The Supreme Court has upheld the forfeiture of ₹6.39 crore deposited by a successful bidder in a liquidation auction after it failed to pay the remaining sale consideration within the stipulated 90-day period.
A bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran has observed that an express auction condition permitting forfeiture of the entire deposit, including earnest money and part-payment towards the purchase price, bound the bidder.
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The dispute arose from an e-auction of assets belonging to a corporate debtor undergoing liquidation under the Insolvency and Bankruptcy Code, 2016.
The insolvency proceedings had commenced on an operational creditor’s application under Section 9 of the IBC. Although expressions of interest were received, no resolution plan was submitted within the available time. The National Company Law Tribunal consequently approved liquidation. A challenge by a suspended director to the liquidation order was subsequently dismissed by the NCLAT.
An e-auction notice dated October 25, 2021 offered several properties for sale. The disputed property, identified as Lot No. 5, comprised land measuring 68 kanals and 17 marlas at Village Nangal Khurd, Tehsil Sonepat, Haryana. Its reserve price was ₹25.56 crore.
The auction notice expressly stated that the sale was on an “as is where is” basis. It also disclosed a pending civil suit concerning the sale deed relating to a six-marla portion of the land and stated that the liquidator was filing an application to obtain custody of the document.
The assessee participated in the auction held on November 15, 2021 and emerged as the successful bidder at the reserve price.
Under the auction terms, the balance sale consideration was payable within 30 days, by December 14, 2021. Payment could also be made within the extended period of 90 days, subject to interest at 12% per annum. The final deadline was February 14, 2022.
On December 15, 2021, the bidder emailed the resolution professional, expressing its intention to pay the remaining ₹19.17 crore by February 14, 2022, together with the applicable interest.
However, it did not make the payment.
The bidder relied on proceedings initiated by M/s Agarwal Trading Company concerning the same property. While rejecting that company’s writ petition, the Punjab and Haryana High Court had allowed it time until February 14, 2022 to approach the NCLT and directed that no sale deed be executed during that period.
Agarwal Trading Company filed an application before the NCLT on February 11, 2022 and later withdrew it on September 22, 2022.
ASJ Finsolutions also approached the NCLT on February 11, 2022 seeking prior title deeds. That application was rejected on March 31, 2023, and its appeal was dismissed on April 21, 2023.
The bidder then moved the High Court. While those proceedings were pending, the property was auctioned again and sold for ₹31.10 crore. The High Court subsequently rejected the request for prior deeds while leaving the bidder free to pursue remedies available in law.
NCLT Ordered Refund; NCLAT Reversed It
Relying on the liberty granted by the High Court, the bidder initiated fresh proceedings before the NCLT seeking annulment of the forfeiture and refund of its deposit.
The NCLT allowed the request. It considered whether the bidder had acted with a hidden agenda to rig the auction, lacked adequate financial capacity, or had been prevented by extraneous circumstances from completing payment.
The tribunal found no material indicating a mala fide intention to frustrate the auction. It relied on the bidder’s communications promising payment and treated the High Court’s direction in the third party’s proceedings as a bona fide reason for withholding the balance.
The NCLAT reversed that decision. The Supreme Court agreed with the appellate tribunal.
Disclosed Title Issues Could Not Justify Withholding Payment
The Supreme Court emphasised that the auction notice had disclosed the issue concerning the sale deed and that the bidder had participated with knowledge of the terms.
The bidder had neither sought verification of the title deeds before bidding nor raised the issue before depositing the earnest money. It could not subsequently make production of those documents a condition for paying the balance consideration.
The Court also noted that earlier proceedings had already resulted in a finding of wilful default in payment of the remaining ₹19.17 crore.
Given the express forfeiture clause, the bidder could not successfully argue that the upheld cancellation of its bid had no bearing on its claim for refund.
The Court rejected the reliance on the third party’s proceedings as an afterthought and an excuse to avoid completing the auction purchase.
Promises to Pay Did Not Establish Financial Capacity
The Supreme Court disagreed with the NCLT’s reliance on repeated assurances of payment as evidence of financial capacity.
It held that financial capacity had to be supported by material demonstrating the ability to pay. Communications merely expressing willingness to make payment were insufficient.
The Court also stressed the time-bound nature of liquidation proceedings and noted that substantial time had already elapsed after the payment default.
The bidder’s claim that other auction purchasers had received extensions beyond 90 days was also rejected. The Court observed that the contention could have been raised during the earlier proceedings. It declined to examine orders supplied with the written submissions and found the discrimination argument belated.
Higher Resale Price Did Not Entitle Bidder to Refund
The subsequent sale at a higher price did not persuade the Court to reverse the forfeiture.
The Court attributed the higher realisation to the property’s inherent value and held that it did not operate as a set-off against the expenses incurred.
Accordingly, the fact that the fresh auction fetched ₹5.54 crore more than the original bid did not create an entitlement to recover the forfeited deposit.
EMD Limit Did Not Restrict Forfeiture to Earnest Money
The bidder argued that Schedule I of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 limited earnest money to 10% of the reserve price and did not expressly provide for forfeiture.
The Supreme Court acknowledged the regulatory limit and the absence of an express forfeiture provision in the regulations. However, it held that the auction notice specifically provided for forfeiture upon failure to pay the balance consideration.
The judgment recorded that the ₹6.39 crore deposit comprised ₹2.55 crore in earnest money and ₹3.84 crore towards the balance sale consideration. The amount had been paid without protest.
The auction condition covered the entire amount paid by a successful bidder, including earnest money, where the bidder failed to pay the balance in accordance with the sale terms.
The Court also referred to Westcoast Infraprojects Private Limited v. Mr. Ram Chandra Dallaram Choudhary, in which forfeiture of both earnest money and other deposits under an auction clause had been upheld.
Finding no reason to direct a refund or interfere with the NCLAT’s order, the Supreme Court dismissed the appeal and rejected the pending applications.
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