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Judgment
Per Justice N. Seshasayee, Member (Judicial)
Challenging an Order of the Adjudicating Authority (NCLT – II, Mumbai) dated 04.08.2023, dismissing a petition under Sec.7 IBC, and at any rate the right to claim is barred by limitation, the purported financial creditor is now before us. The issue in short is, if there exists a financial debt.
The Facts:
The material facts relevant for the current purpose are now stated:
Following the request of the corporate debtor- the respondent herein, the appellant had invested a sum of Rs.55.0 lakhs in the former. That was between February, 2015 and June, 2015. The payment and receipt of the amount is not in dispute, since the transaction had taken place only through bank-transfer of funds.
On 28.03.2015, appellant wrote to the respondent indicating therein that certain proposal of the respondent was being considered, and that Rs.5.0 lakhs which the appellant had sent to the respondent was required to be kept as a deposit.
The parties herein were on correspondence, and on 24.06.2015, the appellant wrote to the respondent in which the former has inter alia indicated or instructed the latter that shares (for the value of Rs.55.0 lakhs) could be issued, “from the stock of unissued shares or by way of transfer of shares by some existing shareholder/s ”. On 05.09.2015, the appellant addresses a letter to the respondent wherein the appellant mentions that he was still awaiting, “Allotment and/or transfer of equity shares of the company in the name of the persons who have deposited amounts” as per the letters earlier issued, and that “the receipts issued (by the respondent) do not bear the nature of the payment received”. On 09.09.2015, the respondent e-mailed the appellant indicating therein how it proposes to allot shares to the appellant’s group. Necessary authorization was also issued to the respondent on how to adjust the funds let with it for appropriation towards share-price and in whose name the share might have be issued.
The respondent, apparently has done precious little towards issue of shares. In these circumstances, on 21.12.2016, the appellant had written to the respondent to release the deposits made by the former. Then on 01.05.2017, the appellant had written to the respondent in which he had underscored that “the above deposits, as of today have assumed the character of unsecured deposits received by the company from general public.” As the “original plan to induct us as shareholders, has failed.”
According to the appellant, there was change of director at the helm of affairs of the respondent and that the new director of the respondent had promised return of the deposit, which he has recorded in his communication dated 07.10.2017 to the new director of the respondent.
Accordingly, what had commenced as an investment for purchase of shares stood converted to deposit-amount, and this stands fortified by an admission of the respondent in its trial balance for the financial year ending 31.03.2018, wherein it has positively referred to the sum paid by the appellant as deposit and figures in the Standalone financial Statement of the MCA portal as ‘long term liabilities’.
Since the respondent did not refund the deposit-amounts due to the appellant, in September, 2019, he laid a petition to initiate a CIRP against the respondent.
The respondent’s plea has been:
That the any amount paid towards purchase of shares would not constitute financial debt;
Alternatively, if the same were presumed as financial debt, then applying the timeframe as stipulated in Sec.42(6) of the Companies Act for return of the share-subscription money consequent to non-allotment of shares, time runs from payment of each of the instalment of amounts by the appellant from January, 2015 to June 2015 (whereas the appellant claims that the payments were made between February 2015 and June, 2015), and it expires between January, 2018 and June, 2018. However, petition is filed only in September, 2019.
To the plea of bar of limitation, the appellant would plead that the petition is within time, since the respondent has acknowledged the deposit due to the appellant in its trial balance for the year 2017-2018, and that the petition was laid within three years therefrom.
Finding of the Adjudicating Authority
The Adjudicating Authority was persuaded by the plea of limitation and dismissed the petition. Though in paragraph 10 of its Order where the Adjudicating authority purports to detail the defence taken by the respondent, it did touch upon the issue if share-purchase money would constitute a financial debt, yet in the operative portion, it overlooked it and did not give a pointed finding.
Arguments:
The arguments are predictable and they merely touched upon two aspects: (a) whether the money initially invested by the appellant constituted a deposit as to fall within the definition of financial debt under Sec.5(8) IBC; and if the petition filed under Sec.7 is time barred.
The learned counsel for the appellant submitted while the initial intent that could be gathered might indicate that appellant paid the money for acquiring the shares of the respondent, the money so paid changed character when shares were not allotted as promised, and it assumes the character of a deposit. What is significant in the context of the facts of the present case is that there was a meeting between the appellant and the new director of the respondent in October, 2017, pursuant to which the appellant had written a letter dated 07.10.2017 to the respondent wherein the appellant confirms what had been agreed during the meeting. This is not disputed. And, what corroborates this change of character of the money in the hands of the respondent, how it chose to describe the same in its books. Indeed, in its trial balance for the year 2017-2018, the respondent had shown the amount only as deposit. And if this with interest is reckoned then it constitutes financial debt. And, inasmuch as the respondent had acknowledged its liability in its trial balance in 2018, the petition laid in September, 2019, under Sec.7 IBC is not time barred.
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 that the appellant had merely made investment to purchase shares in the respondent when it was under the erstwhile management and an investment for purchase of shares does not constitute a financial debt within the meaning of Sec.5(8) of the Code and hence a proceeding under sec.7 of the IBC can neither be maintained nor sustained. The learned counsel then proceeded to adopt the stands of the respondent vis-à-vis the point of limitation which it adopted before the Adjudicating Authority.
Discussion & Decision
That the appellant has essentially made an investment for purchase of shares in the respondent is established beyond debate, for the very correspondences which the appellant had written to the respondent and which the appellant relies on, themselves evidence it. For facts, refer to paragraph 2 above. At that time, the respondent was under a different management. Then there was a change of management, and according to the appellant, he had held discussion with the new director of the respondent, and that he had confirmed what transpired in that meeting in his letter dated 07.10.2017 and this was followed by the acknowledgement of respondent’s liability to the appellant in the trial balance of the respondent as on 31.03.2018, where it was shown as deposits. And, the respondent is particularly silent on this aspect.
Very evidently, the appellant aims at a rear-guard action, but it is not without its fallacies. Is there a subsequent change of character of the money which the appellant had paid the respondent as to bring it within the definition of a financial debt? If the appellant’s payment were to be treated as share-subscription money, he straight away is driven beyond the IBC zone. If he were to give it a colour of deposit, then it would stand excluded in terms of Rule 2(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014. The point is how far the trial balance of the respondent referred to earlier will be of use to the appellant? It is true, the respondent goes silent on it in its pleading, but it may have least impact since it will still stand excluded from the definition of deposit in terms of Rule 2(c)(vii) of the Companies (Acceptance of Deposits) Rules, which positively excludes share subscription amount from the definition of deposit. See: Muralidhar Vincom case [C.A.(AT)(Ins) 1334 of 2024]. Therefore, even if there is no pointed finding of the Adjudicating Authority as to the existence of a financial debt, we have little hesitation in holding that there exists no financial debt which may enable the appellant to invoke IBC.
With the gates of IBC closed for the appellant to seek entry into it, we consider there is hardly any need to consider the point of limitation.
To conclude, we find no merit in the appeal, and accordingly we dismiss it.
No costs.
[Justice N. Seshasayee]
Member (Judicial)
[Arun Baroka]
Member (Technical)
[Indevar Pandey]
Member (Technical)