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NCLT: Advance paid for purchase of shares of Corporate Debtor does not fall under definition of Financial Debt

Cause Title : Jushya Realty Private Limited vs Ninety Properties Private Limited, CP (IB) No.949/MB-IV/2021, National Company Law Tribunal (Mumbai)

Date of Judgment/Order : 03.02.2023

Corum : Mr. Prabhat Kumar (Technical) & Mr. Kishore Vemulapalli (Judicial)

Citied: 

Background

The Financial Creditor agreed to purchase 100% of share capital of the Corporate Debtor held by its Shareholders/promoters for a lumpsum consideration of Rs.4,50,00,000/- and paid an advance payment of Rs. 1,25,00,000 to the Corporate Debtor towards this transaction on 17.12.2014 which was stated as as “advance from debtors” under the head “other current liabilities” by the Corporate Debtor.

When the CD failed to provide documents to complete due diligence, the FC asked the CD for refund but the CD denied all existence of any advance. Thereafter FC filed an application under Section 7 of the Insolvency & Bankruptcy Code, 2016 claiming this advanced payment is in nature of financial debt.

Judgment

From plain reading of the definition of "financial debt" under Section 5(8) of the Code, the NCLT declared that amount of advance paid for purchase of shares of the Corporate Debtor does not fall under the definition of Financial Debt as it was not disbursed against the consideration for the time value of money. It is further noted that such advance also does not fall within the inclusive definition part as contained in clause (a) to (i) and Since, the amount in default is not a financial debt, accordingly, the applicant is not a financial creditor in terms of sec 5(7) of the Code.


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