The Supreme Court has ruled that a minor shortfall in Earnest Money Deposit does not invalidate an auction sale conducted under the SARFAESI Act, provided the successful bidder pays 25% of the auction price on the day of the sale itself. The court held that substantial compliance with the Security Interest (Enforcement) Rules, 2002 is sufficient, and technical defects in EMD quantum cannot be used to unravel an otherwise valid auction sale, protecting bona fide purchasers at securitisation auctions.

This Supreme Court ruling engages a critical interface between contract law principles and statutory enforcement mechanisms under the SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).

Under the Security Interest (Enforcement) Rules, 2002, Rule 9 governs the conduct of public auctions by secured creditors. It mandates that the successful bidder deposit 25% of the bid amount on the day of the auction, with the balance payable within 15 days. The EMD (Earnest Money Deposit) functions as a pre-bid security to ensure serious participation.

The core contractual doctrine at play is substantial performance versus strict compliance. In contract law, where a party has substantially performed their obligation — here, the 25% deposit on auction day — a technical shortfall in an ancillary requirement (EMD quantum) does not entitle the other party to treat the contract as void. This mirrors the doctrine established in Hoenig v. Isaacs and applied under Section 37 of the Indian Contract Act, which recognises substantial performance of reciprocal promises.

The ruling also draws on the principle that equity will not intervene to void a sale in favour of a party (typically the defaulting borrower) who seeks to use a procedural technicality to defeat a legitimate enforcement action. The court distinguishes between conditions precedent that go to the root of the transaction and mere irregularities that do not prejudice any party substantively.

For CLAT PG aspirants, the examiner-relevant concept is the distinction between void, voidable, and merely irregular contracts — and whether a procedural non-compliance renders a securitisation sale void ab initio or simply voidable at the election of an affected party.