Share Application Money Deposited With Corporate Debtor Cannot Be Treated As Financial Debt U/S 5(8) Of IBC: NCLAT

The NCLAT New Delhi bench of Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) has held that share application money deposited with the corporate debtor cannot be treated as financial debt under section 5(8) of the IBC. In this case, share application money was given for the allotment of shares but neither were shares allotted nor was money refunded. Brief Facts The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated 22.03.2024 (hereinafter referred to as ('Impugned Order') passed by the Adjudicating Authority. By the impugned order, the Adjudicating Authority has dismissed the Section 7 application filed by the Appellant for admitting M/s Skoda (India) Pvt Ltd-Corporate Debtor into the rigours of Corporate Insolvency Resolution Process (“CIRP” in short). Aggrieved by the impugned order, the present appeal has been preferred by the Appellant. On the request of the Corporate Debtor, funds were infused by the Appellant-M/s Murlidhar Vincom Pvt Ltd as share application money in the Corporate Debtor during FY-2009-10. In return, the Corporate Debtor had allotted 3000 equity shares for an amount of Rs 6.97 lakhs in the share capital of the Corporate Debtor to the Appellant. Subsequently, during the next two financial years i.e. 2010-11 & 2011-12, another sum of Rs 1.32 Cr. was paid as share application money by the Appellant for allotment of equity shares as share application money. No shares were however allotted by the Corporate Debtor but Rs 40 lakhs was refunded by the Corporate Debtor from the said share application money. The Corporate Debtor was not able to refund the balance amount of Rs 92 lakhs. The Corporate Debtor not being in a position to refund the balance amount of share application money purportedly on account of liquidity crunch, instead agreed to allot shares for the balance amount subject to the Appellant providing additional funds to the Respondent. The Appellant thereafter provided additional funds of Rs 79.60 lakhs which were paid in several instalments from 2012-14. Since neither the shares were allotted nor the share application money was refunded, the Appellant sent a Demand Notice on 07.07.2023 to the Corporate Debtor for repayment of the share application money with statutory interest of 12% in terms of Section 42(6) of the Companies Act, 2013. Since the Corporate Debtor failed to repay the amount, the Appellant filed a Section 7 application before the Adjudicating Authority on 30.08.2023.The Adjudicating Authority however held that share application money in respect of the shares not allotted cannot be deemed to be a financial debt. Contentions The appellant submitted that under Rule 2 of the Companies (Acceptance of deposit) Rules (herein after referred to as “CADR Rules”) provides that if shares are not allotted within 60 days of receipt of share application money, the same amount is deemed to be treated as deposit money. That since in the present factual matrix, shares were not allotted within the time-period as prescribed by the Companies Act, 2013 against the share application money provided by the Appellant, the share application money provided by a Financial Creditor to the Corporate Debtor should have been deemed by the Adjudicating Authority to be deposit money which would have come within the meaning of 'financial debt' under Section 5(8) of the IBC. Reliance was placed on Kushan Mitra Vs Amit Goel and Ors. wherein it was held by this Tribunal that share application money in the event of non-allotment of share attracts interest under Section 42(6) of the Companies Act, 2013 and therefore falls within the ambit of financial debt under Section 5(8) of the IBC. Issue Before NCLAT Whether the share application money which was deposited with the Corporate Debtor by the Appellant fell in the category of Section 5(8) of the IBC. NCLAT's Analysis The tribunal, at the outset, referred to section 5(8) of the Code which provides the definition of financial debt and noted that the basic ingredients which are required to be met for a debt to become 'financial debt' are that there must be a disbursal against the consideration for time value of money. The tribunal further noted that sub clauses (a) to (i) of Section 5(8) delineates the various transactions which are included in the ambit of 'financial debt'. Prima-facie, amounts raised by way of share application money is not expressly covered in the transactions covered by sub clauses (a) to (i) of Section 5(8) of the IBC. The tribunal further referred to Rule 2(c)(vii) of the CADR Rules, 2014 and the explanatory clause appended thereto. The explanation states that “if the securities for which application money or advance for such securities was received cannot be...

Share Application Money Deposited With Corporate Debtor Cannot Be Treated As Financial Debt U/S 5(8) Of IBC: NCLAT

Mohd Malik Chauhan

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