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Case Number
Attorney(S)
  • Mr. Harshit Agarwal and Mr. Ashish Gupta, Advocate ;
  • Mr. Abhishek Anand and Mr. Kunal Godhwani, Advocates Nos. 1 and 2.
Judges
  • Bansi Lal Bhat
  • Acting Chairperson
  • Anant Bijay Singh, Member (Judicial)
  • Shreesha Merla, Member (Technical)
Acts
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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Mr. Harshit Agarwal and Mr. Ashish Gupta, Advocate ;
  • Mr. Abhishek Anand and Mr. Kunal Godhwani, Advocates Nos. 1 and 2.
Judges
  • Bansi Lal Bhat
  • Acting Chairperson
  • Anant Bijay Singh, Member (Judicial)
  • Shreesha Merla, Member (Technical)
Acts
See more information ...
Smart Summary

Structured Summary of the Opinion (extract)

Factual and Procedural Background

This summary is based exclusively on the extract of the Court's opinion in Company Appeal (AT) (Insolvency) No. 1098 of 2020. The dispute arose from an e‑auction conducted by a Liquidator for the sale of inventory of Case Cold Roll Forming Limited. The Appellant participated in the e‑auction, was declared the successful bidder on 18.03.2020 and unconditionally accepted the Letter of Intent (LoI) on 23.03.2020.

Under the auction terms and the LoI, the successful bidder was required to pay 25% of the total consideration by 25.03.2020 and the balance by specified dates. The Appellant did not pay the stipulated 25% by the due date, sought extensions, and paid only 10% of the EMD. The Liquidator issued repeated reminder e‑mails (specifically dated 01.04.2020, 02.04.2020, 23.04.2020, 15.05.2020 and 18.05.2020), extended the initial deadline to 31.03.2020 in one communication, and ultimately warned that failure to pay would lead to forfeiture of the EMD. When payment was not made, the Liquidator forfeited a portion of the EMD by an e‑mail dated 23.05.2020.

The Appellant challenged the forfeiture before the Adjudicating Authority; that challenge was dismissed. The present appeal concerned whether the Liquidator was justified in forfeiting part of the earnest money.

Legal Issues Presented

  1. Whether the Liquidator was justified in forfeiting part of the earnest money (EMD) deposited by the Appellant in the e‑auction.
  2. Whether Section 74 of the Indian Contract Act, 1872 (and related contract law principles) applied to bar forfeiture in these circumstances — specifically whether Section 74 applies at a pre‑contractual stage or only once a contract has been broken, as contended by the Appellant.
  3. Whether the circumstances arising from the COVID‑19 pandemic and the national lockdown justified non‑payment and rendered forfeiture unjustified.

Arguments of the Parties

Appellant's Arguments

  • The Appellant's counsel argued that Section 74 of the Indian Contract Act cannot be invoked at a pre‑contractual stage (i.e., forfeiture at a stage before a concluded contract cannot invoke Section 74).
  • The Appellant argued that the amount sought to be forfeited was being forfeited without any loss being shown.
  • The Appellant also relied on the factual distinction from prior authority (Kailash Nath Associates v. DDA) and contended that timelines/extensions were such that forfeiture was unjustified; implicitly, the Appellant relied on the COVID‑19 lockdown as affecting its ability to pay.

Respondent's Arguments (Liquidator / Respondent)

