Earnest Money Deposit Requirement : a Saviour of CIRP

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Shubhabrata Chakraborti

Partner, Juris Corp

Earnest Money Deposit Requirement: A Savior Of CIRP

One of the crucial pre-requisites set out in the RFRP for the resolution applicant(s) is the earnest money deposit (“EMD”). An EMD is akin to a bank guarantee that the contract will be fulfilled. This article endeavors to touch upon the rational for such a pre-requisite including the views taken by the Courts and the Adjudicating Authority in this regard.

The Insolvency and Bankruptcy Code, 2016 (“Code”) has authorized the Resolution Professional (“RP”) to play a significant role to set the wheel in motion in the corporate resolution process of the Corporate Creditor. The RP on the advice of the Committee of Creditors (“CoC”) initiates the process of identifying the resolution applicant(s) for the corporate debtor by publishing the request for the resolution process (“RFRP”).

Basis such RFRP, the RP invites expression of interest (“EOI”) from the investors/resolution applicant(s) having adequate financial capability to submit resolution plan for the corporate debtor1.

The RFRP broadly comprises of:

  • Eligibility criteria;
  • Bidding process;
  • An agreement containing the terms and conditions of bidding;
  • Bid evaluation matrix;
  • Form-G and time for which the EOI would remain open for submission;
  • Such other terms as desired by CoC.

One of the crucial pre-requisites set out in the RFRP for the resolution applicant(s) is the earnest money deposit (“EMD”).  An EMD is akin to a bank guarantee that the contract will be fulfilled.

This article endeavours to touch upon the rational for such a pre-requisite including the views taken by the Courts and the Adjudicating Authority in this regard.


The purpose is essentially to:

  • Deter the non-serious resolution applicant(s), from the pool of the interested prospective resolution applicant(s); and
  • Ensure resolution of the corporate debtor in a time bound manner;


The regulatory framework governing EMD are highlighted as under:

  • Section 25(2)(h) of the Code – Empowers the RP to invite the prospective resolution applicant(s) to submit the resolution plan(s), post fulfilment of the eligibility criteria approved by the CoC, including but not limited to EMD.
  • Regulation 36(A)2 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations 2016 (“CIRP Regulations”) deals with the EOI. Particulars of the EOI are set out in Form G of the Schedule to the IBBI Regulations. The EMD amount is fixed depending on the complexity and scale of the operations of the business of the corporate debtor.
  • Regulation 36(4A)3 of the CIRP Regulations – provides for deposit of a performance security after the resolution applicant has been declared as the successful applicant. This has been incorporated to ensure that once the plan of the successful resolution has been approved, the same does not become non-performing, thereby resulting in failure of the resolution process.
  • The Insolvency and Bankruptcy Board of India has also envisaged imposition of the EMD and its forfeiture. The IBBI’s draft specimen of RFRP also provides for such enabling clauses.
  • The government is contemplating to further amend Section 29A of the Code by disqualifying a successful bidder in a resolution process from any future bidding if it failed to implement the scheme approved by the Adjudicating Authority.


There have been several instances where the successful bidders have either defaulted in implementation of the approved resolution plan or have withdrawn the resolution plan whilst it was pending for approval before the Adjudicating Authority. Such acts have been criticized and condemned by the Courts and the Adjudicating Authority. Few such judgements have been captured below:

  • In the CIRP against Amtek Auto Ltd (“AAL”)4 the resolution applicant, Liberty House Group Pte. Ltd (“Liberty House”) had failed to implement the resolution plan approved by the Adjudicating Authority. The Adjudicating Authority permitted the financial creditors of AAL for filing the complaint before the IBBI or the Central Government consequent to which the Board initiated criminal proceeding u/s 74(1) against Liberty House.
  • Likewise, the resolution plans for Adhunik Metaliks Ltd5. and Orchid Pharma Ltd. too faced similar fate wherein the resolution applicants had failed to make upfront payments in terms of the approved resolution plans. Consequently, the Corporate Debtors/CoC/RP were granted leave to initiate appropriate proceedings against such defaulters.
  • In Eight Finance Pvt. Ltd vs. Resolution Professional, Parekh Aluminex Ltd7 the Adjudicating Authority, inter alia, held that the Code does not have any provision by which the resolution plan pending approval by the Adjudicating Authority can be withdrawn. Accordingly, it dismissed resolution applicant’s application for withdrawal and directed to forfeit the EMD of INR 2 crores in case the plan is not pursued by the resolution applicant.


Time being the essence of the code as recognized by the Supreme Court of India in M/s Innovative Industries Ltd. vs. ICICI Bank8, the EMD requisition has proven to be an effective catalyst to weigh the bona fide of a resolution applicant.  Further, to ensure that the resolution applicant(s) do not back out from the resolution plan, the EMD condition(s) generally stipulates certain standard circumstances under which it can be forfeited.

As regards the quantum of the EMD, the CoC under its commercial wisdom, has been given discretion to fix the same based on viability and feasibility. However, while doing so, the CoC is expected to ensure that the quantum of the EMD is not exorbitant and arbitrary engendering in discouraging the potential resolution applicant(s).


1. Section 25(2)(h) of IB Code, 2016

25. Duties of resolution professional. –

(1) …..

(2) For the purposes of sub-section (1), the resolution professional shall undertake the following

actions, namely:

(a) ….


(b) …..


(h) invite prospective resolution applicants, who fulfil such criteria as may be laid down by him

with the approval of committee of creditors, having regard to the complexity and scale of

operations of the business of the corporate debtor and such other conditions as may be

specified by the Board, to submit a resolution plan or plans.


36A. Invitation for expression of interest

(1) The resolution professional shall publish brief particulars of the invitation for expression of

interest in Form G of the Schedule at the earliest, not later than seventy-fifth day from the

insolvency commencement date, from interested and eligible prospective resolution applicants to

submit resolution plans.

(2) The resolution professional shall publish Form G-


(7) An expression of interest shall be unconditional and be accompanied by-


(f) an undertaking by the prospective resolution applicant that every information and records

provided in expression of interest is true and correct and discovery of any false information or

record at any time will render the applicant ineligible to submit resolution plan, forfeit any

refundable deposit, and attract penal action under the Code; and


[(4A) The request for resolution plans shall require the resolution applicant, in case its resolution plan

is approved under sub-section (4) of section 30, to provide a performance security within the time

specified therein and such performance security shall stand forfeited if the resolution applicant of such

plan, after its approval by the Adjudicating Authority, fails to implement or contributes to the failure of

implementation of that plan in

accordance with the terms of the plan and its implementation schedule.

Explanation I. – For the purposes of this sub-regulation, “performance security” shall mean security

of such nature, value, duration and source, as may be specified in the request for resolution plans

with the approval of the committee, having regard to the nature of resolution plan and business of the

corporate debtor.

4 NCLT, Chandigarh Bench – CP (IB) No.42/Chd/Hry/2017

5 NCLT, Kolkata Bench – CP No.373/KB/2017

6 NCLT, Chennai Bench – TCP/540/IB/CB/2017

7 MA No.1212 /2019 in C.P (IB) (MB) No. 1262 /2017

8. (2018)1 SCC 407

Disclaimer: The views expressed in the article above are those of the authors’ and do not necessarily represent or reflect the views of this publishing house

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