2021 (12) TMI 739 - AT - Insolvency and Bankruptcy

Share application money deemed 'Financial Debt' under Insolvency Code. Statutory interest considered 'time value of money'.

The court held that share application money, in the event of non-allotment of shares, qualifies as a 'Financial Debt' under the Insolvency and Bankruptcy ... Share Application Money treated as deposit on non allotment - Statutory interest under Section 42(6) of the Companies Act as consideration for time value of money - Definition of Financial Debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 - Adjudicating Authority's duty under Section 7 of the IBC to ascertain existence of default from recordsShare Application Money treated as deposit on non allotment - Definition of Financial Debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 - Share application money paid for preferential allotment that is not allotted and not refunded within statutory time is of the character of a loan/ deposit and falls within the ambit of 'Financial Debt'. - HELD THAT: - The Tribunal found that where shares are not allotted within sixty days and refund is not made within the further fifteen days, Section 42(6) read with the Deposit Rules deems the application money to be a deposit repayable with statutory interest. Once the law treats the amount as a loan/deposit with interest, that statutory transformation gives the amount the character of money disbursed which carries the feature of consideration for the time value of money. Applying the statutory definitions and the precedents relied upon, the Tribunal held that the share application money in the facts of this case qualified as a 'Financial Debt' under Section 5(8) of the Code and thus the creditor could invoke proceedings under Section 7. [Paras 17, 18, 20]Share application money on non allotment attracts the character of a deposit/loan and falls within the definition of 'Financial Debt'.Statutory interest under Section 42(6) of the Companies Act as consideration for time value of money - Definition of Financial Debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 - Statutory accrual of interest under Section 42(6) constitutes 'consideration for the time value of money' required by Section 5(8) of the Code. - HELD THAT: - The Tribunal analysed Section 42(6) which mandates repayment with interest where allotment is not completed and refund not made, and held that statutory interest provides compensation for the time value of money. The court applied the principle from higher judicial authority that the essential element for a 'Financial Debt' is disbursal against consideration for time value of money, and concluded that statutory interest under Section 42(6) satisfies that requirement, bringing such claims within Section 5(8). The Tribunal therefore rejected contentions that the monies remained non financial in character merely because they were originally meant for equity allotment. [Paras 12, 18, 20]Interest under Section 42(6) is consideration for time value of money and the claim qualifies as 'Financial Debt'.Adjudicating Authority's duty under Section 7 of the IBC to ascertain existence of default from records - Intervention applications alleging fraud and seeking forensic audit were not maintainable and did not preclude admission of the Section 7 petition where the adjudicating authority was satisfied on the evidence of debt and default. - HELD THAT: - Relying on the framework of Section 7 and the settled principle that the adjudicating authority must ascertain existence of default from records or evidence produced, the Tribunal observed that allegations of fraud and parallel criminal or regulatory complaints do not, without more, prevent admission of a Section 7 application where a debt and default are shown. The Tribunal therefore found no sufficient grounds to allow the I.A.s for intervention or to stay the admitted proceedings, and dismissed those applications as non maintainable. [Paras 19, 20]Intervention applications alleging fraud/forensic audit are dismissed as non maintainable and do not vitiate admission under Section 7 where debt and default are established on record.Final Conclusion: The appeal is dismissed; the Tribunal affirms that unrefunded share application money (with statutory interest under Section 42(6)) qualifies as 'Financial Debt' under Section 5(8) of the IBC and that the Section 7 petition was rightly admitted; intervenor applications are dismissed as non maintainable. Issues Involved:1. Whether 'Share Application Money' in the event of non-allotment of shares can be treated as 'Loan/Debt' and whether such an amount falls under the definition of 'Financial Debt' as defined under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).2. Whether statutory accrual of interest under Section 42(6) of the Companies Act, 2013 can be construed as 'consideration for time value of money' to qualify the requirement of 'Financial Debt' under the IBC.Issue-wise Detailed Analysis:1. Treatment of Share Application Money as Loan/Debt:The core issue is whether the share application money, in the event of non-allotment of shares, can be treated as a loan or debt. The judgment clarifies that if shares are not allotted within 60 days of receiving the share application money and if the refund does not occur within 15 days from the expiry of this period, the amount will be treated as a 'Deposit' under the Companies (Acceptance of Deposits) Rules, 2014. This deposit must be returned by the company along with interest at the rate of 12% per annum from the expiry of the 60th day. This statutory interest transforms the nature and character of the money from share application money to a loan, thereby falling within the ambit of 'Financial Debt' as defined under Section 5(8) of the IBC.2. Statutory Accrual of Interest as Consideration for Time Value of Money:The judgment emphasizes that the statutory accrual of interest under Section 42(6) of the Companies Act, 2013, constitutes 'consideration for time value of money'. This interest is a form of compensation for the time value of money given by the applicant to the company. Therefore, the share application money, which attracts interest due to non-allotment of shares, qualifies as 'Financial Debt' under Section 5(8) of the IBC. The court referenced the case 'M/s. Orator Marketing Pvt. Ltd. Vs. M/s. Samtex Desinz Pvt. Ltd.' to support the argument that financial debt includes any amount raised under any transaction having the commercial effect of a borrowing.Assessment:The judgment reiterates that the key feature of a financial transaction under Section 5(8) of the IBC is the 'consideration for time value of money'. The court held that the amount given by the first respondent indeed falls within the definition of share application money and, due to the statutory interest imposed by Section 42(6) of the Companies Act, 2013, the amount qualifies as a 'Financial Debt'. The court dismissed the appeal and the intervention applications, affirming that the share application money, in the event of non-allotment of shares, falls under the definition of 'Financial Debt' and attracts statutory interest, thus fulfilling the criteria for 'consideration for time value of money'.