NCLAT Rules, Issue Of Share Application Money As Financial Debt Once Decided In Earlier Proceedings Can't Be Reagitated In Subsequent Plea U/S 7 Of IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), has held that once the question of whether share application money constitutes a financial debt has been decided in earlier proceedings, the same issue cannot be reopened or reargued in a subsequent application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal observed that such re-litigation is barred by the doctrine of res judicata, which prevents parties from challenging matters that have already attained finality.
The appeal was filed by Ajit Kumar Gupta, a suspended director of Uniexcel Developers Pvt. Ltd. (Corporate Debtor), challenging the order dated 12 December 2023 passed by the NCLT, New Delhi Bench, Court-II, which admitted a Section 7 application filed by Uniexcel Ltd., a financial creditor.
Background of the Case:
Uniexcel Developers Pvt. Ltd., incorporated in 2007, was engaged in setting up an IT sector project on land allotted by the Noida Authority. The financial creditor, Uniexcel Ltd., registered in the British Virgin Islands, had remitted US $1,24,000 on May 5, 2008, and another US $1,42,000 on September 22, 2008, to the corporate debtor. The remittance was intended for allotment of shares under a private placement arrangement. However, due to disputes with the Noida Authority, the project did not proceed, and the allotment of shares was put on hold at the creditor’s request. Subsequently, in 2015, the financial creditor sought a refund of the remitted amount. Though the corporate debtor expressed willingness to refund, the amount remained unpaid. The financial creditor then filed a Section 7 IBC application in 2019 (C.P. (IB) No. 403/ND/2019) before the NCLT. The Tribunal, in that case, framed three issues—(i) limitation, (ii) whether the share application money was a financial debt, and (iii) whether default occurred.
In its order dated 25 July 2019, the NCLT held that the share application money amounted to a financial debt under Section 5(8) of the IBC, since the non-allotment of shares within the statutory time made the funds refundable and thus carried the character of a deposit attracting the time value of money. However, it dismissed the application on the ground that default had not been proved, granting the financial creditor liberty to revive the petition if the refund was not made. The corporate debtor challenged only the portion granting liberty to revive, by filing Company Appeal (AT) (Insolvency) No. 962 of 2019 before the NCLAT. By its order dated 26 November 2019, the Appellate Tribunal set aside the liberty clause but did not interfere with the NCLT’s finding that the remitted amount constituted a financial debt. The NCLAT, however, granted the financial creditor liberty to file a fresh Section 7 application, if so advised. When the refund was still not made, the financial creditor filed a fresh Section 7 application (C.P. (IB) No. 21/ND/2021), which the NCLT admitted on 12 December 2023, prompting the suspended director to file the present appeal.
Contentions of the Parties:
The appellant argued that the remitted amount was purely share application money and could not be categorized as a financial debt. He relied on the decisions of the NCLAT in Pramod Sharma v. Karanaya Healthcare Pvt. Ltd. and Murlidhar Vincom Pvt. Ltd. v. Skoda (India) Pvt. Ltd., contending that unless the transaction involved statutory compliance under Section 42(6) of the Companies Act, 2013, it could not be treated as a financial debt. The appellant further maintained that no default had occurred and that insolvency proceedings were unjustified.
In response, the financial creditor contended that the question of whether the remittance constituted a financial debt had already been adjudicated and settled in the 2019 proceedings, which had reached finality. The finding of the NCLT, affirmed by the NCLAT in 2019, operated as res judicata, preventing the appellant from re-agitating the same issue. It was further submitted that despite repeated requests for refund, the corporate debtor had failed to pay, clearly establishing default within the meaning of the IBC.
Findings and Observations:
The NCLAT observed that in the 2019 proceedings, the NCLT had unequivocally held that the remitted amounts were financial debts, and this finding was neither challenged nor overturned on appeal. Therefore, the issue had attained finality and could not be reopened in subsequent proceedings. Citing the Supreme Court’s ruling in Neelima Srivastava v. State of Uttar Pradesh & Ors. [(2021) 17 SCC 693], the Appellate Tribunal emphasized that once a judicial finding between the same parties has become final, it cannot be collaterally attacked or re-litigated. The Tribunal quoted the Supreme Court’s principle that “reopening concluded judgments amounts to an abuse of process and has far-reaching adverse effects on the administration of justice.”
The NCLAT also noted that the financial creditor had made renewed requests for refund through a letter dated 6 December 2019, but the corporate debtor failed to refund the amount, thus constituting a clear default. It further held that the debtor’s prior assurance to refund, without any subsequent payment, demonstrated a lack of bona fides.
Concluding that the earlier finding regarding the financial debt was final and binding between the parties, the Appellate Tribunal held that the appellant could not reargue the same issue in a new proceeding under Section 7 of the IBC. The Tribunal affirmed that the NCLT was correct in admitting the financial creditor’s application and initiating CIRP against the corporate debtor. The appeal was accordingly dismissed, and the interim stay was vacated. The Tribunal directed that the amount deposited by the appellant pursuant to the interim order be refunded. However, it granted liberty to the appellant to remit the total outstanding amount of US $2,66,000 to the financial creditor and observed that the financial creditor may then consider withdrawal of CIRP under Section 12-A of the IBC.
Thus, the NCLAT reaffirmed the principle that once the nature of a debt has been judicially determined, the same issue cannot be reopened, as doing so violates the doctrine of res judicata and the principle of finality of litigation.
Appearance
For Appellant: Mr. Abhijeet Sinha, Sr. Advocate with Mr. Saurabh Kalia, Mr. Ateendra Saumya Singh, Ms. Heena Kochar, Ms. Tanu, Mr. Anuj Tiwari, Mr. Kaanchi Ahuja and Ms. Palak Kalra, Advocates.
For Respondents: Mr. Gaurav Mitra, Mr. Rachit Batra, Mr. Rachit Khandelwal and Ms. Isha Bhalla, Advocates
Cause Title: Ajit Kumar Gupta Versus Uniexcel Ltd. & Anr.
Case No: Company Appeal (AT) (Insolvency) No. 1686 of 2023
Coram: Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member)
