Supreme Court: Forfeiture Of Deposit In Private Sale Under IBC Valid; Section 74 Contract Act Inapplicable

The Supreme Court ("Court") in its judgement Messrs. Shri Karshni Alloys Private Limited v. Ramakrishnan Sadasivan, Civil Appeal Nos. 3625-3628 of 2025 dated December 10, 2025 has held that the forfeiture of deposit as a commitment advance paid by a prospective purchaser/ appellant was lawful and justified under the Insolvency and Bankruptcy Code, 2016 ("IBC"). The Court upheld the NCLT's order dated June 29, 2022 which stipulated that any deviation from the extended payment timelines would result in automatic forfeiture of the entire amount paid by the appellant. The Court further noted that the transaction was a private sale under Regulation 33(2)(d) of the IBBI (Liquidation Process) Regulations, 2016 ("Liquidation Regulations"), requiring prior permission of the Adjudicating Authority, and not a contractual arrangement governed by the Indian Contract Act, 1872 ("Contract Act"). Consequently, Section 74 of the Contract Act relating to compensation for breach of contract had no application to the case.

Brief Facts

Messrs. Surana Industries Limited ("Corporate Debtor") entered into corporate insolvency resolution process ("CIRP") on January 2, 2018 and liquidation commenced pursuant to an order dated October 12, 2018 passed by the Adjudicating Authority. Mr. Ramakrishnan Sadasivan ("Liquidator") was appointed as the liquidator. The Corporate Debtor owned assets/plants at Gummidipoondi in Tamil Nadu and Raichur in Karnataka.

Between January 6, 2019 and February 2, 2021, 6 (six) auctions were held for the sale of these assets/plants, resulting in the sale of only the Gummidipoondi assets. The assets of the Corporate Debtor located in Raichur remained unsold despite 13 (thirteen) auctions conducted till June 30, 2021.

The liquidation value of the assets located in Raichur was assessed thrice: Rs. 338.01 crore (Rupees three hundred thirty-eight crore and one lac) in December 2018, Rs. 227.31 crore (Rupees two hundred twenty-seven crore and thirty-one lac) in August 2019, and Rs. 117.23 crore (Rupees one hundred seventeen crore and twenty-three lac) in August 2020, showing a continuous decline.

After the last unsuccessful auction on July 28, 2021 with a reserve price of Rs. 105 crore (Rupees one hundred five crore) , the Stakeholders Consultation Committee ("SCC") decided on July 31, 2021 to sell the assets in Raichur at scrap value of approximately Rs. 50 crore (Rupees fifty crore).

On September 9, 2021, the appellant made an offer of Rs. 105.21 crore (Rupees one hundred five crore and twenty-one lac) to purchase the assets located in Raichur as a going concern. The proposal envisaged equity infusion of Rs. 40 crore (Rupees forty crore) and unsecured debts of Rs. 65.21 crore (Rupees sixty-five crore and twenty-one lac). The appellant deposited 10% (ten percent) of the sale consideration Rs. 10.5210 crore (Rupees ten crore fifty-two lac ten thousand) as commitment advance and committed to pay the balance amount within 15 (fifteen) days from the date of NCLT approval.

The SCC consented to the sale at its meeting on September 15, 2021. The Liquidator filed an application (IA No. 997/CHE/2021) before the NCLT on September 22, 2021 seeking approval for the private sale. The NCLT allowed the application on March 22, 2022 ("NCLT Order") , directing payment within 15 (fifteen) days from receipt of the order.

The appellant claimed difficulty in making payment within the stipulated time due to efflux of time between application filing and NCLT Order, and changes in market scenario. On April 13, 2022 , the SCC extended the timeline till May 30, 2022 with 12% (twelve percent) interest on payments made post April 15, 2022. The appellant then filed IA No. (IBC)/512(CHE)/2022 on April 25, 2022 seeking extension till May 31, 2022.

By order dated June 29, 2022, the NCLT granted extension noting that the appellant had paid Rs. 36.30 crore (Rupees thirty-six crore and thirty lac) till that date. The NCLT directed payment of 50% (fifty percent) of balance sale consideration Rs. 34.60 crore (Rupees thirty-four crore and sixty lac) with 12% (twelve percent) interest by June 6, 2022 , and remaining 50% (fifty percent) Rs. 34.60 crore (Rupees thirty-four crore and sixty lac) with 12% (twelve percent) interest by July 31, 2022. Crucially, the order recorded that the appellant should strictly comply with these timelines and any deviation would result in forfeiture of the entire amount paid.

The appellant failed to abide by the extended timelines, though it paid a further sum of Rs. 1.50 crore (Rupees one crore and fifty lac), bringing the total payment to Rs. 37.80 crore (Rupees thirty-seven crore and eighty lac). At the SCC meeting on August 1, 2022 , stakeholders decided to enforce forfeiture as per the NCLT Order. By letter dated August 2, 2022 ("Liquidator's Letter"), the Liquidator informed the appellant that the entire amount of Rs. 37.80 crore (Rupees thirty-seven crore and eighty lac) stood forfeited.

The appellant filed IA No. 952 of 2022 assailing the Liquidator's Letter and seeking further extension with waiver of interest. By order dated August 10, 2022 , the NCLT dismissed this application, holding that the Liquidator's action was based on the NCLT's earlier order dated June 29, 2022 , and that forfeiture became automatic upon non-payment.

On August 13, 2022 the appellant filed Company Appeal No. 443 of 2022 before the National Company Law Appellate Tribunal ("NCLAT") challenging the NCLT order dated June 29, 2022. On August 31, 2022 , it filed Company Appeal No. 438 of 2022 against the order dated August 10, 2022. Subsequently, the appellant also filed Writ Petition No. 24262 of 2022 before the Madras High Court on September 5, 2022 , which was dismissed as not maintainable on November 24, 2022.

