Supreme Court Confirms NCLT’s Power to Forfeit Entire Deposit in Liquidation Sales Under IBC
In a significant ruling impacting insolvency and liquidation proceedings, the Supreme Court of India has held that the National Company Law Tribunal (NCLT) is empowered to forfeit the entire deposit paid by a purchaser who defaults in making full payment for assets sold under judicial liquidation.
This judgment reinforces the strict statutory framework of the Insolvency and Bankruptcy Code, 2016 (IBC) and clarifies that the consequences of default in liquidation auctions are governed by the IBC—not by general contract law principles.
Background: Purchaser Defaulted on Payment for Liquidation Assets
The case arose when a successful bidder in a liquidation auction failed to meet the payment schedule prescribed under the liquidation process. The purchaser later sought a refund of the deposit, invoking Section 74 of the Indian Contract Act, 1872, which deals with compensation for breach of contract.
The Supreme Court was asked to determine whether the liquidator or NCLT could forfeit the entire deposit or whether Section 74 restricted forfeiture to “reasonable compensation”.
Key Holding: Contract Act Does Not Apply to IBC Liquidation Sales
The Supreme Court categorically held that:
- The IBC is a complete statutory code, and liquidation sales under the IBC do not constitute a traditional contract governed by the Contract Act.
- Section 74 cannot be invoked to prevent forfeiture or seek refund.
- Defaulting purchasers are fully liable to forfeiture of the entire deposit amount, as per auction terms and liquidation regulations.
- The NCLT is within its powers to order such forfeiture when a bidder fails to honour payment obligations.
- Statutory auctions under IBC are designed to protect creditors and ensure value maximisation—therefore, strict adherence to timelines and conditions is essential.
This ruling strengthens the enforcement mechanism under the IBC and discourages speculative or unserious bidding in liquidation processes.
Impact on Insolvency Practice and Liquidation Auctions
This Supreme Court decision carries significant implications for insolvency professionals, bidders, and corporate debtors:
1. Stronger Deterrent Against Default
Purchasers will face complete forfeiture, reducing frivolous participation in auctions.
2. Increase in Auction Certainty
Liquidators gain clarity and authority to enforce auction terms, ensuring smoother liquidation processes.
3. Priority of IBC Over Contract Act
The ruling confirms that IBC’s statutory framework prevails over general principles of contract law for liquidation sales.
4. Protection of Creditor Interests
By preventing delays and defaults, the judgment supports value maximisation—a key objective of the IBC.
Supreme Court’s Consistent Position on Auction Defaults
The judgment aligns with previous decisions in insolvency and SARFAESI contexts where courts upheld the forfeiture of deposits when auction purchasers default on payment obligations.
Conclusion
The Supreme Court’s ruling is a landmark development in IBC jurisprudence, affirming that:
- The NCLT can order complete forfeiture of deposits when purchasers default on liquidation sale payments.
- Section 74 of the Contract Act has no application in such statutory insolvency processes.
- Liquidation auctions must be taken seriously, and bidders must strictly adhere to payment timelines.
For insolvency professionals, practitioners, and stakeholders in liquidation processes, this decision reinforces the need for diligence, compliance, and clarity in auction procedures.
