Share application money treated as financial debt: Section 7 petition admitted, appeal dismissed and refund ordered to proceed with CIRP remedies

Res judicata bars reopening an earlier finding that the corporate debtor had agreed to refund share application money; the tribunal held that repeated nonrefunds after final orders constitute default and sustain admission of the fresh insolvency petition under Section 7. The appellate challenge to the adjudicating authority's admission was dismissed; interim deposit ordered refunded to appellant. The appellant is permitted to remit the outstanding foreign currency amounts to the financial creditor, who may then pursue remedies under corporate insolvency resolution process regulations. The resolution professional may continue CIRP; the period from 23.12.2023 is excluded from CIRP.

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Issues: (i) Whether the Section 7 application admitting insolvency proceedings against the corporate debtor was rightly admitted, including whether the amounts remitted as share application money by the financial creditor constitute a financial debt and whether that issue is open to challenge in view of earlier final orders between the parties.

Analysis: The earlier adjudicating authority had held in its 25.07.2019 order that the amounts remitted as share application money qualify as financial debt; the Appellate Tribunal on 26.11.2019 did not disturb that finding and granted liberty to file a fresh Section 7 application. Principles of finality and res judicata prevent reopening issues decided between the parties by final orders. Relevant statutory framework includes Section 5(8) and Section 7 of the IBC concerning financial debt and initiation of insolvency proceedings, and Section 42(6) of the Companies Act and Deposit Rules governing recategorisation of unrefunded share application money as deposit and compensation for time value. The adjudicating authority on 12.12.2023 found a continued failure to refund the amounts after post-2019 communications and correctly treated the claim as a financial debt and admitted the Section 7 petition. The Tribunal concluded that the prior finding of financial debt had attained finality and that factual default occurred because the corporate debtor did not refund the amounts despite the liberty and opportunity afforded earlier.

Conclusion: The Section 7 application was rightly admitted; the amounts remitted as share application money constitute financial debt and the issue is final between the parties, accordingly the appeal is dismissed in favour of the respondent.

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