Forfeiture ordered by the NCLT for failure to comply with extended payment timelines in liquidation sales is valid and not governed by contractual penalty principles

The Supreme Court of India has held that forfeiture of amounts paid by a bidder in a liquidation sale, pursuant to a time-bound extension granted by the National Company Law Tribunal, is legally valid where the bidder fails to comply with the stipulated timelines. The Court clarified that such forfeiture is not contractual in nature and therefore cannot be tested on the principles governing penalty or compensation under the Indian Contract Act, 1872.

Dismissing the appeals, the Court upheld the majority view of the National Company Law Appellate Tribunal and affirmed that strict adherence to timelines is integral to the insolvency framework. A bidder who accepts and acts upon an extension order cannot later challenge its conditions after defaulting on payment.

Case Background

The dispute arose out of the liquidation of M/s Surana Industries Limited under the Insolvency and Bankruptcy Code, 2016. The respondent was appointed as the liquidator after the corporate insolvency resolution process failed and liquidation commenced in October 2018.

The corporate debtor owned assets at Gummidipoondi in Tamil Nadu and Raichur in Karnataka. While the Gummidipoondi plant was sold, repeated auctions for the Raichur plant failed. Following stakeholder approval, the appellant offered to purchase the Raichur plant as a going concern through a private sale, committing to make payment within a specified timeframe after approval by the adjudicating authority.

What The Lower Authorities Held

The National Company Law Tribunal approved the private sale in favour of the appellant and directed it to pay the sale consideration within 15 days. On the appellant’s request for extension, the NCLT granted additional time subject to strict conditions, including payment of interest and a clear stipulation that failure to comply with the revised timelines would result in forfeiture of the entire amount paid.

When the appellant failed to comply with the extended timelines, the liquidator enforced forfeiture. The NCLT dismissed the appellant’s challenge to the forfeiture, holding that it flowed automatically from the earlier extension order.

On appeal, the NCLAT delivered a split verdict. The majority upheld the forfeiture in full, while the dissenting view held that only the initial deposit could be forfeited. The matter was decided in favour of full forfeiture by the third Member, resulting in dismissal of the appeals.

The Court’s Reasoning

The Supreme Court examined whether the forfeiture enforced by the liquidator pursuant to the NCLT’s order could be interfered with. The Court focused on the nature of the sale, the source of the forfeiture condition, and the conduct of the appellant throughout the proceedings.

Nature of the liquidation sale

The Court rejected the appellant’s contention that the sale was governed by general contractual principles. It held that the sale was conducted under the supervision of the adjudicating authority in accordance with the Insolvency and Bankruptcy Code and the Liquidation Regulations.

The private sale was effected only after obtaining prior approval of the NCLT and was therefore subject to the statutory framework governing liquidation proceedings.

Extension of time and forfeiture condition

The Court noted that the appellant itself sought extension of time to make payment and that the NCLT exercised its power under Rule 15 of the NCLT Rules to grant such extension on terms it considered just.

The forfeiture clause was found to be a conscious and justified condition intended to ensure expeditious completion of the liquidation process. The appellant accepted this condition and acted upon it by making further payments.

Conduct of the appellant

The Court placed significant emphasis on the appellant’s conduct, including its failure to comply with the extended timelines and its attempt to simultaneously pursue parallel remedies while suppressing material facts.

Having accepted the benefits of the extension order, the appellant was held to be barred from challenging the forfeiture clause after defaulting on payment.

Statutory Interpretation

The Supreme Court examined the interplay between the Insolvency and Bankruptcy Code, the Liquidation Regulations, and the National Company Law Tribunal Rules. It held that Rule 15 of the NCLT Rules empowers the adjudicating authority to extend timelines on such terms as justice may require.

The forfeiture condition imposed by the NCLT was held to be within its statutory competence and aligned with the object of the IBC, which emphasises time-bound resolution and liquidation. The Court clarified that such forfeiture cannot be equated with a contractual penalty and therefore does not attract Section 74 of the Indian Contract Act, 1872.

