Section 7 application rejected as no concluded contract or financial debt established between parties

NCLAT upheld NCLT's rejection of Section 7 application for CIRP initiation. Tribunal found no concluded contract between parties and no financial debt existed. Appellant failed to establish Rs.2.6 crore was advanced pursuant to private placement offer under Section 42 of Companies Act. No material evidence showed company issued private placement offer or that amount qualified as financial debt under IBC Section 5(8). While NCLAT criticized NCLT's finding in paragraph 27 regarding debt liquidation as unsustainable and based on conjecture, it ultimately upheld the rejection order. Appeal was disposed of with NCLT's decision maintained.

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Issues Involved:

1. Whether the amount of Rs.2.6 Crores transferred by the Appellant to the Corporate Debtor constitutes a financial debt.
2. Applicability of Section 42 of the Companies Act, 2013 and Companies (Acceptance of Deposit) Rules, 2014.
3. Validity of the Adjudicating Authority's observation that no financial debt is due.

Summary:

Issue 1: Financial Debt

The Appellant transferred Rs.2.6 Crores to the Corporate Debtor between 04.03.2017 and 18.05.2017. The Adjudicating Authority rejected the Section 7 application, stating there was no concluded contract and no consideration for the time value of money, hence no financial debt. The Appellant contended that Rs.2 Crores was for share allotment and Rs.60 Lakhs as an unsecured loan, which was to be repaid with statutory interest under Section 42(6) of the Companies Act, 2013. The Respondent refuted, claiming the amount was not advanced against any share application money and that statutory compliances for private placement were not met.

Issue 2: Applicability of Section 42 and Deposit Rules

The Appellant argued that the share application money not refunded should be treated as a financial debt under Section 42 and Companies (Acceptance of Deposit) Rules, 2014. The Tribunal noted that several statutory requirements under Section 42 were not met, such as issuing a private placement offer, Board Resolution, and Special Resolution. There was no material on record to indicate that the amount was advanced in response to any offer for private placement, making Section 42(6) and Rule 2(vii) inapplicable.

Issue 3: Validity of Adjudicating Authority's Observation

The Adjudicating Authority's observation in paragraph 27 that no financial debt is due was challenged. The Tribunal found that the email dated 09.04.2018, which suggested the amount could be adjusted by the sale of summit units, did not imply the debt was liquidated. The Corporate Debtor's reply in the Appeal introduced a new theory of financial adjustments, which contradicted the Adjudicating Authority's findings. The Tribunal concluded that the Adjudicating Authority's finding that no financial debt is due was unsustainable and based on conjecture.

Conclusion:

The Tribunal upheld the Adjudicating Authority's order rejecting the Section 7 Application but deleted paragraph 27 of the Adjudicating Authority's order, stating it was unsustainable. The Tribunal did not express any opinion on whether the amount of Rs.2.6 Crores was repaid, leaving it to be decided in appropriate proceedings.

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