Share Purchase Dues Between Exiting And Erstwhile Shareholders Not Financial Debt: NCLT Indore

The National Company Law Appellate Tribunal (NCLT) at Indore has held that consideration paid for the purchase of shares between outgoing and incoming shareholders is a personal equity transaction and cannot be treated as a financial debt against the company under the Insolvency and Bankruptcy Code. A coram of Judicial Member Brajendra Mani Tripathi and Technical Member Man Mohan Gupta ruled that amounts paid towards share purchase consideration lack the essential characteristics of debt. “The amounts paid towards share consideration are not expressly covered in the transactions covered by sub clauses (a) to (f) (i) of Section 5(8) of the IBC, 2016, because they are normally treated as equity capital and not 'debt,' and there is no obligation to repay, and the objective is to acquire an ownership stake, not to earn a return as a creditor,” the tribunal observed. Gautam Rai Rally and Priya Rally, who were then the directors of the company, had extended an unsecured loan of Rs 1.07 crore to Mansavi Infracon in FY 2016–17 to meet the company's business requirements. In 2021, incoming shareholders agreed to acquire their shares for Rs 2.25 crore. They also assured repayment of the loan, bringing the overall transaction value to Rs 3.43 crore. After only Rs 1.16 crore was paid, they invoked insolvency proceedings seeking to treat the balance amount as a financial debt against the company. The corporate debtor opposed the plea, arguing that unpaid share consideration was a purely inter se dispute between shareholders and could not be enforced against the company. The tribunal agreed. It noted that a Section 7 application can succeed only if the transaction has the “commercial effect of borrowing.” The tribunal referenced the Supreme Court's ruling in Pioneer Urban Land and Infrastructure Limited vs. Union of India, which establishes that a claim must have a "commercial effect of borrowing" to qualify as financial debt. The coram observed that share consideration is essentially equity capital; its purpose is to grant ownership rights rather than to create a formal creditor-debtor relationship. Drawing on its earlier decision in Promod Sharma vs. Karanaya Heartcare Private Limited, the tribunal reaffirmed that share application money does not constitute financial debt under Section 7. Applying these established precedents, the tribunal concluded that the Rs 2.25 crore paid for share value was a shareholder-level transaction. It fell outside the definition of financial debt under Section 5(8) of the Code. Since the sale and purchase of shares took place between current and former shareholders in their personal capacities, any resulting dues could not be shifted onto the corporate debtorThe tribunal further observed that the amount paid by the corporate debtor cannot be treated as a payment made by the individual buyers towards the purchase of shares. Therefore, it cannot be contended that the said amount represents part payment of share consideration. Case Title: Gautam Rai Rally & Anr. v. Manasavi Infracon Pvt. Ltd. Case Number: C P(IB) No. 34(MP)2022 For Applicant: Advocate Natasha Dhruman Shah For Respondent: Advocate Hussain AliClick Here To Read/Download Order

Share Purchase Dues Between Exiting And Erstwhile Shareholders Not Financial Debt: NCLT Indore

Mohd.Rehan Ali

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Share Purchase Dues Between Exiting And Erstwhile Shareholders Not Financial Debt: NCLT Indore

Mohd.Rehan Ali

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