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Judgment
R. Banumathi, J.—Whether the learned single Judge was right in ordering forfeiture of Earnest Money Deposit of Rs. 33,45,000/- and
further ordering retention of Rs. 10 lakhs as damages from the purchase money is the point falling for consideration in this Appeal.
This Appeal arises on the following facts:
Winding up proceedings has been initiated against M/s. Arun Pipes Limited. In C.P. No. 339 of 1997, by the order dated 28.09.2001, the said
company was ordered to be wound up and the Official Liquidator became the Liquidator of the said company and taken effects of the company in
liquidation. After valuation, upset price of the entire lot was fixed at Rs. 2,15,00,000/-. After effecting publication of sale notice in the newspapers,
on 24.10.2008 public sale was conducted before the Company Court. Appellant was the highest bidder for a sum of Rs. 3,40,00,000/-and paid
the Earnest Money Deposit (EMD) of Rs. 26,55,000/-. In pursuance to the order of the Court, Appellant paid the balance EMD of Rs.
7,45,000/- on 10.12.2008. Appellant was also directed to pay the balance sale consideration i.e. 50% of the same within 45 days from the date of
sale i.e. 24.10.2008 and then the balance 50% within 45 days thereafter.
Expressing recession in economy and its financial problems, Appellant filed Company Application Nos. 182 and 183 of 2009 and sought for
extension of time for payment of the balance sale consideration and also prayed for a direction to the Official Liquidator to execute the sale deed
infavour of the Appellant or his nominee on the Appellant depositing the entire sale consideration. The Court has extended the time limit to pay Rs.
145 lakhs on or before 03.04.2009; another Rs. 145 lakhs on or before 31.05.2009 with interest at the rate of 12% for the belated payment.
In C.A. No. 182 of 2009, Appellant had stated that he is not in a position to raise funds to make the sale consideration and stated that the
amount already paid be refunded to him. On 03.04.2009, the Court directed forfeiture of EMD and also directed retention of Rs. 10 lakhs
towards damages from out of the purchase money and directed refund of Rs. 10 lakhs. Aggrieved by the same, the present Appeal has been filed.
Mr. R.N. Amarnath, learned Counsel for Appellant contended that all along the Company Court was permitting execution of sale deed infavour
of the nominees or successful bidder and while so, the learned single Judge was not justified in not passing orders directing execution of sale deed
infavour of his nominees. According to Appellant, in the auction notice, there is no indication regarding prohibition of nominees. Insofar as forfeiture
of EMD of Rs. 33,45,000/- and retention of further amount of Rs. 10 lakhs towards damages, the learned Counsel would contend that the same is
unreasonable and there is no justification to direct retention of Rs. 10 lakhs towards damages.
We have heard Mr. S.R. Sundar, learned Counsel appearing for the 1st Respondent-Official Liquidator. We have also heard Mr. L.N.
Pragasham, learned Counsel appearing for Respondents 2 and 4 and Ms. Rita Chandrasekar, learned Counsel appearing for 3rd Respondent.
Learned Counsel for 1st Respondent-Official Liquidator has submitted that due to the act of the Appellant, payment due to various creditors has
got delayed and had the sale been confirmed infavour of any other person with financial ability and stability, the Official Liquidator could have
completed the disbursement of the sale consideration to the creditors. It was further submitted that as per the terms and conditions of the tender,
nonpayment of balance sale consideration would result in forfeiture of EMD paid and being aware of the terms and conditions of the tender,
Appellant cannot have any valid grievance for forfeiture of EMD.
We have carefully gone through the terms and conditions of the tender. All conditions therein only pertains to conditions between the tenderer
and the Court. Nowhere, the terms and conditions provide for execution of the sale deed infavour of the nominee.
Learned Counsel for Appellant has submitted that in some cases, Court had executed the sale deed infavour of the nominees of successful
bidder and only in case of Appellant, Court has declined to pass an order permitting execution of sale deed infavour of the nominee. Learned single
Judge has dismissed C.A. No. 183 of 2009, application to direct the Official Liquidator to execute the sale deed infavour of the nominee of the
Appellant on the ground that Appellant has not paid the entire sale consideration. To our mind, execution of sale deed infavour of nominee of a
highest bidder may not be a healthy practice. Since the order in C.A. No. 183 of 2009 is not under challenge, we do not propose to examine the
propriety of such practice of executing sale deed infavour of nominees of the highest bidder. We need the issue to be examined in some other
appropriate matter.
