Share Value Consideration Not Recognized as Financial Debt Under IBC, Petition Fails to Satisfy Rs. 1 Crore Minimum Default Requirement
In a recent ruling, the National Company Law Tribunal (NCLT) Indore Bench dismissed an insolvency petition filed by financial creditors Gautam Rai Rally and Priya Rally against Manasavi Infracon Private Limited. The Tribunal concluded that the petition did not meet the mandatory financial debt threshold of Rs. 1 crore as stipulated under Section 4 of the Insolvency and Bankruptcy Code (IBC), 2016.
The financial creditors had sought to initiate a Corporate Insolvency Resolution Process (CIRP) against the corporate debtor, claiming an outstanding debt of Rs. 2.33 crore, which included unsecured loans and share value consideration. However, the Tribunal held that the share value consideration did not qualify as a "financial debt" under Section 5(8) of the IBC, as it lacked the disbursement against the time value of money and was merely equity capital, not a debt obligation.
The petitioners argued that the unsecured loans, disbursed in the financial year 2016-17, along with a 2021 oral agreement for share sale at a market value of Rs. 3.43 crore, constituted a valid financial debt. However, the NCLT found that the alleged share consideration was a personal obligation between the applicants and individual buyers and did not involve the corporate debtor. Consequently, the claim was reduced to the unsecured loan portion of Rs. 1.17 crore, which fell short of the requisite threshold.
The Tribunal further noted that the corporate debtor had already made payments totaling Rs. 1.14 crore towards the unsecured loan, leaving only Rs. 3.15 lakh unpaid. Given this, the Tribunal ruled that the petition could not be maintained under the IBC, as the outstanding debt was below the Rs. 1 crore threshold.
This decision underscores the NCLT's adherence to the statutory requirements of the IBC and reinforces that share value considerations cannot be used to satisfy financial debt obligations under the Code.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Petition under Section 7 of the IBC dismissed due to failure to meet the minimum threshold of financial debt mandated under Section 4 of the Code, as share value consideration does not qualify as "financial debt".
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 4, 5(8), 7
