ACPC ENTERPRISES Vs. AFFINITY BEAUTY SALON PVT LTD

JUDGEMENT

(1.) M/S ACPC Enterprises, a partnership firm has approached this Tribunal u/s 7 of the Insolvency and Bankruptcy Code 2016 (for brevity 'the Code') with a prayer to initiate Corporate Insolvency Resolution Process in the matter of Affinity Beauty Salon Pvt. Ltd. -Respondent. The Petitioner claims to be a 'Financial Creditor' and describe the Affinity Beauty Salon Pvt. Ltd. -Respondent as "Corporate Debtor".

(2.) Before we embark upon the legal controversy raised in this petition few facts may be noticed. The case of the petitioner is that the parties have entered into a Share Subscription Agreement (for brevity 'SSA') on 4.6,2016 envisaging transfer of 2,50,000 shares which are known as Cumulative Convertible Redeemable Preference shares ((for brevity 'CCRPS') in favour of the petitioner against the payment of sum of Rs.2,50,00,000/-. The amount of consideration was duly received by the 'Corporate Debtor' on 13.6.2016 and share certificate with distinctive share Nos.500001 to 750000 being 8% CCRPS were issued in favour of the petitioner-Tinancial Creditor'. The 'Corporate Debtor' later alleged that the CCRPS issued were not registered with the ROC in favour of petitioner- Financial Creditor on the ground it was an unregistered partnership firm. The petitioner later on got itself registered with the Registrar of Firms, Noida. The period of 60 days from the date of receipt of money by the Corporate Debtor for subscription expired on 14.8.2016. It is alleged that discussion between the parties concerning the issuance of CCRPS to the Corporate Debtor -respondent have failed as 'Corporate Debtor' did not honour his promise to issue the CCRPS. Eventually on 26.4.2017 Financial Creditor issued a letter cum notice to the Corporate Debtor that if the CCRPS were not dully issued and registered with the ROC within seven days then the money paid by the Financial Creditor under the SSA and the 'Corporate Debtor' was be treated as liable to respect the claim which is due along with interest. After the receipt of the aforesaid letter cum notice the Corporate Debtor -respondent sold off his profit making business of Affinity Express Franchise on 30.5.2017. Vide letter dated 1.8.2017 address to LLP Incorporated by the partners of the Corporate Debtor -respondent offer to issue CCRPS which now stand drastically devalued. It is thus claimed that shares have not been issued and share subscription money become a debt and payable with interest therefore Corporate Insolvency resolution process deserved to be initiated.

(3.) Respondent have opposed the claim made by the petitioner -Financial Creditor asserting that the petition u/s 7 of the Code read with rule 4 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 the petition is not maintainable. The execution of the SSA dated 4.6.2016 has been admitted which provide for issuance and allotment of 2,50,000 CCRPS. It is also conceded that clause 5.1 of the SSA provides for refund of the entire subscription and guaranteed return in accordance with the provisions of clause 5.2(a) to the investors like the petitioner within a period of five years and which has to be regarded as tenure of the investor shares. After five years the petitioner shall be compulsorily bound to choose whether to exit or continue to hold equity shareholding. As per clause 5.8 no exit was permitted before the expiry of 30 months from the date of the SSA i.e. 4.6.2016. The pleaded case of the respondent is that before the expiry of 30 months as per clause 5.8 of the SSA, the petitioner -Financial Creditor cannot seek redemption of CCRPS and the only remedy is to seek refund of the money paid in lieu of allotment of shares. It is further pleaded that the amount paid for the purposes of allotment of shares cannot be considered as an amount paid by way of loan or it involved any kind of borrowing. The amount was paid for specific purpose for allotment of shares and could be returned if the shares were not allotted and therefore such an amount cannot be treated as receipt of loan, deposit or borrowing nor it amounts to a debt within the meaning of section 3(11) of the Code. The case of the respondent- 'Corporate Debtor' is that no default has taken place. The share certificate dated 7.6.2016 were issued by the respondent on the terms and conditions stipulated in the SSA. The ROC refused to accept the transfer of shares in favour of petitioner-'Financial Creditor' on the ground that it was an unregistered partnership firm. The terms of SSA did not provide that share certificate were to be allotted by the 'Corporate Debtor' in favour of the individual partners of the petitioner firm and nor the partnership firm has to exist on the date of issuance of share certificate dated 7.6.2016. There are details of various emails depicted in paras 7 to 11 which are not necessary to be referred in details. The pleaded case of the Corporate Debtor is that the money paid by the petitioner 'Financial Creditor' to the respondent 'Corporate Debtor' for allotment of shares in no manner would amount to a loan or deposit and reliance has been placed on various judgments decided under the Income Tax Act.