Amount Given As Share Application Money Does Not Qualify As A Financial Debt Under IBC: NCLT Kolkata

Background Facts

In September 2019, Mittson Fille Enterprise (“Financial Creditor”) paid Rs. 5,00,00,000 to Sammaan Ventures Limited (“Corporate Debtor”) to acquire shares that were to be issued by the Corporate Debtor.

The Corporate Debtor failed to complete the procedure of allotment of shares and the amount advanced by the Financial Creditor was stated as “Other Loans Advances” in its Financial Statements for the Financial Years 2019-2020, 2020-2021, and 2021-2022. In January 2022, the Financial Creditor issued a notice to the Corporate Debtor for repayment of the dues.

In April 2023, the Financial Creditor filed an application under section 7 of the Code read with rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“NCLT Rules”) seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

The Financial Creditor relied upon the judgment of the National Company Law Appellate Tribunal (“NCLAT”) in Mr. Kushan Mitra v. Mr. Amit Goel [C.A.(AT)(Ins.) 128 of 2021] and argued that the Share Application Money in case of non-allotment of shares comes under the ambit of “Financial Debt” as per section 5(8) of the Code.

The Corporate Debtor relied upon the judgment of the NCLAT in Pramod Sharma v. Karanaya HeartCare Private Limited [C.A. (AT)(Ins.) No. 426 of 2022] and argued that the amount given as Share Application Money does not constitute “Financial Debt” under section 5(8) of the Code. It submitted that the judgment relied upon by the Financial Creditor i.e. Kushan Mitra had been stayed by the Supreme Court of India in Shobori Ganguli v. Amit Goel [C.A. No. 002661/2022] though an order dated 25 February 2022.

The Financial Creditor contended that the ratio of the judgment in Kushan Mitra continued to bind the NCLT as a stay of a judgment only stays its operation and not the proposition of law laid down. Further, it argued that the judgment in Pramod Sharma is not applicable as it did not law down any ratio and was only a non-speaking order where an appeal was dismissed.

NCLT Verdict

The NCLT noted that the judgment in Kushan Mitra was passed by an NCLAT bench comprising two members, whereas the judgment in Pramod Sharma was passed by an NCLAT bench comprising three members. It further noted that the judgment in Kushan Mitra had been stayed by an order passed by the Supreme Court of India.

It held that the amount of default in the case was not a “Financial Debt” as per the judgment in the case of Pramod Sharma and therefore the application filed by the Financial Creditor was not maintainable.

However, it noted that the dismissal of this petition shall not be construed as an expression of opinion on the claim of the Financial Creditor and it can pursue any other remedy under any other law.

Case Title: Mittson Fille Enterprise v. Sammaan Ventures Limited

Case No.: C.P. (IB) No. 147/KB/2023

Counsel for the Applicant: Adv. Rachit Lakhmani, Adv. Siddhanth Makkar

Counsel for the Respondent: Adv. Bishwajeet Dubey, Adv. S. B. Dasgupta, Adv. Rijoy Bhaumick

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