Karnataka High Court
Sri Dinesh Pulipati vs Sri Pankaj Srivastava on 12 December, 2024
Author: Hemant Chandangoudar
Bench: Hemant Chandangoudar
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NC: 2024:KHC:51263
WP No. 5759 of 2024
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 12TH DAY OF DECEMBER, 2024
BEFORE
THE HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
WRIT PETITION NO. 5759 OF 2024 (GM-RES)
Between:
Sri Dinesh Pulipati
Aged about 47 years,
S/o P.Bhaskar Naidu
Residing at No.113, 11th Main
IV 'T' Block, Jayanagar,
Bengaluru-560041.
...Petitioner
(By Sri B.Vachan, Advocate)
And:
1. Sri Pankaj Srivastava
Liquidator of M/s. Samrudhi Realty Ltd.,
Having Office at No.5
VI Cross, Navya Nagar Jakkur
Bengaluru-560064
2. The Registrar
National Company Law Tribunal,
Digitally signed by B
K Raheja Towers, M.G.Road,
MAHENDRAKUMAR
Location: HIGH Bengaluru-560001.
COURT OF
KARNATAKA (Proforma Party)
...Respondents
(By Sri Kiran Ramesh a/w
Smt. Ayushi Agarwal, Advocate for R1)
This Writ Petition is filed under Articles 226 and 227 of the
Constitution of India, praying to quash the letter dated 09.02.2024 issued
by the Respondent No.1 produced herein as Annexure-F and etc.
This Writ Petition, coming on for further dictation, this day, order
was made therein as under:
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NC: 2024:KHC:51263
WP No. 5759 of 2024
CORAM: HON'BLE MR JUSTICE HEMANT CHANDANGOUDAR
ORAL ORDER
M/s. Samrudhi Realty Ltd. was ordered to be liquidated under Section 33(1) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "IBC"). Following the liquidation order passed by the National Company Law Tribunal, Bengaluru Bench, respondent No.1 issued an e- auction process memorandum inviting bids for the sale of assets on an "as is where is basis," "as is what is basis,"
"whatever there is basis," and "without any recourse basis."
2. The petitioner submitted a bid via the e-auction platform National E-Governance Services Ltd. for the "Song of Winds" project, a plotted development project. The bid documents specified that the project land was owned by the corporate debtor, 10% of the project was complete, 71 plots were proposed, and 23 plots were sold, leaving 48 unsold. Before the petitioner's bid was opened, the petitioner issued a letter dated 31.01.2024 seeking clarification on whether homebuyers' claims would be settled from the auction proceeds or would form an additional liability.
3. The respondent No.1 subsequently opened the petitioner's bid, which was the highest. The petitioner was declared the successful bidder and was required to deposit 15% of the sale consideration within two days. However, the -3- NC: 2024:KHC:51263 WP No. 5759 of 2024 petitioner failed to deposit the balance amount within the stipulated time, leading respondent No.1 to cancel the letter of intent, disqualify the petitioner as the successful bidder, and forfeit the petitioner's Earnest Money Deposit (EMD). Aggrieved by this action, the petitioner filed the present writ petition.
4. The learned counsel for the petitioner contends that respondent No.1 lacked authority under law to forfeit the EMD. It was argued that Section 35 of the IBC empowers the liquidator to sell the corporate debtor's immovable property only without encumbrance, and does not provide for the sale of property with encumbrance. Further, the petitioner argued that the sale in question was not conducted as a "going concern" under Schedule I of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (hereinafter referred to as "Regulations"). Specifically, the petitioner asserted:
• Clause 12 of Schedule I does not permit forfeiture of EMD.
• Sale cancellation under Clause 12 could occur only after the expiry of 30 days, whereas respondent No.1 forfeited the EMD within two days, which was contrary to law.
5. In response, the learned counsel for respondent No.1 argued that the project was sold as a "going concern" as per Regulation 32A of the Regulations. The bid documents -4- NC: 2024:KHC:51263 WP No. 5759 of 2024 clearly stipulated the terms and conditions, including forfeiture of the EMD for failure to deposit the required amount. He submitted that forfeiture was justified as the petitioner defaulted on its obligations.
6. The learned counsel for respondent No.1 relied on the following decisions:
• Potens Transmission & Power Pvt. Ltd. v. APEX Buildsys Ltd. (NCLAT, New Delhi, decided on 08.04.2024), which upheld the liquidator's authority to forfeit the EMD under Schedule I and excluded the application of Section 74 of the Indian Contract Act to such sales.
