2025 (12) TMI 771 - SC - IBC

Payment forfeiture upheld for defaulting auction purchaser; post-failed-auction private sale held outside Regulation 33(2)(c) scope in liquidation

SC upheld NCLAT and NCLT orders confirming forfeiture of the appellant-purchaser's payment of Rs.37.80 crores and dismissal of its challenge. The Court ... CIRP - Liquidation - Sale of Assets - Failure to make payment within stipulated time - sale of the corporate debtor's Raichur assets to the purchaser - private sale under Regulation 33(2)(c) or Regulation 33(2)(d) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 or not - scope of Regulation 33(2)(c) of the Liquidation Regulations - HELD THAT:- Admittedly, the appellant failed to abide by the extended timelines. It, however, paid a further sum of ₹1.50 crores, thereby bringing the total amount paid by it to ₹37.80 crores. At the SCC’s meeting held on 01.08.2022, the stakeholders decided to enforce forfeiture of the entire payment made by the appellant, as per the NCLT’s order, and that the liquidator should issue a fresh auction notice to dispose of the assets/plant at Raichur. By letter dated 02.08.2022, the liquidator informed the appellant that, as the payment had not been made by it as directed by the NCLT, the entire amount of ₹37.80 crores paid by it stood forfeited, in adherence to the order dated 29.06.2022 passed by the NCLT - The NCLT noted therein that the liquidator had issued the letter dated 02.08.2022 based on its earlier order dated 29.06.2022 and if the appellant had been aggrieved thereby, it ought to have challenged the same but had not done so. The NCLT, therefore, opined that merely challenging the liquidator’s letter dated 02.08.2022 would not suffice as, once there was non-payment of the sum as directed by it, the forfeiture became automatic. The last auction in relation to the assets/plant at Raichur was held on 28.07.2021 with a reserve price of ₹105 crores. However, no bids were forthcoming on that date. Thereupon, the SCC held a meeting on 31.07.2021 and decided to sell the said assets/plant at the scrap value of approximately ₹50 crores. The auction process, therefore, stood concluded in its entirety, having culminated in failure, and the later decision of the stakeholders to resort to a scrap sale was in place on the date the appellant made its offer on 09.09.2021, proposing to buy the assets/plant at Raichur as a going concern - Once the stakeholders directed the liquidator to take the process forward in accordance with the IBC and the liquidator filed an IA seeking approval of the NCLT for the sale, there is no possibility of the appellant trying to bring the sale within the ambit of Regulation 33(2)(c). Be it noted that the auction process failed in July, 2021, itself and was thereafter followed by the decision of the stakeholders to resort to a scrap sale and the question of the assets/plant being sold at a price higher than the reserve price of the failed auction was not available thereafter. It was thus a private sale that required prior permission of the NCLT and the liquidator, accordingly, resorted to that procedure. Further, the conduct of the appellant during the course of the proceedings also disentitled it from seeking relief. The clandestine act of filing a writ petition before the High Court, suppressing the fact that it had already filed an appeal before the NCLAT against the order dated 29.06.2022, and attempting to challenge the very same order under Article 226 of the Constitution, clearly reflected on its lack of bonafides. Such abuse of process warranted non-suiting of the appellant on that ground itself - The sale in question was purely under the supervision of the Adjudicating Authority, i.e., the NCLT, and the forfeiture condition stipulated by the NCLT while granting extension of time cannot be equated with a forfeiture clause in a contract. Having made an offer, coupled with a temporal commitment, which was duly accepted by the NCLT, vide its order dated 22.03.2022, the appellant went before the NCLT and sought extension of time. That extension was granted, saddled with the condition of forfeiture in the event of failure, and was duly accepted and acted upon by the appellant, as already noted supra. The appellant actually made payments to the tune of ₹1.50 crores after the passing of the extension order dated 29.06.2022 but failed to make the full payment by 31.07.2022. The appellant cannot, therefore, seek to approbate and reprobate at this stage by assailing the forfeiture clause in the said order, having accepted and acted upon the extension granted thereunder. There are no merit in the contentions advanced on behalf of the appellant. The appeals are, therefore, bereft of merit, be it on facts or in law. No grounds are made out to interfere with the majority opinions of the Member (Judicial) and the Member (Technical) of the National Company Law Appellate Tribunal, Chennai Bench, holding against the appellant and dismissing its appeals. Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the sale of the corporate debtor's Raichur assets to the purchaser was a private sale under Regulation 33(2)(c) or Regulation 33(2)(d) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 1.2 Whether the Adjudicating Authority was empowered, under Rule 15 of the National Company Law Tribunal Rules, 2016, to grant extension of time for payment of sale consideration subject to a condition of forfeiture of the entire amount already paid in case of default, and whether such forfeiture was valid. 1.3 Whether the relationship between the purchaser and the liquidator/stakeholders in respect of the sale was governed by the Indian Contract Act, 1872, particularly Section 74, so as to render the forfeiture a penal/unlawful enrichment. 1.4 Whether the subsequent resale of the Raichur assets at a higher price, and alleged absence of ultimate loss to stakeholders, affected the legality or propriety of the forfeiture. 1.5 Whether the purchaser, having accepted and acted upon the extension order containing the forfeiture condition and having pursued parallel and suppressed proceedings, was disentitled from challenging the forfeiture (principles against approbation and reprobation and abuse of process). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of the sale under Regulation 33(2)(c) or 33(2)(d) of the Liquidation Regulations Interpretation and reasoning 2.1 The auction process in respect of the Raichur assets had conclusively failed by the last auction of 28.07.2021, after which the Stakeholders Consultation Committee (SCC) resolved on 31.07.2021 to sell the assets at scrap value of approximately Rs.50 crores. 2.2 The purchaser's offer of 09.09.2021 to acquire the Raichur assets as a going concern for Rs.105.21 crores was made after the auction process had been abandoned and a scrap sale decision had been taken. The offer expressly contemplated approval by the Adjudicating Authority and proposed payment of the balance within 15 days of such approval. 2.3 In the SCC meeting of 15.09.2021, all secured financial creditors/stakeholders, upon being informed of the offer and the 15-day payment commitment post-approval, directed the liquidator to proceed 'in keeping with the IBC', following which the liquidator filed an application before the Adjudicating Authority seeking approval of the private sale. 2.4 Regulation 33(2) permits private sale when: (a) the asset is perishable, (b) likely to deteriorate in value, (c) it is sold at a price higher than the reserve price of a failed auction, or (d) prior permission of the Adjudicating Authority has been obtained. The Court held that, since the auction process had already been concluded and superseded by a decision to resort to scrap sale, the route under Regulation 33(2)(c) (higher than reserve price of a failed auction) was no longer available. 2.5 The transaction proceeded only after prior permission was sought from, and granted by, the Adjudicating Authority on the liquidator's application. The Court therefore held that the case fell squarely under Regulation 33(2)(d), and not under Regulation 33(2)(c). Conclusions 2.6 The sale of the Raichur assets to the purchaser was a private sale requiring and obtained with prior permission of the Adjudicating Authority under Regulation 33(2)(d), not a sale 'at a price higher than the reserve price of a failed auction' under Regulation 33(2)(c). Issue 2: Power of the Adjudicating Authority under Rule 15 of the NCLT Rules to impose a forfeiture condition with extended timelines, and validity of forfeiture Legal framework as discussed 2.7 Rule 15 of the National Company Law Tribunal Rules, 2016 empowers the Adjudicating Authority to extend time 'upon such terms, if any, as the justice of the case may require'. 2.8 The scheme of the Insolvency and Bankruptcy Code emphasises time-bound resolution; delay undermines the object of the statute. The Court referred to the dictum in Kridhan Infrastructure Private Limited vs. Venkatesan Sankaranarayan, recognising time as a crucial facet of the IBC framework. Interpretation and reasoning 2.9 The purchaser's offer dated 09.09.2021 specifically committed to deposit the balance consideration within 15 days from the date of approval by the Adjudicating Authority. This commitment was accepted, and the Adjudicating Authority, by order dated 22.03.2022, directed payment of sale consideration within 15 days of receipt of the order. 