E-auction buyer loses EMD and part payment; forfeiture upheld despite Section 74 Contract Act challenge

The AT dismissed the appeal, upholding the liquidator's competence to forfeit both the earnest money deposit and part payment of sale consideration upon the appellant's failure to complete the e-auction transaction. The Tribunal found that the appellant, as highest bidder, had clear notice through the e-auction information document and the subsequent term sheet that, in case of default, the liquidator could forfeit not only EMD but any part payments. Section 74 of the Contract Act was held not to invalidate such forfeiture in these circumstances. The AT distinguished the precedent involving only EMD and followed its own prior decision in a similar liquidation auction context, affirming that no refund was due and rejecting the appellant's challenge to the liquidator's authority.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, in an e-auction conducted under the Insolvency and Bankruptcy Code and the Liquidation Process Regulations, the liquidator is entitled to forfeit not only the earnest money deposit but also the part sale consideration paid by the highest bidder upon failure to pay the balance consideration within the stipulated time.

1.2 Whether Section 74 of the Indian Contract Act, 1872 applies to restrict or invalidate forfeiture of the part sale consideration in an auction conducted by a liquidator under the Insolvency and Bankruptcy Code and the Liquidation Process Regulations.

1.3 Whether any equitable jurisdiction exists under the Insolvency and Bankruptcy Code to grant relief against contractual/Regulation-based forfeiture of amounts deposited by the highest bidder in liquidation e-auction.

1.4 Whether, in light of prior orders of the Adjudicating Authority, this Tribunal, and the Supreme Court, the forfeiture of the deposited amounts by the liquidator had attained finality, thereby precluding a subsequent claim for refund.

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2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement of the liquidator to forfeit EMD and part consideration under the auction terms and Liquidation Process Regulations

Interpretation and reasoning

2.1 The Corporate Debtor was put to sale as a going concern through e-auction under the framework of the Insolvency and Bankruptcy Code and the IBBI (Liquidation Process) Regulations, 2016, specifically Schedule I.

2.2 The e-auction process information document, furnished to the appellant prior to bidding and EMD deposit, expressly provided that if the successful bidder failed to pay the balance sale consideration within the stipulated time, all amounts deposited till that date, including EMD and any part of the sale consideration, would be forfeited, and the assets would be offered to the next highest bidder (clauses (c) and (d)).

2.3 The appellant submitted a written declaration on 29.05.2021 acknowledging and agreeing that, in case of failure to complete the transaction or to fulfil the auction terms within the time limit, the EMD and all monies paid, including part consideration, were liable to be forfeited, and that in case final sale consideration was not paid within the timeline, the liquidator "shall forfeit EMD and any other amount deposited by us by that date."

2.4 The email dated 03.06.2021, declaring the appellant as successful bidder, reiterated that all terms and conditions in the e-auction process information document were binding on the appellant.

2.5 A term sheet dated 15.06.2021 was executed, inter alia providing that: the auction was governed by the Code read with the Liquidation Process Regulations; and that, in the event of default in payment of full sale consideration by 01.09.2021 (90 days with interest @12%), the liquidator would cancel the auction as per the Regulations and all amounts deposited till that date would be forfeited.

2.6 The appellant failed to pay the balance amount within the contractually and statutorily stipulated period, and its applications seeking concessions and extension of time (I.A. No. 3153 of 2021 and I.A. No. 4317 of 2021) were rejected by the Adjudicating Authority, which instead allowed the liquidator's application I.A. No. 5255 of 2021 permitting cancellation of the sale and further auction. That order was upheld by this Tribunal and, ultimately, by the Supreme Court.

2.7 Pursuant to the order dated 25.04.2022 permitting cancellation and to proceed in accordance with law, the liquidator notified the appellant of forfeiture of the entire amount deposited (EMD and part consideration). The appellant did not challenge that specific act of forfeiture, and it thus attained finality.

2.8 The Tribunal relied on its earlier decision in West Coast Infraprojects Pvt. Ltd. v. Ram Chandra Dallaram Choudhary, where, on similar facts, it was held that in auctions conducted by a liquidator under the Liquidation Process Regulations, the parties are governed by the terms and conditions of sale framed pursuant to statutory empowerment, and that forfeiture of both EMD and part consideration upon default by the highest bidder is valid.

Conclusions

2.9 The liquidator, acting under the Code and the Liquidation Process Regulations, and in accordance with the expressly accepted auction terms, was legally entitled to forfeit not only the earnest money deposit but also the part sale consideration paid by the appellant upon its failure to pay the balance consideration within the stipulated time.

2.10 The appellant, having unequivocally accepted the forfeiture clauses at multiple stages (declaration, auction document, email intimation, and term sheet), is bound by them and cannot claim refund of the forfeited part consideration.

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Issue 2: Applicability of Section 74 of the Indian Contract Act, 1872 to forfeiture of deposits in liquidation e-auctions

Legal framework discussed

2.11 Section 74 of the Indian Contract Act, 1872, concerning compensation for breach of contract where a penalty is stipulated, was reproduced and considered. The appellant relied upon Section 74 and on Supreme Court decisions in Kailash Nath Associates v. Delhi Development Authority and Authorised Officer, Central Bank of India v. Shanmugavelu to contend that the liquidator could only claim reasonable compensation for loss and not forfeit/retain the entire part consideration without proof of damage.

