Liquidation bidder gets partial EMD refund after COVID-19 delays prevent payment completion

NCLAT Chennai ruled on a liquidation bidding dispute where the successful bidder defaulted on payment obligations. The appellant sought time extension to pay the settlement amount, citing COVID-19 related delays in foreign investment approvals by RBI's Financial Investment Unit. The tribunal denied the extension request but acknowledged genuine efforts hampered by factors beyond the appellant's control. Applying equitable principles and citing Alisha Khan precedent, NCLAT ordered partial EMD forfeiture - retaining 25% (Rs. 1.25 crores) while directing refund of 75% (Rs. 3.75 crores) within one month. Appeal allowed in part.

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ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the Appellant, who was the successful bidder in the liquidation proceedings, should be granted an extension of time to pay the balance amount due under the tender document, despite defaulting on the initial payment timeline.

2. Whether the Earnest Money Deposit (EMD) of Rs. 5 Crores paid by the Appellant should be refunded, given that a subsequent sale process resulted in a higher bid from a third party.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Extension of Time for Payment

- Relevant Legal Framework and Precedents: The court considered the stipulations in the tender document and the Letter of Intent, which required the successful bidder to pay the full bid amount within 90 days. The court also referenced judgments from the principal bench and the Hon'ble Apex Court, which emphasize the sanctity of the 90-day period for payment in bidding processes.

- Court's Interpretation and Reasoning: The court noted that the Appellant had failed to pay the balance amount despite multiple extensions granted by the NCLT. The court highlighted that the auction process is intended to find a bona fide purchaser, and extending the payment period beyond the stipulated 90 days undermines this objective.

- Key Evidence and Findings: The Appellant was declared the successful bidder on 26.08.2020, with a bid of Rs. 351 Crores. Despite extensions, the Appellant failed to pay the balance amount by the final extended deadline of 15.02.2022.

- Application of Law to Facts: The court applied the legal framework to the facts, concluding that the Appellant's repeated failure to meet payment deadlines justified the cancellation of the bid and the initiation of a fresh bidding process.

- Treatment of Competing Arguments: The Respondents argued that the 90-day payment period is sacrosanct and should not be extended. The court agreed, emphasizing the need for certainty and finality in auction processes.

- Conclusions: The court concluded that the Appellant's request for an extension of time could not be granted, as the subsequent sale to M/s. Kalyani Steels Limited had been completed and was unchallenged.

Issue 2: Refund of Earnest Money Deposit (EMD)

- Relevant Legal Framework and Precedents: The court considered the forfeiture clause in the tender document and referenced a judgment by the Hon'ble Apex Court in Alisha Khan vs Indian Bank, which allowed for partial refund of earnest money in light of the COVID-19 pandemic.

- Court's Interpretation and Reasoning: The court acknowledged the exceptional circumstances caused by the COVID-19 pandemic, which hindered the Appellant's ability to secure funds. The court found the Appellant's argument for a partial refund reasonable, given the higher subsequent bid.

- Key Evidence and Findings: The Appellant argued that the COVID-19 pandemic and related restrictions prevented timely payment. The court noted that the subsequent auction resulted in a higher bid of Rs. 450 Crores, causing no financial loss to the Respondents.

- Application of Law to Facts: The court applied the principles from the Alisha Khan judgment, determining that a partial refund of the EMD was appropriate under the circumstances.

- Treatment of Competing Arguments: The Respondents maintained that the forfeiture clause should be enforced. However, the court balanced the equities, considering the impact of the pandemic.

- Conclusions: The court ordered a partial refund of 75% of the EMD to the Appellant, retaining 25% as a reasonable deduction.

SIGNIFICANT HOLDINGS

- Core Principles Established: The court reaffirmed the importance of adhering to payment timelines in auction processes to maintain the integrity and finality of such proceedings. However, it recognized the need for flexibility in exceptional circumstances, such as the COVID-19 pandemic.

- Final Determinations on Each Issue: The court denied the Appellant's request for an extension of time to pay the balance amount but granted a partial refund of the EMD, acknowledging the unique challenges posed by the pandemic.

- Verbatim Quotes of Crucial Legal Reasoning: The court cited the Alisha Khan judgment, emphasizing the need for a reasonable attitude and partial refund when subsequent auctions result in higher bids.

The appeal was partially allowed concerning the refund of the EMD, with the court ordering the refund of Rs. 3,75,00,000/- to the Appellant while retaining Rs. 1,25,00,000/- as a reasonable deduction. All other reliefs sought by the Appellant were dismissed.

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