2.10 The purchaser failed to honour this initial timeline and sought extension of time. The SCC, showing lenience, agreed in its 10th meeting (13.04.2022) to extend time only up to 30.05.2022 with 12% interest from 15.04.2022 and directed the purchaser to move the Adjudicating Authority for approval of revised timelines. 2.11 The purchaser's own application (filed 25.04.2022) sought extension only till 31.05.2022. When that application was decided on 29.06.2022, the Adjudicating Authority (i) directed payment of 50% of the balance (Rs.34.60 crores) with 12% interest from 15.04.2022 by 30.06.2022, (ii) directed payment of the remaining 50% (Rs.34.60 crores) with interest by 31.07.2022, and (iii) stipulated that deviation from these timelines would result in forfeiture of the entire amount already paid. 2.12 The Court held that, since the purchaser had itself represented that it required time only up to 31.05.2022 and had approached the Adjudicating Authority two months earlier, the expectation that funds would be arranged was justified. Consequently, requiring payment of 50% of the balance by 30.06.2022 (the next day) and the remainder by 31.07.2022 was considered reasonable in the circumstances. 2.13 Given the purchaser's earlier default on its clear temporal commitment and the need to ensure expeditious liquidation, the imposition of a forfeiture clause, operative on failure to adhere to the extended schedule, was considered an appropriate 'term' within the ambit of Rule 15. 2.14 The purchaser paid additional sums aggregating Rs.1.50 crores after the extension order, thereby acting upon and accepting the conditions of that order, including the forfeiture stipulation, but nevertheless failed to comply with the final deadline of 31.07.2022. 2.15 In view of this non-compliance, the SCC resolved to enforce forfeiture and the liquidator communicated forfeiture of the entire Rs.37.80 crores paid. The Court held that, once the extension order clearly provided for automatic forfeiture on deviation, and the purchaser failed to pay within the stipulated time, the forfeiture followed directly from the adjudicatory order. Conclusions 2.16 The Adjudicating Authority validly exercised its power under Rule 15 of the NCLT Rules to grant extension of time on stringent terms, including a condition for forfeiture of the entire amount paid in case of default. 2.17 The purchaser, having defaulted on the extended timelines, was liable to forfeiture in terms of the order dated 29.06.2022, and the enforcement of forfeiture by the liquidator and stakeholders was lawful and binding. Issue 3: Applicability of the Indian Contract Act, 1872 and Section 74 to the forfeiture ordered Interpretation and reasoning 2.18 The purchaser argued that the sale constituted a contract between it and the liquidator/stakeholders, that the forfeiture clause must be tested as a stipulation in a contract, and that under Section 74 of the Indian Contract Act, excessive forfeiture amounting to penalty or unjust enrichment was impermissible; reliance was placed on case law under Section 74. 2.19 The Court rejected this characterisation. The sale process was conducted under the IBC and Liquidation Regulations and was subject throughout to the supervision and approval of the Adjudicating Authority. The critical term of forfeiture emanated from a judicial order made while exercising statutory jurisdiction under the IBC and Rule 15 of the NCLT Rules, not from a bilateral contractual stipulation independently negotiated between parties. 2.20 The purchaser's offer, including its temporal commitment, was submitted into and accepted within this statutory adjudicatory framework. The subsequent extension of time and forfeiture condition were judicially imposed terms, which the purchaser invited by its application and thereafter accepted and acted upon. 2.21 The Court therefore held that the transaction and, in particular, the forfeiture in question could not be equated with a purely contractual clause so as to attract Section 74 of the Indian Contract Act. Consequently, case law on contractual forfeiture and compensation for breach under Section 74 was held inapplicable. Conclusions 2.22 The relationship and obligations in issue flowed from the statutory insolvency framework and orders of the Adjudicating Authority, not from a simple private contract; Section 74 of the Indian Contract Act and related jurisprudence on contractual penalties do not control the forfeiture ordered. 