SC: Payment received for duly issued shares cannot be a financial debt under IBC, 2016

The Hon’ble Supreme Court, on 28th August 2020, in the matter of M/s Radha Exports (India) Pvt. Limited. v. K.P. Jayaram & Anr. pronounced that the payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt under the Insolvency and Bankruptcy Code, 2016.

Allegations of forgery and fraud are not decided in proceedings under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports. (Para 16)

Alternative defences are permissible to contest a claim. (Para 31)

Once a debt or even part thereof becomes due and payable, the resolution process begins. Section 3(11) of the Insolvency and Bankruptcy Code, 2016 defines ‘debt’ as a liability or obligation in respect of a claim and the claim means a right to payment even if it is disputed. The Code gets triggered the moment default is of Rs.1,00,000/- or more. Once the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted, unless it is otherwise incomplete and not in accordance with the rules. The judgment is however, not an authority for the proposition that a petition under Section 7 of the IBC has to be admitted, even if the claim is ex facie barred by limitation. (Para 33)

The definition of ‘financial debt’ in Section 5(8) of the Insolvency and Bankruptcy Code, 2016 makes it clear that ‘financial debt’ means a debt along with interest, if any, disbursed against the consideration for time value of money and would include money raised or borrowed against the payment of interest; amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; receivables sold or discounted other than any receivables sold on non-recourse basis or any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. (Para 43)

The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, 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. (Para 43)

Copy of judgement: Judgement_28-Aug-2020

-Adv. Tushar Kaushik

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