  • The Respondent contended that the Appellant's assertion that only a two‑day extension was given was factually incorrect and relied on the Corrigendum and timeline documents showing staged dates (auction 18.03.2020; announcement 18.03.2020; LoI to be issued 20.03.2020; unconditional acceptance of LoI 23.03.2020; payment of up to 25% by 25.03.2020; balance by 20.04.2020).
  • The Respondent submitted there was no violation of timelines by the Liquidator, that the LoI was issued and accepted unconditionally on 23.03.2020, and that by that date the COVID‑19 situation and the prospect of lockdown were already known to the Appellant; therefore, the Appellant could not claim later that lockdown excused the default.
  • The Respondent relied on Clause J of the auction terms and conditions which expressly permitted forfeiture of EMD in specified events, including failure to pay the stipulated 25% or failure to make complete payment as per the LoI.
  • The Respondent emphasized the repeated reminders and that the Appellant neither complied with timelines nor responded meaningfully to repeated communications prior to forfeiture.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Associates v. Delhi Development Authority and Another (2015) 4 SCC 136 (reproduced paragraphs) Discusses that Section 74 of the Indian Contract Act applies only when a contract has been broken and that in public auctions, forfeiture of earnest money may take place even before an agreement is reached (so Section 74 may not attract in pre‑contractual forfeitures under auction terms). The Court noted the distinction in that earlier authority but treated its facts as different from the present case; the earlier passage was used to explain the applicability (or non‑applicability) of Section 74 in auction contexts and to situate the legal landscape. The present case was distinguished on its facts (see below).
National Highways Authority of India v. Ganga Enterprises, (2003) 7 SCC 410 Forfeiture of earnest/security money given for a particular purpose may be permitted under contractual terms even if an offer is withdrawn before acceptance; such forfeiture ensures genuineness of bids and does not affect statutory rights under the Indian Contract Act. The Court relied on this precedent to support the proposition that earnest/security money can be forfeited as per contractual terms to ensure genuine bids and that forfeiture does not necessarily require proof of consequential loss to the auctioning authority.
State of Haryana v. Malik Traders, (2011) 13 SCC 200 Right to withdraw an offer before acceptance does not nullify an agreement to suffer a penalty for withdrawal; bid security can be forfeited if the offer is withdrawn in violation of the agreement and such forfeiture serves the purpose of guaranteeing genuine bids. The Court relied on this authority to reinforce that a bidder who has agreed to terms that allow forfeiture cannot claim return of bid security if he withdraws in breach of those terms. This principle supported upholding forfeiture on the facts before the Court.

Court's Reasoning and Analysis

The following recounts the Court's step‑by‑step analysis as stated in the opinion extract.

  1. Identification of the central question: the Court framed the core issue as whether the Liquidator was justified in forfeiting part of the EMD deposited by the Appellant.
  2. Examination of the auction terms: the Court reviewed Clause J of the Auction terms and conditions, which enumerated specific events permitting forfeiture, including (inter alia) breach of auction conditions, false declarations of eligibility, failure to pay 25% within the stipulated time after being intimated as successful bidder, and failure of the successful bidder to make complete payment as per the LoI. Clause J also expressly provided that in any such event all amounts deposited may be forfeited and the property offered to the next highest bidder.
  3. Interpretation of Clause 5 and forfeiture language: the Court rejected the Appellant's interpretation that forfeiture was conditioned on any consequential loss or on whether the property was re‑sold and realized proceeds. The Court noted the forfeiture clause did not specify that it was subject to realization from any subsequent sale.
  4. Assessment of timelines and conduct: the Court found undisputed documentary evidence showing that the Appellant unconditionally accepted the LoI on 23.03.2020 and, under the auction timelines, was required to deposit up to 25% by 25.03.2020. The nationwide lockdown was declared on 24.03.2020, and the Court observed that the Appellant was aware of the circumstances because of the timing of acceptance. The Liquidator extended the time for the 25% deposit from 25.03.2020 to 31.03.2020 (by an e‑mail dated 29.03.2020) but did not relax timelines for the balance payment.
  5. Evaluation of communications: the Court reproduced a significant e‑mail dated 18.05.2020 in which the Liquidator summarized prior communications (01.04.2020, 02.04.2020, 23.04.2020 & 15.05.2020), noted the Appellant's default in payment, recalled an assurance to pay within two days from a contact on 09.05.2020 that was not honored, and called upon the Appellant to deposit the entire consideration within 48 hours failing which the EMD would be forfeited. The Court observed that the Appellant failed to respond or comply with these repeated requests, and that the Liquidator ultimately forfeited the EMD on 23.05.2020. The Appellant only replied on 16.06.2020.
  6. Distinguishing precedent relied upon by Appellant: the Court specifically distinguished the facts of the Kailash Nath Associates judgment relied upon by the Appellant. The Court noted differences including that in that earlier case the successful bidder had paid the full 25% and had been given extension(s) with DDA's explicit requests/consents and that forfeiture occurred without putting the bidder to notice. By contrast, in the present case the Appellant had paid only 10% of the EMD, there was no consent for making a delayed balance payment with interest, and the bidder here had been repeatedly put on notice.
  7. Reliance on binding precedent supporting forfeiture: the Court placed reliance on National Highways Authority of India v. Ganga Enterprises and State of Haryana v. Malik Traders for the principle that forfeiture of earnest/security money by contract is permissible to ensure genuineness of bids and that a party cannot benefit from its own wrong where its conduct precluded the coming into existence of the contract.
  8. Application of principles to facts: applying the auction clause, the documentary evidence of repeated notices, the Appellant's unconditional acceptance of the LoI, and the cited authorities, the Court concluded that the Appellant by its conduct precluded the sale from being completed and therefore could not claim to avoid agreed forfeiture. The Court found Clause 3 of the forfeiture provisions squarely applicable.
  9. Conclusion of analysis: on this legal and factual matrix, the Court held that the Adjudicating Authority had correctly dismissed the Appellant's application seeking a refund of the EMD.

