Frustration of a contract: Successful Auction Purchaser allowed to withdraw after e-Auction

Cause Title : Nitin Jain vs Lucky Holdings Pvt. Ltd., National Company Law Appellate Tribunal Principal Bench, New Delhi, Company Appeal (AT)(Insolvency) No. 1390 of 2022

Date of Judgment/Order : 18.01.2023

Corum : Justice Ashok Bhushan, Chairperson & Mr. Barun Mitra, Member (Technical)

Citied: 

Background

Chronology of event:-

1) The Appellant as the Liquidator of a company published sale notice for selling the corporate debtor as a going concern. 

2) The Liquidator received a summon from the Directorate of the Enforcement, PMLA (ED) seeking certain documents from the Appellant in reference to investigation under PMLA Act, 2002 regarding the payment of Rs. 300 Crores sanctioned by Bank of Baroda to M/s. PSL Limited. 

3) Liquidator received an email from the ED asking the liquidator not to proceed with the sale of the assets of the Corporate Debtor.  On the Liquidator approaching the High Court against the email, the court directed the Appellant to proceed for the sale of the corporate debtor. 

4) Accordingly the Liquidator republished the sale notice for selling the corporate debtor as a going concern and the Respondent No. 1 was declared as highest bidder in the E-Auction. First installment of Rs. 30 Crores was paid by the Respondent No.1 to the Appellant on 23rd April, 2021. Adjudicating Authority (AA) approved the sale in favour the Respondent No. 1 and directed the balance payment within 30 days from the date of the order. 

5) Subsequently with the ED attaching the assets of the Corporate Debtor, the AA  based on an interim application (IA) filed by the Respondent directed the liquidator not to forfeit any amount of the Successful Bidder.

6) Against a writ filed by the Liquidator, the court held the Liquidator entitled in law to proceed further with the liquidator process in accordance with the provisions of the IBC and restrained the ED from taking any further action, coercive or otherwise, against the liquidation estate of the corporate debtor or the corpus gathered by the liquidator in terms of the sale of liquidation assets as approved by the AA under the IBC.

7) On the basis of a Letter Patent Appeal filed by the ED against the order of the High Court and for staying the proceedings before the AA under PMLA. At this point the Counsel appearing for the Successful Auction Purchaser- Respondent No. 1 made a statement that Respondent No. 1 wishes to exit by withdrawing its bid from the e-auction.

8) Based on an IA filed by the Respondent No. 1, the AA permitted the Successful Auction Bidder to withdraw from e-auction and directed the liquidator to pay the applicant a sum of Rs. 30,00,00,000/- together with interest accrued.

Against AA order, the Liquidator filed this appeal. The Liquidator submitted that the amount deposited by Respondent No. 1 are deserved to be forfeited since the Respondent No. 1 participated in the e-auction fully knowing that Enforcement Directorate had initiated proceedings against the Corporate Debtor. Further In the process sale notice “as is where is”, “as is what is” and “whatever there is basis” and the Respondent had also failed to submit the balance amount as per agreed terms. The Respondents argued that the application for withdrawal was made before the time for payment of the remaining amount has passed and also the Liquidator is not in a position to hand over the assets or to complete the sale.

Judgment

The primary questions which arise for consideration were :-

i. Whether the Successful Auction Purchaser (Respondent No. 1) having not deposited the balance bid amount within 90 days from approval of the e-auction sale, the EMD and the first installment paid deserved to be forfeited as per terms and conditions of sale notice;

ii. Whether the Adjudicating Authority committed error in allowing Successful Auction Purchaser to withdraw from e-Auction along with the direction to refund the EMD and first installment;

The NCLAT observed that while the terms and conditions of the e-auction notice clearly provides for forfeiture of the Earnest Money Deposited by the bidder, the question to be answered is as to whether even after attachment of the assets of the corporate debtor under PMLA Act on 02.12.2021, the auction purchaser was required to deposit the entire sale amount.

On that issue the NCLAT held that before the Order of attachment was passed on 02.12.2021, no default can be said to have been committed by Auction Purchaser.  The first installment was deposited within time and the Auction Purchaser had 90 days time to deposit the balance amount but before expiry of 90 days the assets of the corporate debtor were attached. In view of the attachment of the assets of the corporate debtor on 02.12.2021 and the order of the Division Bench to maintain status quo, Liquidator can neither complete the sale, can issue sale certificate nor can hand over the assets of the corporate Debtor to the Successful Auction Purchaser and due to aforesaid event the Application was filed by the Successful Auction Purchaser to withdraw from auction and for refund of the EMD. 

Under the circumstances, the NCLAT opined that the Successful Auction Purchaser has genuine case and the AA has rightly passed an order permitting the Successful Bidder to withdraw from the auction and directed to refund of the amount of the EMD Rs. 5 Crores and First Installment of Rs. 30 Crores.

Note:

Though the conclusion is correct, no proper explanation was provided by the NLCAT. This appears to a perfect example of the doctrine of frustration. Frustration of a contract is somewhat covered under Section 56 & 65 of the Indian Contract Act.