The Intersection of Share Application Money and Insolvency Law: Prakash Ambure v. Invent Bio-Med

The case analysis is conducted by Adv. Siddhant Jain

The case of Prakash Ambure & Ors. v. Invent Bio-Med Private Limited presented an important question regarding the classification of share application money as financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment by the National Company Law Tribunal (NCLT), Mumbai Bench, sheds light on the nuances of financial debt, statutory timelines, and the importance of proper classification in insolvency proceedings.

Facts

The petitioners, acting as Financial Creditors, sought the initiation of Corporate Insolvency Resolution Process (CIRP) against Invent Bio-Med Private Limited under Section 7 of the IBC. The claim revolved around a financial debt of ₹55,00,000 with 18% interest per annum, arising from a share subscription agreement. The petitioners alleged that the Corporate Debtor failed to issue shares after receiving share application money and subsequently did not refund the amount within the statutory period, as required under Section 42 of the Companies Act, 2013. Despite the acknowledgment of liability in the trial balance sheet, the Corporate Debtor did not repay the money, leading the petitioners to approach the Tribunal.

Issue

The main issue before the Tribunal was whether the share application money, which was not converted into shares, could be considered a “financial debt” under Section 7 of IBC, thus entitling the Financial Creditors to file for CIRP against the Corporate Debtor.

Arguments from the Financial Creditors (Applicants):

1. Nature of Debt:
   The Financial Creditors argued that the funds advanced to the Corporate Debtor for share subscription were supposed to be refunded since the shares were not issued within the time limit. They cited Section 42 of the Companies Act, 2013, which requires refunding of share application money within 75 days if shares are not allotted. Post 75 days, the money becomes a deposit, attracting 12% interest.
2. Acknowledgment of Debt:
   The Financial Creditors claimed that the Corporate Debtor had acknowledged the liability in its trial balance sheet as of 31.03.2018, thus extending the limitation period.
3. Limitation:
   They argued that the petition was within the limitation period because the default date could be extended to 31.10.2017 based on the trial balance sheet.

Arguments from the Corporate Debtor

1. Nature of Share Application Money:
   The Corporate Debtor contended that the share application money does not constitute a financial debt under Section 5(8) of the IBC. They relied on the NCLAT’s decision in the case of Kushan Mitra v. Amit Goel & Ors., which held that share application money does not automatically become a financial debt.
2. Limitation:
   The Corporate Debtor argued that the petition was time-barred. They stated that the default occurred in April 2015 and July 2015 (75 days after receiving the share application money). Since the petition was filed in September 2019, it was beyond the three-year limitation period under the Limitation Act, 1963.
3. Invalid Acknowledgment of Debt:
   The trial balance cannot be treated as a valid acknowledgment of debt as it was not part of the audited financial statements. Thus, the Financial Creditors’ reliance on the trial balance to extend the limitation period was not acceptable.
4. Maintainability:
   The Corporate Debtor raised the issue of maintainability, arguing that the petition was filed using a Power of Attorney, which is not permitted under IBC for individual creditors.

Judgment

The Tribunal, in its analysis, observed that under Section 42 of the Companies Act, share application money that is not refunded within 75 days becomes a deposit. However, it clarified that the mere non-refund of such money does not automatically qualify it as financial debt under the Insolvency and Bankruptcy Code (IBC), as the amount failed to meet the statutory criteria for such classification. On the issue of limitation, the Tribunal noted that the first default occurred in April 2015 and July 2015, making the petition filed in September 2019 beyond the three-year limitation period prescribed under the Limitation Act, 1963. It dismissed the Financial Creditors’ argument that the trial balance extended the limitation period, holding that trial balance entries alone are insufficient for acknowledging debt under Section 18 of the Limitation Act. Consequently, the Tribunal rejected the petition, concluding that the amount claimed did not constitute a financial debt under the IBC and that the application was time-barred. Ultimately, the petition filed under Section 7 of the IBC was dismissed on these grounds.

Conclusion

The NCLT ruled that share application money, when not refunded or converted into shares, does not automatically transform into a financial debt. Since the Financial Creditors failed to prove that the amount met the requirements of a financial debt under IBC and the petition was filed beyond the limitation period, the Tribunal dismissed the petition. This case highlights the importance of distinguishing between different types of financial transactions and adhering to statutory timelines when initiating insolvency proceedings.

Prakash Ambure & Ors. v. Invent Bio-Med Private Limited

NCLT Mumbai Bench, Court – II, CP (IB) 4100/MB/2019

Siddhant Jain

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