Raising of amount via share subscription-cum-shareholders agreementis a commercial borrowing and constitutes a ’Financial Debt’ under IBC

Facts of the case

• Kakade Estate Developers Private Limited (Corporate Debtor) engaged in the construction of commercial and residential township projects had entered into a Share Subscription and Shareholders Agreement for investment purposes with HDFC Private Ventures Trustee Company Ltd.
• The Financial Creditor, HDFC private Ventures Trustee Company Ltd. agreed to subscribe to shares as per the terms and conditions of the Original Agreement.
• Due to the non-completion of the project, a Consent Award was issued by the Sole Arbitrator for payment of Rs.72.85 crores to the Financial Creditor and Edward Mauritius Limited on or before 25.08.2021 and Rs.47.14 crores on or before the expiry of 15 months from 25.11.2020. Further, in case of non-payment, Rs. 120 crores shall be payable with a 15% interest rate per annum calculated from 25.08.2021 till the date of payment.
• The Financial Creditor filed a CIRP (Corporate Insolvency Resolution process) petition under Section 7 of IBC for defaulting on its obligation which was admitted by NCLT Mumbai via order dated 29.04.2023. The appeal was preferred by Sanjay Kakade (Suspended Director) of the Corporate Debtor challenging the said order.
• The Appellant contended that the Section 7 application was not maintainable as there was no ‘financial debt’ involved.

Legal Precedent

• In the case of Company Appeal (AT) (Insolvency) No.481 of 2023, the National Company Law Appellate Tribunal relied on several legal precedents to support its decision.
• These legal precedents included judgments of the Hon’ble Supreme Court of India, such as Shubankar Bhowmik v. Union of India, SLP, Pioneer Urban Land & Infrastructure Ltd. v. Union of India, and Anuj Jain vs. Axis Bank. The Tribunal also referred to its own previous judgments, such as Raj Singh Gehlot vs. Vistra (ITCL) India Ltd. and Debashis Nanda.
• These legal precedents were cited to interpret and apply the provisions of the Insolvency and Bankruptcy Code, 2016, and to establish the definition and scope of “financial debt” under Section 5(8) of the Code. The Tribunal’s reliance on these legal precedents helped in determining the nature of the transactions between the parties and whether they constituted a “financial debt” under the Code, ultimately influencing the decision to uphold the admission of the Section 7 application. By referencing these legal precedents, the Tribunal demonstrated the application of established legal principles and interpretations to the specific facts and issues presented in the case.

Judgement

The NCLAT dismissed the appeal in the case of Sanjay D. Kakade vs. HDFC Ventures Trustee Company Ltd., reaffirming the classification of funds raised through a Share Subscription-cum-Shareholders Agreement as ‘Financial Debt’ under the IBC. The Tribunal held that the transactions between the parties, including the Agreement, Supplementary Agreement, and Binding Term Sheet, clearly indicated that there was a debt, due and payable, which debt was in the nature of ‘financial debt’. The Tribunal further noted that the Corporate Debtor had time and again acknowledged the debt and had defaulted on its obligation. Therefore, the Tribunal dismissed the appeal and upheld the order of the Adjudicating Authority admitting the Section 7 application. The decision underscores the tribunal’s commitment to upholding the remedies provided by the IBC, emphasizing the commercial nature of the transaction and the acknowledgment of the Corporate Debtor’s default.

Gaurav Sankhla, Audit Associate, SW India