Payment Of Earnest Money Towards Purchase Of Land Is Not A Financial Debt: NCLAT Delhi

Background Facts

S. Chandriah ("Appellant") had sent a letter dated 14.09.2018 to M/s. Digjam Ltd., offering to purchase surplus land available at the Mills premises of the said company at Jamnagar, Gujarat. Subsequently, the Appellant had paid Earnest Money to Digjam Ltd. between 26.09.2018 to 08.04.2019 amounting to Rs. 7 Crores.

In the meantime, M/s. Oman Inc. had filed an Application under Section 9 of the IBC seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against M/s. Digjam Ltd. ("Corporate Debtor"). On 26.04.2019, the NCLT Ahmedabad Bench admitted the application and initiated CIRP against the Corporate Debtor. Mr. Sunil Kumar Agarwal was appointed as the Resolution Professional.

The Appellant filed its claim as a Financial Creditor before the Resolution Professional, the latter informed the Appellant that remittance of funds as interest free advance, to be adjusted against sale consideration for proposed sale of land, does not fall under "Financial Debt". Thereafter, the Appellant filed an application before the NCLT seeking its inclusion as a Member of Committee of Creditors and the application was dismissed vide an order dated 07.02.2020. The Appellant filed an appeal before the NCLAT challenging the Order dated 07.02.2020.

Further, on 11.02.2020 the Resolution Plan submitted by M/s. Finquest Financial Solutions Pvt. Ltd. was approved by the CoC and subsequently by the NCLT. The said Resolution Plan had proposed payment of NIL amount to 'other creditors'.

Contentions Of The Appellant

The Appellant contended that Corporate Debtor had issued receipt for the payment of Rs. 7 Crores and had not disputed the receipt of amount. The Resolution Professional had wrongly classified the Appellant as 'Other Creditor', while the Annual Reports of the Corporate Debtor for 2018-19 and 2019-20 had classified the amount of Rs. 7 Crores as "other Financial Liability" hence the Appellant's claim deserved to be admitted as a "Financial Debt".

Moreover, the Resolution Plan was approved without earmarking any amount to for the class of 'other creditors'. The decision of the CoC must reflect that it has taken into account in maximizing the value of the assets of the Corporate Debtor and the fact that it has adequately balanced the interest of all the stakeholders.

Contentions Of The Respondent

The Respondent contended that there was no contract between the Parties for sale of any land. The Appellant of his own had made payment of the Earnest Money to the Corporate Debtor, without there being any acceptance of the offer of the Appellant. Therefore, the amount advanced cannot be regarded as a Financial Debt.

Issue

Whether the payment of earnest money of Rs. 7 Crores by the Appellant to the Corporate Debtor is a financial debt within the meaning of Section 5(8) of the IBC?

Decision Of The NCLAT

The NCLAT observed that a contract between the parties can be oral as well as in writing however, the Appellant had failed to prove that there was even an oral agreement between the Parties.

For a debt to be financial debt, essential condition is that the debt is disbursed against the consideration for the time value of money. Time value of money means the price received for the length of time for the money for which the money has been disbursed. It was opined that the disbursement made by the Appellant to the Corporate Debtor was only a payment of Earnest Money, to be adjusted in sale of the land and was not a disbursement in consideration for the time value of money.

"Acknowledging the Liability of earnest money as a Financial Liability is not akin to admitting as a "Financial Debt". A debt of "other Creditors" is also a Financial Liability. Thus on the strength of Annul return of Financial Year 2018-19 and 2019-20, it cannot be held that payment of earnest money by the Appellant was "Financial Debt"."

The NCLAT Bench dismissed the appeal and upheld the order of the NCLT.

Case Title: S. Chandriah v Sunil Kumar Agarwal & Ors., Company Appeal (AT) Insolvency No. 22 of 2022

Counsel for Appellant: Sr. Adv. K. Datta, with Mr. Ravi Raghunath, Mr. Vishnu Mohan and Mr. Rajat Sinha, Advocates.

Counsel for Respondents: Adv. Pratik Thakkar.

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