Share Application Money Can't Be Treated As Financial Debt
Anmol Jain
14 Jan 2025 9:27 AM
The NCLT in the judgment of Rajeev Kumar Jain vs Uno Minda Limited Formerly, defined financial debt, as to entail debt plus interest, if any. The understanding between the parties is important and relevant to determine the existence of the time value of money, which can take many forms other than the simple payment of interest. This means that interest is not a necessary condition, so the corporate debtor may or may not be required to pay interest. The NCLAT noted that the phrase "disbursement should be made to a corporate debtor only" is not used in the definition of financial debt included in Section 5(8) (Definition of "financial debt") of the IBC. 'Financial Debt' has an inclusive definition given u/s 5(8) of the IBC, which defines it as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Further, Section 5 of the Insolvency and Bankruptcy Code 2016(IBC) defines 'financial creditor' as any person to whom a financial debt is owed. It includes a person to whom such debt has been legally assigned or transferred. Since the definition of 'financial debt' is non-exhaustive, the Judiciary has the power to interpret what can or cannot be considered as a 'financial debt'. Regarding what qualifies as a "financial debt" under the IBC, the Supreme Court and Tribunals have rendered a number of decisions. In a recent, significant ruling, the Supreme Court ruled that interest-free loans would be considered "financial debt." In yet another important decision, the Supreme Court held that a debt must be disbursed against the consideration of the time value of money in order to qualify as "financial debt" for the purposes of Part II of the Code. Understanding the definition of "time value of money" is essential to comprehending how "financial debt" is explained. According to Black's Law Dictionary, "time value" is the cost related to the amount of time an investor must wait until an investment matures or the related income is earned
Recent Developments
The NCLAT was asked to decide whether share application funds that had not been returned within the time frame specified by Section 42 of the Companies Act, 2013 read with the Companies (Acceptance of Deposit) Rules, 2014, could be regarded as financial debt in the case of Murlidhar Vincom Private Limited vs M/S Skoda (India) Pvt. Ltd (Company Appeal (AT) (Insolvency) No. 1334 of 2024). In order to respond to the inquiry, the NCLAT noted the particular circumstances and proceeded to remark that the money applied for shares in this instance was not provided in accordance with the private placement process outlined in the Companies Act. These factors prompted NCLAT to note that funds provided in violation of the legislative standards would not be considered deposits and, as a result, not qualify as financial debt. In our humble opinion, the NCLAT's decision that share application fees would not be considered a financial obligation is accurate, but the reasoning used to support it has to be questioned. Even if the share application money had been provided in accordance with the terms of the Companies Act, it would not have been considered a financial debt in our opinion since it lacked the necessary components to be considered financial debt under Section 5(8) of the Code. The proper method would have been to submit a Section 9 application as an operational creditor, considering the shares as goods (as specified under the CIRP regulations), if any CIRP application could have been maintained on the basis of unpaid share application money. The proper method would have been to file a Section 9 application as an operational creditor, treating the shares as goods (as defined by the Sale of Goods Act, 1930), and treating the share application money as an advance payment made toward the purchase of such goods, if any CIRP application could have been maintained on the basis of unpaid share application money.
Determining the rights and responsibilities of creditors and debtors under the Insolvency and Bankruptcy Code (IBC) depends critically on the differentiation between financial debt and other types of liabilities. Share application money cannot be categorized as financial debt, as the NCLAT noted in its ruling in Murlidhar Vincom Private Limited v. Skoda (India) Private Limited. As stated in Section 5(8) of the IBC, the argument is based on the fact that the crucial element of the "time value of money" is missing. Since share application money is an advance for equity, it is not repaid with interest or a corresponding financial return. It lacks the essential features of financial debt as its goal is to acquire an ownership interest in the business. The NCLAT's decision emphasizes that share application funds would not satisfy the definitional requirements of financial obligation even if they were given in accordance with the Companies Act of 2013. Court rulings, such as the Supreme Court's focus on the need of "disbursement against consideration for the time value of money" in order for a loan to be classified as financial debt, are consistent with this approach. Furthermore, a sensible substitute is offered by the proposal to use Section 9 of the IBC to handle unpaid share application money by treating shares as products under the Sale of products Act, 1930. This method preserves the structural integrity of the Code's concept of financial debt while acknowledging the transactional character of share application funds. In the end, the ruling supports the IBC's objective of differentiating between operational and financial creditors while expediting bankruptcy procedures. The court guarantees that only transactions that have the fundamental components of financial debt are subject to the specific remedies granted under Part II of the IBC by excluding share application money from the definition of financial debt. This preserves legal coherence and clarity.