NCLAT held that the Compulsorily Convertible Debentures(CCDs), which do not carry any obligation for repayment but are mandatorily convertible into equity shares, cannot be treated as 'Financial Debt'.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Ajai Das Mehrotra (Technical Member) was hearing an appeal and held that the Compulsorily Convertible Debentures (CCDs), which do not carry any obligation for repayment but are mandatorily convertible into equity shares, cannot be treated as "financial debt" under the Insolvency and Bankruptcy Code (IBC).
The Appellate Tribunal observed that the nature of CCDs, as per the Debenture Subscription Agreement (DSA), constitutes equity rather than debt due to the lack of a repayment obligation. This decision was guided by the Supreme Court's precedent in the IFCI Limited v. Sutanu Sinha case, affirming that CCDs, which are intended to convert into equity without an option for repayment, should be classified as equity instruments and not financial debt.
The NCLAT judgment involved an appeal against an order from the NCLT, Hyderabad, regarding the inclusion of Shubham Corporation Pvt. Ltd. as a financial creditor in the Committee of Creditors (CoC) during the Corporate Insolvency Resolution Process (CIRP) for Navayuga Infotech Pvt. Ltd. The core issue was whether Compulsorily Convertible Debentures (CCDs) held by Shubham Corporation could be classified as financial debt.
The appellant had initially provided unsecured loans to the Corporate Debtor, later converted into CCDs with a 0% interest rate, as per a Debenture Subscription Agreement (DSA). The NCLT had rejected the inclusion of the Appellant as a financial creditor, stating that CCDs, by their nature, should be treated as equity rather than debt, given their compulsory conversion into equity shares with no repayment obligation.
The NCLAT upheld the NCLT's decision, referencing the Supreme Court’s judgment in M/s IFCI Limited vs Sutanu Sinha, which clarified that CCDs, lacking a repayment clause and mandating conversion into equity, should be treated as equity instruments, not financial debt. Consequently, the Appellant's claim as a financial creditor was deemed impermissible, and their inclusion in the CoC was rejected.
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