Amount Given As 'Share Application Money' Is Not Covered Under Financial Debt: NCLAT, Delhi

Background Facts

The Appellant had filed a petition under Section 7 of the IBC before the National Company Law Tribunal, New Delhi ("Adjudicating Authority") for initiating CIRP against the Respondent. The Appellant had submitted that it had given Rs.1,03,00,000/- in the share capital of the Respondent and the same was shown as 'Share Application Money'. However, no share was allotted in lieu of such money. Subsequently, the principal amount of Rs. 1,03,00,000/- was paid off by the Respondent, but no amount was paid towards interest. As neither any share was allotted nor was amount returned, it became deposit. Hence, petition under Section 7 of the IBC was maintainable. However, the Adjudicating Authority dismissed the petition vide an order dated 02.03.2020 with following observations:

"7. The matter between both the parties was amicably settled as recorded in order dated 11th October, 2017 of the Hon'ble National Company Law Tribunal passed in C.P. No. 205(ND)/2017, between the parties along with that the Respondent failed to show any agreement to substantiate the fact that money was paid as a financial debt or that the money was paid against the payment of interest. Therefore, we find that the share application money does not fall under any of the clauses of Section 5(8) of the Code and it cannot be said to fall under the definition "a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money" since no debt was disbursed by the Applicant to the Respondent and no time value has been attached with the share application money. Thus, since the claim is not a financial debt the present application under Section 7 of the Code is not maintainable and is dismissed with no costs."

Decision Of The NCLAT

The NCLAT Bench observed that admittedly the amount was given by the Appellant as a 'Share Application Money' on which no share was allotted and afterwards the principal amount was refunded by the Respondent under some settlement. The Bench dismissed the appeal and upheld the order dated 02.03.2020 passed by the Adjudicating Authority. It was held that an amount given as 'Share Application Money' cannot be treated to be a financial debt in order to trigger the Insolvency Process under Section 7 of the IBC.

Case Title: Pramod Sharma v Karanaya HeartCare Pvt. Ltd., Comp. App. (AT) (Ins.) No. 426 of 2022.

Counsel for Appellant: Adv. Sunil Singh Parihar

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