Act of Forfeiting EMD of Rs. 2 Crore Deposited by Kineta Global Limited is beyond Terms of Process Documents: IBBI suspends Registration of IP for Period of 1 Year [Read Order]

The Insolvency and Bankruptcy Board of India (Disciplinary Committee) has held that the act of forfeiting Earnest Money Deposit (EMD) of Rs. 2 crore deposited by Kineta Global Limited is beyond the terms of the process documents.

Mr. Subburengan Hari Karthik, who is an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI/Board). The Corporate Insolvency Resolution Process (CIRP) of Jeypore Sugar Company Limited (Corporate Debtor/CD) was initiated by an order dated 25.02.2019 by the NCLT, Chennai Bench (AA) under Section 7 of the Code filed by M/s IDBI Bank Limited.

Subsequently, the AA ordered liquidation of the CD on 29.05.2020 and appointed Mr. V. Venkata Sivakumar as the Liquidator. Later, Mr. V. Venkata Sivakumar was replaced as the liquidator by the AA vide its order dated 01.07.2022 and Mr. Subburengan Hari Karthik was appointed as the Liquidator.

The Board received a grievance against Mr. Subburengan Hari Karthik on 31.08.2024 in the matter of the CD. Accordingly, the Board vide email dated 08.11.2024 sought clarification on the allegations levelled in the said grievance. Mr. Subburengan Hari Karthik provided his response via email dated 14.11.2024.

Subsequently, two other grievances were filed before the Board on 28.04.2025 and 13.05.2025 with similar issues as the earlier complaint dated 31.08.2024. The Board sent emails on 21.01.2025, 03.03.2025 and 14.05.2025 to Mr. Subburengan Hari Karthik seeking some additional documents from him and Mr. Subburengan Hari Karthik provided his response vide email dated 04.03.2025 and 16.05.2025.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Board examined the allegations in the said grievances vis-à-vis reply of Mr. Subburengan Hari Karthik to the same and based on such examination, the Board formed a prima facie view that Mr. Subburengan Hari Karthik had contravened the provisions of the Code and the Regulations made thereunder and issued an SCN to Mr. Subburengan Hari Karthik on 28.03.2025.

The SCN alleged contraventions of several provisions of the Code, IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) and IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations). The reply of Mr. Subburengan Hari Karthik to the SCN was received by the Board on 11.06.2025.

Forfeiture of the Earnest Money Deposit (EMD) of a Scheme Proponent beyond the Stipulated Conditions in the Expression of Interest/Process Document. Regulation 2B(3) of the Liquidation Regulations states that in case the proposed compromise or arrangement under Section 230 of the Companies Act, 2013 is not sanctioned by the Tribunal under S. 230(6) of the Companies Act, then the cost incurred by the Liquidator in relation to compromise or arrangement shall be borne by the parties who proposed such compromise or arrangement.

The liquidation of the CD was ordered on 29.05.2020 by the AA. The RP, Mr. V Venkata Sivakumar was appointed as the Liquidator to carry out the process. Mr. Venkata Sivakumar had made the Public Announcement for inviting Expression of Interest (EOI) for the purpose of proposing a Scheme of Compromise/Arrangement under Section 230 of the Companies Act, 2013 on 03.07.2020. On 31.07.2020, Mr. Venkata Sivakumar had requested Kineta Global Limited to submit a detailed plan under the scheme along with Deposit of Earnest Money Deposit (EMD) of Rs.2,00,00,000 (Rs. Two crore).

Kineta Global Limited deposited the requested EMD and submitted its Scheme on 14.08.2020 and Mr. Venkata Sivakumar had given it status as H1 Bidder in a letter dated 19.10.2020 addressed to the secured creditors of the CD.

The Secured Lenders of the CD i.e., IDBI Bank Limited, Bank of India, Prithvi Asset Reconstruction and Securitisation Company Ltd., Bank of Baroda, Indian Overseas Bank, The District Co-Operative Central Bank Limited (hereinafter referred to as “Secured Lenders”) challenged the process on account of exclusion of approximately 784 acres of Rayagada lands from the liquidation estate, flaws in the valuation conducted by the former Liquidator; and circulation of such valuation reports to Kineta Global Limited and other scheme proponents.