Constitutional / Policy Context

While adjudicating the dispute, the Supreme Court situated its reasoning within the policy framework underlying the Insolvency and Bankruptcy Code, 2016. The Court reiterated that the IBC is a special legislation enacted to ensure time-bound resolution and liquidation of insolvent entities, and that certainty, predictability, and strict adherence to timelines are essential to its effective operation.

The Court emphasised that delays in liquidation directly erode the value of assets and defeat the interests of creditors and other stakeholders. Orders granting extensions of time in liquidation proceedings are therefore exceptions, not the norm, and must be accompanied by safeguards to ensure compliance.

The judgment reflects the Court’s consistent approach that equitable considerations cannot be allowed to undermine the statutory objectives of the IBC, particularly where parties have acted in disregard of express directions of the adjudicating authority.

Source and Nature of the Forfeiture Power

The Supreme Court clarified that the forfeiture in the present case did not arise from a private contractual stipulation between the parties but from a judicial order passed by the National Company Law Tribunal while exercising statutory powers.

The Court held that when an adjudicating authority grants an extension of time under Rule 15 of the NCLT Rules, it is empowered to impose conditions to secure compliance. Such conditions, once accepted and acted upon, acquire binding force independent of contract law principles.

The forfeiture clause was thus traced directly to the authority of the NCLT and not to any negotiated bargain between the liquidator and the bidder.

Inapplicability of Contractual Penalty Principles

A central contention of the appellant was that the forfeiture amounted to a penalty and should therefore be tested against Section 74 of the Indian Contract Act, 1872. The Supreme Court rejected this argument in unequivocal terms.

The Court held that Section 74 applies only where a contract stipulates a sum to be paid upon breach. In the present case, the forfeiture flowed from a judicial extension order passed in liquidation proceedings, and not from a contractual clause.

Consequently, the principles governing reasonable compensation or proportionality under the Contract Act were held to be wholly inapplicable.

Effect of Acceptance and Estoppel

The Supreme Court placed considerable emphasis on the appellant’s conduct in accepting and acting upon the extension order. The appellant sought the extension, accepted its conditions without protest, and proceeded to make further payments pursuant to the order.

Having availed the benefit of the extension, the appellant was held to be estopped from challenging the forfeiture condition after failing to comply with the revised timelines.

The Court reiterated the principle that a party cannot approbate and reprobate — it cannot accept an order when it suits its interest and later challenge the same order when consequences follow from non-compliance.

Assessment of the Appellant’s Conduct

The Supreme Court noted that the appellant had repeatedly failed to honour commitments and had sought extensions on multiple occasions, thereby contributing to prolonged delay in liquidation.

The Court also took note of the appellant’s conduct in pursuing parallel proceedings and suppressing material facts before different forums. Such conduct was held to disentitle the appellant from invoking discretionary or equitable relief.

The judgment underscores that insolvency proceedings demand utmost candour and diligence from participants, and that litigants who act in abuse of process cannot expect indulgence from courts.

Why This Judgment Matters

This judgment provides crucial clarity on the legal nature of forfeiture in liquidation sales under the IBC. It affirms that conditions imposed by the adjudicating authority in extension orders are enforceable and not subject to dilution through contract law principles.

For bidders in liquidation processes, the decision serves as a clear warning that timelines and conditions imposed by the NCLT must be strictly complied with, failing which severe consequences may follow.

For insolvency professionals and tribunals, the judgment reinforces the legitimacy of imposing stringent conditions to ensure timely completion of liquidation.

Final Outcome

The Supreme Court dismissed the appeals and upheld the majority decision of the National Company Law Appellate Tribunal.

The forfeiture of the entire amount paid by the appellant pursuant to the extension order was held to be valid and legally sustainable. No interference was warranted with the orders passed by the NCLT and the NCLAT.

Case Details

• Case Title: M/s Shri Karshni Alloys Private Limited v. Ramakrishnan Sadasivan
• Citation: 2025 INSC 1411
• Court & Bench: Supreme Court of India; SANJAY KUMAR J. and ALOK ARADHE J.
• Date of Judgment: 10 December 2025