NCLAT New Delhi: Raising Of Amount Via Share Subscription-Cum-Shareholders Agreement Is A Commercial Borrowing And Constitutes 'Financial Debt' Under IBC

The National Company Law Appellate Tribunal ('NCLAT'), New Delhi Bench, comprising of Mr. Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) dismissed an appeal challenging Corporate Insolvency Resolution Process ('CIRP') petition and held that raising of amount through Share Subscription-cum-Shareholders Agreement is a commercial borrowing and constitutes 'Financial Debt' under Insolvency and Bankruptcy Code, 2016 ('IBC'). Background Facts Kakade Estate Developers Private Limited (Corporate Debtor) engaged in the construction of commercial and residential township projects and its Promoters had entered into a Share Subscription and Shareholders Agreement (Agreement) dated 14.05.2008 for investment purposes with HDFC Private Ventures Trustee Company Ltd. (Financial Creditor). The Financial Creditor agreed to subscribe to shares as per the terms and conditions of the Original Agreement. An Amended and Restated Share Subscription and Shareholders Agreement was entered between the Promoters, Financial Creditor, Company, and the Corporate Debtor on 14.05.2008. Due to the non-completion of the project, a Consent Award was issued by the Sole Arbitrator for payment of Rs.72.85 crores to the Financial Creditor and Edward Mauritius Limited on or before 25.08.2021 and Rs.47.14 crores on or before the expiry of 15 months from 25.11.2020. Further, in case of non-payment, Rs. 120 crores shall be payable with a 15% interest rate per annum calculated from 25.08.2021 till the date of payment. The Financial Creditor filed a CIRP petition under Section 7 of IBC which was admitted by NCLT Mumbai via order dated 29.04.2023. The appeal was preferred by Sanjay Kakade (Suspended Director) of the Corporate Debtor challenging the said order. NCLAT Verdict: The NCLAT New Delhi dismissed the appeal challenging the CIRP petition by placing reliance on the Supreme Court decision of Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors.. It observed that raising of amount through the Share Subscription-cum-Shareholders Agreement was a 'commercial borrowing' as it had a direct effect on the business carried out by the Corporate Debtor and constituted 'financial debt' within IBC. It also emphasized that the commercial effect of borrowing can be evidenced via the Supplementary Share Subscription-Cum-Shareholders Agreement dated 12.07.2008, where it noted that “the Company now requires further funding to the extent of Rs.50 to carry out objectives of the Business Plan, i.e. approval of township, and actual execution of the township as per the designs prepared by the Company architects”. The use of the expression 'further funding' indicates that the transaction has the commercial effect of borrowing. It held that the expression 'time value of money' encompasses in itself the concept of the time value of the disbursement. Presently, different clauses of the Agreement and Binding Term Sheet indicate that the Financial Creditor's investment was with consideration for the time value of money. There was no consideration for the time value of debentures as the coupon rate of 15% per annum was deleted. Further, by placing reliance on Supreme Court's decision in Kotak Mahindra Bank Ltd. vs. A. Balakrishnan & Anr, NCLAT emphasized that if the Settlement Agreement or Arbitration Award arises out of transactions, which are 'financial debt', the mere fact that 'financial debt' has crystallized in Decree, cannot result in disentitling the Financial Creditor, the remedy provided under Section 7. Moreover, the Appellate Tribunal noted that the Consent Award was not the only basis for the CIRP petition rather all the previous transactions also formed a basis for the petition. Thus, the CIRP petition was filed for Corporate Debtor's defaults in fulfilling its obligation under various Agreements. In conclusion, NCLAT dismissed the appeal and observed that there is clear acknowledgment and default of debt by Corporate Debtor and no ground exist to interfere with the order admitting Section 7 application. Case Title: Sanjay D. Kakade vs. HDFC Ventures Trustee Company Ltd. Case No.: Company Appeal (AT) (Insolvency) No.481 of 2023 Counsel for the Appellant: Mr. Abhinav Vasisht and Mr. Sanjiv Sen, Sr. Advocates, Mr. Tanmaya Mehta, Ms. Rashmi Gogai, Ms. Anjali Singh, Ms. Radha Gupta, Advocates. Counsel for the Respondents: Mr. Arun Kathpalia, Sr. Advocate, Mr. Abhijeet Sinha, Mr. Aman Raj Gandhi, Ms. Nanki Gehrwal, Mr. Parthsarthy Bose, Ms. Panchi Agarwal, Ms. Manasi Joglekar, Mr. Aditya Shirolkar, Advocates for R-1&2. Mr. Tishampati Sen, Ms. Riddhi Sancheti, Mr. Anurag Anand, Mr. Himanshu Kaushal, Mr. Mukul Kulhari, Advocates for R-3. Mr. Krishnendu Datta, Sr. Advocate, Mr. Samar Kachwaha, Ms. Shivangi Nanda, Mr. Anmol Agarwal, Advocates for CoC. Click Here To Read/Download Order

NCLAT New Delhi: Raising Of Amount Via Share Subscription-Cum-Shareholders Agreement Is A Commercial Borrowing And Constitutes 'Financial Debt' Under IBC

Sachika Vij

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