The National Company Law Tribunal (NCLT) Mumbai Bench has issued a significant ruling curtailing the powers of liquidators to unilaterally withhold bidder funds. In a decision delivered on October 28, 2026 , the Tribunal ordered Mr. Avil Menezes, the liquidator of Auro Gold Jewellery Private Limited , to refund an Earnest Money Deposit (EMD) of ₹42,80,680 to unsuccessful auction bidders Mamta Ravi Doshi and Ravi Ghewarchand Doshi. The Bench, comprising Member (Technical) Shri Prabhat Kumar and Member (Judicial) Shri Sushil Mahadeorao Kochey, ruled that the liquidator lacked the legal authority to forfeit auction deposits to settle alleged, unquantified rent dues arising from independent transactions.

The dispute originated following an e-auction held on April 24, 2024 , for the assets of the corporate debtor . The applicants participated in the auction but remained unsuccessful, making them eligible for a refund of their EMD under the terms of the Process Memorandum . However, the liquidator refused to return the funds, issuing a letter on May 13, 2024 , that declared the amount forfeited. The liquidator justified this action by citing the applicants' failure to provide documentation regarding rent payments for a property they occupied, alleging that these payments were owed to the corporate debtor .

The NCLT’s intervention provides much-needed clarity on the procedural boundaries of the liquidation process under the Insolvency and Bankruptcy Code (IBC), 2016 . By directing the liquidator to return the funds within 15 days, the Tribunal signaled that auction participants are protected by the defined terms of the Process Memorandum , which do not permit the arbitrary adjustment of deposits against unrelated financial claims.

Scrutinizing the Limits of Forfeiture Authority

During the hearing, the applicants argued that their EMD was refundable under Clause 11(vi) of the Process Memorandum , which dictates that deposits from unsuccessful bidders must be returned. They maintained that the liquidator had no contractual basis to withhold these funds. In contrast, the liquidator contended that his actions were supported by an earlier Tribunal order dated November 23, 2023 , which allowed him to take "appropriate action" if the occupants of certain residential flats failed to provide details of rent paid to the erstwhile management.

The Tribunal flatly rejected the liquidator ’s broad interpretation of its previous order. The bench clarified that the authority to "take appropriate action" did not grant the liquidator a blank check to engage in self-help recovery tactics. According to the court, the liquidator ’s reliance on the past order was misplaced, as it was never intended to authorize the appropriation of unliquidated recoveries from third parties against sums supposedly due under an independent, non-auction transaction.

Addressing the specific conditions for forfeiture, the Tribunal pointed to Clause 11(vii) of the Process Memorandum , which strictly limits the instances under which an EMD can be retained. The Bench observed: "None of the sub-clauses in clause 11(vii) contemplates forfeiture of EMD paid by a bidder for the recovery of any amount due from such bidder or for any breach, other than those specifically enumerated therein. Accordingly, the Earnest Money could not have been forfeited in the manner the Liquidator did."

Navigating Mutual Credits and Set-Off Provisions

A central legal issue in the case was the liquidator ’s attempt to invoke Regulation 29 of the Insolvency and Bankruptcy Board of India (IBBI) (Liquidation Process) Regulations, 2016, which pertains to mutual credits and set-offs . The liquidator argued that he was entitled to offset the alleged rental arrears against the EMD held on behalf of the applicants. The Tribunal, however, dismantled this argument by highlighting the fundamental requirement that a debt must be quantified before a set-off can be applied.

The Court noted that there was no adjudicated finding or definitive proof that the applicants owed rent to the corporate debtor . The liquidator had essentially acted as both prosecutor and judge, forfeiting the money without determining whether the applicants' explanation—that they had already paid the rent to the company's erstwhile management—was truthful or false. The Tribunal underscored that, in the absence of a crystallized debt or pending adjudication to establish liability, the liquidator ’s action lacked a legal foundation.

Furthermore, the NCLT addressed the liquidator ’s reliance on the Supreme Court ruling in Ujaas Energy Ltd. v. West Bengal Power Development Corporation Ltd. , noting that the case was entirely distinguishable from the current scenario. While the Supreme Court had upheld a creditor's right to raise a counterclaim in ongoing arbitral proceedings, the NCLT pointed out that the current matter involved an attempt to enforce a debt that had not been established through any formal proceeding. As the court stated: "In the present case, the applicant is raising a right of set-off for a debt that is yet to crystallise and for which no proceedings are pending for its crystallisation, against a debt that has become due and payable in terms of a binding arrangement codified under the Process Memorandum ."

The final order mandates the liquidator to complete the refund of the ₹42,80,680 within a strict 15-day window. While the Tribunal has provided this relief to the applicants, it explicitly stated that the liquidator remains at liberty to pursue appropriate, lawful remedial actions if he believes there are valid claims for rent against the applicants. This decision effectively preserves the integrity of the e-auction process by ensuring that earnest money, meant to guarantee bid sincerity, cannot be weaponized by liquidators to recover disputed debts outside of established legal channels. The matter concludes for the present, with the liquidator required to comply with the refund directive while navigating any future formal litigation regarding the disputed rental payments.