Share Application Money Deposited With Corporate Debtor Cannot Be Treated As Financial Debt U/S 5(8) Of IBC: NCLAT
The NCLAT New Delhi bench of Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that share application money deposited with the corporate debtor cannot be treated as financial debt under section 5(8) of the IBC. In this case, share application money was given for the allotment of shares but neither were shares...
The NCLAT New Delhi bench of Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that share application money deposited with the corporate debtor cannot be treated as financial debt under section 5(8) of the IBC. In this case, share application money was given for the allotment of shares but neither were shares allotted nor was money refunded.
Brief Facts
The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated 22.03.2024 (hereinafter referred to as ('Impugned Order') passed by the Adjudicating Authority.
By the impugned order, the Adjudicating Authority has dismissed the Section 7 application filed by the Appellant for admitting M/s Skoda (India) Pvt Ltd-Corporate Debtor into the rigours of Corporate Insolvency Resolution Process (“CIRP” in short). Aggrieved by the impugned order, the present appeal has been preferred by the Appellant.
On the request of the Corporate Debtor, funds were infused by the Appellant-M/s Murlidhar Vincom Pvt Ltd as share application money in the Corporate Debtor during FY-2009-10. In return, the Corporate Debtor had allotted 3000 equity shares for an amount of Rs 6.97 lakhs in the share capital of the Corporate Debtor to the Appellant.
Subsequently, during the next two financial years i.e. 2010-11 & 2011-12, another sum of Rs 1.32 Cr. was paid as share application money by the Appellant for allotment of equity shares as share application money. No shares were however allotted by the Corporate Debtor but Rs 40 lakhs was refunded by the Corporate Debtor from the said share application money.
The Corporate Debtor was not able to refund the balance amount of Rs 92 lakhs. The Corporate Debtor not being in a position to refund the balance amount of share application money purportedly on account of liquidity crunch, instead agreed to allot shares for the balance amount subject to the Appellant providing additional funds to the Respondent.
The Appellant thereafter provided additional funds of Rs 79.60 lakhs which were paid in several instalments from 2012-14. Since neither the shares were allotted nor the share application money was refunded, the Appellant sent a Demand Notice on 07.07.2023 to the Corporate Debtor for repayment of the share application money with statutory interest of 12% in terms of Section 42(6) of the Companies Act, 2013.
Since the Corporate Debtor failed to repay the amount, the Appellant filed a Section 7 application before the Adjudicating Authority on 30.08.2023.The Adjudicating Authority however held that share application money in respect of the shares not allotted cannot be deemed to be a financial debt.
Contentions
The appellant submitted that under Rule 2 of the Companies (Acceptance of deposit) Rules (herein after referred to as “CADR Rules”) provides that if shares are not allotted within 60 days of receipt of share application money, the same amount is deemed to be treated as deposit money.
That since in the present factual matrix, shares were not allotted within the time-period as prescribed by the Companies Act, 2013 against the share application money provided by the Appellant, the share application money provided by a Financial Creditor to the Corporate Debtor should have been deemed by the Adjudicating Authority to be deposit money which would have come within the meaning of 'financial debt' under Section 5(8) of the IBC.
Reliance was placed on Kushan Mitra Vs Amit Goel and Ors. wherein it was held by this Tribunal that share application money in the event of non-allotment of share attracts interest under Section 42(6) of the Companies Act, 2013 and therefore falls within the ambit of financial debt under Section 5(8) of the IBC.
Issue Before NCLAT
Whether the share application money which was deposited with the Corporate Debtor by the Appellant fell in the category of Section 5(8) of the IBC.
NCLAT's Analysis
The tribunal, at the outset, referred to section 5(8) of the Code which provides the definition of financial debt and noted that the basic ingredients which are required to be met for a debt to become 'financial debt' are that there must be a disbursal against the consideration for time value of money.
The tribunal further noted that sub clauses (a) to (i) of Section 5(8) delineates the various transactions which are included in the ambit of 'financial debt'. Prima-facie, amounts raised by way of share application money is not expressly covered in the transactions covered by sub clauses (a) to (i) of Section 5(8) of the IBC.
The tribunal further referred to Rule 2(c)(vii) of the CADR Rules, 2014 and the explanatory clause appended thereto. The explanation states that “if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.”
Based on the above, the tribunal noted that it refers to any amount received and held pursuant to an offer made in accordance with the provisions of the Companies Act, 2013 towards subscription to any securities, including share application money. It flows therefrom that for the aforementioned CADR Rules to be attracted in respect of share application money, there has to be a clear nexus to show that the share application money amount was advanced in conformity with the relevant provisions of the Companies Act, 2013.
The tribunal further referred to section 42 of the Companies Act and noted that as per this provision several statutory compliances are required to be met prior to issue of shares on private placement basis. Section 42(2) of the Companies Act stipulates the requirement of issue of private placement offer letter in such cases.
Based on the above, the tribunal observed that from the records available on file, nothing was found which could show that the Corporate Debtor had issued any such private placement offer letter to the Appellant. There is no evidence of any valid concluded agreement between the two parties with respect to allotment of shares.
The tribunal came to the conclusion that the amount which was advanced by the Appellant cannot be treated to be amount in response to the private placement offer. Rule 2 of CADR Rules envisages that only if any amount is received pursuant to any private placement offer made in accordance with the provisions of the Companies Act, 2013 and no shares are allotted qua that amount, only then the sum becomes a deposit.
The tribunal further noted that when no proof of any private placement offer made in accordance with the provisions of the Companies Act, 2013 has been placed on record by the Appellant, the CADR Rules cannot be held to be applicable. Since the amount advanced cannot be related to Section 42 of the Companies Act, the applicability of Section 42(6) cannot be pressed as is being sought by the Appellant in the present case.
The tribunal concluded that the share application cannot be treated as financial debt therefore the Adjudicating Authority committed no error in rejecting the application under section 7 of the Code.
Case Title:M/s. MURLIDHAR VINCOM PVT. LTD. Versus M/s. SKODA (INDIA) PVT. LTD
Case Reference:Company Appeal (AT) (Insolvency) No. 1334 of 2024
Judgment Date: 26/11/2024
For Appellant : Mr. Abhishek Arora, Mr. Ashish Choudhury, Advocates.