2.23 The forfeiture was not treated as a contractual penalty or unjust enrichment under the Contract Act, but as a consequence of a binding judicial order in insolvency proceedings. Issue 4: Effect of higher resale price and alleged absence of stakeholder loss on the validity of forfeiture Interpretation and reasoning 2.24 The purchaser contended that, since the Raichur assets were ultimately resold to another buyer for Rs.145.38 crores-substantially more than the purchaser's offer of Rs.105.21 crores-stakeholders had in fact not suffered any loss; hence, forfeiture of Rs.37.80 crores was said to be unjust and unwarranted. 2.25 The Court noted that the liquidation value of the Raichur assets had already undergone significant reduction over time (assessed at Rs.338.01 crores in December 2018, Rs.227.31 crores in August 2019 and Rs.117.23 crores in August 2020), and that even with the subsequent sale at Rs.145.38 crores, financial creditors did not recover their full outstanding dues and suffered a 'major haircut'. 2.26 The majority below had emphasised, and the Court endorsed, that the fact that the resale fetched a higher price than the earlier offer did not negate the stakeholders' overall losses nor did it undermine the need for strict adherence to timelines under the IBC. 2.27 The Court treated the later resale price as immaterial to the legality of the forfeiture arising from the purchaser's breach of a time-bound obligation imposed by the Adjudicating Authority in a statutory liquidation process. Conclusions 2.28 The subsequent higher resale value of the assets does not affect the validity of the forfeiture; stakeholders continued to face significant shortfall in recovery and the forfeiture remained a legitimate consequence of the purchaser's default. 2.29 Absence of additional or quantifiable 'loss' vis-à-vis the purchaser's offer is not a basis to undo or dilute a lawfully ordered forfeiture in an IBC proceeding. Issue 5: Effect of the purchaser's conduct - approbation and reprobation, suppression, and abuse of process Interpretation and reasoning 2.30 The purchaser, after the order dated 29.06.2022, made further payments totalling Rs.1.50 crores on 13.07.2022 and 25.07.2022, thereby clearly acting under and affirming the extension order which contained the forfeiture condition. 2.31 While challenging the liquidator's forfeiture communication and seeking further extension/waiver before the Adjudicating Authority, the purchaser did not then assail the operative forfeiture condition in the 29.06.2022 order itself; the Adjudicating Authority refused relief on the basis that the forfeiture followed automatically from that order. 2.32 The purchaser, thereafter, filed appeals before the Appellate Tribunal against both orders of 29.06.2022 and 10.08.2022. Nonetheless, it also instituted a writ petition before the High Court challenging the 29.06.2022 order and related actions, asserting through senior counsel that limitation for appeal had expired and without disclosing that an appeal had already been filed before the Appellate Tribunal on 13.08.2022 (though kept defective until 28.12.2022). 2.33 The High Court dismissed the writ petition as not maintainable on the ground that the statutory appellate remedy had not been exhausted and that there were disputed facts. The Court noted that the purchaser had secured an interim order in the writ by suppressing the pendency of the appeal, and did not rectify this non-disclosure even by the time of dismissal of the writ petition. 2.34 The Court regarded this conduct as a 'clandestine act' reflecting lack of bona fides and constituting abuse of process. Further, the liquidator had, in the meantime, distributed the forfeited amounts among stakeholders as per law. 2.35 The Court also endorsed the majority view that the purchaser could not approbate and reprobate: it could not, after acting upon the extension order (by making further payments under it), later challenge the very forfeiture clause contained in that order. Acceptance and partial performance under that order estopped the purchaser from disputing its terms at a later stage. Conclusions 2.36 The purchaser's conduct in accepting and acting upon the extension order, while later challenging its terms, attracted the principle that a party cannot approbate and reprobate. 2.37 Suppression of the already-filed appeal while pursuing writ proceedings amounted to abuse of process and independently disentitled the purchaser from any equitable relief. 2.38 In light of the purchaser's conduct, as well as the merits, there was no basis to interfere with the forfeiture or to grant any relief; the appeals were devoid of merit and were rightly dismissed.