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

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

Mr. Kushan Mitra Versus Mr. Amit Goel, CMYK Printech Limited

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 ... Initiation of CIRP - NCLT admitted the application - Corporate Debtor failed to make repayment of its dues - Financial Creditors - Share Application Money in the event of non-allotment of shares - Loan/Debt or not - Statutory accrual of interest under Section 42(6) of the Companies Act, 2013, to be construed as ‘consideration for time value of money’ or not - HELD THAT:- The Key Feature of a Financial Transaction as contemplated under Section 5(8) is ‘consideration for time value of money’. In other words, the legislature has included such financial transactions in the definition of ‘Financial Debt’ which are usually for sum of money received today to be paid over a period of time in a single or series of payments in the future. In Black’s Law Dictionary the expression ‘Time Value’ has been defined ‘as the price associated with the length of time that an investor must wait until an investment matures or the related income is earned’. In the instant case, allotment of equity shares on preferential basis by Private Placement Offer was done and subsequently revoked. The allotment of shares is evident under Form PAS-5, Form PAS-4, the Board Resolution dated 01.08.2018, the Special Resolution dated 25.08.2018 and the Board Resolution dated 11.09.2018. Subsequently vide a Board Resolution dated 10.05.2019, the allotment made in favour of First Respondent was declared as invalid and void ab initio. Therefore, the money given by the First Respondent indeed falls within the definition of Share Application Money. It is clear from the reading of Section 42 of the Companies Act, 2013 and the Deposit Rules that if the Shares are not allotted within 60 days of receiving the Share Application Money, and if the refund does not take place within 15 days form the expiry of 60 days time limit, then this amount will be treated as a ‘Deposit’, advanced to the Company, which has to be returned by the Company at the rate of 12 percent per annum from the expiry of the 60th day. Thus the concerned person would get compensation for the time value of money given by him to the Company which changes the nature and character of the money so given. Although the amount was initially paid towards Shares, since the allotment was revoked, the equity did not materialise. Thereafter, by operation of law, Section 42(6) of the Companies Act, 2013, the amount has statutorily been given the character of loan with interest. Same is the case of amounts paid as optionally convertible debentures - when under law, the amount has been treated as a loan, we hold that refund of Share Application Money, in the event of non-allotment of shares attracts interest as provided for under Section 42(6) of the Act and therefore qualifies the essential ingredients of Section 5(8) of the Code in terms of consideration paid for time value of money and therefore falls within definition of the ambit of ‘Financial Debt’ as defined under Section 5(8) of the Code. Thus, Share Application Money in the event of non-allotment of shares, attracts interest under Section 42(6) of the Companies Act, 2013 and therefore falls within the ambit of definition of ‘Financial Debt’ as defined under Section 5(8) of the Code - appeal dismissed. 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'.