Payment received for shares, duly issued cannot be a debt under IBC-Supreme Court

Payment received for shares, duly issued cannot be a debt under Insolvency and Bankruptcy Code. Personal loan to Promoter/Director cannot trigger CRIP -SC 

ABACUS Case Law Citation
ABCAUS 3375 (2020) (08) SC

Important case law relied upon by the parties:
Innoventive Industries Ltd. v. ICICI Bank and Anr.
B. K. Educational Services Pvt.Ltd. v. Parag Gupta and Associates

In the instant case, appeal was filed under Section 62 of the Insolvency and Bankruptcy Code, 2016 against the judgment of the National Company Law Appellate Tribunal (NCLAT).

The appellant company was incorporated as a Private Limited company to take over the business of a proprietorship concern which had taken loan from the respondents.

After the said incorporation, the respondent who also became a member in the Board of the company, requested the Appellant Company to convert substantial amount out of the outstanding loan as share application money for issuance of shares in the Appellant Company. The respondent even confirmed this in income tax proceedings.

The appellant company accordingly adjusted the said amount as share application money, for issuance of shares in a Appellant Company in the name of the Respondent.

However, later, by a legal notice the Respondents called upon the Appellant Company to repay to the Respondents the alleged outstanding debt.

Finally, the respondents filed a petition under Section 9 of the IBC, in the NCLT claiming to be an operational creditor of the Appellant Company, within the meaning of Section 9 of the IBC.

he NCLT held that the Respondents had failed to prove that there was any debt due from the Appellant  Company, to the Respondents, observing that the Appellant Company had produced proof of payments.

However, NCLAT allowed the appeal of the Respondents and set aside the order of the NCLT.

The Hon’ble Supreme Court stated that it was for the applicant invoking the Corporate Insolvency Resolution Process (CRIP), to prima facie show the existence in his favour, of a legally recoverable debt. In other words, the respondent had to show that the debt is not barred by limitation, which they failed to do.

Personal loan to Promoter or a Director of a company cannot trigger the Corporate Resolution Process under the IBC

Further, the Hon’ble Supreme Court observed that one one Respondent resigned from the Board of the Appellant Company he requested the Appellant Company to treat the share application money as share application money to another person and to issue shares for aforesaid value to him. The amount was to be treated as a personal loan from the Respondent to the said person. The Court said that a personal Loan to a Promoter or a Director of a company cannot trigger the Corporate Resolution Process under the IBC.

Payment received for shares, duly issued cannot be a debt under IBC

The Hon’ble Supreme Court further concurred with NCLT in that even otherwise, the application under Section 7 of the IBC was not maintainable as there was no financial debt in existence.

The Hon’ble Supreme Court observed that as per the definition of ‘financial debt’ in Section 5(8) the payment received for shares, duly issued to a third party at the request of the payee cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits

Accordingly, the Hon’ble Supreme Court allowed tha ppeal and set aside the order of NCLAT.

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