The New Delhi bench of National Company Law Appellate Tribunal ( NCLAT) has held that share application money deposited with the corporate debtor cannot be treated as financial debt under section 5(8) of the IBC.
The appeal was filed by Muralidhar Vincom ltd under Section 61 of Insolvency and Bankruptcy Code 2016 (‘IBC’) out of the Order (‘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).
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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.
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.
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It was 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.
The tribunal 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 section 42 of the Companies Act and noted that as per this provision several statutory compliances are required to be met prior to issue of shares on private placement basis. Section 42(2) of the Companies Act stipulates the requirement of issue of private placement offer letter in such cases.
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The bench of Mr. Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member) and Mr. Arun Baroka (Technical Member) concluded that the amount which was advanced by the Appellant cannot be treated to be amount in response to the private placement offer. Rule 2 of CADR Rules envisages that only if any amount is received pursuant to any private placement offer made in accordance with the provisions of the Companies Act, 2013 and no shares are allotted qua that amount, only then the sum becomes a deposit.
It was held that the share application cannot be treated as financial debt therefore the Adjudicating Authority committed no error in rejecting the application under section 7 of the Code.
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