Mr. Katepalli Venkateswara Rao. v. M/s. Bio Green Papers Ltd. (CP (IB) No.97/7/HDB/2022)

The present petition has been filed by the Petitioner under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in order to initiate the Corporate Insolvency Resolution Process (“CIRP”) and appoint an Interim Resolution Professional (“IRP”) against the Corporate Debtor (“CD”) for failing to pay back the dues.

The facts of the present matter are such that the Petitioner involved in the business of rendering financial services entered into a Memorandum of Understanding (“MoU”) dated April 2, 2018 for the allotment of securities in the form of convertible/redeemable preference shares to the CD involved in the business of manufacturing and dealing of paper of all kinds in lieu of an investment amount of INR 1,00,00,000 (Rupees One Crore Only). However, the CD failed to allot shares or repay the invested amount along with the interest of 18% (eighteen percent) from the date of investment. The Petitioner approached the CD various times for the allotment of the securities, but the CD ignored such requests.

In light of this default, the Petitioner approached the National Company Law Tribunal, Hyderabad (“NCLT”) with a petition to initiate CIRP in accordance with Section 7 of IBC.

Whether or not the allotment money so invested by the Petitioner is a financial debt under Section 7 of IBC.

It is the case of the Petitioner that in accordance with the MoU the CD had agreed to allot convertible/redeemable preference shares in consideration of an investment amount of INR 1,00,00,000 (Rupees One Crore Only) within a period of one year from the date of the receipt of the investment amount. This investment amount was primarily for the purpose of revival and rehabilitation of machinery and the working capital needs of the CD. Additionally, the MoU also states that there will be an interest of 18% (eighteen percent) per annum on the investment amount of INR 1,00,00,000 (Rupees One Crore Only) if the CD fails to allot shares within the stipulated time of 1 (one) year.. Thus, the total amount owed to the Petitioner stands at INR 1,64,65,891 (Rupees One Crore Sixty-Four Lakhs Sixty-Five Thousand Eight Hundred and Ninety-One Only).

The CD in its counter has stated that the Petitioner has already approached itself whereby an oral understanding between the two parties to pay the said amount devoid of the interest amount in 12 (twelve) quarterly installments was entered upon in June 2021. Thus, the CD contends that the Petitioner has filed this petition contrary to the oral understanding and in order to fulfill an ulterior motive to recover the amount which goes against the object of IBC.

The Hon’ble NCLT, in this case, has admitted the Section 7 petition on the ground that the allotment money i.e., the investment amount has been converted into a financial debt. The requisite conditions of a financial debt under Section 5(8) of IBC are that there should be a debt along with interest, disbursed against the consideration for time value of money.

The Court stated that “since the said debt is not repaid the default in repayment of the same stands established. Therefore, as existence of debt and its default has been established the petition is liable to be allowed.”

The Hon’ble NCLT Hyderabad in this case has taken a different stance as compared to NCLT Delhi. In the case of M/s. Kisten Realtech Pvt. Ltd. v. M/s. Aerens Jai Realty Pvt. Ltd.​¹ a similar MoU was entered into between the Petitioner and the CD for the sale and purchase of equity shares. Pursuant to the transfer of shares, the CD failed to pay the sale consideration. In order to determine the nature of debt, NCLT Delhi conjointly read the definition of Operational Debt under Section 5(21) of IBC and Goods under Section 2(7) of the Sales of Goods Act, 1930 (“SOGA”) to conclude that shares are within the ambit of “goods” thus, the nature of the debt was operational and a Section 9 petition under IBC was admitted. The Hon’ble NCLT also cited the judgement of Delhi. In the case of Samkar Financial Services Private Limited v. Votary Trading Private Limited​² where the NCLT Kolkata specifically stated that shares are goods and a claim with respect to such shares will be operational in nature.

Thus, with the present stance of NCLT Hyderabad, there persists an uncertainty regarding the nature of debt with respect to shares and securities.

1.IB-867(ND)/2022.
2.CP (IB) 735/KB/2019.