Holding and Implications

Holding: The Appeal is dismissed. The Court upheld the forfeiture of the EMD by the Liquidator and affirmed the decision of the Adjudicating Authority that refused direction for refund of the EMD. The opinion recorded "No order as to costs."

Implications:

  • Direct effect on the parties: The Appellant's challenge to the forfeiture failed and the forfeited amount was not ordered refunded; the Adjudicating Authority's dismissal of the refund application was upheld.
  • Legal consequence: The Court applied established Supreme Court principles permitting contractual forfeiture of earnest/bid security where a bidder's conduct precludes formation or completion of the contract and where the forfeiture clause is expressly part of the auction/offer terms. The decision relied on prior authorities rather than creating a new rule; the Court distinguished disanalogous authority relied upon by the Appellant.
  • Scope and precedent: The extract reflects reliance on established precedents (NHAI v. Ganga Enterprises; State of Haryana v. Malik Traders) to validate forfeiture clauses in auction terms. The Court's conclusion is fact‑specific (based on the terms, acceptance of LoI, timeline, notices and conduct of the Appellant) and does not indicate the setting of a new legal principle beyond applying those precedents to the facts at hand.

Disposition as recorded in the extract: "For all the afore-noted reasons, this Appeal fails and is accordingly dismissed. No order as to costs." (Bench: Justice Bansi Lal Bhat, Justice Anant Bijay Singh, Ms. Shreesha Merla; New Delhi, 18th January, 2021.)

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    Saboo Tor Private Limited v. Sanjay Gupta, Liquidator Case Cold Roll Forming Ltd. And Another .

    Associates V/s. Delhi Development Authority and Another reported in (2015) 4 SCC 136. The relevant paragraphs are reproduced as hereunder:

    41. It must, however, be pointed out that in cases where a public auction is held, forfeiture of earnest money may take place even before an agreement is reached, as DDA is to accept the bid only after the earnest money is paid. In the present case, under the terms and conditions of auction, the highest bid (alongwith which earnest money has to be paid) may well have been rejected. In such cases, Section 74 may not be attracted on its plain language because it applies only when a contract has been broken.

    42. In the present case, forfeiture of earnest money took place long after an agreement had been reached. It is obvious that the amount sought to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown. In fact, it has been shown that far from suffering any loss, DDA has received a much higher amount on re-auction of the same plot of land. 43.7. Section 74 will apply to cases of forfeiture of earnest money under a contract. Where, however, forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section

    74 would have no application. Company Appeal (AT) (Insolvency) No. 1098 of 2020 The Appellant Counsel strenuously argued that in public auctions, Section 74 of the Indian Contract Act, 1872 cannot be invoked at a pre-contractual stage and further that the amount sought to be forfeited on the facts of the present case is sought to be forfeited without any loss being shown.