The NCLAT initially delivered a split verdict on October 20, 2023 wherein the Member (Judicial) dismissed both appeals while the Member (Technical) partly allowed them, holding that only 10% (ten percent) Rs. 10.5210 crore (Rupees ten crore fifty-two lac ten thousand) was liable to be forfeited. The matter was referred to a third Member (Technical) who agreed with the Member (Judicial) on May 31, 2024 , resulting in dismissal of both appeals by majority opinion.

After the appellant's failure to deposit the entire amounts, the assets of the Corporate Debtor located at Raichur were sold to Messrs Texcon Steels Limited for Rs. 145.38 crore (Rupees one hundred forty-five crore and thirty-eight lac) on August 30, 2022, which was significantly higher than the appellant's offer. The forfeited amount was distributed amongst stakeholders as per law.

Submissions by the Parties

Submissions by the appellant (M/s. Shri Karshni Alloys Private Limited):

1. On behalf of the appellant, it was contended that since the assets of the Corporate Debtor located at Raichur were eventually sold for Rs. 145.38 crore (Rupees one hundred forty-five crore and thirty-eight lac), which was far higher than the appellant's offer of Rs. 105.21 crore (Rupees one hundred five crore and twenty-one lac) , the stakeholders did not suffer any actual loss.
2. Therefore, forfeiture of Rs. 37.80 crore (Rupees thirty-seven crore and eighty lac) paid by the appellant was unjust and unlawful.
3. The appellant relied on case law pertaining to Section 74 of the Contract Act regarding compensation payable for breach of contract and submitted that the forfeiture amount should be limited to actual loss suffered.
4. The appellant contended that the sale was under Regulation 33(2)(c) of Liquidation Regulations, which provides for private sale when the asset is sold at a price higher than the reserve price of a failed auction, thereby characterizing it as a contractual arrangement.

Submissions by the respondent (Liquidator):

1. The Liquidator argued that extension of time was granted by the NCLT in exercise of power under Rule 15 of the NCLT Rules, 2016, which was duly acted upon by the appellant by making further payment of Rs. 1.50 crore (Rupees one crore and fifty lac).
2. Having done so, the appellant could not seek to assail the forfeiture condition included in the extension order.
3. The Liquidator contended that this was not a case of penalty or unjust enrichment falling under Section 74 of the Indian Contract Act, 1872, and that judgments relied upon by the appellant had no relevance.
4. It was further submitted that after dismissal of the writ petition, the Liquidator had already distributed the forfeited amount amongst stakeholders as per law, and there was no cause to turn back the clock when the appellant was wholly disentitled from claiming relief.

Findings and Conclusion by the Supreme Court

The Court found that the sale transaction clearly fell under Regulation 33(2)(d) of the Liquidation Regulations, which permits private sale when prior permission of the NCLT has been obtained. The Court rejected the appellant's contention that it was covered by Regulation 33(2)(c) of the Liquidation Regulations.

The Court noted that the auction process had failed in July 2021 itself and was thereafter followed by the stakeholders' decision to resort to a scrap sale. The question of the assets being sold at a price higher than the reserve price of the failed auction was not available thereafter. Once the stakeholders directed the liquidator to take the process forward in accordance with the IBC and the Liquidator filed an application seeking approval of the NCLT for the sale, there was no possibility of bringing the sale within the ambit of Regulation 33(2)(c).

The Court held that this was not a case of a contract between the appellant and the Liquidator whereby the appellant could seek to fall back on Section 74 of the Contract Act. The sale in question was purely under the supervision of the NCLT, and the forfeiture condition stipulated by the NCLT while granting extension of time could not be equated with a forfeiture clause in a contract.

The Court found that the NCLT was exercising power under Rule 15 of the NCLT Rules, 2016, and was therefore at liberty to stipulate such terms as the justice of the case required. The Court noted that the appellant itself had asked for extension of time till May 31, 2022 , and when the NCLT granted extension directing payment by June 30, 2022 and July 31, 2022 , it was justified in doing so.

The Court observed that the appellant had already backtracked on its original commitment to pay the entire amount within 15 (fifteen) days from March 22, 2022 and was being given an extended timeline to make payment by July 31, 2022 (nearly 4 (four) months later). In these circumstances, the NCLT was fully justified in adding the forfeiture clause.

The Court emphasized, referring to its earlier decision in Kridhan Infrastructure Private Limited v. Venkatesan Sankaranarayan, that time is a crucial facet of the scheme under the IBC and to allow such proceedings to lapse into indefinite delay would plainly defeat the very object of the statute.

The Court found that the appellant had accepted and acted upon the extension order dated June 29, 2022 by making two additional payments totalling Rs. 1.50 crore (Rupees one crore and fifty lac) on July 13, 2022 (for Rs. 50 lacs (Rupees fifty lac)) and July 25, 2022 (Rs. 1 crore (Rupees one crore)).

The appellant actually made payments after the passing of the extension order but failed to make full payment by July 31, 2022. In these circumstances, the appellant could not seek to approbate and reprobate at this stage by assailing the forfeiture clause in the said order.

Addressing the appellant's argument that stakeholders suffered no loss since the assets were eventually sold for Rs. 145.38 crore (Rupees one hundred forty-five crore and thirty-eight lac), the Court observed that the outstanding dues of financial creditors were never fully recovered and they had to suffer a major haircut.

The Supreme Court found no merit in the contentions advanced on behalf of the appellant. The appeals were held to be bereft of merit both on facts and in law.

Please find attached a copy of the judgement, here.

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