2020 (5) TMI 248 - Tri - Insolvency and Bankruptcy

Maintainability of application - Financial Creditor seeks to appoint Insolvency Professional for the company and start of Corporate Insolvency Resolution Process - It is further stated that on the failure of Corporate Debtor, the Financial Creditor had moved Madras High Court for the recovery of interest and restraining corporate debtor from alienating the assets of the Corporate Debtor. Application filed by Corporate Debtor for opposing the suit had been dismissed by Madras High Court on the ground that suit is continuing breach of tort and every act of breach giving rise to fresh cause of action. HELD THAT - This Tribunal hereby is of the opinion that the intention of both the parties is manifested in the Master Facility Agreement and the Debenture Subscription Agreement. The parties have made arrangement for an investment in the business of the Corporate Debtor in order to scale up their business operations. The investment was sought to be made by the Financial Creditor by way of subscribing to the Debentures in consideration of the money brought in by the Financial Creditor into the coffers of the Corporate Debtor. Fully convertible debentures are a financial instrument within the meaning of section 5(8) of the Insolvency and Bankruptcy Code, 2016 - Convertible Debenture is in the nature of financial debt; though it is hybrid in nature, it cannot be treated as equity unless converted into equity; it cannot par take the characteristics of equity until the conversion is done. The Financial Creditor has taken all precautions to safeguard his interest so long as the Convertible Debenture remains as debenture. It is also seen from the documents that a Simple Mortgage is seen to have been created in favour of the Financial Creditor which shows that there is debt which is a financial debt based on the principle that once a mortgage; always mortgage . It postulates that unless and until a mortgage is discharged it remains as a mortgage and as such the financial debt - On a perusal of clause 8.1.2 of the Master Facility agreement, a default is said to have occurred when there is non-payment in full, any of the interest amount that becomes due within a period of 30 days on which such amounts become payable. Therefore, it cannot be contented by the Respondent that no sum was liable to be returned or repaid. Apart from payment of a sum of ₹ 39,86,371.36 for the quarter ending September, 2007, interest amount was not paid for the remaining period by the Respondent and there is a clear default on part of the Respondent. This Application as filed by the Applicant - Financial Creditor is required to be admitted under section 7(5) of the I B Code, 2016 - Application admitted - moratorium declared.

Summary

Issues Involved:
1. Application under section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Financial Creditor's claim of default by Corporate Debtor.
3. Nature and classification of Fully Convertible Debentures.
4. Corporate Debtor's defense and counterclaims.
5. Memorandum of Agreement and its implications.
6. Appointment of Interim Resolution Professional (IRP) and initiation of Corporate Insolvency Resolution Process (CIRP).
7. Moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Application under section 7 of the Insolvency and Bankruptcy Code, 2016:
The application was filed by the Financial Creditor under section 7 of the Insolvency and Bankruptcy Code, 2016, in the prescribed format under Rule 4 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The Financial Creditor, a private limited company, sought to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

2. Financial Creditor's claim of default by Corporate Debtor:
The Financial Creditor claimed that the Corporate Debtor defaulted on payments of interest and failed to convert the debentures into equity shares as stipulated in the agreements. The total amount claimed as due was ?49,13,76,941, consisting of a principal sum of ?15 Crores and accrued interest of ?34,13,76,941.

3. Nature and classification of Fully Convertible Debentures:
The Tribunal examined the nature of Fully Convertible Debentures (FCDs) and determined that they are a financial instrument within the meaning of section 5(8) of the Insolvency and Bankruptcy Code, 2016. The Tribunal clarified that FCDs are considered financial debt until they are converted into equity shares.

4. Corporate Debtor's defense and counterclaims:
The Corporate Debtor argued that the FCDs were intended to be converted into equity and not repaid as a loan. They also claimed that the downturn in their business operations was due to unforeseen international market conditions. The Corporate Debtor contended that the Memorandum of Agreement (MOA) constituted a separate contract and superseded the Master Facility Agreement.

5. Memorandum of Agreement and its implications:
The MOA was executed on 18th April 2017, and confirmed by the Madras High Court on 14th July 2017. The Corporate Debtor claimed that the MOA was entered into in a spirit of goodwill and compromise, not to admit or determine the quantum of liability. The MOA provided for resolving disputes amicably and sharing 50% of the net assets after certain adjustments.

6. Appointment of Interim Resolution Professional (IRP) and initiation of Corporate Insolvency Resolution Process (CIRP):
The Tribunal appointed Mr. A.R. Ramasubramania Raja as the Interim Resolution Professional (IRP) to take forward the process of CIRP. The IRP was directed to take necessary steps as required under the statute and file his report within 20 days.

7. Moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016:
The Tribunal ordered a moratorium as envisaged under section 14(1) of the Code, which includes:
- Suspension of all suits or proceedings against the Corporate Debtor.
- Prohibition on transferring, encumbering, or disposing of any assets of the Corporate Debtor.
- Prohibition on foreclosing or recovering any security interest created by the Corporate Debtor.
- Prohibition on recovering any property occupied by the Corporate Debtor.

The moratorium shall remain in effect until the completion of the CIRP or until an order for liquidation is passed.

Conclusion:
The Tribunal admitted the application under section 7 of the Insolvency and Bankruptcy Code, 2016, and initiated the CIRP against the Corporate Debtor. The IRP was appointed, and a moratorium was imposed as per the provisions of the Code. The Tribunal emphasized that the FCDs constitute financial debt and the Corporate Debtor defaulted on its obligations under the agreements.