Money disbursed to corporate debtor as a payment to be adjusted in sale of land wasn’t a financial debt u/s 5(8)

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Financial debt

Case Details: S. Chandriah v. Sunil Kumar Agarwal, Resolution Professional of Digjam Ltd. - [2022] 145 taxmann.com 172 (NCLAT-New Delhi)

Judiciary and Counsel Details

    • Justice Ashok Bhushan, Chairperson & Naresh Salecha, Technical Member
    • Krishnendu Datta, Sr. Adv., Ravi RaghunathVishnu MohanRajat Sinha, Advs. for the Appellant.
    • Pratik Thakkar, Adv. for the Respondent.

Facts of the Case

In the instant case, the appellant filed its claim as a financial creditor to the Resolution Professional (RP) for an amount advanced to the corporate debtor as earnest money for the purpose of purchasing surplus land of the corporate debtor.

The RP vide an e-mail replied that funds remitted to the corporate debtor were interest-free advance and the same was to be adjusted against sale consideration for the proposed sale of land, which didn’t fall under the category of ‘financial debt’.

Thereafter, the appellant filed an application before the Adjudicating Authority (NCLT) seeking direction to RP to adjudicate its claim, revise the list of CoC members, and admit him as a CoC member.

However, the NCLT dismissed the said application on the ground that there was no contract between the parties for the sale of any land and, therefore, the earnest money advanced by the appellant couldn’t be treated as a ‘financial debt’. Thereafter, an appeal was made to the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT.

The appellant submitted that the RP had admitted the payment of earnest money by the appellant as another creditor but wrongly classified the appellant as the other creditor. Further, the appellant also referred to the annual reports of the corporate debtor for financial years 2018-19 and 2019-20 where earnest money had been classified as a ‘financial debt’ and, therefore, the appellant’s claim deserved to be admitted as a financial debt.

NCLAT Held

The NCLAT observed that there was no agreement between parties and that disbursement made by the appellant to the corporate debtor was only a payment, which was to be adjusted in the sale of land.

Further, the NCLAT observed that since disbursement was not in consideration for the time value of money, an essential condition for accepting a debt to be financial debt was absent.

The NCLAT held that acknowledging the liability of earnest money in annual returns as financial debt was not akin to admitting the same as financial debt.

Further, the NCLAT held that where the appellant’s claim was classified as other creditor and CoC in its commercial decision decided not to allocate any amount to other creditors and the appellant failed to prove any violation of provisions of IBC, the resolution plan approved by the Adjudicating Authority didn’t require any interference. Accordingly, the appeal was to be dismissed.

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