Bid Beyond the EMD and Fail to Pay? You Can Lose All of It, Not Just 10%, Rules Supreme Court

Case at a glance: The Supreme Court has upheld the forfeiture of an entire Rs 6.39 crore deposit made by a bidder in an IBC liquidation e-auction who failed to pay the balance sale consideration — rejecting the argument that forfeiture should be capped at the 10% EMD prescribed under the Liquidation Process Regulations. Where the auction notice itself contains an express forfeiture clause, the Court held, that contractual term governs.

During the liquidation of a corporate debtor, an immovable property with a reserve price of Rs 25.56 crore was put up for e-auction on an “as is where is, as is what is” basis. The auction notice pre-disclosed a pending civil dispute over the sale deed for part of the property. ASJ Finsolutions won the auction at the reserve price and deposited Rs 6.39 crore in total — Rs 2.55 crore as earnest money and a further Rs 3.84 crore toward the purchase price, together exceeding the 10% EMD cap prescribed under Schedule I of the IBBI (Liquidation Process) Regulations, 2016.

The balance Rs 19.17 crore was due within 30 days, extendable to 90 days with 12% interest. Despite repeated assurances of intent to pay, the bidder failed to remit the balance within the stipulated period. The liquidator forfeited the entire Rs 6.39 crore already paid. The NCLT initially ordered a refund to the bidder; the NCLAT reversed that order in the liquidator's favour; the bidder then appealed to the Supreme Court.

The Key Question Before the Court

Where a liquidation e-auction notice expressly provides for forfeiture of amounts paid on a bidder's default, is that forfeiture capped at the 10% EMD figure referenced in the Liquidation Process Regulations, or can the full amount actually paid be forfeited?

Why the Forfeiture Clause Governed, Not Just the Regulations

The Court held that express contractual forfeiture terms in the e-auction notice govern the outcome, independent of whether the Liquidation Process Regulations separately spell out a matching forfeiture mechanism. As the Bench put it, the absence of an explicit forfeiture stipulation in the regulations themselves “falls flat” where the auction notice clearly conditions the sale on forfeiture for non-payment.

The Court applied what secondary reporting describes as the NCLT's established “triple test” for evaluating a defaulting bidder's excuses: whether the bidder had a hidden agenda to rig or frustrate the auction, whether they genuinely lacked financial capacity, or whether real extraneous obstacles prevented payment. None of the three was found to assist the appellant here.

Why the Bidder's Defences Failed

• Title deed dispute: Rejected, since this was pre-disclosed in the auction notice itself, and the bidder deposited money without protest — effectively accepting the risk knowingly.
• Claimed financial incapacity: Rejected, since repeated assurances of ability and intent to pay, unsupported by material evidence, do not excuse a default.
• Related third-party litigation: Treated as an afterthought rather than a genuine impediment to payment.
• Regulatory silence on forfeiture beyond EMD: Held not to matter, since the auction notice's own express forfeiture condition was sufficient and enforceable on its own terms.

Why This Judgment Matters

• It strengthens liquidators' hands in structuring e-auction sale terms, confirming that well-drafted forfeiture clauses going beyond the bare 10% EMD are enforceable even without matching language in the Liquidation Process Regulations.
• It puts bidders on notice that paying beyond the EMD toward the purchase price risks losing that entire amount, not merely 10%, on default.
• It confirms that pre-disclosed encumbrances or title issues, once accepted by a bidder who proceeds to pay without protest, cannot later be raised as an excuse for non-payment.
• It signals the Court's reluctance to rewrite commercially negotiated auction terms in liquidation sales, reinforcing “as is where is” sales as binding once a bid is accepted.

What This Means in Practice

For Liquidators and Auction Authorities

• Draft e-auction notices with clear, express forfeiture clauses covering the full amount paid, not just the EMD, to maximise enforceability in the event of a bidder default.
• Ensure any known encumbrances or disputes over the property are clearly disclosed in the auction notice itself, since pre-disclosure defeats a later excuse based on the same issue.

For Prospective Bidders in Liquidation Auctions

• Understand that paying beyond the EMD toward the purchase price is a real financial commitment — default can result in forfeiture of the entire amount, not a capped 10%.
• Raise any concerns about disclosed disputes or encumbrances before bidding and paying, since proceeding without protest will be treated as accepting that risk.

For Insolvency Practitioners Generally

• Cite the NCLT's triple test — hidden agenda, genuine incapacity, or genuine extraneous obstacles — as the operative framework for assessing whether a defaulting bidder's excuse should be accepted.

Key Takeaways

Frequently Asked Questions

No. This judgment holds that where the e-auction notice itself contains an express forfeiture clause covering amounts beyond the EMD, that contractual term governs, and the full amount paid can be forfeited on default.

Not if that dispute was disclosed in the auction notice and the bidder proceeded to pay without objection. Proceeding under those circumstances is treated as knowingly accepting that risk.

It refers to an NCLT-developed framework for assessing a defaulting bidder's excuse: whether the bidder had a hidden agenda to frustrate the auction, whether they genuinely lacked financial capacity, or whether real extraneous obstacles prevented payment. None of these was found to justify non-payment here.

Conclusion