NCLAT held that unallotted share application money did not qualify as financial debt under the IBC due to the lack of statutory compliance and the absence of consideration for the time value of money.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal today and held that unallotted share application money does not qualify as "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016. The Appellate Tribunal emphasized that such money lacks the essential element of "disbursal against the consideration for the time value of money" and that statutory compliance with Section 42 of the Companies Act, 2013, is required for it to be deemed a deposit under the Companies (Acceptance of Deposits) Rules, 2014.
The appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, was filed by M/s Murlidhar Vincom Pvt. Ltd., challenging the order of the NCLT, New Delhi Bench-VI, dismissing their Section 7 application. The application sought to initiate the Corporate Insolvency Resolution Process (CIRP) against M/s Skoda (India) Pvt. Ltd., contending that unallotted share application money amounted to "financial debt" under Section 5(8) of the IBC. The funds in question were advanced as share application money during FY 2009-2014, with part of the amount refunded, leaving an unpaid balance of ₹92 lakhs. Despite additional infusions of ₹79.60 lakhs, neither were shares allotted nor was the balance refunded, prompting the Appellant to issue a demand notice under Section 42(6) of the Companies Act, 2013, and seek redress under the IBC.
The Adjudicating Authority dismissed the application, holding that unallotted share application money did not meet the definition of "financial debt" under Section 5(8) of the IBC. It reasoned that the lack of "disbursal against consideration for the time value of money" precluded its qualification as financial debt. The Appellant argued that unallotted share application money, as per Section 42(6) of the Companies Act, 2013, and Rule 2(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014, automatically became a deposit, attracting interest, and thereby acquired the nature of the financial debt. The Appellant further cited the ruling in Kushan Mitra v. Amit Goel & Ors., asserting that similar circumstances in that case led to a finding of financial debt.
The NCLAT upheld the NCLT's reasoning, emphasizing that share application money is not explicitly enumerated as financial debt under Section 5(8) of the IBC. The Tribunal further noted that for Rule 2(c)(vii) of the CADR Rules to apply, compliance with Section 42 of the Companies Act, including the issuance of a private placement offer letter, was mandatory. The Appellant failed to demonstrate such compliance or evidence of a concluded agreement for private placement. Consequently, the share application money could not be deemed a deposit or financial debt. The reliance on the Kushan Mitra judgment was deemed untenable due to the Supreme Court's stay on the ruling. Additionally, the NCLAT referred to the precedent in Promod Sharma v. M/s Karanaya Heartcare Pvt. Ltd., where similar claims were rejected.
The Tribunal concluded that the Appellant had not established that the share application money constituted financial debt and affirmed the Adjudicating Authority's dismissal of the Section 7 application. It clarified that the Appellant could pursue remedies for recovery or refund of the share application money in an appropriate forum. Consequently, the appeal was dismissed on merit.
Mr. Abhishek Arora and Mr. Ashish Choudhury, Advocates represented the Appellant.
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