Forfeiture in Court-Supervised Liquidation Sales under the IBC: A Case Analysis of M/s Shri Karshni Alloys Pvt. Ltd. v. Ramakrishnan Sadasivan

Facts of the Case:

M/s Surana Industries Limited commenced the Corporate Insolvency Resolution Process on 02 January 2018. Since no feasible resolution plan was found, the National Company Law Tribunal, Chennai Bench, directed the liquidation of the corporate debtor on 12 October 2018 and designated the respondent as the liquidator. This marked the formal commencement of the liquidation process under IBC, triggering statutory timelines and stakeholder protections. The corporate debtor possessed production facilities in Gummidipoondi, Tamil Nadu, and Raichur, Karnataka. Even though the Gummidipoondi assets were successfully sold in liquidation, multiple attempts to sell the Raichur plant were unsuccessful. From 2018 to 2021, the liquidator held 13 auction attempts for the Raichur facility. The most recent auction, conducted on 28 July 2021 with a minimum price of ₹105 crores, did not draw any bidders. The Stakeholders’ Consultation Committee determined that the auction process was deemed exhausted and decided to sell the Raichur plant for scrap value,  a step often permitted under the evolving framework of liquidation under IBC.

The appellant, M/s Shri Karshni Alloys Pvt. Ltd., made a private proposal on 09 September 2021 to acquire the Raichur plant as an ongoing entity for a price of ₹105.21 crores. The appellant placed a 10% deposit of the sale price, which totalled ₹10.5210 crores, as a commitment advance and agreed to pay the remaining amount within 15 days following the NCLT’s approval of the sale. The Committee endorsed the proposal and instructed the liquidator to obtain the approval of the Adjudicating Authority. Furthermore, the liquidator applied to the NCLT requesting permission for the private sale. On 22 March 2022, NCLT sanctioned the sale and instructed the appellant to remit the full sale amount within 15 days.

Events Leading to Extension of Time:

The appellant did not adhere to the payment schedule set by the NCLT. It argued that the gap between the offer's submission and the sale's approval had changed market conditions, complicating immediate payment. The Stakeholders’ Consultation Committee allowed a short extension of time with interest but declined to permit an indefinite postponement. Subsequently, the appellant submitted a request to the NCLT for a time extension.

 At the moment this application was resolved, the appellant had already disbursed ₹36.30 crores. The NCLT provided an extension under Rule 15 of the NCLT Rules, 2016, while enforcing stringent conditions. The Tribunal ordered payment of designated installments by set deadlines and clearly indicated that any non-compliance would lead to the loss of the total sum already paid by the appellant,  reflecting the strict discipline embedded within the overall IBC liquidation process.

Default and Forfeiture:

Even with the extension, the appellant did not comply with the updated payment plan. An extra payment of ₹1.50 crores was made, raising the total disbursed to ₹37.80 crores, yet the complete payment was not finished within the extended timeframe. As a result, during its meeting on 01 August 2022, the Stakeholders’ Consultation Committee resolved to impose forfeiture of the full amount paid and to initiate a new auction of the Raichur plant. The liquidator officially informed the appellant of the forfeiture.

The appellant contested this decision and requested the annulment of the forfeiture and an additional extension of time. The NCLT rejected the application, stating that forfeiture was an automatic result of violating the conditional order from 29 June 2022 and that the appellant did not contest that order.

Subsequent Proceedings and Conduct of the Appellant:

The appellant simultaneously pursued multiple remedies. It appealed the forfeiture ruling from August 10, 2022, as well as the extension order from June 29, 2022, to the NCLAT. Additionally, it filed a writ petition with the Madras High Court without disclosing that the NCLAT had already received an appeal against the June 29, 2022, order. The High Court observed the appellant's incapacity to pursue appellate proceedings and dismissed the writ petition on the ground that an alternative legislative remedy was available.

The verdict was divided before the NCLAT. The Technical Member decided that only 10% of the sale price might be forfeited, but the Judicial Member rejected the appeals entirely.

Issues before the Supreme Court:

1. Whether the private sale was a contractual transaction governed by the Indian Contract Act or a court-supervised sale under the IBC,
2. Whether Section 74 of the Contract Act could be invoked to challenge the forfeiture,
3. Whether the NCLT had the power to impose complete forfeiture while granting an extension of time,
4. Whether the appellant’s conduct disentitled it to relief, and whether the subsequent higher sale price negated the justification for forfeiture.

Judgment and Reasoning by the Supreme Court:

The sale was a court-supervised sale under the IBC since it was a private sale under Regulation 33(2)(d) of the Liquidation Regulations, requiring prior approval from the NCLT. It asserted that, rather than any clause within the contract, the forfeiture resulted from a court order issued in accordance with Rule 15 of the NCLT Rules. As a result, it was decided that Section 74 of the Indian Contract Act was not applicable.

The Court further stated that, considering the time-sensitive nature of the IBC, the NCLT had full authority to impose stringent requirements, such as complete forfeiture, when granting time extensions. The appellant was unable to challenge the forfeiture condition after requesting and accepting the extension and moving forward as a result. The claim that no loss occurred from the later increased sale was dismissed, since forfeiture was not a remedy for loss but rather a result of violating a court-mandated schedule. The Court highlighted the significance of finality in liquidation processes, particularly when the forfeited sums had already been allocated to stakeholders.