NCLAT held that Compulsory Convertible Debentures, carrying the Time Value of Money, qualified as financial debt under Section 5(8) of the IBC.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, led by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed an appeal and held that Compulsory Convertible Debentures (CCDs), carrying an interest component and involving Time Value of Money, constitute ‘financial debt’ under Section 5(8) of the IBC, even if redemption or conversion is contingent. The NCLAT emphasized that, in the present case, the CCDs satisfied the criteria of debt, distinguishing them from instruments that are purely treated as equity.
The appeal challenged the order dated 29.05.2024 passed by the National Company Law Tribunal, New Delhi (Court-II) in IA No.2068 of 2023, which allowed Respondent No.1's claim as a Financial Creditor and restored its position in the Committee of Creditors (CoC). The Corporate Debtor, M/s Taxus Infrastructure and Power Projects Pvt. Ltd., had availed financial assistance, leading to an application under Section 7 of the IBC, admitted on 10.10.2022. Respondent No.1 filed its claim in Form-C based on an Arbitral Award dated 31.12.2021, asserting that the Corporate Debtor was funded through 1,00,000 secured Compulsory Convertible Debentures (CCDs). While the Resolution Professional (RP) initially accepted the claim, objections were raised, and after obtaining a legal opinion, the RP rejected it, contending that the Arbitral Award had not attained finality. Aggrieved, Respondent No.1 sought recognition as a Financial Creditor.
The Adjudicating Authority held that the CCDs carried an interest component, signifying the Time Value of Money, and therefore constituted a financial debt under Section 5(8) of the IBC. It further observed that the Arbitral Award validated the claim, notwithstanding the RP’s pending challenge under Section 34 of the Arbitration Act. The Appellant argued that the CCDs lacked a redemption clause and were compulsorily convertible into equity, thus failing to meet the definition of financial debt. It contended that payments under the Debenture Subscription Agreement (DSA) resembled damages and not financial obligations. Respondent No.1 countered by highlighting the DSA's inclusion of Events of Default and interest provisions, which established the Time Value of Money, supported by the crystallization of the debt through the Arbitral Award.
The NCLAT examined the DSA clauses, definitions of financial debt under Section 5(8)(c) of the IBC, and the concept of debentures under Section 2(30) of the Companies Act, 2013. It observed that the CCDs evidenced debt and involved the Time Value of Money, thus qualifying as financial debt. The Tribunal rejected the Appellant’s reliance on prior Supreme Court rulings in the case of IFCI Limited v. Sutanu Sinha and Others, REEDLAW 2023 SC 11574, that deemed CCDs as equity, noting that the present case’s DSA explicitly incorporated interest and default clauses. The NCLAT also referred to its decision in Shubham Corporation Pvt. Ltd. v. Kotoju Vasudeva Rao and Another, REEDLAW 2024 NCLAT Del 05568, where zero-coupon CCDs were held to lack repayment obligations, unlike the present case.
The Tribunal concluded that the CCDs issued in this matter constituted financial debt under Section 5(8) of the IBC and upheld the Adjudicating Authority’s order, recognizing Respondent No.1 as a Financial Creditor entitled to participate in the CoC. The appeal was dismissed, finding no merit in the Appellant's claims, and no order as to costs was passed.
Mr. Nakul Sachdeva, Mr. Sagar Arora, Mr. Abhinandan Sharma and Mr. Karundeep Singh, Advocates represented the Appellant.
Mr. Akshay Sapre, Mr. Abhijeet Swaroop and Ms. Shivani Karmakar, Advocates appeared for Respondent No. 1.
Mr. I.P.S. Oberoi, Advocate appeared for Respondent No. 2.
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