[Tejas Venkatesh is a Final Year student at Jindal Global Law School]
On 26 November 2025, the principal bench of the National Company Law Appellate Tribunal (NCLAT) in New Delhi dismissed an appeal arising from an order of the National Company Law Tribunal (NCLT). The order of the NCLT rejected an application by Muralidhar Vincom Pvt. Ltd. to initiate corporate insolvency resolution process (CIRP) against Skoda (India) Pvt. Ltd. in the capacity of a financial creditor under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The NCLAT ruled that any funds disbursed as share application money (SAM) by a creditor do not qualify as “financial debt” under section 5(8) of the IBC. As a result, such creditors cannot initiate proceedings under section 7 of the IBC, as they do not fall within the definition of financial creditors. This post argues that while the ruling reinforces the NCLAT’s previous decision in Pramod Sharma v. Karanaya HeartCare Pvt. Ltd., it fails to provide sound reasoning to support its conclusion. Moreover, the judgment does not engage with recent Supreme Court rulings that have expanded the interpretation of section 5(8) of the IBC—an omission that could have influenced the reasoning in the judgment.
Facts of the Case
The petition concerns the application for initiation of CIRP by Murlidhar Vincom Private Limited against Skoda (India) Private Limited in accordance with section 7 of the IBC for default in repayment of debt amounting to INR 3.58 crores (which includes INR 1.71 crores of the principal amount and INR 1.86 crores in interest). The financial creditor (i.e., Murlidhar), initially invested a sum of INR 6.9 Lakhs in lieu of 3000 equity shares in the share capital of the corporate debtor (i.e., Skoda) in 2009, on the request of the corporate debtor.
In 2011, a further sum amounting to INR 1.32 crores was invested by the financial creditor as share application money at the request of the corporate debtor for allotment of equity shares. However, no equity shares were allotted against the deposit. Meanwhile, the proposal to increase the share capital of the corporate debtor was rejected by its board and a loan proposal from another entity was accepted by the board. Consequently, an amount of INR 40 Lakhs was refunded to the financial creditor. However, the corporate debtor failed to refund the balance amount of INR 92 Lakhs of the application money owing to a liquidity crunch.
Having conveyed its inability to refund the balance to the financial creditor, the corporate debtor proposed that it would allot the shares to the creditor on the condition that it provides additional funds to meet the liquidity needs of the corporate debtor. Thus, the creditor provided an additional sum of INR 74 lakhs between 2012 and 2014 in several tranches to meet the working capital needs of the corporate debtor. Further, with the introduction of the new Companies Act in 2013, section 42 was added which provided for strict timelines for receipt of share application money and its allotment to the shareholders failing which interest will be accrued at the rate of 12% per annum on the outstanding application money. After repeated attempts to recover the money and after sending a demand notice in July 2023, the financial creditor decided to apply to the NCLT.
Holdings of the NCLT and NCLAT
The NCLT paid no heed to arguments pleaded by both sides and summarily quoted the three-judge bench decision of the NCLAT in Pramod Sharma, wherein the NCLAT held that any amount given as share application money cannot be treated to be a financial debt to trigger the CIRP under section 7 of IBC. The rationale provided was that the share application money did not constitute a debt under section 5(8) of the IBC as there was no “disbursement against the consideration for the time value of money”, a phrase which will be analysed later in the post.
On appeal to the NCLAT, the appellate authority engaged in a detailed analysis of the applicable provisions of the Companies Act, 2013, the IBC, and the Companies (Acceptance of Deposits) Rules 2014 (CADR rules). The bench noted that the introduction of section 42(6) of the Companies Act, 2013 mandated strict deadlines for receipt and allotment of share application money by companies. In terms of the provision, a company has to allot securities within 60 days of receipt of application money failing which the amount has to be refunded within 15 days after the expiry of the 60-day window. Refusal to do so would attract an interest of 12% on the un-refunded amount. A further consequence is that the un-refunded amount would constitute a “deposit” under rule 2(1)(c)(vii) of the CADR Rules and, consequently, a financial debt under the provision of section 5(8) of the IBC.
Having deduced the legal chronology, the NCLAT went on a tangent to reject the appeal noting that the provisions of the Act and rules would only come into play when the proper procedure for the offer of shares has been fulfilled under section 42. In the present case, the bench noted that a private placement offer letter was not issued in line with the procedure under section 42. Failing such an offer, the money received would not constitute a subscription amount for the private placement and would not attract the provisions of the rules or the IBC.
Analysis
The reliance on the three-judge bench ruling of the NCLAT in Pramod Sharma ensures consistency in the tribunal’s approach to treating share application money under the IBC. However, the varied and insubstantial reasoning employed by the appellate tribunal to arrive at the same conclusion as the NCLT raises several concerns.
The NCLAT swiftly dismissed the appeal, citing that the private placement procedure outlined in section 42 of the Companies Act was not adhered to. However, it failed to elaborate on its position regarding a scenario where the private placement complied with the procedure under section 42. Failing to clarify the same leaves the door open to conclusions otherwise. The alternative interpretation and conclusion can be drawn under section 9 of the IBC by treating these creditors as operational creditors. This is because shares are considered “goods” under section 2(7) of the Sale of Goods Act 1930. Thereby, any claim relating to the provision of goods becomes an “operational debt” under section 2(20) of the IBC and such creditor becomes an “operational creditor” under section 2(21) of the IBC. Given the alternative avenue available to such creditors under section 9, the adjudicating authority ought to have clarified its stance vis-à-vis applications under section 7 of the IBC.
Secondly, the NCLAT ought to have considered whether an interest payment obligation flowing from a breach of statutory provisions would satisfy the requirements for being a “financial debt” under the IBC. Further, according to the recent decision of the NCLAT in Sanjay D Kakade v. HDFC Ventures Trustee Company Ltd, and the Supreme Court’s ruling in Global Credit Capital Limited v. Sach Marketing Pvt. Ltd., the determination of whether a transaction involves a disbursement against the time value of debt has to be inferred while keeping the surrounding circumstances, intent and construct of the contract in mind.
In the present case, while the initial intent of the disbursement in the form of the share application money was solely to gain a stake in the company in the form of equity share allotment, the changed circumstances and terms of the contract amended the nature of the transaction. In my view, the subsequent disbursements between 2012 and 2014, amounting to INR 74 lakhs, were intended not merely as share application money but also as an interim loan to the company to meet its working capital needs. In other words, the intent was not merely to get shares allotted but to the effect of having a preference in such allotment if the immediate debt requirement of Skoda was serviced by the creditor. Therefore, there is a “time value” benefit that Muralidhar Vincom Pvt. Ltd. stood to gain by payment of the additional share application money without any certainty of equity share allotment. The NCLAT fails to consider this dynamic in its ruling.
Conclusion
The NCLAT’s ruling underscores a strict view of what counts as “financial debt” under the IBC, prioritizing legal consistency over the complex realities of business dealings. While it sticks to a familiar path, the decision dodges bigger questions of whether following proper procedures could have changed the result. Broader judicial trends in the recent past push for a more flexible approach, yet the NCLAT stays rigid and ambiguous in its ruling. This leaves such creditors caught in a gray area regarding the right avenue for filing their claims. In the end, the judgment appears to be a missed opportunity to bridge the gap between the IBC’s framework and the fluid nature of commercial relationships.
– Tejas Venkatesh
