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2024 (12) TMI 411 - AT - IBCFinancial Debt or not - Compulsory Convertible Debentures (CCDs) issued by the Corporate Debtor - whether there is time value of money in respect of the debt, which is reflected by debenture? - HELD 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. On looking 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). There are no good ground to interfere with the order of the Adjudicating Authority, allowing the Application of Respondent No.1. There is no merit in the Appeal - The Appeal is dismissed.
Issues Involved:
1. Whether the Compulsory Convertible Debentures (CCDs) issued by the Corporate Debtor constitute a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code (IBC). 2. Whether the Arbitral Award can be relied upon for classifying the claim amount as a financial debt. 3. The implications of the Debenture Subscription Agreement (DSA) clauses on the nature of the transaction. Issue-wise Analysis: 1. Nature of Compulsory Convertible Debentures (CCDs) as Financial Debt: The primary issue was whether the CCDs issued by the Corporate Debtor could be considered a 'financial debt' as defined under Section 5(8) of the IBC. The Appellant argued that the transaction involving CCDs was not a financial debt because there was no provision for redemption of the CCDs, and the conversion into equity shares did not constitute a financial debt. The Appellant contended that the investment lacked the time value of money, which is essential under Section 5(8) of the IBC. However, the Adjudicating Authority held that the CCDs, despite being convertible into equity, had an interest component payable in case of default, signifying the time value for money. The Tribunal examined the clauses of the DSA, particularly those related to 'Event of Default' and 'Remedies on an Event of Default,' which indicated that the transaction had a time value of money. The Tribunal concluded that the transaction was a financial debt within the meaning of Section 5(8) of the IBC, as the debentures were issued to raise capital, had an interest component, and the issuer had raised money for its capital needs. 2. Reliance on Arbitral Award: The Appellant argued that the Arbitral Award could not be relied upon for classifying the claim amount as a financial debt, especially since the Award was challenged under Section 34 of the Arbitration and Conciliation Act, 1996, and was pending consideration. The Respondent No.1, however, contended that the Arbitral Award crystallized its rights under the DSA, and the mere fact that the Award was challenged could not be a ground to reject its claim as a financial debt. The Tribunal noted that the Arbitral Award was issued in favor of Respondent No.1 for an amount of Rs.10 crores along with interest, and the CIRP commenced subsequent to the Award. The Tribunal found that the Award could be considered in determining the nature of the debt, given that the Award had crystallized the rights of Respondent No.1. 3. Clauses of the Debenture Subscription Agreement (DSA): The Tribunal delved into the DSA to ascertain the real nature of the transaction. The DSA indicated that the CCDs were compulsorily convertible into equity shares at the option of the Investor, with a provision for interest in case of default. The Tribunal noted that the DSA contained clauses related to 'Event of Default' and 'Remedies on an Event of Default,' which provided for the payment of interest and redemption of debentures. The Tribunal observed that the transaction had a time value of money, as evidenced by the interest component and the option for redemption, thereby qualifying as a financial debt under Section 5(8) of the IBC. The Tribunal distinguished the present case from other cases where CCDs were treated as equity instruments, emphasizing that each case must be assessed based on the specific clauses of the DSA and the nature of the transaction. In conclusion, the Tribunal upheld the Adjudicating Authority's decision, affirming that the CCDs constituted a financial debt and that the Arbitral Award could be considered in classifying the claim. The Appeal was dismissed, with no order as to costs.
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