2020 (9) TMI 506 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Preference Share holding claiming as financial creditor - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - HELD THAT - Relying upon the rights and obligations between the parties had been recorded under a subscription agreement dated 28th February, 2013 the only question that requires to be considered is whether the applicant who is the holder of preference shares in the CD company would be a financial creditor within the meaning of section 5(7) of the Code. To satisfy that the applicant is a financial creditor, burden is heavy on the side of the applicant to prove that the debt allegedly due and payable by the CD would falls under the purview of Financial Debt as defined under section 5(8) of the Code. At the outset, we would say that the applicant has miserably failed to convince us that the debt allegedly due and payable is a financial debt as claimed by the applicant. The Corporate Debtor had issued a cheque to the Financial Creditor bearing No. 234327 for an amount of ₹ 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th April, 2016 but was returned as dishonored . This is an application alleging default in performing the part of obligation on the side of the CD as per the terms of subscription agreement and according to the applicant the CD has defaulted the terms as on March 31,2013 and has been continuously defaulting since the said date. What is defaulted is not repayment of debt, but not redeeming the preferential shares at the option exercised on the side of the applicant. Admittedly, the applicant is a holder of preference shares in the CD Company. The applicant's claim in no way falls under any of the Clauses of Sub Section (8) of Section 5 of the Code and therefore, what is claimed is not a financial debt under section 5(8) of the Code. It is also true that as per the existing provisions of the Company law and the judgments on the issue, a holder of Redeemable Preference shares cannot sue the Company for redeeming its shares except out of the profit of the Company or out of the proceeds of a fresh issue of shares made for the purposes of such redemption. On a combined reading of section 55 of the Companies Act, 2013 read with Rule 9 of the Companies (Share Capital) Rules, 2014 and Section 5(7) (8) of the Code, a preference share holder cannot be classified as a financial creditor falling under section 5(7) of the Code and the applicant's claim is not a financial debt under section 5(8) of the Code. The application is not maintainable under section 7 of the Code and is liable to be dismissed - Application dismissed.

Summary

Issues Involved:
1. Whether the applicant is a "Financial Creditor" under the Insolvency & Bankruptcy Code, 2016.
2. Whether the claim under the subscription agreement qualifies as a "Financial Debt."
3. The impact of arbitration proceedings initiated by the Financial Creditor.
4. The sufficiency of stamping on the Subscription Agreement and Non-Disposal Undertaking.

Issue-wise Detailed Analysis:

1. Whether the applicant is a "Financial Creditor" under the Insolvency & Bankruptcy Code, 2016:
The Financial Creditor argued that they had disbursed ?40 crores to the Corporate Debtor by subscribing to cumulative non-convertible redeemable preference shares, with an obligation of repayment, thus qualifying as a "Financial Creditor." The Corporate Debtor contended that preference shareholders are not creditors but owners of the company, and their claims do not constitute a financial debt. The Tribunal concluded that the applicant, being a holder of redeemable preference shares, could not be classified as a "Financial Creditor" under Section 5(7) of the Insolvency & Bankruptcy Code (IBC), as the preference shares remain shares and can only be redeemed out of the profits of the company or through a fresh issue of shares, not as a debt.

2. Whether the claim under the subscription agreement qualifies as a "Financial Debt":
The Financial Creditor maintained that the transaction under the Subscription Agreement involved the payment of redemption premium and dividend, which constituted a financial debt under Section 5(8) of the IBC. The Corporate Debtor argued that the preference shares are part of the capital and not a debt. The Tribunal noted that the applicant's claim did not fall under any clauses of Section 5(8) of the IBC, as redemption of preference shares is excluded from its purview. The Tribunal emphasized that preference shares cannot be classified as a liability unless redeemed and concluded that the applicant's claim did not qualify as a financial debt.

3. The impact of arbitration proceedings initiated by the Financial Creditor:
The Corporate Debtor argued that the Financial Creditor had already initiated arbitration proceedings under the Arbitration and Conciliation Act, 1996, and thus, the current application was not maintainable. The Tribunal did not delve deeply into this issue, as the primary determination was based on whether the applicant qualified as a Financial Creditor and whether the claim constituted a financial debt.

4. The sufficiency of stamping on the Subscription Agreement and Non-Disposal Undertaking:
The Corporate Debtor raised the issue of insufficient stamping on the Subscription Agreement and Non-Disposal Undertaking. The Tribunal did not make a definitive ruling on this matter, as the decision was primarily based on the classification of the applicant as a Financial Creditor and the nature of the claim as a financial debt.

Conclusion:
The Tribunal concluded that the application was not maintainable under Section 7 of the IBC, as the applicant, being a holder of redeemable preference shares, could not be classified as a Financial Creditor, and the claim did not constitute a financial debt. The application was dismissed without an order as to costs.