Raising Money Through Optional Convertible Debentures Can Be Considered As Financial Debt U/S 5(8): NCLAT
Mohd Malik Chauhan
9 Dec 2024 7:00 PM IST
The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Barun Mitra (Technical Member) and Arun Baroka (Technical Member) has held that raising money by issuance of convertible debentures with an option to be later converted into equity shares can be classified as a financial debt if a default is committed by the corporate debtor. Brief Facts Financial assistance...
The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member), Barun Mitra (Technical Member) and Arun Baroka (Technical Member) has held that raising money by issuance of convertible debentures with an option to be later converted into equity shares can be classified as a financial debt if a default is committed by the corporate debtor.
Brief Facts
Financial assistance was provided by the appellant to the corporate debtor. An application was filed under section 7 of the code by the appellant when the corporate debtor defaulted in repaying the amount. The Adjudicating Authority admitted the corporate debtor into insolvency on October 10, 2022. The Respondent filed its claims before the RP on basis of the an arbitral award, Debenture Subscription Agreement (DSA) and related documents.
The status of the Respondent by the RP as a financial creditor was initially accepted but later rejected on the ground that the award had not attained finality. An IA was filed by the Respondent against this decision of the RP and the Adjudicating Authority after hearing the parties, disposed of the Application, accepting the claim of Respondent No.1 as Financial Creditor. Against this order of the AA, the present appeal has been filed.
The appellant submitted that there was no provision for redemption of the Compulsory Convertible Debenture (“CCD”) under the DSA. The transaction of conversion into equity shares was not a 'financial debt'. The DSA does not support any mechanism for the redemption of the CCDs and it only provided for compulsory conversion into equity. It further argued that even if the failure to redeem the CCD was considered as an event of default, it is in the form of damages or penalty for breach of terms of DSA and the said payment in the form of penalty, in no manner, can be construed as a financial debt in terms of Section 5, sub-section (8).
In response, it is the case of the respondent that debenture is a 'financial debt' as defined under Section 5, sub-section (8) of the IBC. The CD has obtained financial assistance from Respondent No.1 under the DSA, which is a mode of taking money.
It was also contended that transaction contained a financial debt, since by debenture, financial assistance was extended by Respondent No.1 to the CD by DSA dated 16.10.2012, which was entered between the parties. It further argued that the very definition of CCD as contained in Clause-1, mentions that the debenture are compulsory convertible debentures into equity shares of the Company at the option of the Investor as per the terms of DSA. When the option was given to the Investor, the true nature of the transaction is treated to be optionally convertible debenture.
Observations:
The tribunal observed that by issuing debenture, the Issuer has raised money for its capital and on plain reading of definition of 'financial debt', the debentures are fully covered under Section 5, sub-section (8) (c).
It further noted that various clauses of DSA indicate that Investor has option to request for conversion of CCD into equity, which option was to be exercised within a period of 65 months from the date of allotment. Respondent No.1 has also by the letter noticed above, asked for payment of amount with interest. Event of default occurred, since even after the letter issued by Respondent No.1 neither payment was made nor debentures were converted into equity shares, which entitled Respondent No.1 to claim 24% interest per annum as per Clause 8.1.
“When we look into the relevant clauses of DSA it clearly proves that the transaction had a time value of money and clearly comes within the meaning of 'financial debt' as defined in Section 5, subsection (8)” the tribunal observed.
The tribunal while noting the judgment of the Supreme Court in IFCI Ltd. vs. Sutanu Sinha and Ors. (2023) and NCLAT Chennai in M/s. IFCI Ltd. vs. Sutanu Sinha and Anr. observed that it is clear that for finding nature of transaction, the documents entered between the parties are the best guide to find out nature of debt, as to whether there was time value of money or not.
“When we look into the clauses of DSA pertaining to the present case, we are of the considered opinion that the transaction, which was entered between the parties has time value of money and the redemption of debenture was also contemplated and conversion of debenture was operational at the option of Investor. The Issuer has raised the amount by issuance of debenture, which was clearly a 'financial debt' within the meaning of Section 5, subsection (8)” the tribunal observed.
Finally, the tribunal opined that there is no ground to interfere with the order of the Adjudicating Authority, allowing the Application of Respondent No.1. Accordingly, the present appeal was dismissed.
Case Title: Indian Renewable Energy Development Agency Limited Versus Waaree Energies Limited and Anr.
Case Number: Company Appeal (AT) (Insolvency) No.1380 of 2024
Judgment Date: 6/12/2024
