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TMI Blog2020 (9) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, having its Registered Office at Kolkata, West Bengal, hereinafter referred to as the "Corporate Debtor". The Financial Creditor has proposed the name of Mr. Bijay Murmuria, an Insolvency Professional, who vide his letter dated 14th February, 2019 addressed to this Tribunal has agreed to accept the appointment as IRP, if an order of admission is passed in the present application. 2. It is submitted in the application that the Corporate Debtor had approached the Financial Creditor for seeking financial assistance to shore up the net worth of the Corporate Debtor and improve the debt equity ratio as required by the Bankers. The Financial Creditor thus issued Sanction Letter dated November 30, 2012 expressing their interest in subscribing to Redeemable Preference Shares of the Corporate Debtor subject to various terms and conditions mentioned in the Sanction Letter, followed by a subscription agreement dated 28th February, 2013 whereby the Financial Creditor subscribed to 6,25,000 Cumulative Non-Convertible Redeemable Preference Shares (RPS) of the face value of Rs. 100/- each which were issued at a premium of Rs. 540/- for an aggregate consideration amount of Rs. 40,00,00,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er amount. It, however, admitted the revised rating downgrade by CARE of BBB (minus) and attributed the same to the prevailing market condition. 6. On December 22, 2014 the Corporate Debtor vide its e-mail assured the Financial Creditor that they were in the process of raising Rs. 200,00,00,000/- (Rupees Two Hundred Crores Only) equity capital by March, 2015 and would pay the entire dividend due regularly while reiterating that there would be no issue in redemption of RPS from 2019 onwards but the Corporate Debtor once again defaulted in fulfilling the assurance by raising capital by March, 2015. 7. The Financial Creditor vide letter dated 6th July, 2015 and 16th October, 2015 wrote to the Corporate Debtor and reiterated its desire to exercise the option of early redemption of RPS in full and called upon the Corporate Debtor to honor the same latest by 30th November, 2015. The Corporate Debtor issued a cheque to the Financial Creditor bearing No. 234327 for an amount of Rs. 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor merely identified and effected part redemption of RPS to few buyers mentioned in the application and failed to complete the process of redemption by September, 2017. On June 28, 2018 the Financial Creditor called upon the Corporate Debtor to pay the outstanding Redemption amount of Rs. 36,32,07,895/- (Rupees Thirty Six Crore Thirty Two Lakh Seven Thousand Eight Hundred Ninety Five Only) as on June 30, 2018. On August 3, 2018, the Financial Creditor informed the Corporate Debtor that out of the total outstanding redemption amount as per the letter dated June 28, 2018 only an amount of Rs. 5,00,00,000/-(Rupees Five Crore Only) has been received from Williamson Financial Services. The Financial Creditor called upon the Corporate Debtor to repay the balance outstanding redemption amount of Rs. 31,96,99,577/- (Rupees Thirty One Crore Nine Six Lakh Ninety Nine Thousand Five Hundred Seventy Seven Only) as on 2nd August, 2018. In view of the continuing default, the Financial Creditor vide letter dated August 14, 2018 called upon the Corporate Debtor to create a first ranking pledge over the specified shares of MSEL within 7 days to ensure a security cover of an amount of Rs. 66,82,00,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial Creditor has not disclosed the details regarding number of shares which it has actually sold and number of shares currently held by it. The Corporate Debtor has denied all the allegations, contentions and claims made against it by the Financial Creditor in the said application. It is further submitted that the preference shareholder is a shareholder and not a creditor. The application has been filed as a creditor and thus it does not bring about any actionable claim under the provisions of the code against the Corporate Debtor. It is submitted that the preference shareholder invests in the resources of the Company and has voting rights thereby as a shareholder he becomes an owner of the company and not its creditor. The preference shareholder and its dividend are paid out of the profits of the company and not its Capital and in case it is paid out of the capital, it would amount to a fraudulent act. 15. It is submitted that the preference shareholder cannot in any way become the Creditor of the Company as the Preference shares form a part of the capital and it is not a debt and cannot be treated as such. It is submitted in the reply that the purported Financial Creditor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial transaction which falls squarely within the definition of Financial Debt. 19. It is submitted that the Financial Creditor is justified in approaching this Tribunal for initiating Corporate Insolvency Resolution Process against the Corporate Debtor and the Corporate Debtor is making erroneous and legally misplaced averments before this Tribunal with a view to avoid its repayment obligations. It is submitted that since the debt has been admitted by the Corporate Debtor, they cannot now raise an objection on the document being insufficiently stamped. It is submitted that on 30th September, 2013 the Corporate Debtor had failed to comply with the provisions of 6.2.31 of the agreement. 