Insofar as forfeiture, as pointed out earlier, Appellant has paid EMD of Rs. 33,45,000/-. Public auction was conducted as per the terms and
conditions of the tender. Clause-19 of the terms and conditions stipulates forfeiture of EMD in case of non-payment of balance sale consideration.
Clause-19 reads as under:
The non-payment of the balance sale consideration on confirmation of sale within the period stipulated above shall result in the forfeiture of
Earnest Money Deposit paid and the highest bidder shall also be liable in respect of expenses incurred for conducting the sale and also for
damages.
Appellant was well aware of the terms and conditions of the tender and having participated in the public auction which is subject to the terms and
conditions of the tender, now cannot turn round and contend that forfeiture of EMD is not justified. In our considered view, forfeiture of EMD is in
pursuance to the terms and conditions of the tender for which no valid objection could be raised.
Earnest money deposited is a security deposit for due performance of the contract. When there is a breach of contract, EMD is liable to be
forfeited.
Following are the principles to reckon whether an amount paid under a contract is ""Earnest Money"": (1) it must be given at the moment the
contract is concluded; (2) it represents a guarantee that the contract will be fulfilled or, in other words, the ''earnest'' binds the contract; (3) it is part
of the purchase price when the transaction is carried out; (4) it is forfeited when the transaction falls through by reason of the default or failure of
the purchaser; (5) unless there is anything contrary to the contract, on default committed by the buyer, the seller is entitled to forfeit it Shri
Hanuman Cotton Mills and Others Vs. Tata Air Craft Limited, .
The question relating to refund of ""Earnest Money"" came for consideration before the Supreme Court in Shri Hanuman Cotton Mills and
Others Vs. Tata Air Craft Limited, . In the said case, by terms of the contract, purchaser was liable to pay 25% of the purchase price. In
default/failure of the purchaser to pay the purchase price, the Supreme Court held that ""earnest money deposited shall be forfeited.
Similar view was taken by the Supreme Court in Housing Urban Development Authority and another Vs. Kewal Krishan Goel and others,
wherein the Supreme Court held that ""the earnest money deposited shall bind the contract between parties and the forfeiture would be justified,
when the contract falls through, on default/failure on the part of the allottee/purchaser.
In Saurabh Prakash Vs. DLF Universal Ltd., , the Supreme Court noticed the distinction between ""Security"" and ""Earnest Money"" and held
that the Appellant-developed in the said case, rightly exercised its right to forfeit the Earnest Money as per the terms of the contract.
As per the terms of the contract/tender, Appellant was liable to deposit 10% of the offer given. In the event of non-payment of balance sale
consideration, as per Clause-19 of the terms and conditions, the EMD is liable to be forfeited. Insofar as forfeiture of EMD of Rs. 33,45,000/-,
we do not find any ground for interference.
Learned single Judge has also directed retention of Rs. 10 lakhs towards damages from out of purchase money. There is no distinction
between ""earnest money"" and ""part of purchase price"". Earnest money although taken as a part payment of consideration is also a guarantee for
due performance of the contract. As pointed out earlier, huge amount of Rs. 33,45,000/- paid as EMD was ordered to be forfeited. In the facts
and circumstances of the case, in our considered view, there is no need for further deduction of Rs. 10 lakhs towards damages from out of the
purchase money and the impugned order directing retention of Rs. 10 lakhs from out of the purchase money is liable to be interfered with.
In the result, the Appeal is partly allowed. The order of learned single Judge directing the 1st Respondent-Official Liquidator to retain a sum of
Rs. 10 lakhs to the account of the company in liquidation is set aside and the Official Liquidator is directed to refund the sum of Rs. 10,00,000/- to
the Appellant. The order directing forfeiture of EMD is confirmed. No costs.