The AA vide its order dated 17.11.2021 annulled the scheme process and directed the initiation of a fresh scheme process with an updated asset memorandum and fresh valuation.

Kineta Global Limited expressed their interest in the Fresh Scheme and requested Mr. Subburengan Hari Karthik to adjust the EMD requirement of Rs.50,00,000 (Rs. Fifty Lakh) against the EMD of Rs.2,00,00,000 (Rs. Two crore) made during the 1st Scheme process. However, Mr. Subburengan Hari Karthik refused to adjust the EMD amount previously submitted by Kineta Global Limited.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

Mr. Subburengan Hari Karthik, in his reply to the Board, submitted that the previous EMD submitted by Kineta Global Limited was forfeited by him to cover the expenses incurred during the appeal filed by Kineta Global Limited as the said appeal was baseless and frivolous. Mr. Subburengan Hari Karthik further stated that the said appeal filed by Kineta Global Limited caused the entire liquidation process to stand still for over two years and forced the Liquidator to incur various costs.

The Board noted that the terms and conditions for forfeiture of the EMD as stipulated by Mr. V. Venkata Sivakumar to Kineta Global Limited mentioned that if the successful bidder failed to pay the upfront amount agreed upon, the EMD would be forfeited. The Board observed that no other condition was stipulated in the terms and conditions for forfeiture of the EMD as stipulated in the said letter.

The Board further observed from the letter of Mr. V. Venkata Sivakumar dated 21.01.2021 addressed to the scheme proponents including Kineta Global Limited that the AA, on an application filed by one of the bidders had directed Mr. V. Venkata Sivakumar to re-negotiate with all the three scheme proponents and file revised proposal for the consideration of the AA.

It was observed that Mr. Subburengan Hari Karthik’s conduct in forfeiting the EMD of Rs.2,00,00,000 (Rupees two crore) was beyond the conditions of Expression of Interest/Process Document as stipulated in the said letters of Mr. V. Venkata Sivakumar dated 31.07.2020 and 21.01.2021 addressed to the prospective scheme proponents. The AA also vide its order dated 02.05.2025 directed Mr. Subburengan Hari Karthik to refund the EMD

In view of the above, the Board held the prima facie view that Mr. Subburengan Hari Karthik had contravened Sections 208(2)(a) & (e) of the Code, Regulation 2B(3) of the Liquidation Regulations, Regulation 7(2) (a) and (h) of IP Regulations read with Clause 14 of the Code of Conduct for Insolvency Professionals, as given in the first schedule of the IP Regulations, hereinafter referred to as Code of Conduct.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The DC notes that the forfeiture of Earnest Money Deposit (EMD) must be strictly in accordance with the terms and conditions communicated to the bidders, as the EMD represents a security linked to compliance with the bidding process and not a penalty to be imposed for subsequent litigation or conduct of the scheme proponents. The letters dated 31.07.2020 and 21.01.2021 issued by the erstwhile liquidator clearly stipulated that forfeiture of the EMD could only occur in the event of default/withdrawal or non-compliance with the terms by the successful bidder, particularly failure to pay the upfront amount.

The DC further observed that the annulment of the first scheme process by the AA was on the ground that valuation of one of the assets of the CD i.e., Rayagada property was not proper and it is not attributable to Kineta Global Limited. The appeal preferred by Kineta Global Limited thereafter was in exercise of a statutory right, as also recognised by the AA. Resort to appellate remedies cannot be equated with “withdrawal” or “default” under the process terms, nor can it justify forfeiture of the EMD. The reasoning adopted by the Liquidator in relying upon Regulation 2B(3) of the Liquidation Regulations to appropriate the EMD towards liquidation costs is misplaced.

The proviso of the Regulation 2B(3) casts the burden of costs of a failed scheme on the proponents of such scheme if such compromise or arrangement is not sanctioned by the Tribunal under sub-section (6) of section 230. However, it cannot be stretched to justify unilateral forfeiture of the entire EMD when the scheme is rejected by AA on technical grounds.

The DC held that the act of forfeiting the EMD of rupees two crore deposited by Kineta Global Limited is beyond the terms of the process documents and suspended the registration of Mr. Subburengan Hari Karthik for a period of one year.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates