NCLAT rules earnest money paid for land purchase is not a financial debt

NCLAT rules earnest money paid for land purchase is not a financial debt

Dismissing the appeal, the bench upheld the order of the National Company Law Tribunal

The Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) has held that the payment of earnest money towards the purchase of land is a financial liability but not a 'financial debt' as per the Insolvency and Bankruptcy Code (IBC), 2016. That is because it has not been disbursed for consideration of the time value of money.

The bench comprising Justice Ashok Bhushan (Chairperson) and Naresh Salecha (Technical Member) was adjudicating an appeal filed in the S. Chandriah v Sunil Kumar Agarwal & Ors case.

The appellant, S. Chandriah, sent a letter in September 2018 to Digjam Ltd., offering to purchase surplus land available at the mill's premises of the company at Jamnagar, Gujarat.

Subsequently, the appellant paid the earnest money amounting to Rs.7 crores to Digjam Ltd. between September 2018 and April 2019.

Meanwhile, Oman Inc. filed an application under IBC seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Digjam Ltd. (Corporate Debtor).

In April 2019, the Ahmedabad Bench of the National Company Law Tribunal (NCLT) admitted the application and initiated CIRP against the corporate debtor and Sunil Kumar Agarwal was appointed the Resolution Professional (RP).

When the appellant filed its claim as a financial creditor before the RP, the latter informed the appellant that remittance of funds as interest-free advance, to be adjusted against sale consideration for the proposed sale of land, did not fall under 'financial debt.'

Thereafter, the appellant filed an application before the NCLT seeking its inclusion as a Member of Committee of Creditors. The application was dismissed vide a February 2020 order. Aggrieved by the order, the appellant then filed an appeal before NCLAT.

In February 2020, the RP submitted by Finquest Financial Solutions Pvt. Ltd. was approved by the CoC and subsequently, by NCLT. The Resolution Plan had proposed payment of NIL amount to 'other creditors'.

The appellant contended that the corporate debtor had issued a receipt for the payment of Rs.7 crores and had not disputed it. But the RP had wrongly classified the appellant as 'other creditor'. 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 'financial debt.'

Moreover, the RP was approved without earmarking any amount to the class of 'other creditors'. The decision of the CoC must reflect that it considered maximizing the value of the assets of the corporate debtor and the fact that it has adequately balanced the interest of all stakeholders.

But the respondent contended that there was no contract between the parties for the sale of land. The appellant had made the payment of the earnest money to the corporate debtor without any acceptance of the offer. Therefore, the amount advanced could not be regarded as financial debt.

The issue before NCLAT was whether the payment of earnest money of Rs.7 crores by the appellant to the corporate debtor was a financial debt under IBC.

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 it to be financial debt, the 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.

The tribunal ruled that the disbursement made by the appellant to the corporate debtor was the payment of earnest money to be adjusted in the sale of the land. It was not a disbursement in consideration of the time value of money. Hence, it cannot be held that the payment of earnest money by the appellant was 'financial debt'.