NCLAT Recognises Share Subscription Agreement as Commercial Borrowing Under IBC

NCLAT Recognises Share Subscription Agreement as Commercial Borrowing Under IBC

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT), presided over by Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), dismissed an appeal contesting the Corporate Insolvency Resolution Process (CIRP) petition. The Bench also ruled that funds raised through a Share Subscription-cum-Shareholders Agreement qualify as commercial borrowings and constitute "Financial Debt" under the Insolvency and Bankruptcy Code, 2016 (IBC).

On May 14, 2008, Corporate Debtor Kakade Estate Developers Private Limited, a company involved in the construction of commercial and residential townships, entered into a Share Subscription and Shareholders Agreement (Agreement) with HDFC Private Ventures Trustee Company Ltd. (Financial Creditor).

The Financial Creditor agreed to purchase shares in accordance with the provisions outlined in the original agreement. Subsequently, on May 14, 2008, an amended and restated Share Subscription and Shareholders Agreement was entered into by the Promoters, Financial Creditor, Company, and the Corporate Debtor.

Owing to the project's non-completion, the Sole Arbitrator issued a Consent Award requiring payment of ₹72.85 crore to the Financial Creditor and Edward Mauritius Limited by August 25, 2021, and an additional ₹47.14 crore within 15 months of November 25, 2020. In the event of non-payment, a sum of ₹120 crore will be due, along with a 15 per cent annual interest calculated from August 25, 2021, until the date of payment.

The Financial Creditor initiated Corporate Insolvency Resolution Process proceedings under Section 7 of the Insolvency and Bankruptcy Code against the Corporate Debtor. The National Company Law Tribunal (NCLT) Mumbai admitted this petition through an order dated April 29, 2023. Subsequently, Sanjay Kakade, the Suspended Director of the Corporate Debtor, filed an appeal challenging the NCLT's decision.

The NCLAT New Delhi Bench dismissed the appeal filed in opposition to the CIRP petition, relying heavily on the Supreme Court's ruling in Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors. The NCLAT observed that raising funds through the Share Subscription-cum-Shareholders Agreement constituted "commercial borrowing" due to its direct impact on the Corporate Debtor's business activities, thereby qualifying as "financial debt" under the Insolvency and Bankruptcy Code.

Furthermore, the Supplementary Share Subscription-Cum-Shareholders Agreement dated July 12, 2008, explicitly confirms the commercial nature of the borrowing. This document states that the company requires "further funding" to achieve the objectives outlined in its business plan, including township approval and execution according to the architects' designs. The use of this specific phrase "further funding" strongly indicates that the transaction has the commercial effect of borrowing.

The NCLAT Bench determined that the phrase "time value of money" inherently contains the concept of the time value of the disbursement. Notably, various clauses within the Agreement and Binding Term Sheet demonstrate that the Financial Creditor's investment was made with consideration for the time value of money. This was further supported by the absence of any consideration for the time value of debentures, evidenced by the removal of the 15 per cent annual coupon rate.

Furthermore, drawing upon the Supreme Court's judgment in Kotak Mahindra Bank Ltd. vs. A. Balakrishnan & Anr, the NCLAT asserted that a Settlement Agreement or Arbitration Award stemming from transactions constituting "financial debt" does not lose its status as "financial debt" merely because it has been crystallised into a Decree. This, in turn, does not deprive the Financial Creditor of the remedy provided under Section 7 of the IBC.

The NCLAT further observed that the Consent Award was not the singular justification for the CIRP petition. Instead, it considered all prior transactions as contributing factors. Therefore, the petition stemmed from the Corporate Debtor's failure to fulfil its obligations under various agreements.

The NCLAT concluded by dismissing the appeal. The NCLAT noted the Corporate Debtor's clear acknowledgement and default of debt, concluding that no justification existed for interfering with the order admitting the Section 7 application.