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TMI Blog2021 (12) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... ement Offer was done and subsequently revoked. The allotment of shares is evident under Form PAS-5, Form PAS-4, the Board Resolution dated 01.08.2018, the Special Resolution dated 25.08.2018 and the Board Resolution dated 11.09.2018. Subsequently vide a Board Resolution dated 10.05.2019, the allotment made in favour of First Respondent was declared as invalid and void ab initio. Therefore, the money given by the First Respondent indeed falls within the definition of Share Application Money. It is clear from the reading of Section 42 of the Companies Act, 2013 and the Deposit Rules that if the Shares are not allotted within 60 days of receiving the Share Application Money, and if the refund does not take place within 15 days form the expiry of 60 days time limit, then this amount will be treated as a Deposit , advanced to the Company, which has to be returned by the Company at the rate of 12 percent per annum from the expiry of the 60th day. Thus the concerned person would get compensation for the time value of money given by him to the Company which changes the nature and character of the money so given. Although the amount was initially paid towards Shares, since the allotment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el (hereinafter referred as the first Respondent ), filed under Section 7 of the Code, observing as follows: 5. The contention of the Applicant/Financial Creditor is also supported by the report of the Independent Auditor as is recorded under para 7 8 of the Reply filed by the Corporate Debtor i.e., Clause XIV of Annexure-I of the Independent Auditor s Report provides that during the year 2018 the Corporate Debtor has made preferential allotment of 26,00,566 Shares to its Director, Mr. Amit Goel/Financial Creditor. Further, it is stated that the Corporate Debtor has allotted those shares in lieu of the outstanding loan of ₹ 79.68 lakhs and after booking and reversal entry in the name of Prior period expenses for recognizing the claim of the expenses borne by the Director in the earlier year for a total of ₹ 76.35 Lakhs and against this claim, the Corporate Debtor has allotted the Preferential and Equity Shares to the Director (Applicant) during the year. 6. The Applicant has placed on file Form No. PAS-3, which was filed by the Corporate Debtor with the Registrar of Companies (hereinafter referred as RoC ) wherein it is stated that the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an amount of ₹ 79.35 Lakhs is outstanding as loan against the CD, which the Corporate Debtor failed to pay. In the circumstances, the defence that has been projected by the Ld. Counsel for the Corporate Debtor is noting but moonshine and a mere bluster. Therefore, the arguments of the CD stand rejected. 2. Submissions of the Learned Sr. Counsel appearing on behalf of the Appellant: Learned Sr. Counsel appearing for the Appellant submitted that the Adjudicating Authority has wrongly admitted the Section 7 Petition despite recording its satisfaction only to the extent of ₹ 79.35 Lakhs as the claim amount due to the first Respondent. Even if the amount and an interest of 12% due is calculated from 10.11.2018, the claim amount would only be ₹ 97,55,919/- which is below the threshold of ₹ 1 Crore. Proceedings under the Code are not recovery proceedings and no debt is payable by the Corporate Debtor to the first Respondent as there exists no loan received by the Company which is evident from the facts mentioned in the Complaint to the RoC on 29.04.2019. The same is also reflected in the Board Resolution Dated 10.05.2019, Complaint to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the basic elements are that it ought to be disbursed against consideration for time value of money . Admittedly, the first Respondent made a Private Placement dated 08.09.2018 for the allotment of 26,00,566 equity shares with the 2nd Respondent when the shares were allotted to him vide Board Resolutions dated 01.08.2018, 25.08.2018 and 11.09.2018. The first Respondent pledged the entire shareholding with one M/s. Vipin Malik Associates even before the same could be resolved. Hence the shareholder of the Company does not fall within the meaning of Financial Creditor as the amount invested for purchasing shares does not amount to disbursement against consideration for time value of money. The share application money was neither disbursed nor invested for consideration for time value of money, but for purchasing Equity Shares. Section 42(6) of the Companies Act, 2013 is not attracted as the said provision deals with application money actually coming in to increase the subscribed capital, whereas the present case is of alleged amount due being converted into equity, the option which is resorted to tide over the financial difficulty. The scheme under Section 42(6) envisages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udulent one. Learned Counsel for the Appellant placed reliance on the following Judgments to support his case: Radha Exports India Private Limited Vs. K.P. Jayaram, 2020 10 SCC 538 . Sesa Goa Limited and Ors. Vs. State of Maharashtra Ors., [2009] 151 Comp Cas 358 (Bom) . 3. Submissions of Learned Sr. Counsel appearing on behalf of the first Respondent: Learned Sr. Counsel appearing for the first Respondent submitted that as per Section 42(6) of the Companies Act, 2013, and the Companies Acceptance of Deposit Rules, 2014 (Rule 2 and Rule 17), share money pending allotment carries statutory interest and it is Financial Debt for time value of the money. The amount of ₹ 1,56,03,396/- was treated as share application money in the books of account of the Corporate Debtor . Form PAS-5 shows that equity shares of ₹ 1.56,03,396/- is signed by Mr. Chandan Mitra, Director of the Corporate Debtor and filed with the Registrar of Companies. Form PAS-4 being the private placement of the equity shares offer letter, the role of the first Respondent is shown as solely editorial and Mr. Chandan Mitra is the Managing Director. The Board Resolution dated 01.08.