Lakshmi Mohan (Dead) Through LRs. & Anr. v. M/s. Airtech Projects Engineers Pvt. Ltd. & Anr., 2026

The borrower defaulted in repayment. As on 31 July 2008, the outstanding amount was approximately ₹88.52 lakh, against a sanctioned limit of ₹85 lakh. The account was consequently classified as an NPA. 

The Bank issued a demand notice under Section 13(2) of the SARFAESI Act on 1 August 2008.

The secured property was subsequently brought to auction. The Bank's sale notice required prospective bidders to deposit an EMD of ₹21.50 lakh.

Lakshmi Mohan and another auction purchaser submitted their bid but deposited ₹21.15 lakh, resulting in an EMD shortfall of ₹35,000.

Their bid of ₹2.174 crore was nevertheless the highest and was accepted.

On the date of auction, the auction purchasers deposited an additional amount so that the total deposit reached 25% of the bid price, as required by Rule 9(3). 

The DRT initially upheld the auction. However, the DRAT subsequently held that the auction had not complied with Rule 8(5) and directed restoration of the secured asset.

The matter reached the Madras High Court, which ultimately dismissed the challenges to the DRAT decision.

The Supreme Court was therefore required to determine whether the ₹35,000 EMD shortfall invalidated the auction bid. 

The Court held that the EMD requirement contained in Clause 7 of the possession-cum-sale notice was a non-statutory condition intended primarily to filter out non-serious bidders. It was not an essential statutory eligibility requirement.

Importantly, both bidders had deposited ₹21.15 lakh instead of ₹21.50 lakh, meaning that the same shortfall existed in relation to both bidders. The successful auction purchasers subsequently deposited 25% of the sale price, thereby satisfying the statutory requirement under Rule 9(3). 

The Court therefore concluded that the earlier EMD shortfall did not cause prejudice or injustice to the borrower or the other bidder and did not invalidate the auction.

The Court also rejected the challenge concerning delayed payment of the balance consideration because the Bank had agreed to extend the payment period during the pendency of the litigation. 

However, the Court found fault with the Bank for retaining an excess amount of ₹1,33,94,054 in a non-interest-bearing account. The borrower was therefore held entitled to the surplus amount together with 7% per annum interest from 23 March 2010 until payment. 

The Court observed that not every deviation from an auction condition automatically renders the entire process invalid. Where a condition is essential to eligibility, strict compliance may be necessary. Conversely, where a condition is ancillary, a deviation may be permissible if it does not cause substantial prejudice, injustice, or harm to public interest. 

In the present case, the Court treated the EMD requirement as non-statutory and intended to identify serious bidders. The decisive circumstances were that both bidders had deposited the same reduced EMD, and the successful bidders subsequently complied with the statutory requirement of depositing 25% of the sale price.

The Court therefore distinguished between the purpose of the EMD clause and the statutory requirement under Rule 9(3). Once the auction purchasers deposited the required 25% of the sale price, the earlier ₹35,000 deficiency became insignificant in the circumstances of the case. 

The judgment also demonstrates the importance of prejudice in determining whether an irregularity should invalidate an auction. The Court found no prejudice to the borrower or the competing bidder because the competing bidder had committed the same EMD shortfall.

Another important aspect concerns payment of the balance sale consideration. Although Rule 9(4) contemplates payment within 15 days, the auction notice itself permitted an extension by the authorised officer. Since the Bank had informed the auction purchasers that payment would be intimated after the court proceedings, the Court found that the Bank had effectively extended the period. 

At the same time, the Court maintained accountability on the part of the Bank. The surplus amount of ₹1.33 crore should have been maintained in an interest-bearing account. Since the Bank failed to do so, the borrower could not be made to suffer the financial consequence of the Bank's omission. The award of 7% interest therefore served to compensate the borrower for the period during which the surplus remained without interest. 

Overall, the judgment reinforces that procedural irregularity and substantive invalidity are not necessarily synonymous. The legal effect of a deviation depends upon the nature and purpose of the relevant condition, the statutory framework, and whether the deviation caused actual prejudice or injustice.