2025 (12) TMI 646 - AT - IBC

Appeal upholds liquidator's EMD forfeiture for auction default, stressing strict IBC liquidation payment timelines over contract law

The Appellate Tribunal allowed the appeal, setting aside the impugned order and upholding the Liquidator's cancellation of the sale and forfeiture of the ... Liquidation - Auction of assets - Cancellation of sale - Refund of Earnest Money Deposit (EMD) in the e-auction - Respondent failed to comply with mandatory payment timelines under the E-Auction Process Document - Whether the Liquidator acted in accordance with law in cancelling the sale and forfeiting the Earnest Money Deposit or not? - HELD THAT:- It is found necessary to assess the Respondent’s conduct in a manner consistent with the structure of liquidation auctions. The Respondent was declared H1 on 26.04.2022. Under the auction terms, the first instalment became due on 11.05.2022. The record shows that the Respondent did not raise any concern regarding the timeline at any point prior to 09.05.2022, nor did it indicate any inability or difficulty in arranging funds. On 09.05.2022, when IA No. 397/2022 was taken up, the Liquidator’s undertaking was limited and procedural, it was not a statement that the sale itself was under challenge or would not proceed. The Respondent, in fact, wrote on 11.05.2022 requesting postponement of the deposit until the “issue is resolved,” indicating clearly that it intended to go ahead with the purchase, but sought a short deferment while the application was pending. This correspondence confirms that the Respondent was not prevented from preparing to comply and that it expected to make the payment after the dispute was resolved. This legal position has been conclusively settled by the judgment of this Appellate Tribunal in Westcoast Infraprojects Private Limited [2023 (5) TMI 44 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI], which was affirmed by the Hon’ble Supreme Court in [2023 (7) TMI 1616 - SC ORDER (LB)] in the same matter. In these decisions, it has been held that forfeiture of EMD in liquidation auctions is a legitimate, contractual and statutory remedy for default, and Section 74 is wholly inapplicable. Further support for the Liquidator’s position is found in judgment of this Appellate Tribunal in BRS Refineries Private Limited v. Supriyo Kumar Chaudhuri [2024 (7) TMI 933 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI - LB], where a bidder’s failure to demonstrate readiness and repeated requests for time were held incompatible with the time-bound nature of liquidation, and forfeiture was upheld - The same reasoning was followed in judgment of this Appellate Tribunal in Potens Transmission & Power Private Limited [2024 (4) TMI 1343 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI (LB)], which reaffirmed that even minor deviations from timelines permit forfeiture when the terms are strict. Most recently, this Appellate Tribunal in Vikram Bajaj, Liquidator of Best Foods Limited [2025 (1) TMI 1686 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI (LB)] held that conditional expressions of willingness do not save a bidder from default; only clear, unconditional readiness suffices. The Respondent did commit default under the binding auction terms, that the Liquidator’s action of cancelling the sale and forfeiting the EMD was fully justified and in accordance with the provisions of the Code. We have already seen that the impugned order suffers from incorrect appreciation of facts and law like application of Indian Contract Act whereas the issue should have been examined through the lens of this Code only. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the Liquidator acted in accordance with the Insolvency and Bankruptcy Code and the governing auction documents in cancelling the sale and forfeiting the Earnest Money Deposit after the successful bidder failed to pay the first instalment within the stipulated period. (2) Whether the direction to refund the Earnest Money Deposit, based on application of Section 74 of the Indian Contract Act, 1872 and on alleged absence of loss or Letter of Intent, was legally sustainable in the context of a liquidation e-auction. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Validity of cancellation of sale and forfeiture of Earnest Money Deposit Legal framework (a) The Tribunal examined the Sale Notice, the E-Auction Process Information Document issued under the Liquidation Process Regulations, and the bidder's affidavit/declaration as forming a single, binding statutory-contractual framework governing the liquidation auction. (b) Clause 9 of the Sale Notice provided that default in deposit of the 'balance amount' within the time mentioned in the email would entail forfeiture of the entire amount deposited ('EMD + any other amount'). (c) Clauses 12.1, 12.2.4 and 13.5.1(vii) of the E-Auction Process Information Document stipulated: (i) no right to withdraw/cancel/renegotiate the bid and express forfeiture of EMD and other amounts on non-payment within timelines; (ii) obligation of the successful bidder to submit the first instalment of 25% of the successful bid amount (less EMD) within 15 days from declaration as successful bidder; and (iii) specific authorisation to forfeit EMD if the successful bidder failed to make payment of the first instalment within 15 days of such declaration. (d) Clause 6 of the bidder's affidavit expressly recorded the bidder's agreement that failure to complete the transaction within the specified time, or failure to fulfil any auction condition, would render the EMD and other monies liable to forfeiture, with any extension of timelines being at the sole discretion of the Liquidator. Interpretation and reasoning (e) The Tribunal held that liquidation auctions under the Code operate under a statutory scheme distinct from ordinary negotiated contracts, with pre-defined conditions and strict timelines; bidders voluntarily subject themselves to these terms and the Liquidator is obliged to enforce them to preserve value and certainty. (f) The Tribunal found that the Sale Notice, E-Auction Process Document and the affidavit together constituted a comprehensive 'code of conduct' binding the successful bidder, including an unequivocal acceptance of forfeiture of EMD on default in timely payment. (g) Factually, the bidder was declared H1 on 26.04.2022, making the first instalment of 25% (after adjusting EMD) due on 11.05.2022. No difficulty about timelines or funding was raised prior to 09.05.2022. (h) On 