Raising Funds Through Share Subscription-Cum-Shareholders Agreement Is Financial Debt, Plea U/S 7 Of IBC Maintainable: NCLT Mumbai

Brief Facts

Spectrum Trimpex Pvt. Ltd (Financial creditor) invested the amount to the tune Rs. 16,55,700 in VPhrase Analytics Solutions Pvt. Ltd. (corporate debtor) through a share subscription and shareholders agreement on February 24, 2016. Thereafter, 378 shares of the corporate debtor were allotted to the financial creditor with a provision of compulsory redemption. It was provided in the agreement that there shall be an exit period of 5 years within which the founders had to facilitate the exit of the investors. It was further stipulated that if the founders failed to facilitate the exit within that period, the investor had a right to claim buy back of shares at a value determined by an independent valuator.

When exit period passed, the financial creditor sent a notice claiming buy back of shares at a price of Rs. 24,814 per share amounting to Rs. 93,79,692 in total based on the audited financial statement for financial year 2021-22. No response was given by the corporate debtor. Thereafter, an independent valuer was appointed by the financial creditor who determined the value of per share at a price of Rs. 34,600 per amounting to Rs. 1,30,78,800 in total for which a notice was again sent to the corporate debtor on January 16, 2024 but no reply was received this time also. Consequently, a petition under section 7 of the Insolvency and Bankruptcy Code (IBC) was filed by the financial creditor for initiating corporate insolvency resolution process (CIRP) in which the amount to the tune of Rs. 1,30,78,800 was claimed.

Contentions

The applicant contended that a default was committed by the corporate debtor by not buying back its shares from the applicant as per the shareholders agreement which it had to buy compulsorily. Since the corporate debtor has defaulted for which a petition under section 7 of the IBC can be filed.

Per contra, the corporate debtor contended that although applicant has been classified as a financial creditor, its debt does not qualify the criteria of a financial debt under section 5 (8) of the IBC therefore the applicant is merely an equity shareholder. It was further submitted that there is no compulsory redemption right and redemption right if any has to comply with the provisions of the companies act. It was further argued that agreement executed in 2016 was superseded by a subsequent agreement executed in 2019 in which right issues were accepted by the applicant. It was further contended that this petition was filed to exert undue pressure on the corporate debtor which violated section 65 of the IBC therefore the petition is liable to be rejected.

NCLT's Analysis

The NCLT observed that money given by the financial creditor to the corporate debtor under a shareholders agreement constituted a financial debt. Exit period of 5 years was provided in the agreement itself with a specified return or buy back of shares at a fair market value which had all the trappings of a commercial borrowing. The NCLT referred to the judgment of the NCLAT in D. Kakade v/s. HDFC Ventures Trustee Co.Ltd & Ors. (CA(AT)(Ins.) No. 481/2023). Ltd in which it was held that when a company raises money from the investor and provides them an opportunity to exit with a stipulated return, such a money will constitute a financial debt as it is a disbursement for consideration of time value of money. It was held as under:

“It has been unequivocally held by the Hon'ble NCLAT in Sanjay D. Kakade v/s. HDFC Ventures Trustee Co.Ltd & Ors. (CA(AT)(Ins.) No. 481/2023) that raising of amount by the Company through Share Subscription-cum-Shareholders Agreement was a commercial borrowing, since the said transaction has direct effect with business, which was carried out by the corporate debtor. The Hon'ble NCLAT has further held that since the corporate debtor required the money raised from the shareholders for funding its township projects, the said transaction had commercial effect of borrowing; and since there was an exit option provided to the investors with an internal rate of return @ 15% p.a. compounded annually or the Fair Marker Value, whichever is higher, the investment made by the shareholders via the Share Subscription-cum Shareholders Agreement was held to be a disbursement against consideration for time value of money. Therefore, the Hon'ble NCLAT concluded that that raising of amount by the Company through Share Subscription-cum Shareholders Agreement was a financial debt”.

The NCLT further held that:

“Therefore, since the transaction has the commercial effect of borrowing and there was a disbursement of money against the consideration for time value of money, the Adjudicating Authority holds that the money was raised by the Corporate Debtor from the shareholders through Share Subscription-cum-Shareholders Agreement is a financial debt, as defined u/s 5(8) of the Code, and accordingly, the Tribunal rejects the contention of the learned Counsel for the Corporate Debtor that the money raised by the Corporate Debtor from the Petitioner is not a financial debt”.

The NCLT further observed that the financial creditor could not appoint an independent valuer unilaterally as it breached the terms of the agreement wherein it was stipulated that the valuer will be appointed with mutual consent of both parties. It further held that the corporate debtor was not bound by the report prepared by the independent valuer. It was further observed by the tribunal that initial report submitted by the valuer for financial year 2021-22 in which the default amount was to the tune of Rs. 93,79,692 was below the threshold limit prescribed under section 4 of the IBC.Furthermore, no subsequent financial statement was submitted by the financial creditor to substantiate the claim above 1 crore rupees. It was held as under:

“Therefore, it is evident from the Agreement itself that for the valuation of the shares, the valuer had to be appointed with the mutual consent of both the parties; whereas the Petitioner in this case obtained the valuation report from the valuer, unilaterally and at the back of the Corporate Debtor and the act of the Petitioner has been contrary to the terms and conditions of the contract between the parties. Therefore, the very appointment of the valuer is questionable and under such circumstances, the Corporate Debtor cannot be held to be bound by the valuation report nor on the basis of the said report, can it be claimed by the Petitioner that the value of the shares in question was INR 34,600/- per equity share at the given time. It appears that as per the notice dated 27.01.2023, issued by the Petitioner, the value of the claim was INR 93,79,692/- was less than the threshold limit of rupees one crore which must have incapacitated the Petitioner to proceed u/s 7 of the Code against the Corporate Debtor and to overcome the said hardship, the Petitioner unilaterally obtained the valuation report”.

Conclusion

The NCLT concluded that the petition under section 7 of the IBC is liable to be rejected due to failure to meet the threshold limit under section 4 of the IBC. The tribunal further held that independent valuer was appointed unilaterally which breached the shareholders agreement. Accordingly, the present petition was dismissed.

Case Title: Spectrum Trimpex Pvt. Ltd. v. VPhrase Analytics Solutions Pvt. Ltd.

Court: National Company Law Tribunal, Mumbai

Case Reference: CP (IB) 249/MB/2024

Judgment Date: 04/10/2024

Click Here To Read/Download The Order