Forfeiture Of Earnest Money Deposit Is A Valid Consequence Upon Failure To Pay Balance Sale Consideration Under IBC Liquidation Process: Supreme Court

"The appellant having paid the money voluntarily and the terms and conditions stipulated in the e-auction notice having provided for the entire amount paid by a successful bidder, including EMD to be forfeited, if he fails to pay the balance sale consideration as per the terms of the sale, there is no reason to order refund." Supreme Court, in a significant ruling dated September 28, 2026, held that the forfeiture of Earnest Money Deposit (EMD) and other deposited amounts is a permissible and automatic consequence when a successful bidder fails to pay the balance sale consideration within the stipulated time under the liquidation process of the Insolvency and Bankruptcy Code (IBC).

A bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran observed that when a bidder participates in an auction with open eyes and accepts the terms of the e-auction notice, they cannot later resile from the specific forfeiture conditions mandated upon their own default.

The appellant, a successful bidder in a liquidation auction conducted by a Resolution Professional, failed to remit the balance sale consideration within the mandated 90-day period. Despite an initial deposit, the bidder sought to excuse the default by citing a pending civil dispute regarding the title deeds of the property. The NCLT initially ordered a refund, but the NCLAT reversed this decision, affirming the forfeiture of the EMD and other deposited amounts.

The primary issue before the Supreme Court was whether the forfeiture of EMD and other deposits is legally sustainable under the Insolvency and Bankruptcy Board (Liquidation Process) Regulations, 2016, in the absence of an express forfeiture clause within the regulations themselves. The court was further tasked with determining whether the failure to pay the balance consideration constituted a wilful default, thereby negating the bidder's plea for a refund based on the 'Triple Test' doctrine.

Validity Of Forfeiture Clauses

The court rejected the contention that the absence of an explicit forfeiture provision in the 2016 Regulations bars the liquidator from enforcing such a condition. The bench emphasized that the explicit terms of the e-auction notice, which clearly state that the failure to pay the balance consideration will lead to forfeiture, must be strictly enforced. Since the bidder voluntarily agreed to these conditions at the time of bidding, they are bound by the contractual consequences of their failure.

Contractual Binding Nature Of Auction Notice

The court observed that the auction was conducted on an 'as is where is' basis, and the non-availability of certain sale deeds was known to the appellant. By failing to verify title deeds before participating in the auction or depositing the money, the bidder could not later project this as an excuse to avoid payment. The bench noted that the forfeiture clause acts as an essential safeguard for the time-bound nature of the IBC liquidation process.

"The argument of absence of stipulation of forfeiture, in the regulations also falls flat in the wake of the specific condition in the auction notice, which made forfeiture an inevitable consequence on failure to deposit the balance sale consideration."

Rejection Of Triple Test Application

The court found that the 'Triple Test'—used to assess whether a bidder acted in good faith or was prevented by external circumstances—was inapplicable in the present case. The bench noted that the appellant's default was wilful and that the alleged extraneous factors, such as the litigation initiated by another party, were merely afterthoughts intended to scuttle the auction process. The court highlighted that there was no material evidence presented to substantiate the bidder's financial capacity to complete the transaction.

Affirmation Of Earlier Precedents

In its analysis, the bench relied upon the principles upheld in cases like Westcoast Infraprojects Private Limited v. Mr. Ram Chandra Dallaram Choudhary. The court reiterated that when a successful bidder fails to adhere to the payment schedule stipulated in the auction terms, the forfeiture of the EMD and any other deposits made is a legally sound outcome. The court firmly stated that the higher value fetched in a subsequent auction does not entitle a defaulting bidder to a set-off or a refund of their forfeited amount.

Concluding its analysis, the bench found no reason to interfere with the impugned order of the NCLAT, which had correctly identified the wilful default of the appellant. The Supreme Court dismissed the appeal and rejected all pending applications, thereby upholding the sanctity of the auction process and the strict timelines required under the IBC.

Date of Decision: 28 September 2026