Liquidator Cannot Forfeit Auction EMD To Recover Unquantified Rent Dues: NCLT Mumbai

The Mumbai Bench of the National Company Law Tribunal (NCLT) on 28 October, held that a liquidator cannot forfeit the earnest money deposit (EMD) of unsuccessful auction bidders to recover alleged rent dues that remain unquantified and unestablished.

A Bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar allowed an application filed by Mamta Rvi Doshi and Ravi Ghewarchand Doshi, directing liquidator Avil Menezes to refund Rs. 42.80 lakh to them. It observed:

“None of the sub-clauses in clause 11(vii) contemplates forfeiture of EMD paid by a bidder for the recovery of any amount due from such bidder or for any breach, other than those specifically enumerated therein. Accordingly, the Earnest Money could not have been forfeited in the manner the Liquidator did.”

The applicants had jointly participated in an e-auction conducted by the liquidator but failed to secure the assets. The liquidator forfeited their EMD and adjusted it against alleged unpaid rent for premises occupied by them. The applicants contended that they had already paid the rent to the corporate debtor's erstwhile management.

The Tribunal examined Clause 11(vii) of the Process Memorandum, which specified the circumstances in which the EMD could be forfeited. It held that the clause did not permit forfeiture to recover alleged dues arising from an independent transaction.

It also examined its order dated 23 November 2023, which had permitted the liquidator to take appropriate action to recover the rent. It clarified that the order did not authorize the liquidator to appropriate the EMD against an unquantified claim. It said:

“In any case, the order dated 23.11.2023, which left it for the Liquidator to consider appropriate action against the Applicants herein in view of their agreeing to provide payment details to the Liquidator and their subsequent failure to do so, cannot be read to vest any right in the Liquidator to appropriate unliquidated recoveries from a person against sums due under an independent transaction.”

The Bench rejected the liquidator's reliance on Regulation 29 of the Insolvency and Bankruptcy Board of India (IBBI) (Liquidation Process) Regulations, 2016, which deals with mutual credits and set-off. It held that the provision required a quantified debt and noted that the liquidator had forfeited the deposit without determining whether any rent was actually due.

It also distinguished the Supreme Court's decision in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd., observing that the case concerned a counterclaim in pending arbitral proceedings. In the present matter, the alleged rent liability had not crystallised, and no proceedings to determine that liability were pending.

Accordingly, the NCLT allowed the application and directed the liquidator to refund Rs. 42.80 lakh to the applicants.