    6. Learned Counsel appearing for the Respondent contended that the submission by the Appellant that only two days extension was granted is factually incorrect as the Corrigendum shows that the proposed E-Auction date was 18.03.2020; announcement of the successful bidder was on 18.03.2020; LoI to be issued on 20.03.2020; unconditional acceptance of LoI on 23.03.2020; payment of upto 25% of total consideration is to be done by 25.03.2020 and payment of balance consideration by 20.04.2020. He further submitted that there was absolutely no violation of any timelines on behalf of the Liquidator and that the LoI was issued on 18.03.2020 and there was unconditional acceptance of LoI by the Appellant on 23.03.2020, by which time the Covid-19 situation in the country was well-known. Having given an unconditional acceptance on 23.03.2020 with respect to payment of the balance amounts, the Appellant cannot now take a stand that the forfeiture was unjustified on the ground that there was lockdown in the country.

    7. Heard both sides at length. The main issue which arises for consideration is whether the Liquidator was justified in forfeiting a part of the earnest money deposited by the Appellant. Company Appeal (AT) (Insolvency) No. 1098 of 2020

    8. Clause J of the Auction terms & conditions refers to Earnest Money Deposit (EMD) and the terms of forfeiture of EMD from the E-Auction of the Applicant/Bidder, which is detailed as hereunder: Forfeiture of Earnest Money Deposit from the E-Auction Applicant/Bidder It is to be noted that the Earnest Money furnished can be forfeited at any time, upon the occurrence of any of the following events:

    1. if there is a breach of any of the conditions under this E-Auction Process Information Document by the Bidder or in case Bidder is found to have made any misrepresentation; or

    2. if Bidder is found to be ineligible to submit the bid as per the conditions set out in Section 29 A of the IBC (as amended from time to time) or is found to have made a false or misleading declaration of eligibility as per the conditions set out in Section 29A of the IBC (as amended from time to time); or

    3. if the Bidder is identified as the Successful bidder and it fails to pay 25 % of the Money within the stipulated time as per the clauses of this E-auction documents after being intimated as successful bidder by the Liquidator.

    4. if the Successful Bidder fails to make the complete payment as per the terms of the Letter of Intent issued by the Liquidator.

    5. in any of the above event, all the amounts deposited till that date shall be forfeited and the property will be offered to the next highest bidder (Emphasis Supplied)

    9. The interpretation of Clause 5 by the Learned Counsel appearing for the Appellant that as the property was re-auctioned and the entire amount realized, the EMD was consequently to be refunded resulting in the non-applicability of the aforenoted clauses, is untenable, as the Clause of forfeiture does not anywhere specify that it is subject to the happening of any event viz. realization from any Sale. Undisputedly as per the timelines under the auction, the Appellant was required to make the payment of upto Company Appeal (AT) (Insolvency) No. 1098 of 2020 25% of the total sale consideration by 25.03.2020 and the LoI issued, was unconditionally accepted, by the Appellant on 23.03.2020. The Covid-19 situation in the country at that point of time was already an ongoing pandemic and there was declaration of Nationwide Lockdown by the Central Government vide a notification dated 24.03.2020 and hence it can be safely construed that the Appellant was well aware of the circumstances prevalent in the country.

