2017 (12) TMI 290 - Tri - Insolvency and Bankruptcy

Corporate Insolvency Resolution Process - whether the petition satisfies the requirements of section 7 which provide that corporate insolvency resolution process can be initiated against a corporate debtor by attaching record of the default and proposing name of the resolution professional to act as an interim resolution professional? - Held that - We have thoughtfully considered aforesaid submissions of the learned counsel for the petitioner-Financial Creditor and are of the view that the same are devoid of merit. The expression Debt u/s 3(11) of the Code is a general definition and in respect of insolvency resolution and liquidation for corporate debtor section 4 provide that Part II was to be applied to matter related to insolvency and liquidation for corporate debtor where a minimum amount of default is one lac rupees and section 5 further clarifies that in part II the various expression have been defined unless the context otherwise required. The expression debt has not been used in sub-sections (7) and (8) of section 5. The expressions used are financial creditor and financial debt. Every debt is not essentially a financial debt. Therefore the definition of expression debt cannot be imported to part II and the argument is hereby rejected. The guaranteed returns as per the provisions of clause (5.2.a) of SSA would start only after the period of five years has lapsed. The period of five years is to expire in June 2021. There could not be any default. Likewise we find no substance in the argument that in accordance with clause 5.3.1 read with clause 5.8 it could be regarded as default as no valid allotment of share has taken place and in any case period of three years and five years is yet to expire. We are further of the view that any default has not occurred in terms of section 7(5). The expression default has been defined by section 3(12) to mean non-payment of debt when whole or any part or instalment of the debt have become due and payable and the same is not repaid by the corporate debtor. In the present case the petitioner financial creditor has pleaded that no allotment of CCRPL in accordance with law has been made. As a matter of fact allotment made was to an unregistered firm and the ROC refused to register the transfer. Therefore there is no question of any default occurring. Petition fails.

Summary

Issues Involved:
1. Whether the petitioner qualifies as a 'Financial Creditor' under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Whether the subscription money advanced for purchase of shares constitutes a 'Financial Debt'.
3. Whether the petition satisfies the requirements of Section 7 for initiating Corporate Insolvency Resolution Process (CIRP).
4. Whether there was a default by the Corporate Debtor in issuing and registering the CCRPS shares.
5. Whether the petitioner is entitled to any remedy under the SSA and Companies Act, 2013.

Detailed Analysis:

1. Qualification as a 'Financial Creditor':
The petitioner, M/s ACPC Enterprises, approached the Tribunal under Section 7 of the Insolvency and Bankruptcy Code, 2016, claiming to be a 'Financial Creditor' and sought to initiate Corporate Insolvency Resolution Process against Affinity Beauty Salon Pvt. Ltd., described as the 'Corporate Debtor'. The Tribunal examined whether the petitioner meets the definition of 'Financial Creditor' as per Section 5(7) and Section 5(8) of the Code. It was determined that the petitioner does not qualify as a 'Financial Creditor' because the subscription money advanced for the purchase of shares does not fall within the definition of 'Financial Debt', which requires disbursement against the consideration for the time value of money.

2. Subscription Money as 'Financial Debt':
The Tribunal analyzed whether the subscription money advanced by the petitioner constitutes a 'Financial Debt' under Section 5(8) of the Code. It was concluded that the subscription money was not disbursed against the consideration for the time value of money, nor was it money borrowed against payment of interest. Therefore, it does not meet the criteria for 'Financial Debt'.

3. Requirements of Section 7 for CIRP:
The Tribunal considered whether the petition satisfies the requirements of Section 7, which necessitates that the petitioner be a 'Financial Creditor' and that there be a default in payment of a 'Financial Debt'. Since the petitioner does not qualify as a 'Financial Creditor' and the subscription money does not constitute a 'Financial Debt', the petition does not meet the requirements of Section 7 for initiating CIRP.

4. Default in Issuing and Registering CCRPS Shares:
The Tribunal examined the issue of default in issuing and registering the CCRPS shares. It was found that the share certificates were issued to the petitioner, but the Registrar of Companies (ROC) refused to register the transfer as the petitioner was an unregistered partnership firm at that time. The Tribunal noted that the SSA did not provide for the issuance of shares to individual partners, and the petitioner later got itself registered. The Tribunal concluded that no valid allotment of shares took place, and therefore, no default occurred as per the terms of the SSA.

5. Entitlement to Remedy under SSA and Companies Act, 2013:
The petitioner argued that under Section 42(6) of the Companies Act, 2013, the company is liable to repay the application money with interest if it fails to allot securities within 60 days. The Tribunal acknowledged this provision but clarified that the definition of 'Debt' under Section 3(11) of the Code is general and does not apply to the specific context of 'Financial Debt' under Sections 5(7) and 5(8). The Tribunal also noted that clauses 5.1, 5.2, and 5.8 of the SSA, which provide for guaranteed returns and buy-back options, are not triggered due to the invalid allotment of shares. As a result, the petitioner is not entitled to any remedy under the SSA in the context of initiating CIRP.

Conclusion:
The Tribunal dismissed the petition, concluding that the petitioner does not qualify as a 'Financial Creditor' and the subscription money does not constitute a 'Financial Debt'. The dismissal of the petition does not bar the petitioner from seeking other remedies in accordance with the law. The parties were directed to bear their own costs.