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TMI Blog2020 (9) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... not a debt. It is true that in the agreement, that after 15 years, these debentures would become equity, but until such time the Corporate Debtor shall pay fixed returns to this applicant. The RP merely by showing this, the RP Counsel cannot come with an argument to say that this is to be treated as equity for redemption of debentures has not been envisaged in the agreement. At the time of winding up or admission of a case under IBC, if the debentures are not matured and not convertible for the period for redemption is not complete, they shall be treated as debentures and the consequence is, it will remain as debt - Same is the case here, debentures are not matured for conversion, interest shall be paid through coupons periodically. That has also not complied with. This application is hereby allowed directing the Resolution Professional to admit the claim as Financial Debt as envisaged under Section 5(8) (c) of the Insolvency and Bankruptcy Code, 2016. - (IB)-967(PB)/2018 - - - Dated:- 31-1-2020 - B.S.V. Prakash Kumar, Actg. (President) And Santanu Kumar Mohapatra, Member (T) For Appellant/Respondent : Akhil Shankhwar, P. Nagesh, Harshal Kumar, Krishnendu Datta, Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts in favour of this applicant, the Resolution Professional rejected its claim on 09.04.2019 treating it as a equity. The reason given by the Resolution Professional for rejection is as follows: Dear Mr. Pavlos Pavlou I would like to bring to your attention the following observations which arose in the discussion with the lawyers while discussing your claim 1. You have been issued Fully Compulsory Convertible Debentures by the Corporate Debtor. 2. The debentures under any circumstances are not redeemable or refundable to you in cash for consideration. 3. The said debentures are required to be fully converted into shares as and when any of the clause of the debenture agreement are triggered. 4. Under the rules and regulations of FEMA the said amount paid by you against the debentures is treated as equity and I presume that you must have filed your papers with the RBI accordingly. 5. On conversion of the said debentures the same will be treated as equity. Therefore in view of the above and in view of the laws prevailing for the time being in force your CCD's have been treated as equity of the corporate debtor and hence your claim as financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new type of instrument introduced in this case and these appear to have caught the imagination of the investors. It has been asserted before us that subsequent to RPL issue, others have also gone for this type of project. Our attention was drawn to Rule 2(b)(x) of Companies (Acceptance of deposits) Rules, 197 which provided clearly that a convertible debenture was not to be included in the definition of debenture. It was further asserted that the security visualised in clauses (5) and (6) of the prospectus was one which was prevalent and customary in corporate practice and was regarded as valid and adequate Nothing contrary to this was indicated before us. 98. Our attention was drawn to Section 2(12) of the Companies Act under which a debenture need not be secured at all. In that light the guidelines should be interpreted. Therefore, it was submitted, guideline 10, reasonably interpreted, means that such security should be provided as is customarily adopted in corporate practice in the matter of issuing debentures. It has to be borne in mind that the debentures issued in the present case are compulsorily convertible. Therefore, no repayment of principal is really involved. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any instrument which is compulsorily convertible into shares, is regarded as a equity and not as a loan or debt. Even a non-convertible debenture need not be always secured. In fact, modern tendency is to raise loan by unsecured stock, which does not create any charge on the assets of the company (The Encyclopaedia of Forms and Precedents, 4th Edn. Vol. 6 para 17 at pages 1094, 1095 and para 22 at pages 1097-1098). Whenever however, a security is created, it is invariably in the form of a floating charge (See The Encyclopaedia of Forms and Precedents, 4th Edn. Vol. 6 para 25 at page 1099). It follows, therefore, that the secured debenture almost invariably contains a floating charge. In addition to the floating charge, debentures are frequently secured by trust deed also as has happened in the present case where specific property, land, etc. has been mortgaged to trustees. In addition to the above argument, he has taken us to FEMA Regulations for showing the definition of 'Capital' to say that convertible debentures are covered under the definition of 'Capital'. Further reliance has been placed on a Form filed by the applicant before Reserve Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 of the Employees Stock Option Guidelines. These Guidelines being in relation to Employees Stock Option Guidelines and Issue of Cumulative Convertible Preference Shares, this ratio cannot be extended to say that debentures also fall under this category. Therefore, we believe that the ratio decided in Narendra Kumar Maheshwari (supra) is not applicable to the present facts of the case. Moreover, since Insolvency and Bankruptcy Code, 2016 has overriding effect over other enactments, the debentures being treated as debt under IBC, this value of debentures shall be treated as debt, not as equity. In any event, since it is not the case of this Corporate Debtor that it is not a debt as per its books, the debtor counsel cannot come out with a new argument saying that these debentures shall be treated as equity. Another argument advanced by the Resolution Professional counsel is that the nature of investment being compulsorily convertible debentures, the applicant cannot claim the value of the investment except to the extent of interest. As to this point, if a company is a running company and regularly paying interest, it is understandable that this RP Counsel can come with this ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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