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the IRP has verified the claims received from the Creditors of the Corporate Debtor and is ensuring that the Corporate Debtor remains a Going Concern as per Order of this Tribunal dated 22.02.2021. 4. I.A. No. 2413 of 2021: Mr. Narendra Kumar Printer and Publisher of the Corporate Debtor Company preferred this Application. Learned Counsel appearing for the Applicant submitted that the Applicant came to know about the forensic audit report and then filed this instant Application to bring to the notice of this Tribunal that there has been a fraud of almost 800 Crores and misappropriation. The first Respondent is not a Financial Creditor as shareholder of the Company does not come within the meaning of Financial Creditor. The amount invested for purchasing shares does not amount to disbursement against consideration for time value of money. On revocation of shares, a shareholder may claim for the amount but does not become a Financial Creditor. IRP has the authority to appoint and conduct the forensic audit and the Petition filed under Section 7 is only an eyewash to avoid Criminal Prosecution. It is prayed to set aside the Impugned Order, which otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.2021 under the heading After Notice . He submitted that the proceedings before the CoC require to be stayed as the Corporate Debtor is a renowned newspaper in business for a long period of time. We see no reason to interfere with the order dated 03.08.2021, which is interlocutory in nature. However, we direct the NCLAT to decide the appeal, i.e. Company Appeal (AT) (Insolvency) No.128 of 2021 finally on 05.10.2021 when the matter is listed for hearing. The appeal is disposed of accordingly. Pending application(s), if any, shall stand disposed of. As the Learned Counsel for the Appellant was not present on 05.10.2021, Learned Proxy Counsel informed that some efforts are being made to settle the matter between the parties which was denied by the Learned Counsel for the Respondent and the matter was adjourned to 08.10.2021 directing the parties to file their written-submissions. Subsequently on 21.10.2021. M/s. Opinion Express Communications Entertainment Pvt. Ltd. and Mr. Narendra Kumar Printer and Publisher of the Corporate Debtor proposed to intervene and the matter was posted once again to 12.11.2021. The status report filed by IRP was taken on record. The m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be an amount having the commercial effect of a borrowing; and (ii) the expressions, allottee and real estate project shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016); (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; (Emphasis Supplied) 8. It is the main case of the Appellant that Section 42 (6) of the Companies Act, 2013 is not attracted as such provisions deal with Share Application Money actually coming in to increase the subscribed capital; that Section 42(6) of the Act deals with a case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outstanding principal due in respect of Loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only outstanding principal would qualify as Financial Debt . Furthermore, sub-clause (a) (i) of sub-Section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. 10. Share Application Money is the amount of advance received from a prospective shareholder which is later transferred to share capital account on the issue of shares or refunded in case the issue falls to take place. 11. Refund of Application money for private companies: For private placements, invitation to subscribe should be given to less than 50 people (excluding Qualified Institutional Buyers and employers under ESOP) Fresh allotments should not be made until allotments under earlier offers are completed or withdrawn. Subscriptions should be collected only in modes other than cash. Shares should be allotted within 60 days of completion of subscription period, else all money collected should be refunded within 15 days from that date. (with an interest of 12 % p.a. from the date of expiry of 60 days) Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that all provisions of Section 42 (Private Placement) are also applicable to issue of shares under Section 62(1)(c) (Preferential Allotment). 14. Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules 2014 reads as follows: (c) deposit includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include (vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for; Explanation.- For the purposes of this sub-clause, it is hereby clarified that (a) Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money 50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression financial creditor is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor s business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated income is earned . 17. In the instant case, allotment of equity shares on preferential basis by Private Placement Offer was done and subsequently revoked. The allotment of shares is evident under Form PAS-5, Form PAS-4, the Board Resolution dated 01.08.2018, the Special Resolution dated 25.08.2018 and the Board Resolution dated 11.09.2018. Subsequently vide a Board Resolution dated 10.05.2019, the allotment made in favour of First Respondent was declared as invalid and void ab initio. Therefore, we are of the considered view that the money given by the First Respondent indeed falls within the definition of Share Application Money. 18. To understand the nature of transaction involving a Share Application Money it is necessary to see how Section 42(6) of the Act and the Companies (Acceptance of Deposits) Rules, 2014 treat the Share Application Money. The relevant parts of the Act and the Deposit Rules have been reproduced in Paragraphs 12 to 15 above. It is clear from the reading of Section 42 of the Companies Act, 2013 and the Deposit Rules that if the Shares are not allotted within 60 days of receiving the Share Application Money, and if the refund does not take place wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India in M/s. Innoventive Industries Ltd. Vs. ICICI Bank Anr. , reported in 2018(1) SCC 407 wherein the Hon ble Supreme Court of India has observed as follows:- 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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