Only earnest money can be forfeited not the advance given especially when no loss is suffered – High Court

Only earnest money can be forfeited not the advance given especially when no loss is suffered on account of non transaction or non performance. Showing an amount in the balance sheets amounts to admission-Delhi High Court


ABCAUS Case Law Citation:
ABCAUS 2084 (2017) (09) HC

Important Case Laws Cited/relied upon by the parties:
Rishi Pal Gupta vs M/s S.J.Knitting and Finishing Mills Pvt Ltd 73 (1998) DLT 593
Bhajan Singh Samra vs. Wimpy International Ltd 185(2011) DLT 428
Bengal Silk Mills Co. Vs. Ismail Golam Hossain Ariff, AIR 1962 Cal. 115
Kailash Nath Associates vs. Delhi Development Authority and Another (2015) 4 SCC 136;
Manoj Tomar vs. Smt.Neena Khatter & Anr. 2015 SCC Online Del 12831;
Satish Batra vs. Sudhir Rawal Civil Appeal No.7588/2012
Entrepreneurs Cooperative Group Housing Society vs. Schindler India Private Limited 2013 (137) DRJ 374

Brief Facts of the Case:
The respondent company had entered into an agreement to sale for total sale consideration of Rs. 16.09 Crore in respect of a plot of the deceased husband of the petitioner, who had paid a sum of Rs. 5.40 Crore and Rs. 40 lakh in cash towards advance amount.

However, the deal could not be materialised as the respondent company did not give a clean title and admitted that it had no transferrable title of the property, but it wrongly alleged that the husband of the petitioner had agreed to purchase the property on ‘as is where is’ basis. The respondent company also denied receipt of Rs. 40 lakh paid in cash.

The respondent company had admitted the liability towards the petitioner by reflecting Rs. 5.40 crores under current liability as ‘advance against property sale’. After the demise of her husband, when the petitioner demanded the same from the respondent company it failed to pay the amount and pleaded non-availability of funds. The petitioner then sent a notice but the respondent failed to reply. The petitioner also sent a statutory notice after a gap of approc six months under Section 433/434 of the Companies Act, 1956 calling upon the respondent to repay the amount within 21 days.

On the failure of the respondent company to pay the admitted outstanding debt the petitioner moved the company writ to pass an order of liquidation of the respondent company.

Contentions of the Respondent:
The respondent contended that:

(a) the debt has become time barred; and

(b) the respondent had forfeited the advance paid on failure to fulfill promise as per the agreement.

Observations made by the High Court:
It was noted that the respondent company in its balance sheet as on 31-03-2010 shown the amount of Rs. 5.00 Crore as an advance against sale of land. Similarly, it was shown in the balance sheets as on 31.03.2011; 31.03.2012; 31.03.2013; and as on 31.03.2014. The respondent had also filed a compliance affidavit dated 14.09.2016 along with various documents submitted by it with the ROC wherein for the first time, the said current liability of Rs. 5.00 Crore is not shown in the amended balance sheet as on 31.03.2014.

The Hon’ble High Court observed that the reason for not showing the said amount in the amended balance sheet was given in note No.10 of accounts stating that it had been forfeited on 31st March, 2014 for non fulfillment of obligations by the vendee and hence the amount of Rs.5.00 crores was not payable and hence the same has been adjusted by reducing the cost of land by equivalent amount.

The Hon’ble High Court observed that as per law settled by various judgments, showing an amount in all the balance sheets till 2014 as an advance against sale, amounted to admission.

The Hon’ble High Court opined that considering that the amount had been shown under the heading current liabilities it did show an admission on the part of the respondent qua the debt of the petitioner as late as till 2014. Note No.10 clarify such amount was lying with the respondent till 31.03.2014 as an advance but was forfeited on the said date. Since, the advance was allegedly forfeited only on 31.03.2014, the filing of this company petition in May, 2015 shall be well within limitation.

Coming to the alternate contention, the Hon’ble High Court further observed that as per the settled law only earnest money could be forfeited and that too to a particular extent, may be 5% to 10% depending upon the earnest amount. However the advance or an amount of installment given cannot be forfeited, especially when the respondent had not pleaded any loss allegedly suffered on account of such transaction.

The Hon’ble High Court opined that since there was no justification to withhold the amount due to the petitioner, so there is no impediment as to why the petition be not admitted and provisional liquidator be not appointed. According to Hon’ble High Court, while admitting liability in its financial accounts till the year 2014 and not paying a single penny to the petitioner or to her deceased husband, despite issuance of notices , the respondent company had neglected to pay the just claims of the petitioner without any reasonable cause or excuse.

The petition was admitted and the Official Liquidator attached to the Court was appointed as the Provisional Liquidator. However, one opportunity was given to the respondent company to pay the amount with interest within one month before the appointment of the Provisional Liquidator which was accordingly deferred.


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