Mr. Kushan Mitra Vs. Mr. Amit Goel & Anr. - In case of non-refund of Share Application Money within 60 days of receipt of the money, the money will be treated as Deposit and would change its character to fall within the definition of ‘Financial Debt’.

 NCLAT (16.12.2021) in Mr. Kushan Mitra Vs. Mr. Amit Goel & Anr. [Company Appeal (AT) (Insolvency) No. 128 of 2021 & I.A. 2340 of 2021 and 2413 of 2021]  held that;

• Consideration for time value of money is an essential element for the amount to fall within the ambit of Financial Debt. The debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces for disbursal against consideration for time value of money.

• In case of non-refund of Share Application Money within 60 days of receipt of the money, the money will be treated as Deposit and would change its character to fall within the definition of ‘Financial Debt’.

Excerpts of the order;

# 7. Assessment

• Whether ‘Share Application Money’ in the event of non-allotment of shares, 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 Code.

• Whether Statutory accrual of interest under Section 42(6) of the Companies Act, 2013, be construed as ‘consideration for time value of money’, to qualify the requirement of ‘‘Financial Debt’’ as defined under the Code.

For better understanding of the case, we find it relevant to reproduce the definition of ‘Debt’ as defined under Section 3(11) of the Code, the definition of ‘Financial Creditor’ as defined under Section 5(7) of the Code and also the definition of ‘Financial Debt’ as defined under Section 5(8) of the Code which read as hereunder:- 

“Section 3 (11) Debt means a liability or obligation in respect of a claim which is due from any person and includes a ‘Financial Debt’ and operational debt;”

“Section 5 (7) financial creditor means any person to whom a ‘Financial Debt’ is owed and includes a person to whom such debt has been legally assigned or transferred to;

(8) ‘Financial Debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes – 

(a) money borrowed against the payment of interest; 

(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; [Explanation----For the purposes of this sub-clause,-- 

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and 

(ii) the expressions, allottee and real estate project shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016); 

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; 

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;” (Emphasis Supplied) 

# 8. It is the main case of the Appellant that Section 42 (6) of the Companies Act, 2013 is not attracted as such provisions deal with Share Application Money actually coming in to increase the subscribed capital; that Section 42(6) of the Act deals with a case where there is no allotment at all; that the decision of the Board to cancel the allotment under the Board Resolution Dated 10.05.2019 does not change the character of the said amount, which is only deemed to be Share Application Money. 

# 9. It is the case of the Respondent that the ‘Corporate Debtor’ after passing the Board Resolution dated 10.05.2019, revoking the allotment of shares, defaulted in not returning the Share Application Money amounting to 1,56,03,396/- along with 12% per annum to the first Respondent as provided for under Section 42(6) of the Companies Act, 2013. Learned Sr. Counsel vehemently contended that the ‘Corporate Debtor’ itself treats the money as pending allotment of shares allotted on preferential basis under private placement and is doubtful about the validity of the allotment and that in case of non-refund of Share Application Money within 60 days of the receipt of the money, under Section 42 of the Companies Act, 2013, the Share Application Money will be treated as Deposit and has to be returned at the rate of 12 percent from the expiry of the 60th day. In support of his submissions, the Learned Counsel relied upon the Judgment of this Tribunal in “Uniexcel Developers Pvt. Ltd.” (Supra). The Learned Counsel strenuously contended that the ratio of the Hon’ble Supreme Court in “M/s. Orator Marketing Pvt. Ltd.” (Supra) is applicable to the facts of this case as the Supreme Court of India has held as follows: 

• 22. The NCLT and NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘‘Financial Debt’’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a ‘Financial Debt’. Both NCLAT and NCLT have failed to notice clause(f) of Section 5(8), in terms whereof ‘‘Financial Debt’’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

• 23. Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive.”

‘Financial Debt’ means outstanding principal due in respect of Loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only outstanding principal would qualify as ‘Financial Debt’. Furthermore, sub-clause (a) (i) of sub-Section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive.

# 10. Share Application Money is the amount of advance received from a prospective shareholder which is later transferred to share capital account on the issue of shares or refunded in case the issue falls to take place.

# 11. Refund of Application money for private companies:

• For private placements, invitation to subscribe should be given to less than 50 people (excluding Qualified Institutional Buyers and employers under ESOP)

• Fresh allotments should not be made until allotments under earlier offers are completed or withdrawn. 

• Subscriptions should be collected only in modes other than cash.

• Shares should be allotted within 60 days of completion of subscription period, else all money collected should be refunded within 15 days from that date. (with an interest of 12 % p.a. from the date of expiry of 60 days)

• Share Application monies should be deposited in a separate bank account, the balance of which would remain unutilised until allotment.

• Violation of provisions under section 42 shall make the private placement to be deemed as a public offer, and SEBI regulations would apply.

• Penalty on default – the amount involved in offer or 2 Crores whichever is higher. (to promoters/directors).

