TaxTMI 
TaxTMI 
2026 (7) TMI 254
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2. The brief facts of this case are as under: i. The Corporate Debtor is a Private Limited company incorporated on 10.02.2004 having registered office in Pune. The company has authorised share capital of Rs. 20.20 crores. The Corporate Debtor is involved in the business of manufacturing, hiring, assembling, dealing, trading, etc. of automobiles, motor vehicles, water ski jets, etc. ii. A Subscription and Shareholders Agreement (in short 'SSA') was entered on 06.09.2021 between Innoventive Industries Limited (identified as "Investor"), Mr. Rajeev Kumar Nair and Ms. Jyothi Rajeev Nair and Ms. Vijaya Nair and Ms. Renu Nair and Shreyas Constructions Private Limited (identified as "Promoters") and Kumar Motors Private Limited (identified as "Company") in the said agreement. iii. Between 08.09.2011 and 09.05.2012 Innoventive Industries Ltd. paid a sum of Rs. 8,70,03,374/- to the Corporate Debtor out of which Rs. 1 crore was taken back on 11.01.2012, though immediately, within 12 days, it was again made available to the Corporate Debtor. iv. On 04.03.2013, Innoventive Industries Ltd. wrote letter to the Corporate Debtor that it has not carried out its....
X X X X Extracts X X X X
X X X X Extracts X X X X
....file a fresh petition under Section 7 of the IBC, 2016. xi. The fresh petition under Section 7 of the IBC, 2016 was filed and was numbered as CP(IB)/7(MB)/2024 seeking Corporate Insolvency Resolution Process (hereinafter referred to as the 'CIRP') against the Corporate Debtor. In the petition under Section 7, it has been submitted that there is a debt of Rs. 8,70,03,275/-, and the date of default is 21.07.2021. The said petition under Section 7 of the IBC, 2016 has been dismissed by the impugned order dated 08.04.2024. xii. While dismissing the petition under Section 7 of the IBC, 2016, the Ld. NCLT has held as under: "23. Heard learned Counsel for both the parties and perused the documents placed on record. 24. We note that the Petitioner had paid a sum of Rs. 6 Crores in terms of SSA, which required the petitioner to arrange credit facility for the Corporate Debtor of an equivalent amount and in case of failure to arrange such facilities the Petitioner was itself liable to pay this amount till such time the credit facilities were arranged. It is not in dispute that the credit facilities could not be arranged for the Corporate Debtor till the ti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdingly, we are of the considered view that the present application is not maintainable in the absence of default. 29. Nonetheless, it is trite in law that the amount given as an advance towards the Share Application money is not a Financial Debt and consequently no Petition u/s 7 is admissible for the same. Accordingly, the present petition is not admissible since upon perusal of the SSA, it is clearly evident that the amount paid by the Financial Creditor is against the subscription of investor's shares and warrants. 30. The Petition bearing CP (IB) 7/(MB) 2024 filed by Metamorphosis Trading LLP [LLPIN: AAX-2069], the Financial Creditor, under section 7 of the IBC read with rule 6(1) of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating Corporate Insolvency Resolution Process (CIRP) against Kumar Motors Private Limited [CIN: U34102PN2004PTC018890], the Corporate Debtor, is disposed of as dismissed." Being aggrieved by the dismissal of petition under Section 7, the Appellant has filed the present appeal. 3. In its oral and written submissions, the Ld. Sr. Counsel for the Appellant has argued as under: i. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utes a "financial debt", particularly considering that the non-allotment of shares within 60 days, as per Section 42(6) of the Companies Act, 2013, transforms such money into a loan, a position further supported by the exit clause 18.12 of the SSA, which provided investor an exit option within 60 months. The amount is shown in "borrowings" in the balance sheet. viii. It is argued that since no shares were allotted, amount advanced metamorphosed into "financial debt" in light of Section 42(6) of the Companies Act, 2013. ix. The Ld. Sr. Counsel for the Appellant submitted that courts in the cases of Global Credit Capital Ltd. & Anr. v. Sach Marketing Pvt. Ltd. & Anr. reported in (2024) 9 SCC 482 and in the case of Sanjay D. Kakade v. HDFC Ventures Trustee Company Ltd. & Ors. in Company Appeal (AT) (Ins.) No. 481 of 2023 have held that character of transaction has to be seen, including, intent and conduct of the parties. x. A perusal of the agreement of SSA will show that the intent was to participate in the business of Respondent. Clause 8.1 of SSA deals with constitution of board of directors and clause 9.1 states that the company shall obtain prior consen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... notice under Section 433 of the Companies Act, 1956 was issued. It is argued the proceedings before the Hon'ble High Court of Bombay will not extend the period of limitation. iv. The Appellant is the assignee of Innoventive Industries Ltd. Innoventive Industries Ltd. itself was not a financial creditor and the