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In the matter of S. Chandriah v Sunil Kumar Agarwal & Ors. under the National Company Law Appellate Tribunal (“NCLAT”), it was held that payment of Earnest Money towards purchase of land is a financial liability but not a ‘financial debt’ as per the Section 5(8) of the  Insolvency and Bankrupt Code, 2016 (“IBC”), as it has not been disbursed for consideration of time value of money.

 

 

Facts of the case: S. Chandriah (“Appellant”) had written to M/s. Digjam Ltd. on September 14, 2018, proposing to purchase any surplus land that was present at the Mills complex of the aforementioned business in Jamnagar, Gujarat. The Appellant then paid Digjam Ltd. earnest money totaling Rs. 7 Crores between 26th September, 2018 and 8th April, 2019.
M/s. Oman Inc. filed an application under Section 9 of the IBC in the meantime, requesting the start of the Corporate Insolvency Resolution Process (“CIIRP”) against M/s. Digjam Ltd. (“Corporate Debtor”). The NCLT Ahmedabad Bench accepted the plea and launched CIRP against the Corporate Debtor on April 26, 2019. The Resolution Professional has been named as Mr. Sunil Kumar Agarwal.

The latter advised the appellant that sending money as an interest-free advance to be offset by the sale price for a potential sale of land does not constitute “financial debt.” Thereafter, the Appellant applied to the NCLT to be added to the Committee of Creditors; however, the application was denied in an order dated February 7, 2020. The Appellant then appealed the abovementioned order that was issued on February 7, 2020 before the NCLAT Delhi.

Furthermore, on February 11, 2020, both the CoC and the NC LT approved the Resolution Plan filed by M/s. Finquest Financial Solutions Pvt. Ltd. The aforementioned Resolution Plan suggested paying “other creditors” NIL.

 

Order: 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.
The payment of a debt must be made in consideration for the time worth of money in order for it to qualify as financial debt. The amount paid over the period of time for which the money has been disbursed is referred to as the time value of money. The disbursement by the Appellant to the Corporate Debtor was argued to be only a payment of Earnest Money, to be adjusted in the sale of the land, and not a disbursement in consideration for the time worth of money.

Therefore, the NCLAT Delhi Bench dismissed the appeal and upheld the order of the NCLT.