09.05.2022, in separate proceedings initiated by an unsuccessful bidder, the Liquidator gave a limited undertaking before the Adjudicating Authority not to proceed with the sale; this was treated as only suspending the running of the already agreed 15-day period and not as altering or restarting the payment structure. (i) The bidder's own letter dated 11.05.2022 seeking postponement of the first instalment 'till the issue is resolved' showed that it intended to proceed with the transaction after disposal of that application and was not disabled from arranging funds. (j) On 15.06.2022, the intervening application was unconditionally withdrawn and the order of the Adjudicating Authority expressly vacated any interim order. The Tribunal held that, from this point, the temporary impediment stood completely removed and the balance of the original 15-day period (two days) recommenced. (k) The Liquidator's email dated 16.06.2022 immediately informed the bidder of the withdrawal of the application, clarified that the undertaking stood vacated, reiterated the auction terms, and called upon the bidder to deposit the first instalment within two days, expressly linking the demand to Clause 12.2 of the E-Auction Process Document. (l) The bidder's reply dated 18.06.2022 did not deny liability, did not offer payment, and instead sought time up to 30.06.2022, citing the need to 'evaluate' the order. Even after receiving the certified copy of the 15.06.2022 order on 23.06.2022, the bidder neither made any payment (even partial) nor gave any definite date or unconditional commitment for payment, despite repeated reminders on 23.06.2022, 28.06.2022 and 29.06.2022. (m) The Tribunal noted that even on the most favourable reckoning (treating 23.06.2022 as the trigger date), the bidder still had at least two days within the originally contemplated 15-day balance to pay, but did not avail that opportunity, did not request an extension under clause 6 of its affidavit, and instead continued only to seek time 'to evaluate', reflecting reluctance to proceed, allegedly driven by fall in aluminium prices. (n) It was held that the failure to pay within the balance period (or within the extended grace informally afforded up to 30.06.2022) constituted clear default under the auction terms, and that the Liquidator cannot permit open-ended uncertainty inconsistent with the time-bound nature of liquidation. (o) On the factual and documentary record, the Tribunal rejected the contention that the bidder was 'prevented' from performance by the Liquidator's conduct; the temporary pause was fully lifted on withdrawal of the intervening application, and adequate opportunity thereafter existed to comply. Conclusions (p) The bidder's non-payment of the first instalment within the contractually stipulated and extended time amounted to breach of the binding auction conditions. (q) The Liquidator's cancellation of the sale and forfeiture of the EMD was in strict conformity with Clause 9 of the Sale Notice, Clauses 12.1, 12.2.4 and 13.5.1(vii) of the E-Auction Process Document, and Clause 6 of the bidder's affidavit, and was a valid exercise of statutory and contractual powers under the liquidation framework. Issue (2): Sustainability of order directing refund of EMD and applicability of Section 74 of the Indian Contract Act Legal framework (a) The Tribunal considered the nature of forfeiture in liquidation auctions under the Insolvency and Bankruptcy Code and the Liquidation Process Regulations, as distinguished from penal clauses in private contracts governed by Sections 73-74 of the Indian Contract Act, 1872. (b) It relied on its earlier decisions, as affirmed by the Supreme Court, holding that where forfeiture occurs under terms and conditions of a public auction conducted by a liquidator before a concluded agreement, Section 74 has no application. Interpretation and reasoning (c) The Tribunal held that the Insolvency and Bankruptcy Code is a complete code for the corporate insolvency and liquidation process; rights and obligations in liquidation sales arise from the statute, the Liquidation Regulations and the auction documents issued thereunder, not from individually negotiated contractual penalty clauses. (d) Forfeiture of EMD in such auctions is a consequence expressly built into the statutory process documents framed under the authority of the Liquidation Regulations (including Schedule I), and is a legitimate contractual-statutory remedy for default rather than a 'penalty' under Section 74. (e) The Tribunal noted that the Adjudicating Authority erred in importing Section 74 into a statutory auction setting and in requiring proof of actual loss as a pre-condition to forfeiture, contrary to the binding view that Section 74 does not control forfeiture under liquidation auction terms. (f) On the factual findings, the Tribunal further observed that the re-auction fetched a significantly lower value (Rs.103.40 crores as against Rs.124.60 crores), evidencing material financial prejudice to the liquidation estate; nonetheless, the law did not require separate adjudication of damages before forfeiture could be effected. (g) The Tribunal also rejected the Adjudicating Authority's reasoning that absence of a Letter of Intent weakened the Liquidator's case, clarifying by reference to Clauses 14 and 15 of the E-Auction Process Document that issuance of Letter of Intent was contractually contingent upon prior payment of the first instalment, not a precondition to demand or to forfeiture. (h) The Tribunal held that delay in communication of the withdrawal order did not exonerate the bidder because, even after receiving the order, the bidder neither complied nor took any concrete steps, and did not invoke any contractual mechanism for extension; hence the finding that the bidder 'had no opportunity' to pay was factually incorrect. Conclusions (i) Section 74 of the Indian Contract Act, 1872 is inapplicable to forfeiture of EMD in liquidation e-auctions conducted under the Insolvency and Bankruptcy Code and the Liquidation Process Regulations. (j) The Adjudicating Authority's reliance on Section 74, its requirement of proof of specific loss, and its inferences from non-issuance of Letter of Intent were contrary to the governing auction documents and to the settled legal position. (k) The order directing refund of the forfeited EMD was unsustainable in law and based on misappreciation of both facts and the statutory scheme; it was liable to be set aside, and the Liquidator's action of forfeiture upheld.