20. During the course of argument, Ld. Counsel for the Financial Creditor submitted that the Corporate Debtor has no dispute at all on the question of disbursal of the amount but the only grounds on which the Corporate Debtor is challenging the application are (1) that the applicant is not a Financial Creditor, therefore, this is not maintainable, (2) the document is in sufficiently stamped and (3) that the Financial Creditor has already enforced the Arbitration Agreement. It is submitted by the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,000/- (Rupees Thirty Five Crores Only) on or prior to September 30, 2013. 8.1: Events of default. Each of the events set out below is an "Event of Default" (whether or not caused by any person whatsoever outside the control of the Issuer or of any other Person.) 8.1.15 Rating The credit rating of the Issuer falls below "A". 8.2: Early Redemption Events: The occurrence of the following event shall, at the option of the Subscriber, be an "Early Redemption Event". (a) Occurrence of the date falling 4 (four) years from the Closing Date; (b) Any introduction or change in the Applicable Law and/or any compliance to be made by the Subscriber (as a result of change in Applicable Law) in reference to its investment or contribution to the share capital of the Issuer, which, in the sole opinion of the Subscriber, warrants it to discontinue its investment or cease to remain invested in the Issuer. 8.3.2: Upon the occurrence of an Early Redemption Event or Accelerated Redemption Event or Event of Default (at any time after the Closing Date), the Subscriber shall be entitled to require the Issuer to redeem the Preference shares and the Issuer shall redeem the Preference Sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preference shares of the Corporate Debtor thus qualifies as a financial debt under the IBC. The Ld. Counsel further submitted that the purchase of investment as enumerated in sanction letter dated 30th November, 2012 makes it abundantly clear that the purpose for investing in the preference shares of the Corporate Debtor is to shore up the net worth of the Company and improve the debt equity ratio as required by the existing Bankers. 26. The Ld. Counsel for the Financial Creditor has referred to and relied upon various judgments of Hon'ble National Company Law Appellate Tribunal, New Delhi, and the Hon'ble High Court of Gujarat which are discussed as under:- in the case of Shailesh Sangani vs. Joel Cardoso & Anr. Reported in Company Appeal (AT)(Insolvency) No. 616 of 2018, the Hon'ble Tribunal held that:- "6. A plain look at the definition of financial debt' brings it to force that the debt along with interest, if any, should have been disbursed against the consideration for the time value of money. Use of expression 'if any'/as suffix to 'interest' leaves no room for doubt that the component of interest is not a sine qua non for bringing the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Understanding, we find the appellants are also 'investors' and have chosen 'committed return plan' like 'Nikhil Mehta and Sons v. AMR Infrastructure Ltd." Thereby we hold that the amount as is due to the appellants, come within the meaning of "debt" as defined in Section 3(11) of the 'I&B Code'. 13. The Balance Sheet has been enclosed by the appellants, wherein the amount deposited by 'persons', including the appellants as shown also suggest that the Respondent 'Corporate Debtor' treated the appellants as 'investors' and borrowed the amount pursuant to sale purchase agreement for their 'commercial purpose' treating the amount at par with loan' in their return. Thereby, the amount invested by appellants come within the meaning of 'Financial Debt', as defined in Section 5(8)(f) of I&B Code, 2016, subject to satisfaction as to whether such disbursement against the consideration is for time value of money." 27. In case of Mack Soft Tech Pvt. Ltd. vs. Quinn Logistics India Limited reported in Company Appeal (AT) (Insolvency) No. 1543 of 2017, the Hon'ble NCLAT looked into the books of accounts of the Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions as may be prescribed. Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: Provided further that- (a) No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) No such shares shall be redeemed unless they are fully paid; (c) Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y but not limited to the following: * There must be a provision in the Articles of Association regarding the issuance/redemption of preference shares. * The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted into fully paid up shares before redemption. * The redeemable preference shareholders should be paid out of undistributed profit/distributable profit or out of fresh issue of shares for the purpose of redemption." 