Raising Funds Through Share Subscription-Cum-Shareholders Agreement Is Financial Debt, Plea U/S 7 Of IBC Maintainable: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Shri Kuldip Kumar Kareer (Judicial Member) and Shri Anil Raj Chellan (Technical Member), held that money raised through a share and subscription agreement in which an exit window with stipulated return is provided will constitute a financial debt for which a petition under section 7 of the Insolvency and Bankruptcy Code (IBC) can be filed. However, in this case, the petition was dismissed as debt amount failed to meet the threshold limit provided under section 4 of the IBC. Brief Facts Spectrum Trimpex Pvt. Ltd (Financial creditor) invested the amount to the tune Rs. 16,55,700 in VPhrase Analytics Solutions Pvt. Ltd. (corporate debtor) through a share subscription and shareholders agreement on February 24, 2016. Thereafter, 378 shares of the corporate debtor were allotted to the financial creditor with a provision of compulsory redemption. It was provided in the agreement that there shall be an exit period of 5 years within which the founders had to facilitate the exit of the investors. It was further stipulated that if the founders failed to facilitate the exit within that period, the investor had a right to claim buy back of shares at a value determined by an independent valuator. When exit period passed, the financial creditor sent a notice claiming buy back of shares at a price of Rs. 24,814 per share amounting to Rs. 93,79,692 in total based on the audited financial statement for financial year 2021-22. No response was given by the corporate debtor. Thereafter, an independent valuer was appointed by the financial creditor who determined the value of per share at a price of Rs. 34,600 per amounting to Rs. 1,30,78,800 in total for which a notice was again sent to the corporate debtor on January 16, 2024 but no reply was received this time also. Consequently, a petition under section 7 of the Insolvency and Bankruptcy Code (IBC) was filed by the financial creditor for initiating corporate insolvency resolution process (CIRP) in which the amount to the tune of Rs. 1,30,78,800 was claimed. Contentions The applicant contended that a default was committed by the corporate debtor by not buying back its shares from the applicant as per the shareholders agreement which it had to buy compulsorily. Since the corporate debtor has defaulted for which a petition under section 7 of the IBC can be filed. Per contra, the corporate debtor contended that although applicant has been classified as a financial creditor, its debt does not qualify the criteria of a financial debt under section 5 (8) of the IBC therefore the applicant is merely an equity shareholder. It was further submitted that there is no compulsory redemption right and redemption right if any has to comply with the provisions of the companies act. It was further argued that agreement executed in 2016 was superseded by a subsequent agreement executed in 2019 in which right issues were accepted by the applicant. It was further contended that this petition was filed to exert undue pressure on the corporate debtor which violated section 65 of the IBC therefore the petition is liable to be rejected. NCLT's Analysis The NCLT observed that money given by the financial creditor to the corporate debtor under a shareholders agreement constituted a financial debt. Exit period of 5 years was provided in the agreement itself with a specified return or buy back of shares at a fair market value which had all the trappings of a commercial borrowing. The NCLT referred to the judgment of the NCLAT in D. Kakade v/s. HDFC Ventures Trustee Co.Ltd & Ors. (CA(AT)(Ins.) No. 481/2023). Ltd in which it was held that when a company raises money from the investor and provides them an opportunity to exit with a stipulated return, such a money will constitute a financial debt as it is a disbursement for consideration of time value of money. It was held as under: “It has been unequivocally held by the Hon'ble NCLAT in Sanjay D. Kakade v/s. HDFC Ventures Trustee Co.Ltd & Ors. (CA(AT)(Ins.) No. 481/2023) that raising of amount by the Company through Share Subscription-cum-Shareholders Agreement was a commercial borrowing, since the said transaction has direct effect with business, which was carried out by the corporate debtor. The Hon'ble NCLAT has further held that since the corporate debtor required the money raised from the shareholders for funding its township projects, the said transaction had commercial effect of borrowing; and since there was an exit option provided to the investors with an internal rate of return @ 15% p.a. compounded annually or the Fair Marker Value, whichever is higher, the investment made by the shareholders via the Share Subscription-cum Shareholders Agreement was held to be a disbursement against consideration for time value of money. Therefore, the Hon'ble NCLAT concluded that that raising of amount by ...

Raising Funds Through Share Subscription-Cum-Shareholders Agreement Is Financial Debt, Plea U/S 7 Of IBC Maintainable: NCLT Mumbai

Mohd Malik Chauhan

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