assignee cannot get a better right. v. The reading of relevant provisions of SSA dated 06.09.2011, especially clauses 1.1, 2.1(b), 2.2, 3, 4A, 6 & 6.1, 8, 10, 12, 15 and 18.2 clearly indicate that Innoventive Industries Ltd. was engaged in the capacity of an "investor" subscribing to shares and warrants of the Respondent company and there was no contemplation of repayment. vi. The transaction governed by the SSA contained no stipulation for repayment, interest, maturity or assured returns and lacks any element of time value of money. vii. A holistic reading of the SSA makes it clear that Innoventive Industries Ltd. assumed the risks of equity investor and not the position of a creditor. The amount advanced towards subscription of shares and equity warrants does not transform into "financial debt". viii. In the summary jurisdiction....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing." 6.3 It is the case of the Appellant that the impugned transaction is covered by the terms "any other transaction" "having the commercial effect of a borrowing". 6.4 The admitted facts in this case are that Innoventive Industries Ltd. had paid an amount of Rs. 8.7 crores to the Corporate Debtor under Subscription and Shareholders Agreement (in short 'SSA') in the period from 08.09.2011 to 09.05.2012. Through the liquidation of Innoventiv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Company in accordance with Clause 2.1(a) of this Agreement; "Investor Share Subscription Amount" shall mean a sum of Rs. 100/-towards issue & allotment of 10 Equity Shares by the Company; "Investor Subscription Amount" means the aggregate of the Investor Share Subscription Amount and the Warrant Subscription Amount; "Majority Warrant holder" means at any point of time, a Person holding at least 66.67% of the number of Warrants (whether held in the form of Warrants, or in case of conversion and issue of Warrant Shares as per the terms hereof, including the Warrants represented by the Warrant Shares); ................ "Shareholding Pattern" means the percentage of Shareholding (%) held by the Shareholders of Kumar Motors Private Limited which is as follows: Sr. No. Name Of Shareholders Percentage of Shareholdings (%) 1. Rajeev Kumar Nair 26 2. Vijaya Nair 7 3. Jyothi Nair 28 4. Renu Nair 6 5. Shreyas Construction Pvt. Ltd. 33 TOTAL 100 ................ "Warrant(s)" means warrants of face value of Rs. 800....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrants Exercise Price payable at the time of conversion of the Warrants. 2.2 All Parties acknowledge that the subscription by the Investor of the Investor Shares and the Warrants is based on the integral condition that the Investor Subscription Amount and the Warrant Exercise Price received upon conversion of the Warrants shall be utilized exclusively for the purpose of the Business of the Company. 2.3 Conversion of Warrants Any time between March 31, 2012 to March 31, 2015, any Warrantholder may choose to convert all or any of the Warrants in his possession by giving 7 (seven) days prior written notice to the Company ("Warrant Exercise Notice") specifying therein (i) the date on which the Warrantholder intends to exercise the Warrants ("Warrant Exercise Date") and; (ii) the number of Warrants proposed to be exercised ("Exercise Warrants"); 2.4. On the Warrant Exercise Date, all (but not only some) of the following shall take place: (a) The Warrantholder shall pay the Warrant Exercise Price (as reduced by the Warrant Subscription Price) for each Exercise Warrant to the Company in such manner as Majority Warrantholder may decide; ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that the Company hold a meeting of the Board or its duly authorized committee for passing the following resolutions (certified copies of which resolutions shall be in Agreed Form and shall be delivered to the Investor): i. The issue and allotment of the Investor Shares and the Warrants tothe Investor; ii. Convening an extraordinary general meeting of the Company for considering the resolutions set out in Sub-clause (d) below. (d) . The Company shall hold an extraordinary general meeting at which the following resolutions shall be passed in the Agreed Form: i. Adopting the Memorandum of Association and the Articles of Association in the Agreed Form, in order to reflect the relevant provisions of this Agreement; (e) All requisite forms and returns including, without limitation, the return of allotment to be filed in respect of the allotment of the Investor Shares and the Warrants shall be prepared and signed on behalf of the Company and filed with the appropriate authorities; (f). All corporate, secretarial and statutory filings and entries in statutory registers required to be done for the Closing shall be carried out to the sati....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Transfer restrictions - General 6.1. 