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05 Mar 2025
Is-Share-Application-Money-Financial-Debt-under-the-Insolvency-and-Bankruptcy-Code
Is Share Application Money Financial Debt under the Insolvency and Bankruptcy Code (IBC)?
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| Introduction | The issue of whether Share Application Money (SAM) can be classified as financial debt under the Insolvency and Bankruptcy Code (IBC) has garnered attention in Indian corporate law. A significant ruling by the National Company Law Appellate Tribunal (NCLAT) dismissed an appeal, determining that SAM cannot be treated as financial debt to initiate the Corporate Insolvency Resolution Process (CIRP). This article explores the case's facts, legal implications, and offers an analysis of the ruling. |
| The Facts of the Case | A private company invested significant amounts as share application money in another company, expecting equity shares in return. However, due to internal changes in the company’s structure, the shares were never allotted. After repeated failures to refund the money, the investor approached the National Company Law Tribunal (NCLT) seeking insolvency resolution under the IBC. The dispute centered around whether SAM qualifies as financial debt. |
| NCLT’s Ruling | The NCLT dismissed the application, relying on a previous ruling in which it was determined that SAM does not constitute a debt under section 5(8) of the IBC. According to this decision, SAM did not meet the condition of being disbursed for the consideration of the time value of money. |
| NCLAT’s Appeal and Dismissal | Upon appeal, the NCLAT upheld the NCLT's decision, pointing to the procedural non-compliance of Section 42 of the Companies Act, 2013. Since the procedure for private placement of shares was not followed, the funds were not considered share application money and thus did not qualify for treatment as financial debt under the IBC. |
| Legal Framework of Share Application Money | 1. IBC, Section 5(8): Defines “financial debt” as an amount disbursed against the consideration for the time value of money. 2. Section 42, Companies Act, 2013: Outlines the procedure for private placements, mandating specific timelines for share allotment or refund. 3. CADR Rules, 2014: Define circumstances under which unrefunded SAM becomes a deposit and could potentially qualify as financial debt. |
| Analysis of the Judgment | The ruling reflects consistency but overlooks recent trends in judicial interpretation. The decision did not engage with significant case law that suggests the flexibility of interpreting financial debt based on the surrounding circumstances. Additionally, the evolving nature of the transaction, where the disbursement was not purely for equity, but also for the company’s liquidity, was not addressed. |
| Failure to Address Broader Trends | Recent rulings such as Sanjay D. Kakade v. HDFC Ventures Trustee Co. Ltd. and Global Credit Capital Ltd. v. Sach Marketing Pvt. Ltd. emphasized that courts must consider the intent and the broader context of a transaction, which the NCLAT did not. The funds disbursed by the creditor were arguably meant to serve dual purposes: securing equity shares and providing interim financial support to the company. |
| Alternative Classification under IBC | An alternative interpretation could have classified the creditor as an operational creditor under Section 9 of the IBC, as shares are considered “goods” under the Sale of Goods Act, 1930, making claims related to SAM potentially qualify as operational debt. |
| Interest Payment Obligation | The interest obligation that arises from the breach of statutory provisions was not considered by the NCLAT. As per Section 42, the failure to allot shares within the prescribed period leads to an interest payment, which could be viewed as financial debt under the IBC. |
| Conclusion | The NCLAT's decision emphasizes a strict view of what qualifies as financial debt under the IBC. While maintaining consistency with prior rulings, the decision overlooks important nuances, such as the evolving nature of the transaction and broader judicial trends that advocate for a more flexible interpretation. This leaves creditors in a gray area regarding the correct avenue for filing their claims. The ruling missed an opportunity to provide clarity and flexibility to the commercial relationships within the IBC framework. |
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