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2024 (5) TMI 1153 - AT - Insolvency and BankruptcyDebt or Equity - Compulsorily Convertible Debentures which do not carry any obligation to repay - to be treated as debt or as equity, while admitting the claim under IBC - Waterfall mechanism. Whether the Compulsorily Convertible Debentures which do not carry any obligation to repay should be treated as debt or as equity, while admitting the claim under IBC? - HELD THAT - he Hon ble Supreme Court in the said judgment of IFCI 2023 (12) TMI 129 - SUPREME COURT , upheld the decision of NCLT and NCLAT for treatment of CCD as equity - The Hon ble Supreme Court noted that the very substratum of the submissions of the Appellant is that it has been left high and dry. If it s investment is to be treated as equity, under the waterfall principle nothing will come its way. Thus, while other creditors benefit, the Appellant will not get anything. The salient clauses of the DSA have been reproduced earlier. An examination of the DSA shows that the debentures issued to the Appellant were compulsorily convertible into equity and the only option to the Appellant was to get it converted to shares even prior to the stipulated period of 10 years, failing which the CCDs were to automatically convert into equity shares at the end of 10 years. There was no liability or obligation to repay the debt. 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 does not contemplate repayment of the principal amount at any time, that is, if it compulsorily leads to conversion into equity shares, it is nothing but an equity instrument. Respectfully following the judgment of the Hon ble Supreme Court in the case of M/s IFCI Limited vs. Sutanu Sinha Ors., 2023 (12) TMI 129 - SUPREME COURT , it is held that the compulsorily convertible debentures held by the Appellant are equity instrument and accordingly, we do not find any reason or justification to interfere in the impugned order of the Adjudicating Authority. Appeal dismissed.
Issues Involved:
1. Whether the Compulsorily Convertible Debentures (CCDs) held by the Appellant should be treated as financial debt or equity. 2. Whether the principles of natural justice were violated by not providing the Appellant an opportunity of hearing. 3. Whether the inclusion of the Appellant in the Committee of Creditors (CoC) was permissible under law. Issue-wise Detailed Analysis: 1. Whether the Compulsorily Convertible Debentures (CCDs) held by the Appellant should be treated as financial debt or equity. The Appellant advanced unsecured loans to the Corporate Debtor, which were later converted into CCDs carrying 0% interest under a Debenture Subscription Agreement (DSA) dated 02.03.2020. The CCDs were to automatically convert into equity shares at the end of 10 years if not converted earlier by the Appellant. The Appellant argued that CCDs should be treated as financial debt, emphasizing that the CCDs were reflected under 'long term borrowings' and not as share subscription money. The Appellant also cited several judgments, including "Commissioner of Wealth Tax, Madras v. Spencer & Co. Ltd." and "R D Goyal v. Reliance Industries Ltd.," to support its claim. The Respondents countered that the Appellant, as a CCD holder, had no right to repayment, only to conversion into equity shares, and cited judgments under the IBC, including "M/s IFCI Limited vs Sutanu Sinha" and its affirmation by the Supreme Court, to argue that CCDs should be treated as equity. The Tribunal, guided by the Supreme Court's decision in "M/s IFCI Limited vs Sutanu Sinha," held that CCDs, which do not carry any obligation to repay and are compulsorily convertible into equity, should be treated as equity rather than debt. The Tribunal emphasized that commercial contracts should be read as they are without adding implied terms, and since the DSA had no clause regarding repayment, the CCDs are equity instruments. 2. Whether the principles of natural justice were violated by not providing the Appellant an opportunity of hearing. The Appellant argued that the NCLT's order was made without giving it an opportunity of hearing, violating the principles of natural justice. However, the Tribunal did not find any substantial discussion or decision on this issue in the judgment. The focus remained on whether the CCDs should be treated as financial debt or equity. 3. Whether the inclusion of the Appellant in the Committee of Creditors (CoC) was permissible under law. The Appellant was initially included in the CoC by the Interim Resolution Professional (IRP) after verifying its claim as financial debt. However, the Operational Creditor objected, and the NCLT held that the inclusion of the Appellant as a Financial Creditor was impermissible under law, rejecting the prayer to receive the revised list of members of the CoC. The Tribunal upheld the NCLT's decision, stating that since the CCDs are equity instruments, the Appellant cannot be treated as a Financial Creditor. Consequently, the reconstitution of the CoC to include the Appellant was not permissible. Conclusion: The Tribunal dismissed the appeal, holding that the compulsorily convertible debentures held by the Appellant are equity instruments and not financial debt. Therefore, the Appellant cannot be included in the list of Financial Creditors, and the reconstitution of the CoC to include the Appellant was not permissible. The principles of natural justice were not substantially addressed in the judgment, and the focus remained on the classification of CCDs under the IBC.
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