2024 (11) TMI 1234 - AT - IBC

Dismissal of Section 7 application filed by the Appellant - financial debt or not - share application money in respect of the shares not allotted - whether in the facts of the present case, 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? - HELD 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. Further 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. On looking at Rule 2(c)(vii) of the CADR Rules, 2014 and the explanatory clause appended thereto, it becomes clear 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 - There is no evidence of any valid concluded agreement between the two parties with respect to allotment of shares. Hence, 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. 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. There are no infirmity in the order of the Adjudicating Authority rejecting the Section 7 application of the Appellant - there is no merit in the appeals - appeal dismissed.

Summary

Issues Involved:
1. Whether the share application money deposited by the Appellant with the Corporate Debtor qualifies as 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).
2. Applicability of Section 42(6) of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 to the share application money in question.
3. Validity of the Adjudicating Authority's reliance on previous judgments regarding the nature of share application money as financial debt.

Issue-wise Detailed Analysis:

1. Qualification of Share Application Money as 'Financial Debt':
The primary issue was whether the share application money deposited by the Appellant could be classified as 'financial debt' under Section 5(8) of the IBC. The Tribunal examined the statutory definition of 'financial debt,' which requires a disbursal against the consideration for the time value of money. The Tribunal noted that the transactions listed under Section 5(8) do not expressly cover amounts raised by way of share application money. The Appellant contended that the money should be deemed a deposit and thus a financial debt due to non-allotment of shares and failure to refund the money, as per the Companies Act and CADR Rules. However, the Tribunal found that the statutory requirements for a debt to be considered 'financial debt' were not met, as share application money is not explicitly included in the transactions under Section 5(8).

2. Applicability of Section 42(6) of the Companies Act, 2013 and CADR Rules:
The Appellant argued that under Section 42(6) of the Companies Act, 2013, shares must be allotted within 60 days of receiving the application money, failing which the money should be refunded with interest. The CADR Rules further state that if shares are not allotted within this period, the amount is treated as a deposit. The Tribunal analyzed these provisions and concluded that for the CADR Rules to apply, the share application money must be advanced in conformity with the Companies Act's provisions. The Tribunal found no evidence of compliance with Section 42, such as the issuance of a private placement offer letter, which is a prerequisite for treating the money as a deposit under the CADR Rules. Consequently, the Tribunal held that the share application money in the present case did not transform into a deposit or financial debt.

3. Validity of Reliance on Previous Judgments:
The Tribunal addressed the Appellant's reliance on the Kushan Mitra judgment, which held that share application money could be considered financial debt if shares are not allotted. However, the Tribunal noted that this judgment was stayed by the Supreme Court, thereby limiting its applicability. Instead, the Tribunal relied on a subsequent judgment in Promod Sharma Vs M/s Karanaya Heart Care Pvt. Ltd., which held that share application money does not constitute financial debt under Section 5(8) of the IBC. The Tribunal found no error in the Adjudicating Authority's reliance on this precedent, which supported the conclusion that the share application money did not qualify as financial debt.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision, dismissing the Section 7 application filed by the Appellant, as the share application money did not meet the criteria for financial debt under the IBC. The Tribunal clarified that the Appellant could pursue recovery of the share application money through appropriate legal proceedings in other forums. The appeal was dismissed, affirming that there was no merit in the Appellant's arguments.