• When the Company fails to refund the Application money as stipulated within the time limit of 60 days such balance shall be treated as ‘Deposit’ under Companies (Acceptance of Deposit) Rules, 2014.

# 12. For Private Placement and Preferential Allotment:

At this juncture, we find it relevant to reproduce Section 42(6) of the Companies Act, 2013 which reads as follows:

“Section 42. Offer or invitation for subscription of securities on private placement.

• (6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the 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.”

• (Emphasis Supplied)

# 13. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 reads as follows:

• “For the purposes of clause (c) of sub-section (1) of section 62, if authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act:”

Rule 13 makes it clear that all provisions of Section 42 (Private Placement) are also applicable to issue of shares under Section 62(1)(c) (Preferential Allotment).

# 14. Rule 2(1)(c) of Companies (Acceptance of Deposit) Rules 2014 reads as follows:

(c) “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include 

(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;

Explanation.- For the purposes of this sub-clause, it is hereby clarified that –

(a) Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.

(b) any adjustment of the amount for any other purpose shall not be treated as refund.”

(Emphasis Supplied)

# 15. The Hon’ble Supreme Court of India in “Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited Vs. Axis Limited and Ors.” (2020) 8 SCC 401 in para 46, 50 and 50.1 has held as under:

“The essentials for financial debt and financial creditor

• 46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become ‘financial debt’ for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h). The requirement of existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in respect of any of the transactions/dealings stated in sub-clauses (a) to (i) of Section 5(8), even if it is not necessarily stated therein. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of ‘disbursement’ against ‘the consideration for the time value of money’ could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as ‘financial debt’ within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money

• 50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression ‘financial creditor’ is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor’s business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor.

• 50.1 Keeping the objectives of the Code in view, the position and role of a person having only security interest over the assets of the corporate debtor could easily be contrasted with the role of a financial creditor because the former shall have only the interest of realising the value of its security (there being no other stakes involved and least any stake in the corporate debtor’s growth or equitable liquidation) while the latter would, apart from looking at safeguards of its own interests, would also and simultaneously be interested in rejuvenation, revival and growth of the corporate debtor. Thus understood, it is clear that if the former i.e., a person having only security interest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution.

As can be seen from Section 5(8) of the Code and also the aforenoted principals laid down in “Anuj Jain” (supra), consideration for time value of money is an essential element for the amount to fall within the ambit of Financial Debt. The debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces for disbursal against consideration for time value of money.

# 16. 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’.

# 17. 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, we are of the considered view that the money given by the First Respondent indeed falls within the definition of Share Application Money.

# 18. To understand the nature of transaction involving a Share Application Money it is necessary to see how Section 42(6) of the Act and the Companies (Acceptance of Deposits) Rules, 2014 treat the Share Application Money. The relevant parts of the Act and the Deposit Rules have been reproduced in Paragraphs 12 to 15 above. 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. They may initially be seen as Debt and later, upon conversion the same amount becomes equity. Hence, 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. Therefore, we hold that the Debt is a ‘Financial Debt’ and hence we are of the considered view that the ratio of “Radha Exports India Private Limited” (supra) and “Sesa Goa Limited and Ors. (Supra) is not applicable to the facts of this case. Further, a three Judge Bench of this Tribunal in Uniexcel Developers Pvt. Ltd. Vs. Uniexcel Ltd., Company Appeal (AT) Ins. No. 962 of 2019 has concurred with the finding of the Adjudicating Authority and held that in case of non-refund of Share Application Money within 60 days of receipt of the money, the money will be treated as Deposit and would change its character to fall within the definition of ‘Financial Debt’.

# 19. The contention of the Learned Counsel for the Appellant that the Criminal Complaint dated 29.08.2020, Complaint to the RoC dated 29.04.2019 and clarification given to the Economic Offences Wing (EOW) dated 04.09.2020 is much prior to filing of the Section 7 Application which the Adjudicating Authority has erroneously not addressed to these issues, is untenable, especially keeping in view the ratio of the Hon’ble Supreme Court of India in ‘M/s. Innoventive Industries Ltd.’ Vs. ‘ICICI Bank & Anr.’, reported in 2018(1) SCC 407 wherein the Hon’ble Supreme Court of India has observed as follows:-

• “28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of  Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.

• 30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”

Keeping in view the ratio of Hon’ble Supreme Court in ‘M/s. Innoventive Industries Ltd.’ Vs. ‘ICICI Bank & Anr.’ (supra), all that we need is to see under this Code is whether there is a ‘Debt’ payable under law and if there is a ‘Default’. We find that I.As bearing No. I.A. 2340 of 2021 and 2413 of 2021 have been filed by the proposed Intervenors alleging fraud and seeking a forensic audit. At this juncture, we do not see any substantial grounds in allowing these I.As.

# 20. For all the aforenoted reasons, we are of the considered view that 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.

# 21. For all the aforenoted reasons, this Appeal is dismissed accordingly. The Intervention Applications are also dismissed as non-maintainable. No order as to Costs.

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