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TMI Blog2021 (5) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Compulsorily Convertible Debentures (hereinafter referred as CCCDs ) issued by the Corporate Debtor and on verification, the RP intimated the Applicant with regard to his claim, which is admitted as financial debt, which said admission was based on the documents provided to the RP for verification. 2.4 In view of such admission of the claim of the Applicant as financial debt, the Applicant was made a part of the CoC and he was shown as secured financial creditor in the list of creditors dated 24.09.2020 duly published by IRP/RP and the same is also submitted before this bench along with the report dated 24.09.2020. The copy of the said fact is annexed as Annexure A-5. 2.5 It is submitted that the first meeting of the CoC was conducted by the IRP/RP on 01.10.2020, which said meeting was attended by the Applicant as a member of the creditors in the capacity of financial creditor of the corporate debtor holding 18.90% of the voting share. In the said meeting, IRP/RP apprised members of the CoC regarding the status of the verification of the claims and had presented a list of claims which were either under verification and/or for which queries were raised and responses we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice for the 5th meeting scheduled for 19.01.2021, wherein, the Applicant/Financial Creditor has been invited to attend the meeting of the CoC as an operational creditor. It is further stated that such action of the RP is unilateral, untenable and contrary to the provisions of the IB Code and the regulations thereunder on account of the following grounds: (a) The Resolution Professional has acted beyond the scope of his powers and authority provided under Code. (b) The Code does not prescribe any adjudicatory powers upon the Resolution Professional. (c) The Resolution Professional has acted prejudicially and in contravention of its obligation to act objectively and independently. (d) The claim of the Applicant falls squarely within the definition of a financial debt prescribed under the Code. 3. On receipt of the notice, the RP filed his reply for the limited purpose of dealing with the averments relating to the Applicant's claim against the Corporate Debtor. The RP has denied all the allegations/contentions made in the application by the Applicant except which is specifically admitted therein. 4. It is further submitted by the RP that the primary chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. FINDINGS: 8. Gone through the records and also seen the documents and the reply so filed by the Respondent. The issue involved is with regard to the consideration of CCCD holder as Financial Creditor or other Creditor/stakeholder. In fact CCCDs are a kind of loan that can be converted into a stock of the Company after a stipulated time period at the option of the holder or on issuer in special circumstances. These are issued with the intent to raise money to expand or maintain the business operations at a considerable low interest rate. Thus: i. CCCD is a long term debt instrument issued by the Company that can be converted into equity share of the Company on a future date. ii. They can be fully, partially or optionally convertible. iii. They pay a lower coupon rate (Interest) than pure debt instrument. iv. A Debenture is a creditor or lender of a Company. v. Investor's benefit from the interest payment and have the option to convert the loan into equity to participate in the growth of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions 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. 12. It is also a matter of record that CCCD is not converted into equity i.e. option of conversion has not been exercised by the Corporate Debtor under the terms of the CCDs and continued to be reflected as debt in the books of the Corporate Debtor. Further, on perusal of the Debenture Certificate, there are certain conditions, out of which (vi) condition is that The CCCDs will continue to be secured by mortgage of 1 acre of land at Bhuj. (conditions are already reflected hereinabove). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Companies At, 2013 is stated as under- 2(30) -- debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not Reference is also taken from Section 71 of the Companies Act, 2013 which provides that- (1) A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption: Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting. (2) No company shall issue any debentures carrying any voting rights. 15. 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarded as a 'hybrid' debenture by Palmer's Company Law (para 44.07 at page 676). In this connection, reference may be made to the Guidelines for the Protection of Debenture Holders issued on January 14, 1987 which have recognised the basic distinction between a convertible and a non-convertible debenture. It is apparent that these were issued for the purpose of ensuring the serviceability and repayment of debentures on time. It has been asserted before us that the compulsorily convertible debenture in corporate practice was adopted in India some time after the year 1984. Wherever the concept of compulsorily convertible debenture is involved, the guidelines treat these as equity . This is clear from guideline IV (i) read with IV (iii) of the Guidelines fir Issue of Cumulative Convertible Preference Shares and guidelines 8 and 11 of the Employees Stock Option Guidelines. These two sets of guidelines clearly indicate that 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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