Interpretation and reasoning

2.12 The Tribunal held that the auction was conducted under a specific statutory regime - the Code and the Liquidation Process Regulations - and was governed by the terms framed under Schedule I of those Regulations. The forfeiture provisions in the auction document and term sheet were part of that statutory framework and expressly accepted by the bidder.

2.13 Referring to its earlier ruling in West Coast Infraprojects Pvt. Ltd., the Tribunal reiterated that:

- Auctions conducted by a liquidator under the Liquidation Process Regulations are governed by those Regulations and the process document framed thereunder.

- Bidders give an unqualified undertaking to abide by the auction terms, including clauses empowering the liquidator to forfeit EMD and any payment made in case of default.

- In such a statutory auction process, Section 74 has no application; instead, the rights and obligations are determined by the Code, the Regulations, and the agreed auction terms.

2.14 In West Coast Infraprojects Pvt. Ltd. it was specifically held, after discussing Section 74 and the law in Kailash Nath Associates, that where forfeiture takes place under the terms of a public auction before a final agreement is reached, Section 74 does not apply, and that this principle fully applies to e-auctions conducted by a liquidator.

2.15 The Tribunal found the judgments cited by the appellant distinguishable: in Kailash Nath Associates, the issue concerned forfeiture of earnest money in a different factual and regulatory context (and that decision treated the amount as earnest money, not as part consideration in a liquidation auction); and Central Bank of India v. Shanmugavelu addressed forfeiture of earnest money under SARFAESI Rules, which is a separate regime and turned on different questions framed and answered therein.

Conclusions

2.16 Section 74 of the Indian Contract Act, 1872 does not apply to the forfeiture of EMD and part consideration in an auction conducted by a liquidator under the Insolvency and Bankruptcy Code and the IBBI (Liquidation Process) Regulations, 2016.

2.17 The liquidator was not required to sue for damages under Section 74 and was entitled, under the applicable Regulations and agreed auction terms, to forfeit the entire amounts deposited by the defaulting highest bidder.

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Issue 3: Availability of equity-based relief against forfeiture under the Insolvency and Bankruptcy Code

Interpretation and reasoning

2.18 The appellant sought, in substance, equitable relief from forfeiture by invoking general principles reflected in authorities such as Ex parte Barrell; In re Parnell, as noticed in the Supreme Court's decision in Central Bank of India v. Shanmugavelu, suggesting that equity might relieve against a contractual forfeiture of even an advance payment.

2.19 The Tribunal noted the respondent's reliance on the Supreme Court's decision in Pratap Technocrats Pvt. Ltd. v. Monitoring Committee of Reliance Infratel Ltd., where it was held that the NCLT does not possess equity-based jurisdiction under the IBC to override the statutory scheme.

2.20 The Tribunal accepted that position in substance, holding that in matters governed by the Code and the Liquidation Process Regulations, the Adjudicating Authority and this Tribunal must apply the statutory and contractual framework and cannot grant relief on purely equitable grounds contrary to that framework.

Conclusions

2.21 No equity-based jurisdiction exists under the Insolvency and Bankruptcy Code to undo or dilute the consequences of forfeiture expressly provided in the Liquidation Process Regulations and the contractually accepted auction terms.

2.22 The appellant cannot be granted equitable relief against forfeiture of part consideration once default and the binding forfeiture terms are established.

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Issue 4: Finality and effect of prior judicial orders on the forfeiture and refund claim

Interpretation and reasoning

2.23 The Adjudicating Authority's order dated 25.04.2022 allowing the liquidator to cancel the sale and proceed in accordance with law, and thereby enabling forfeiture of amounts deposited by the appellant, was upheld by this Tribunal on appeal.

2.24 The appellant's further challenge before the Supreme Court resulted first in conditional directions to deposit further amounts by specified dates, with a self-operative consequence that, in default, parties were free to proceed with the auction. The appellant failed to deposit the balance by the deadline; the application seeking extension of time was dismissed, and it was held that, upon such failure, the parties were free to take final decisions on the auction.

2.25 Although the Supreme Court directed refund of Rs. 5.5 crores which had been deposited pursuant to its interim order, that order specifically related to that amount deposited under the Supreme Court's directions, and the civil appeal was finally disposed of. The underlying orders upholding the liquidator's right to cancel the sale and act in accordance with law remained undisturbed.

2.26 The liquidator's communication dated 25.04.2022 to the appellant, declaring forfeiture of EMD and part consideration, was not independently challenged and thus attained finality.

Conclusions

2.27 The legality of cancelling the sale and proceeding in accordance with the Liquidation Process Regulations, including forfeiture pursuant to the auction terms, stands concluded by prior orders of the Adjudicating Authority, this Tribunal, and the Supreme Court.

2.28 In view of such finality, and absent any surviving right under the statutory or contractual framework, the appellant's subsequent attempt to seek refund of the part consideration through a fresh application under Section 60(5) of the Code was untenable.

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2.29 Overall, the Tribunal held that the liquidator's forfeiture of both the earnest money deposit and the part sale consideration paid by the appellant was in accordance with the Code, the Liquidation Process Regulations, and the binding auction terms, that Section 74 of the Contract Act had no application, and that no equitable or other basis existed to order refund of the forfeited part consideration. The appeal was dismissed without costs.

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