Share application money deposits do not qualify as financial debt under Section 5(8) IBC appeals dismissed

NCLAT Principal Bench dismissed appeals challenging rejection of Section 7 applications. The court held that share application money deposited by appellants with corporate debtor did not constitute financial debt under Section 5(8) of IBC. Key findings: financial debt requires disbursal against consideration for time value of money; share application money not expressly covered under Section 5(8) sub-clauses; no valid concluded agreement between parties for share allotment existed; amounts not advanced pursuant to private placement offer under Companies Act 2013; CADR Rules inapplicable without proof of compliant private placement offer. Appeals lacked merit and were dismissed.

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Issues Involved:
1. Whether the share application money deposited by the Appellant with the Corporate Debtor qualifies as 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).
2. Applicability of Section 42(6) of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 to the share application money in question.
3. Validity of the Adjudicating Authority's reliance on previous judgments regarding the nature of share application money as financial debt.

Issue-wise Detailed Analysis:

1. Qualification of Share Application Money as 'Financial Debt':
The primary issue was whether the share application money deposited by the Appellant could be classified as 'financial debt' under Section 5(8) of the IBC. The Tribunal examined the statutory definition of 'financial debt,' which requires a disbursal against the consideration for the time value of money. The Tribunal noted that the transactions listed under Section 5(8) do not expressly cover amounts raised by way of share application money. The Appellant contended that the money should be deemed a deposit and thus a financial debt due to non-allotment of shares and failure to refund the money, as per the Companies Act and CADR Rules. However, the Tribunal found that the statutory requirements for a debt to be considered 'financial debt' were not met, as share application money is not explicitly included in the transactions under Section 5(8).

2. Applicability of Section 42(6) of the Companies Act, 2013 and CADR Rules:
The Appellant argued that under Section 42(6) of the Companies Act, 2013, shares must be allotted within 60 days of receiving the application money, failing which the money should be refunded with interest. The CADR Rules further state that if shares are not allotted within this period, the amount is treated as a deposit. The Tribunal analyzed these provisions and concluded that for the CADR Rules to apply, the share application money must be advanced in conformity with the Companies Act's provisions. The Tribunal found no evidence of compliance with Section 42, such as the issuance of a private placement offer letter, which is a prerequisite for treating the money as a deposit under the CADR Rules. Consequently, the Tribunal held that the share application money in the present case did not transform into a deposit or financial debt.

3. Validity of Reliance on Previous Judgments:
The Tribunal addressed the Appellant's reliance on the Kushan Mitra judgment, which held that share application money could be considered financial debt if shares are not allotted. However, the Tribunal noted that this judgment was stayed by the Supreme Court, thereby limiting its applicability. Instead, the Tribunal relied on a subsequent judgment in Promod Sharma Vs M/s Karanaya Heart Care Pvt. Ltd., which held that share application money does not constitute financial debt under Section 5(8) of the IBC. The Tribunal found no error in the Adjudicating Authority's reliance on this precedent, which supported the conclusion that the share application money did not qualify as financial debt.

Conclusion:
The Tribunal upheld the Adjudicating Authority's decision, dismissing the Section 7 application filed by the Appellant, as the share application money did not meet the criteria for financial debt under the IBC. The Tribunal clarified that the Appellant could pursue recovery of the share application money through appropriate legal proceedings in other forums. The appeal was dismissed, affirming that there was no merit in the Appellant's arguments.

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