31. The Ld. Counsel for the Corporate Debtor, with a view to distinguish the Redeemable Preference Shares from Debentures or for that matter of debt, referred to clause 6.2.35 and submitted that it shall ensure that the redemption premium shall be provided out of its profits and sufficient amounts are maintained in its securities premium account or profit and loss account or general reserve account in accordance with applicable law. It is submitted by the Ld. Counsel for the Corporate Debtor that the Financial Creditor has already sold part of its holdings. 32. The Ld. Counsel for the Corporate Debtor referred to and relied upon judgments passed by the High Court of Calcutta in the case of Hindustan Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l appears on the liabilities side of the company's balance sheet beneath share capital and reserves, but unlike share capital, it does represent indebtedness by the company, and holders of loan capital have the remedies of creditors to recover what the company owes them." (Page 164) Consequently, when the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders." 33. The Ld. Counsel for the Corporate Debtor also referred to and relied upon judgment passed by the High Court of Bombay in the case of Aditya Prakash Entertainment Pvt. Ltd. vs. Magikwand Media Pvt. Ltd. reported in Company petition No. 404 of 2016. The relevant extract of the judgment is reproduced as under:- "In this case, there is no dispute to the fact that petitioner was a shareholder holding preferential redeemable preference shares. The only question that requires to be considered is whether petitioner would be a creditor of the company, Sub-section 1 of Section 80 says, subject to the provisions of this section, a company limited by share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. A debenture-holder as a creditor has a right to sue the company, whereas a shareholder has no such right. Apart from that the scheme of the Companies Act and in particular the forms and contents of its balance-sheets are extremely rigid and, in our view, by reason of the specific compartments in such accounts it is not possible to convert an item of capital into an item of loan as has been suggested on behalf of the assesse." 34. The Ld. Counsel for the Corporate Debtor also referred to and relied upon judgments passed by Andhra High Court in the case of Lalchand Surana And Ors. vs. Hyderabad Vanaspathy Limited. . The relevant extract of the judgment is reproduced as under:- "It is not necessary for the present purpose to notice the Explanation to sub-section (1). In this case, the memorandum or articles of association do not expressly say that these preference shares will carry a preferential right to be paid a fixed amount towards dividends. Nor do they say that, on winding up of the company, these shares shall be entitled to a prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Corporate Debtor, the redeemable preference shares cannot be termed as a "debt" because it is a shareholding and cannot be covered under Section 5(8) "Financial Debt" and according to the Ld. Counsel, the judgments cited by the Ld. Counsel for the Financial Creditor relate to "Loan" and would not be applicable to the facts of the present case. We find some merits in the said submission on the side of the CD. 37. It is significant to note here that this is not an application filed based on the dishonored cheque issued for a consideration of Rs. 2 crores. The Corporate Debtor had issued a cheque to the Financial Creditor bearing No. 234327 for an amount of Rs. 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th April, 2016 but was returned as "dishonored". This is an application alleging default in performing the part of obligation on the side of the CD as per the terms of subscription agreement and according to the applicant the CD has defaulted the terms as on March 31,2013 and has been continuously defaulting since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to and relied upon by the Ld. Counsel for the Corporate Debtor it is amply clear that the repayment of "Redeemable Preference Shares", is not a debt and its redemption can be allowed to be made out of only from the profits of the Company. The provisions of the Companies Act do not permit redemption of the shares as a "debt", in that event the applicant could not have been treated as a Financial Creditor. 41. It is also true that as per the existing provisions of the Company law and the judgments on the issue, a holder of Redeemable Preference shares cannot sue the Company for redeeming its shares except out of the profit of the Company or out of the proceeds of a fresh issue of shares made for the purposes of such redemption. On a combined reading of section 55 of the Companies Act, 2013 read with Rule 9 of the Companies (Share Capital) Rules, 2014 and Section 5(7) & (8) of the Code, a preference share holder cannot be classified as a financial creditor falling under section 5(7) of the Code and the applicant's claim is not a financial debt under section 5(8) of the Code. 42. Having heard learned counsel for the parties and after having gone through all the pleadings filed b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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