100% of shares held in the Company by the Promoters cannot be transferred to any third party either directly or indirectly, in any manner whatsoever, and shall stand locked in from the date of issue and allotment thereof. However with the prior written Consent, Promoters may transfer such number of Equity Shares as approved by the Investor subject to fulfillment of such terms & conditions as Investor may deem fit & appropriate. Pre-emptive Rights 6.4 With the prior written approval of the Investor, and subject to what is provided elsewhere in this Agreement, the Company may raise funds by way of issue of Equity Shares or instruments convertible in to Equity Shares, from other investors or issue Shares to any other person (hereinafter together referred to as "the New Investor/s"). 6.5 The Promoters and the Company undertake that in case of any issue of Equity Shares or other instruments convertible into Equity Shares to New Investor/s, the Investor shall have an independent right to subscribe to additional Equity Shares or Warrants or any other instruments convertible in to Equity Shares, at their ow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lution and (ii) Company shall not issue any further Shares or instruments convertible at any future date into Shares of Company, whether such further issuances are on rights basis or otherwise, unless such further issuance has been approved by the shareholders of Company by way of a special resolution. 14.5. DEMATERIALISATION OF SHARES The Company undertakes and confirms that it shall ensure that the shares of the Company are dematerialised within 30 (thirty) days from the date of issue of the Warrants hereunder. 15. TERMINATION 15.1 This Agreement may be terminated at any time by mutual written agreement of the Parties; 15.2 In the event of a material breach by the Promoters or the Company ("Defaulting Party") of any of their respective representations, Warranties, covenants, undertakings or obligations herein, the Investor and the Majority Warrantholder shall, if such breach is not cured by the Defaulting Party within 15 days of receipt of a written notice to that effect from the Investor or the Majority Warrantholder, have the right to forthwith terminate this Agreement. ............. 18. MISCELLANEOUS .........
X X X X Extracts X X X X
X X X X Extracts X X X X
....hares, it would be entitled to hold not less than 51% of total paid up equity share capital of the company. 6.7 In essence the agreement entails that against the amount invested as also bought in through associates, the "investor" shall gain control over the majority voting rights (equity shareholding) as also the composition of the board of directors. Clause 8.1 of the SSA (supra) states that board of directors of the company shall comprise of not more than 6 directors wherein majority warrant holder shall be entitled to nominate at least 3 directors. The remaining 3 directors shall be nominated by the promoters. Clause 9 of the SSA (supra) states that action on fundamental issues, which are listed in clause 9.3, and which cover almost all major decisions pertaining to operations of company, can be taken only after prior written consent of the majority warrant holder. For brevity, this list running from sub clause (a) to sub clause (u) has not been reproduced above, but it includes amendment to constitutional documents, mergers and acquisitions, finalisation of the business plan, purchase of real estate, change in the name of the company, increase or decrease in size of board o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day: Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than- (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities." 6.12 We find even this objection of the Appellant is not maintainable as the said provision under Section 42 has been introduced in the Companies Act, 2013 and no parallel or equivalent provision existed in the Companies Act, 1956. It is the admitted fact that the SSA was executed on 06.09.2011, when the provisions of Companies Act, 1956 were prevalent. Further, as no private placement of shares is made, Section 42 of Companies Act, 2013 is not, even otherwise, applicable, as held by this Tribunal in M/s Murlidhar Vincom Pvt. Ltd. v. M/s Skoda (India) Pvt. Ltd. in Company Appeal (AT) (Ins.) No. 1334 of 2024....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 47. As far as 5(8)(f) is concerned before we deal with the term commercial effect of borrowing the opening clause of 5(8) cannot be lost sight of. It has to be first a debt and such debt would be a financial debt if it is raised under any other transaction including any forward sale or purchase agreement having the commercial effect of borrowing. As already explained the paid up amounts towards shares do not have the character of debt. The further argument that redemption was due, is also not meritorious. As required under Section 55 of the Companies Act, 2013, the shares could be redeemed only out of the profits or with any amount kept apart for dividends which is not the situation in the present case." (Emphasis supplied) ii. This Tribunal in Prakash Ambure v. Invest Bio Med Private Ltd., CA(AT)(Ins.) No. 582 of 2024 has held as under: "8. Per contra, relying on the ratio in Pramod Sharma Vs Karanaya Healthcare Pvt. Ltd., [C.A. (AT)(Ins) 426 of 2022], dated 21.04.2022 which was relied on in M/s Muralidhar Vincom Pvt. Ltd., Vs M/s Skoda (India) Pvt. Ltd., [C.A.(AT)(Ins) 1334 of 2024], dated 26.11.2024, the learned counsel for the respondent submitted tha....