    10. The e-mail dated 18.05.2020 addressed by the liquidator to the Appellant herein is significant to the facts of this case and is reproduced as hereunder: Dear Mr. Saini, This is in furtherance to emails dated 01.04.2020, 02.04.2020, 23.04.2020 & 15.05.2020 and the last telephone call the undersigned had regarding the payment to be made by you and the assurances given in this regard. For clarity, it is once again reiterated that the undersigned conducted E-auction for sale of specified inventory of Case Cold Roll Forming Limited in which you participated as a qualified bidder. The auction was conducted on 18.03.2020 and you were declared as a Successful Bidder. The E-auction timelines were also communicated to all the qualified bidders including you along with E-Auction Process Document dated 20.02.2020. The revised timelines were issued on 11.03.2020. As per agreed timelines and the LoI that which you had accepted unconditionally on 23.03.2020, an amount of Rs. 93,75,197/- plus GST against 25% of the total consideration was to be paid by i.e. 25.03.2020 and balance consideration plus GST by Monday, 20.04.2020. However, you defaulted in payment of 25% of the total consideration by 25.03.2020 and sent a request for extension of time for depositing the 25% of the total consideration. Company Appeal (AT) (Insolvency) No. 1098 of 2020 The auction was conducted on 18th March, 2020 and at the time of E-Auction, issuance of LoI and acceptance of LoI unconditionally you were aware of the situation caused by the spread of corona virus and which was very well persisting on the day of E-auction where you were declared as successful bidder. On declaration of you as successful bidder, the only thing remained was the transfer of funds. It may be noted that during all time of lock down, all digital services of banks were open and banks have been working too. Therefore, your obligation under the auction was not affected through COVID-19. Though you were always informed right time of payment of consideration of sale of inventory, the undersigned extended the time of deposit of 25% of sale consideration from 25.03.2020 to 31.03.2020 vide its mail dated 29.03.2020 without relaxing the timeline to submit the balanced amount. It is most unfortunate that despite our repeated mails dated 01.04.2020, 02.04.2020, 23.04.2020 & 15.05.2020 we neither received any response nor any consideration. The undersigned also tried to reach you over the call. The undersigned contacted Mr. Manish Saini (on Mobile No. 9816500028) on 09.05.2020 who assured to pay within 2 days. However, you failed to deposit the same. In view of the aforesaid facts and circumstances and in terms of the provisions of the Code, the undersigned, being a custodian of the assets of the Corporate Debtor, hereby by virtue of the present notice call upon you to forthwith upon receipt of the present notice, deposit the whole consideration for sale of Inventory i.e. INR. 3,75,00,786;- (Rupees Three Crore Seventy Five Lakh Seven Hundred and Eighty Six only) plus GST within 48 hours failing which the undersigned will be at liberty to forfeit the EMD of an amount of INR 16,00,000 (Rupees Sixteen Lakh only) which has been retained by the undersigned in terms of process document and LoI as unconditionally accepted by you. (Emphasis Supplied) The aforenoted e-mail establishes that despite repeated requests made by the Liquidator, there was no response from the Appellant herein Company Appeal (AT) (Insolvency) No. 1098 of 2020 which substantiates the case of the Respondent that the Appellant did not adhere to the timelines given in the Corrigendum. The liquidator addressed an email on 18.05.2020 asking the Appellant to deposit the total consideration amount of Rs. 3,75,00,786 by 20.05.2020, failing which, the EMD would be forfeited. As admittedly, the amount demanded was not paid by the Appellant, the amount was forfeited vide an e-mail dated 23.05.2020, in which communication, once again all the earlier e-mails were referred to, but the Appellant chose to reply only on 16.06.2020 which is almost a month thereafter.

    11. The facts in the Judgement of Kailash Nath Associates (Supra) relied upon by the Appellant are different from the facts of the instant case. In the aforenoted Judgement, the successful bidder had paid the entire 25% of the EMD and requested for extension of time to pay the balance amount of the total sale consideration which was also extended on recommendation of two High Power Committees. Secondly, the letter of cancellation and consequent forfeiture of earnest money was made without putting the successful bidder to Notice. Finally, the other noticeable feature of the aforenoted case is that DDA specifically requested the bidder to give their consent to make the balance payment. The facts in the attendant case are distinguishable in the sense that the successful bidder herein has paid only 10% of the EMD amount and not 25%, there was no consent taken to make the balance payment alongwith interest charges and lastly, the bidder in the instant case was admittedly put to Notice by way of repeated e-mails. Additionally, the facts specific to this case evidence that the forfeiture has Company Appeal (AT) (Insolvency) No. 1098 of 2020 no nexus with any consequential benefit gained/or loss suffered by the Respondent.

    12. We find it a fit case to place reliance on the Judgement of the Honble Supreme Court in National Highways Authority of India v. Ganga Enterprises, (2003) 7 SCC 410, in which the Honble Apex Court has observed as follows: The Indian Contract Act merely provides that a person can withdraw his offer before its acceptance. But withdrawal of an offer, before it is accepted, is a completely different aspect from forfeiture of earnest/security money which has been given for a particular purpose. A person may have a right to withdraw his offer but if he has made his offer on a condition that some earnest money will be forfeited for not entering into contract or if some act is not performed, then even though he may have a right to withdraw his offer, he has no right to claim that the earnest/security be returned to him. Forfeiture of such earnest/security in no way, affects any statutory right under the Indian Contract Act. Such earnest/security is given and taken to ensure that a contract comes into existence. It would be an anomalous situation that a person who, by his own conduct, precludes the coming into existence of the contract is then given advantage or benefit of his own wrong by not allowing forfeiture. It must be remembered that, particularly in government contracts, such a term is always included in order to ensure that only a genuine party makes a bid. If such a term was not there even a person who does not have the capacity or a person who has no intention of entering into the contract will make a bid. The whole purpose of such a clause i.e. to see that only genuine bids are received would be lost if forfeiture was not permitted.

    13. The Honble Supreme Court in State of Haryana V/s. Malik Traders, (2011) 13 SCC 200, held as under: The right to withdraw an offer before its acceptance cannot nullify the agreement to suffer any penalty for the withdrawal of the offer against the terms of agreement. A person may have a right to withdraw his Company Appeal (AT) (Insolvency) No. 1098 of 2020 offer, but if he has made his offer on a condition that the bid security amount can be forfeited in case he withdraws the offer during the period of bid validity, he has no right to claim that the bid security should not be forfeited and it should be returned to him. Forfeiture of such bid security amount does not, in any way, affect any statutory right under Section 5 of the [Contract] Act. The bid security was given by the respondent and taken by the appellants to ensure that the offer is not withdrawn during the bid validity period of 90 days and a contract comes into existence. Such conditions are included to ensure that only genuine parties make the bids. In the absence of such conditions, persons who do not have the capacity or have no intention of entering into the contract will make bids. The very purpose of such a condition in the offer/bid will be defeated, if forfeiture is not permitted when the offer is withdrawn in violation of the agreement.

    14. In the present case, the material on record evidences that reminder e-mails dated 01.04.2020, 02.04.2020, 23.04.2020, 15.05.2020 and 18.05.2020 were issued by the Liquidator to the Appellant herein requesting for payment of the balance amount of the 25% of the consideration but the Appellant neither replied to the e-mails nor made any payment adhering to the terms and conditions. It can be safely construed that the Appellant, by his own conduct, precluded the coming into existence of the concluded Sale and cannot now be given an advantage or benefit of his own wrong doing by not allowing forfeiture.

    15. Lastly, the contention of the Learned Counsel for the Appellant that Clause 13 of the Corrigendum is applicable to this case and that the same has not been considered by the Ld. Adjudicating Authority, is unsustainable on the ground that Clause 13 of the Corrigendum is with respect to payments regarding the balance 75% of the sale consideration. The timelines with respect to the initial payment of the 25% is clearly given as Company Appeal (AT) (Insolvency) No. 1098 of 2020 25.03.2020 and the payment of balance consideration by the successful bidder was given as 24.04.2020. Viewed from any angle, it cannot be construed that Clause 13 is applicable to the initial 25% payment of the EMD amount. Be that as it may, the documentary evidence, the e-mails dated 02.04.2020, 03.04.2020, 15.05.2020 and 18.05.2020 clearly establish that sufficient opportunity was given to the Appellant to make the balance payments, which the Appellant had failed to respond or comply with the requests made and therefore we are of the considered view that Clause 3 of the Forfeiture of Earnest Money Deposit from the E-Auction terms and conditions, squarely applies to the facts of this case. Hence, we are of the opinion that the Ld. Adjudicating Authority has rightly dismissed the Application seeking direction for refund of the EMD. For all the afore-noted reasons, this Appeal fails and is accordingly dismissed. No order as to costs. [Justice Bansi Lal Bhat] The Acting Chairperson [Justice Anant Bijay Singh] Member (Judicial) [Ms. Shreesha Merla] Member (Technical) New Delhi (18th January, 2021) ha/basant.

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    Comments

    Saboo Tor Private Limited v. Sanjay Gupta, Liquidator Case Cold Roll Forming Ltd. And Another .
    (Jan 18, 2021)