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2021 (5) TMI 306 - Tri - Insolvency and BankruptcyLiquidation process - priority of settlement of claim of creditors - Financial Creditors or not - prior to the commencement of CIRP against the Corporate Debtor, the maturity date of the subject CCCDs has long expired - consideration of CCCD holder as Financial Creditor or other Creditor/stakeholder? - HELD THAT - The Applicant has issued a letter to AMW Auto Component Limited on 28.07.2016, whereby the Applicant confirmed the role over of the CCCDs on or after 01.07.2017 on the request made by the Corporate Debtor (Auto Component Limited) with respect to CCCDs held by Essar Steel India Limited that are compulsorily converted into equity shares of AACL on or after 01.07.2017. All the other terms and conditions of CCCD's will remain same. Admittedly, the same was not converted into equity share till Corporate Debtor went into CIRP. Further, RP in his reply admitted the fact that CCCD was issued primarily to raise capital and not to raise the money by way of a loan/debt. The terms of CCCDs never postulated any payment of interest or repayment of principal, other than for the initial period of 2 years when the CCCDs could be redeemed at the option of the Corporate Debtor until 22.12.2013. Even if it is assumed for the time being that it is not a loan/debt, then even it attracts interest for the initial period of 2 years when the CCCDs could be redeemed at the option of the Corporate Debtor. Evidently, provisions of the IB Code, categorically recognises that a debt disbursed against the time value of money and includes any amount raised by debtors (Corporate Debtor) pursuant to any note purchase facility or the issue of bonds, notes, debentures (CCCD), loan stock or any similar instrument would fall under Financial Debt - Further, as per the terms given in the Certificate, it provides that an IRR at the rate of 9% face value of the debentures from the date of issue to the date of conversion. That further meets all the requirements to be classified as 'Financial Debt' under the IB Code. That apart, CCCD continue to be recorded as debt in the books of the Corporate Debtor and have not been converted into equity till date (page No. 53 of the application). It can be seen from the Second CoC meeting that CCCD continue to be reflected in the books of the Corporate Debtor. Therefore, it is an admission of debt liability of the Corporate Debtor towards AMNS. The debenture holder of GCCD will be considered as Financial Creditor under the IB Code - Application allowed.
Issues Involved:
1. Whether the Cumulative Compulsorily Convertible Debentures (CCCDs) can be considered as a 'financial debt' under the Insolvency and Bankruptcy Code (IB Code). 2. Whether the Resolution Professional (RP) acted within the scope of their powers in rejecting the applicant's claim as a financial creditor. Issue-wise Detailed Analysis: 1. Whether CCCDs can be considered as a 'financial debt' under the IB Code: The primary challenge raised was whether CCCDs issued by the Corporate Debtor qualify as 'financial debt' under the IB Code. The applicant argued that CCCDs, which were initially accepted as financial debt, should continue to be considered as such. The RP, however, contended that CCCDs are investment instruments that do not postulate any repayment of principal amount or carry any obligation to pay interest, thus lacking the essential element of 'financial debt' as defined under Section 5(8) of the IB Code. The tribunal examined the nature of CCCDs and found that they are long-term debt instruments that can be converted into equity shares at a future date. The CCCDs issued by the Corporate Debtor were redeemable at the option of the issuer for a period of two years from the date of issue and were compulsorily convertible into equity shares after a stipulated period. The tribunal noted that the CCCDs were secured by a mortgage of land and continued to be reflected as debt in the Corporate Debtor's books, indicating an acknowledgment of debt. The tribunal referred to the definition of 'financial debt' under Section 5(8) of the IB Code, which includes any amount raised by the issue of debentures. It also considered the definition of 'debenture' under Section 2(30) of the Companies Act, 2013, which includes any instrument evidencing a debt. The tribunal concluded that the CCCDs meet the criteria for 'financial debt' as they were issued against the consideration for the time value of money and were secured by a mortgage. 2. Whether the RP acted within the scope of their powers in rejecting the applicant's claim as a financial creditor: The applicant argued that the RP acted beyond their powers by unilaterally rejecting the claim as a financial creditor without providing an opportunity for the applicant to respond. The applicant cited the Supreme Court's observation in the Swiss Ribbons Private Limited case, which stated that RPs do not have adjudicatory powers. The tribunal found that the RP initially accepted the applicant's claim as a financial creditor and included the applicant in the Committee of Creditors (CoC). However, on the insistence of certain CoC members, the RP sought a legal opinion on the admissibility of the claim and subsequently rejected it based on the opinion received. The tribunal noted that the RP did not provide the applicant with an opportunity to respond to the legal opinion before rejecting the claim. The tribunal concluded that the RP acted beyond their scope of powers by unilaterally rejecting the claim without following due process. The tribunal emphasized that the RP's role is to verify claims and not to adjudicate them. The tribunal held that the applicant's claim falls within the definition of 'financial debt' under the IB Code and should be considered as such. Conclusion: The tribunal allowed the application, holding that the CCCDs issued by the Corporate Debtor qualify as 'financial debt' under the IB Code. The tribunal directed that the applicant be reinstated as a financial creditor and included in the CoC. The tribunal also observed that the RP acted beyond their powers in rejecting the applicant's claim without providing an opportunity for the applicant to respond. The order was disposed of with these observations.
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