Compulsory Convertible Debentures Having No Obligation Of Repayment To Be Treated As Financial Debt: NCLAT Chennai
The National Company Law Appellate Tribunal, Chennai Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Shri Ajai Das Mehrotra (Technical Member), while adjudicating an application under Section 9 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Shubham Corporation Private Limited vs Kotoju Vasudeva Rao has held that the Compulsory Convertible Debentures having...
The National Company Law Appellate Tribunal, Chennai Bench, comprising Justice Rakesh Kumar Jain (Judicial Member) and Shri Ajai Das Mehrotra (Technical Member), while adjudicating an application under Section 9 of Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) in Shubham Corporation Private Limited vs Kotoju Vasudeva Rao has held that the Compulsory Convertible Debentures having no obligation of repayment should be treated as Financial Debt under IBC.
Background Facts
Vajra IOT Private Limited (“Operational Creditor”/ “Respondent”) initiated CIRP against M/s Navayuga Infotech Private Limited (“Corporate Debtor”). A public announcement was made by Mr. Kotoju Vasudeva Rao (“Interim Resolution Professional”) inviting claims from the Creditors. One of the claims received was by Shubham Corporation Private Limited (“Appellant”). The claim was approved as Financial Debt and the Appellant was included in the List of Financial Creditors and reconstituted the Committee of Creditors (CoC) to bring on record the updated summary of claims. The counter claim was filed by Respondent to re-examine the claim of the Appellant.
It was argued by the Appellant that as per Debenture Subscription Agreement (DSA), debentures were issued to them and they were to automatically get converted at the end of 10 years. Further, it was contended that only a debenture certificate was issued to them and no rights of shareholder were granted. It was argued that the Appellant's unmatured CCDs must be treated as “Financial Debt”.
It was contended by the Respondent that the Appellant herein cannot be included in the list of Financial Creditors. It was argued that the Appellant is only a CCD holder, whose only remedy is redemption of the said CCD.
NCLAT Verdict
It was observed by NCLT that the inclusion of the Appellant herein in the list of Financial Creditors is impermissible under law and the Appellant was not accepted as Financial Creditor. However, NCLAT observed that as per DSA, the debentures issued to the Appellant were compulsorily convertible into equity either before or automatically at the end of 10 years. There was no liability or obligation to repay the debt. It relied on M/s IFCI Limited vs Sutanu Sinha, Company Appeal (AT) (CH) (Ins.) No. 108/2023 wherein the Supreme Court treated CCD as equity. It was observed that “A convertible debenture can be regarded as “debt” or “equity” based on the test of liability for repayment. If the terms of convertible debentures provide for repayment of borrower's principal amount at any time, it can be treated as a debt instrument but if it compulsorily leads to conversion into equity shares, it is nothing but an equity instrument.”
Therefore, it was held that the compulsorily convertible debentures held by the Appellant are equity instrument.
With the aforesaid observation, the appeal was dismissed.
Case: Shubham Corporation Private Limited vs Kotoju Vasudeva Rao
Case No. Company Appeal (AT) (Insolvency) No. 163 of 2023
Order Dated 22.05.2024
Counsels for the Appellant Mr. Sourav Agarwal, AdvocateFor Mr. Sandeep Kumar Ambalavanan, Advocate
Counsels for the Respondent Mr. VVSN Raju, Advocate, For R1 ,Mr. Avinash Krishnan Ravi, Advocate, For R2
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