Proponent Choosing To Withdraw After Non‑Acceptance Of Scheme In Liquidation Cannot Be Forced To Pay EMD: NCLAT Chennai

The National Company Law Appellate Tribunal (NCLAT) at Chennai has ruled that a scheme proponent cannot be compelled to forfeit its Earnest Money Deposit (EMD) guarantee after choosing to withdraw once its scheme was not accepted in the liquidation process.

The bench of Judicial Member Justice N Seshasayee and Technical Member Jatindranath Swain, set aside the order of the Chennai bench of the National Company Law Tribunal (NCLT) that directed deposit of Rs 2 crore into the liquidation estate. The bench observed,

“But in the world of commerce time invariably is considered critical. Given these conflicting realities, a man in business only attempts to optimize his advantage within a time frame, and if he becomes impatient, he cannot be sentenced to force-stay in the race.

Hence we are constrained to hold that when the appellant, impelled by its commercial acumen, opts to withdraw from the race when its scheme was not accepted for reasons which it considers relevant to its scheme of commercial decision, it only deserves to be respected and not punished”

Servalakshmi Paper Ltd. was ordered into liquidation, and in terms of Regulation 2B of the IBBI (Liquidation Process) Regulations, schemes were invited for sale of the corporate debtor as a going concern. Both Sun Paper Ltd. and Seshasayee Paper & Boards Ltd. submitted schemes, each backed by an EMD guarantee of Rs 2 crore. The Committee of Creditors (CoC) initially evaluated both proposals and approved the scheme of Sun Paper Ltd., though the liquidator expressed preference for Seshasayee Papers.

The matter was remanded by the NCLT in March 2020 for fresh consideration. Sun Paper challenged this remand order but later withdrew its appeal in August 2020, citing delays during the Covid‑19 pandemic. Ultimately, neither scheme was approved, and the corporate debtor was liquidated, with Seshasayee Papers purchasing it as a going concern.

Subsequently, the liquidator filed applications seeking realisation of the EMD guarantees from both proponents. While Seshasayee Papers contested, Sun Paper could not appear due to pandemic restrictions. In May 2023, the NCLT directed Sun Paper to deposit Rs 2 crore into the liquidation estate, prompting the present appeal.

Sun Paper argued that no legal obligation can be created against the appellant after its scheme was not accepted

The liquidator countered that withdrawal of the appeal did not amount to withdrawal from the scheme process, and therefore liability to deposit the EMD continued. However, he acknowledged that the corporate debtor was eventually sold to Seshasayee Papers in liquidation.

The NCLAT observed that the EMD was furnished only for submission of the scheme, and once the scheme was not accepted, the appellant had the choice to continue or withdraw. It was also noted that a scheme proponent undertakes to submit its own plan, not to satisfy the CoC or the NCLT indefinitely.

The tribunal highlighted the commercial realities of insolvency proceedings: businesses participate to secure opportunities, not as charity, and cannot be forced to stay in the race when their proposals are rejected. The bench observed.

“But they cannot be forced to look at the food in the plate without eating it for long. This is the reality of commerce.”

The bench further observed that the liquidator had failed to demonstrate any legal basis for demanding deposit of the guarantee amount. Allowing the appeal, the NCLAT set aside the NCLT's order.

APPELLANTS ADVOCATE/ PROFESSIONAL: Advocate TK Bhaskar

RESPONDENTS ADVOCATE/ PROFESSIONAL: Advocate Karthik Seshadri