Question-1: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?

Question-2: 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?

NCLAT held that Share application money is the amount of advance received by the company for the allotment of shares in the company on a later date, which is to be resulted into Share Capital of the Company. In the case of the failure of the company to allot the share, it is an obligation on the company to refund the amount of share Application money pending allotment within 60 days of the of the receipt of money relating thereto. In case the company fails to refund the amount of share application money within 15 days after the expiry of 60 days time limit, then the said amount will be treated as Deposit, advanced to the company, which has to be returned by the company at the rate of 12% per annum from the expiry of 60th day.
As per section 5(8) of the IB Code, 2016 in order to construe a debt to be Financial Debt, there must be the existence of time value of money for the consideration involved therein. Further the Court is of the opinion, that Share application money in the event of non allotment of shares attract interest under section 42(6) of the Companies Act, 2013 and therefore falls within the ambit of “Financial Debt” as defined under section 5(8) of the Code.

Hon’ble NCLAT held that initially the amount advanced to the company was in the nature of equity , however in case of the non-allotment of shares, the said money acquires the nature of debt which has to be refunded along with interest which is the essential ingredients for a debt to qualify as “Financial debt”.
For all the aforenoted reasons, the court is of the 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

Branch: NCLAT, New Delhi Bench

Link: https://ibclaw.in/mr-kushan-mitra-vs-mr-amit-goel-nclat-new-delhi/