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Introduction
The specter of insolvency casts a long shadow over commercial transactions, making the rules governing the liquidation process a matter of paramount importance for all stakeholders. The NCLAT1, Principal Bench, New Delhi, delivered a decisive judgment in the matter of Deepika Bhugra Prasad, Liquidator, M/s Ess Dee Aluminium Ltd. v. Lucky Holdings Pvt. Ltd2.. This pivotal ruling, authored by Indevar Pandey, Member (T), primarily held that the Liquidator is fully justified in forfeiting the EMD3 of a successful bidder who fails to comply with the mandatory payment timelines under the E-Auction Process Document, even if the delay was initially occasioned by a third-party court-imposed interim restraint that was later vacated.
The key issue before the Court was whether the successful bidder’s failure to pay the balance consideration immediately upon the vacation of a stay order constituted a material breach warranting EMD forfeiture, and specifically, whether Section 74 of the Contract Act4, concerning liquidated damages, applies to forfeitures in statutory liquidation auctions. The law focus of the case in the modern era is on the sanctity and strict adherence to timelines prescribed in the IBC5 and its associated regulations.
The Corporate Debtor entered liquidation after the failure of its CIRP6, and the Liquidator (Appellant) conducted an e-auction where the Respondent was the highest bidder. The Respondent’s required 25% payment by May 11, 2022, was stalled by a third-party stay order (May 9, 2022). The stay was vacated on June 15, 2022. Despite the Liquidator’s immediate demands, the Respondent failed to pay, leading the Liquidator to cancel the sale and forfeit the EMD on July 1, 2022. A subsequent auction yielded a lower bid. The NCLT7 ordered the refund of the forfeited EMD, which the Liquidator appealed to the NCLAT.
Settled Law on IBC Auctions: EMD Forfeiture as Statutory Mandate
The Appellant argued the Liquidator’s forfeiture was justified and compliant with the mandatory Sale Notice terms. The 15-day payment period automatically expired when the stay was vacated on June 15, 2022, resulting in the Respondent’s contractual breach. The Adjudicating Authority erred by applying Section 74 of the Contract Act, since the forfeiture is statutory, not a penal contractual measure. Conversely, the Respondent argued its non-payment was caused by the NCLT stay and the Liquidator’s undertaking. The Liquidator cancelled the sale before the stay was formally vacated, so the Respondent was not in default. The forfeiture of the EMD is penal and illegal under Section 74 of the Contract Act, as no actual loss was proven. The EMD should be refunded since non-payment was due to the stay, not willful default.
The NCLAT’s judgment extensively quoted and relied upon precedents to clarify the legal position on EMD forfeiture in statutory auctions under the IBC. The Tribunal explicitly relied on the principle established in Westcoast Infraprojects Pvt. Ltd. v. Ram Chandra Dallaram Chaudhary, Liquidator of Anil Ltd8., which was later affirmed by the Hon’ble Supreme Court. This precedent unequivocally holds that the Liquidator has the full authority to cancel the sale and forfeit the EMD upon the successful bidder’s payment default, and that Section 74 of the Indian Contract Act has no application to forfeiture under liquidation auctions.
The NCLAT further buttressed this by citing BRS Refineries v. Supriyo Kumar Chaudhary, Liquidator of JVL Agro Industries Ltd9. and Potens Transmission & Power Pvt. Ltd. v. Apex Buildsys Ltd10.. These judgments reiterate that the Liquidator’s power to forfeit flows from the statutory auction process and the agreed-upon terms, not as a penal clause in a private contract. The EMD is a guarantee for performance, not merely liquidated damages. By referencing these binding precedents, the NCLAT found that the Adjudicating Authority’s reliance on Section 74 was fundamentally misplaced and contrary to settled law. In IBC auctions, EMD forfeiture is a statutory consequence of default, overriding the contractual provisions of Section 74.
The NCLAT found that the E-Auction Process Document established a binding, statutory contract with non-negotiable forfeiture terms, prioritizing the swift completion of the sale under the IBC. The Tribunal clarified that the interim restraint order only suspended the 15-day timeline, which automatically resumed upon the plea’s withdrawal on June 15, 2022. The Liquidator’s subsequent intimation gave the Respondent time to pay. The Respondent’s refusal, citing the need to await a formal order or legal review, was held to be a material, unexcused breach of a fundamental obligation. Concluding that Section 74 of the Contract Act, is inapplicable to statutory IBC auctions, the NCLAT confirmed that the forfeiture of the EMD was legally sound and necessary to ensure the integrity of the liquidation process. The NCLAT, therefore, set aside the impugned order of the NCLT and upheld the Liquidator’s action of forfeiting the EMD.
Conclusion
The appeal in Deepika Bhugra Prasad (Supra) saw the NCLAT decisively rule in favor of the Liquidator. The Tribunal established that the successful bidder’s failure to deposit the requisite installment immediately upon the vacation of a judicial restraint order constitutes a material default under the E-Auction Process Document. Crucially, the NCLAT affirmed that the power to forfeit EMD in a statutory liquidation sale flows from the IBBI Liquidation Regulations11, and is not governed by Section 74 of the Contract Act. The judgment reinforces the supremacy of auction terms and the need for strict adherence to timelines under the IBC.
This judgment has significant ramifications for the governance of liquidation auctions under the IBC. By affirming the inapplicability of the Indian Contract Act’s provisions regarding liquidated damages to EMD forfeitures, the NCLAT ensures that it strengthens the finality of e-auction processes, reducing the scope for successful bidders to renege on their commitments using legal technicalities or market changes. It validates the Liquidator’s authority to enforce the sale terms rigorously, which is vital for maximizing the asset value for the stakeholders. It places a clear onus on prospective bidders to understand and accept the commercial risk and strict payment obligations inherent in a statutory auction.
The judgment’s emphasis on strict adherence raises key questions for future sales: Should the IBBI Regulations or Sale Notices explicitly define how the payment timeline is paused and restarted (e.g., from the date of the NCLT/NCLAT order’s pronunciation versus the formal written order)? Should the E-Auction Process Document include an express clause outlining the exact procedure and revised payment schedule to be followed immediately upon the vacation of a judicial stay?
Citations
Expositor(s): Adv. Shreya Mishra