• Westcoast Infraprojects Private Limited v. Ram Chandra Dallaram Choudary, Liquidator of Anil Limited (2023 SCC OnLine NCLAT 223), which affirmed similar principles.
• The above decisions were upheld by the Hon'ble Supreme Court in Civil Appeal No. 7209/2024.
7. The Apex Court in V.S. Palanivel v. P. Sriram, Liquidator, (2024 SCC OnLine SC 2413) emphasized that procedural compliance under Schedule I of the Regulations is mandatory, particularly when a consequence for non- compliance is prescribed. Notably:
• Under Clause 12 of Schedule I, the highest bidder must pay the balance consideration within 90 days, failing which the sale is to be canceled.-5-
NC: 2024:KHC:51263 WP No. 5759 of 2024 • The timeline for compliance is mandatory, and liquidators are not permitted to condone delays.
8. When a liquidator conducts a sale under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, the powers and actions of the liquidator are governed strictly by the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Regulations made thereunder.
I. The liquidator is required to conduct the sale in accordance with Schedule I of the Regulations. Schedule I does not specifically provide for forfeiture of Earnest Money Deposit (EMD) in the event of default by the highest bidder. Instead, it outlines steps for finalizing the sale, timelines for payment, and cancellation of the sale in case of non-compliance.
II. If the Regulations or IBC do not expressly provide for forfeiture of EMD, the liquidator cannot unilaterally introduce a clause in the bid document permitting such forfeiture. Any such clause would exceed the authority vested in the liquidator under the IBC and would be ultra vires.
III. The liquidator acts as a statutory officer and is bound to operate within the framework of the law. The inclusion of terms inconsistent with the law would render the clause unenforceable.
-6-NC: 2024:KHC:51263 WP No. 5759 of 2024 IV. While the bid document operates as a contract between the liquidator and the bidder, it cannot include terms that conflict with statutory provisions or the Regulations. The contract cannot override mandatory legal principles established under the IBC and the Liquidation Process Regulations.
V. In the absence of a statutory forfeiture provision, the liquidator must assess actual damages caused by the bidder's default under Section 74 of the Indian Contract Act, 1872. Blanket forfeiture without assessing damages would be legally impermissible.
VI. A clause providing for forfeiture of EMD cannot be incorporated into the bid document unless expressly permitted by the IBC or the Liquidation Process Regulations. The liquidator must adhere strictly to the legal framework and cannot introduce terms beyond the scope of the Regulations. Any such clause, if included, would be unenforceable as being ultra vires the statutory provisions governing the liquidation process.
9. In the present case, the bid document specified that the project was a plotted development, with 48 plots remaining unsold. The sale terms indicated the project was being sold as a "going concern," contrary to the petitioner's assertion.
10. However, Schedule I of the Regulations does not empower the liquidator to forfeit EMD for failure to deposit the -7- NC: 2024:KHC:51263 WP No. 5759 of 2024 sale consideration. The clause permitting such forfeiture is ultra vires the Regulations.
11. Moreover, respondent No.1 failed to assess actual damages caused by the petitioner's default. It is undisputed that the project was subsequently sold to another bidder for ₹14.05 crores, mitigating any potential loss.
12. In light of the above, the forfeiture of the petitioner's entire EMD amount is not justified. Instead, it would suffice if a sum of ₹3,70,000/- is forfeited as compensation, and the balance amount of ₹70,00,000/- is refunded to the petitioner.
13. Accordingly, the respondent is directed to release Rs.70,00,000/- of the petitioner's EMD amount after deducting Rs.3,70,000/- as compensation. The writ petition is disposed of in these terms.
14. Hence the following:
ORDER i. The writ petition is partly allowed. ii. The impugned letter dated 09.02.2024 issued by respondent No.1 produced at Annexure-F is hereby quashed.
iii. Respondent No.1 is directed to refund an amount of Rs.70,00,000/- to the petitioner, without -8- NC: 2024:KHC:51263 WP No. 5759 of 2024 interest, within four weeks from the date of receipt of a certified copy of this order. The balance amount of Rs.3,70,000/- shall be retained by Respondent No.1 and adjusted towards damages caused.
Sd/-
(HEMANT CHANDANGOUDAR) JUDGE KMV List No.: 1 Sl No.: 184