Bidder's Refusal to Accept LOI Triggers Valid Forfeiture of Earnest Money: Karnataka HC Sets Aside Refund of ₹70 lakh [Read Order]

The Karnataka High Court has upheld the liquidator’s power to forfeit the Earnest Money Deposit (EMD) and Participation Deposit Money (PDM) after the successful bidder refused to accept the Letter of Intent (LOI) issued in a liquidation auction. The Court therefore set aside the Single Judge’s order directing a refund of ₹70 lakh to the bidder.

The dispute arose from the liquidation of Samrudhi Realty Ltd., where the petitioner, Sri Dinesh Pulipati, was declared the successful bidder for Block IV (“Song of Winds”) in an e‑auction. Under Clause 6.2 of the Auction Memorandum, the successful bidder was required to accept the LOI within two days, failing which the EMD and PDM were liable to forfeiture.

The bidder, however, emailed the liquidator stating that he could not accept the obligations in the LOI, particularly the requirement to execute an MOU with homebuyers and negotiate cost escalations under Clause 4.3. He expressly stated he had “no intention of commencing the project” and would not sign the LOI unless the terms were modified.

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The liquidator treated this as a refusal to proceed and forfeited the EMD and PDM. The Single Judge later held that Schedule I of the IBBI Regulations did not permit forfeiture and ordered a refund of ₹70 lakh. The liquidator appealed.

The Division Bench of Justice Vibhu Bhakru and Justice CM Poonacha reversed the Single Judge, grounding its reasoning in both statutory interpretation and established precedent on earnest money.

Turning to the nature of earnest money, the Court relied heavily on the Supreme Court’s landmark ruling in Shri Hanuman Cotton Mills v. Tata Air Craft Ltd. (1969) 3 SCC 522. The Supreme Court had summarised the law as follows:

“Earnest… represents a guarantee that the contract will be fulfilled… It is forfeited when the transaction falls through by reason of the default or failure of the purchaser.”

The Karnataka High Court held that this principle squarely applied: the bidder’s refusal to accept the LOI amounted to a clear default, entitling the liquidator to forfeit the earnest money.

The Bench also referred to Kailash Nath Associates v. DDA (2015) 4 SCC 136, where the Supreme Court clarified that Section 74 of the Contract Act does not apply to forfeiture of earnest money in public auctions unless a concluded contract exists. The Supreme Court had observed:

“Where forfeiture takes place under the terms and conditions of a public auction before agreement is reached, Section 74 would have no application.”

Applying this, the High Court held that since the bidder never accepted the LOI, no concluded contract came into existence, and Section 74 could not be invoked to resist forfeiture.

The Court also cited Authorised Officer, SBI v. C. Natarajan (2024), where the Supreme Court upheld forfeiture of 25% of the sale price when the auction purchaser failed to pay the balance. The Supreme Court had rejected the argument of unjust enrichment, holding that forfeiture was contractually justified.

In the present case, the Karnataka High Court found that the bidder’s unequivocal refusal to accept the LOI voided the auction declaration itself. Since the bidder rejected the very terms on which he was declared successful, the liquidator was justified in treating the bid as withdrawn and invoking the forfeiture clause.

Concluding that the Single Judge erred in limiting forfeiture to ₹3.7 lakh, the Division Bench restored the liquidator’s decision to forfeit the entire EMD and PDM, amounting to about 5.08% of the bid value.

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