Liquidation Sale Under IBC Is Not a Contract: Bidder Bound by NCLT Extension and Forfeiture: Supreme Court
- REEDLAW
- 11 hours ago
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REEDLAW Legal News Network reports: In a landmark ruling clarifying the legal character of liquidation sales under the Insolvency and Bankruptcy Code, 2016, the Supreme Court held that a liquidation auction does not constitute a contractual transaction, and that a bidder who sought and availed an extension of time subject to an express forfeiture condition could not later challenge the forfeiture upon failure to adhere to the extended timelines.
The Supreme Court, while adjudicating a batch of appeals arising from liquidation proceedings, examined the legality of the forfeiture of amounts paid by a successful bidder who had failed to comply with payment timelines despite having obtained an extension from the Adjudicating Authority. The Bench comprising Justice Sanjay Kumar and Justice Alok Aradhe observed that the extension was granted with a clear forfeiture stipulation, which had been expressly accepted and acted upon by the bidder. The Court held that such forfeiture flowed from statutory powers exercised under the IBC framework and not from contractual penalty principles, and that a party could not approbate and reprobate by accepting the benefit of an extension order while subsequently assailing its conditions.
The Appellant had challenged the orders passed by the Adjudicating Authority extending time for payment of sale consideration in a liquidation sale and providing for forfeiture upon default, as well as the consequential forfeiture action taken by the Liquidator. The Corporate Debtor had entered liquidation, and repeated auction attempts in respect of one of its plants had failed, following which the Stakeholders Consultation Committee resolved to sell the asset. The Appellant made an offer to purchase the asset as a going concern, deposited a commitment advance, and sought approval of the Adjudicating Authority for a private sale, which was granted subject to payment of the balance consideration within the stipulated period.
Subsequently, on the Appellant’s request, citing changed market conditions, the stakeholders agreed to extend the timeline for payment, subject to interest, and the Appellant approached the Adjudicating Authority seekinga formal extension. By order dated 29.06.2022, the Adjudicating Authority granted an extended schedule with clear timelines and expressly stipulated that any deviation would result in forfeiture of the entire amount paid. Despite this indulgence, the Appellant failed to comply with the extended timelines, made only partial payments, and did not clear the balance consideration within the time granted.
Upon default, the Stakeholders Consultation Committee resolved to enforce forfeiture in terms of the Adjudicating Authority’s order, and the Liquidator issued a communication forfeiting the amounts paid and proceeded to issue a fresh auction notice. The Appellant’s subsequent application challenging the forfeiture and seeking further extension was dismissed by the Adjudicating Authority, which held that forfeiture had become automatic upon non-compliance with its earlier order. Appeals before the Appellate Tribunal resulted in a split verdict, but the majority opinion upheld the forfeiture and dismissed the appeals, holding that the sale was governed by Regulation 33(2)(d) of the Liquidation Regulations and not by contractual principles.
In further appeal, it was held that the extension of time and the forfeiture condition were validly imposed by the Adjudicating Authority in exercise of its powers under Rule 15 of the NCLT Rules, keeping in view the time-bound nature of the insolvency framework. The plea that the forfeiture amounted to an unjust penalty under Section 74 of the Indian Contract Act was rejected, as the sale was conducted under statutory supervision and not as a private contract. It was further held that the Appellant, having accepted and acted upon the extension order by making further payments, could not later challenge the forfeiture condition, and its conduct in pursuing parallel remedies without disclosure disentitled it to any equitable relief. Finding no infirmity in the majority view of the Appellate Tribunal and no perversity in the orders of the Adjudicating Authority, the appeals were dismissed.
Mr. Mukul Rohatgi and Mr. Jaideep Gupta, Senior advocates, Ms. Bharti Tyagi, AOR, Mr. S.D. Singh, Ms. Shweta Sinha, Ms. Racheeta Chawla, Mr. Ram Kripal Singh and Mr. Siddharth Singh, Advocates, represented the Appellant.
Mr. Aditya Verma, AOR, Mr. K. Rigved Prasad, Mr. Mayan Jain and Ms. Parkhi Rai, Advocates, appeared for the Respondent.
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