The Learned Counsel-Newsletter

Are Compulsory Convertible Debentures treated as Financial Debt under IBC, 2016? NCLAT clarifies.

Case details: Company Appeal (AT) (CH) (Insolvency) No. 163 of 2023 (IA Nos. 33, 532 & 534/2023)

Court: NCLAT, Chennai

Upon receiving an application under Section 9 of the IBC, 2016 CIRP was initiated against the corporate debtor.The IRP received the claim of the appellant, and categorised the same as Financial Debt, and the Committe of Creditors (CoC) was expanded to include the appellant.

An operational creditor filed an IA before the Ld.NCLT, to re-examine the claim of the appellant and consequent expansion of CoC.

After examining the Debenture Subscription Agreement (DSA), the Ld.NCLT held that the inclusion of the Appellant herein in the list ofFinancial Creditors is impermissible under law.

The decision was appealed before the NCLAT.

The appellants argued that:

1. The Appellant had advanced unsecured loans to the Corporate Debtor in the period 2012 to 2020. Unable to pay the amount to the Appellant, the Corporate Debtor offered to issue Compulsory Convertible Debentures (hereinafter referred to as ‘CCD’) carrying 0% interest. The Appellant had agreed to the issuance of CCDs under DSA executed between the parties.
2. The CCDs were to automatically convert into equity shares at the end of 10 years from the date of allotment, if option not exercised earlier bythe Appellant.
3. Post execution of the DSA, the subject amount continued to be reflected in final accounts under ‘long term borrowings’ under the sub-head of CCD, and not in the capital account as share subscription money.
4. As per the ‘clean slate principle’, on resolution of the Corporate Debtor all liabilities/obligations are wiped clean if the Corporate Debtor is taken over by a resolution applicant and therefore, the Appellant’s claim will be as a Financial Creditor.
5. The mode of discharge of a debt/liability does not change the character of the debt/liability. CCDs, like debentures are an acknowledgement of debt, remains a debt/liability till converted into shares and are distinct from shares. [Commissioner of Wealth Tax, Madras v. Spencer & Co. Ltd. (1973) 4 SCC 204 and RD Goyal v. Reliance Industries Ltd. (2003) 1 SCC 81]

The respondents argued that:

1. There is no right of repayment in respect of the said CCDs. The only option available to the Appellant was to convert the CCD, at any time within the period of 10 years, failing which it shall automatically stand converted to shares.
2. Whether CCDs are financial debts which issue is directly covered in the following judgments given under IBC: M/s IFCI Limited vs Sutanu Sinha, Company Appeal (AT) (CH)(Ins.) No. 108/2023 and M/s IFCI Limited vs. Sutanu Sinha, Civil Appeal No.4929/2023.

NCLAT observed: Supreme Court has clarifed that Commerce has evolved. The documents forming thebase of commerce have also evolved and created a hybridnature of documents. Thus, what was earlier labelled as adebenture, now has hybrid versions such as partlyconvertible debentures, optionally convertible debenturesand Compulsorily Convertible Debentures (CCDs). We maynote that traditionally debentures were treated as a floating security with a covenant for payment on aspecified date.

Similarly it is a settled position that: A Compulsory Convertible Debenture does not postulate any repayment of the principal. The question of security becomes relevant for the purpose of payment of interest onthese debentures and the payment of principal only in theunlikely event of winding up. Therefore, it does not constitute a ‘debenture’ in its classic sense. Even adebenture, which is only convertible at option has beenregarded as a ‘hybrid’ debenture. Any instrument which iscompulsorily convertible into shares is regarded as an“equity” and not a loan or debt.” (emphasis supplied).

NCLAT dismissed the appeal.

Can the National Company Law Tribunal (s) modify the appointed date, while approving a scheme of arrnagement of demerger?

Case details: COMPANY APPEAL (AT) NO.144 OF 2024

Court: NCLAT New Delhi

NCLAT while observing the compliances required for the de-merger, relying on Sterlite Ports Ltd Vs. Regional Director Southern Regional (Company Appeal (AT) (CH) No.99/2024, the Ld. NCLT went ahead to say under rule 11 of NCLT Rules, 2016, it has the power to fix the appointed date to the scheme on amalgamation and as such it changed the appointed date as per the Scheme of Amalgamation viz. to be considered from the date of pronouncement of the order.

Significance of appointed date.

Appointed date can be any date in the middle of the financial year of the transferor/demerged company. If appointed date is any date middle of the financial year, the transferor/demerged company will be filing Income tax returns for the period beginning the 1st day of the financial year till the appointed date. Books of the transferor/demerged company will be prepared for that period also.

The appellants relied on:

Accelyst Solutions Pvt Ltd Vs Freecharge Payment Technologies Pvt Ltd, Company appeal (AT) No.15 of 2021, to limit the powers of the court, as the case lays down that

1. The sanctioning court has to see to it that all the requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by Section 391(1)(a) have been held.
2. The supervisory jurisdiction of theCompany Court can also be culled out from the provisions of Section 392. Of course this sectiondeals with post-sanction supervision. But the said provision itself clearly earmarks the field in which the sanction of the Court operates. The supervisor cannot ever be treated as the author or a policy maker. Consequently the propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros andcons of the scheme arrive at their own reasoned judgment and agree to be bound by suchcompromise or arrangement.

The appellants also relied on: Shree Balaji Cinevision (India) Pvt Ltd V 2009 SCCOnline Guj 12183 - to assert that the Company Court has discretion to make modification in the proposed scheme of compromise, arrangement etc. However,such discretion is required to be exercised for cogent reasons.

The NCLAT, thus held that the appointed date shall be the date as fixed by the scheme.

Subsribe and Stay Updated