part of two decades before reaching final resolution.
The Court\'s reasoning
The Bench located the EMD correctly in the scheme: it is a term of the sale notice, not of the statute, and exists to screen out speculative bidders. The legally operative deposits are those in Rules 9(3) and 9(4). Once the purchasers had paid the full quarter of the sale price on auction day, the screening purpose stood served, and the shortfall became an arithmetical footnote. The Court applied the settled tender-law principle that a non-conformity or relaxation which causes no substantial prejudice or injustice to any participant does not invalidate the process — no rival bidder was edged out by the ₹35,000, and the borrower\'s interest lay in price, which was realised.
The judgment is equally significant for what it required of the bank. Surplus sale proceeds belong to the borrower; the bank\'s failure to place ₹1.33 crores of surplus in an interest-bearing account attracted a refund direction with 7% interest running from 2010. Secured creditors who sit on surpluses should read the direction as a standing warning.
The deposit architecture in SARFAESI sales
| Stage | Requirement | Character |
|---|---|---|
| Bid submission | Earnest money as fixed by the sale notice | Contractual/ancillary — filters serious bidders |
| On acceptance of bid | 25% of sale price (adjusting EMD) — Rule 9(3) | Mandatory; default forfeits and reopens sale |
| Within the prescribed period | Balance 75% — Rule 9(4), extendable by written agreement | Mandatory; default forfeits deposits |
| After realisation | Appropriation per Section 13(7); surplus to the borrower | Statutory trust — interest-bearing custody expected |
What it means for stakeholders
For borrowers, the decision narrows the field of procedural challenge: attacks must show real prejudice — undervaluation, exclusion of bidders, notice defects that mattered — not decimal-point deviations. For banks and their authorised officers, the two directions pull together: conduct sales that substantially honour the notified terms, and account for every rupee of the proceeds as a fiduciary would. For auction purchasers, nearly two decades of litigation over ₹35,000 is the cautionary tale itself — comply exactly, document everything, and the law\'s substance-over-form protection becomes a shield rather than a necessity.
The chamber of Advocate Manish Jha advises on banking enforcement, SARFAESI proceedings and commercial litigation before the Debts Recovery Tribunals, the High Court of Delhi and the Supreme Court of India. This article is for general information; it is not legal advice and does not create an advocate-client relationship.
Frequently Asked Questions
Is the earnest money deposit a statutory requirement in SARFAESI sales?
No. The Court characterised the EMD as a non-statutory, ancillary stipulation whose purpose is to filter out non-serious bidders. The statutory anchors are elsewhere — notably Rule 9(3), which requires the purchaser to deposit twenty-five per cent of the sale price immediately, and Rule 9(4) on payment of the balance.
When will a deviation invalidate an auction?
The touchstone the Court applied is prejudice: a non-conformity with, or relaxation of, a prescribed standard that does not result in substantial prejudice or injustice to any tenderer or stakeholder will not vitiate the process. A shortfall of ₹35,000 against an EMD of ₹21.50 lakhs, cured the same day by the full 25% deposit, crossed no line.
What was the bank made to do?
Account for the fruits of the sale. The Court directed the bank to refund the surplus of ₹1,33,94,054 with 7% annual interest, holding it responsible for failing to keep the surplus proceeds in an interest-bearing account — a pointed reminder that a secured creditor sells as a trustee of the borrower's equity, not as owner.
What should auction purchasers take from the decision?
Comfort, with a caveat. Confirmed sales are not undone for marginal, non-prejudicial deviations — but the mandatory deposits under Rules 9(3) and 9(4) remain strict territory, and a purchaser's safest course is scrupulous compliance with every timeline, keeping proof of each payment on record.