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TMI Blog2023 (12) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... NJAY KISHAN KAUL, J. 1. Commerce has evolved. The documents forming the base of commerce have also evolved and created a hybrid nature of documents. Thus, what was earlier labelled as a debenture, now has hybrid versions such as partly convertible debentures, optionally convertible debentures and Compulsorily Convertible Debentures (CCDs). We may note that traditionally debentures were treated as a floating security with a covenant for payment on a specified date. In re Crompton & Co. Ltd. [1914] 1 Ch. 954. 2. In the factual scenario of the present case, we are concerned with a Highway project in which the appellant has made investments through the CCDs. The National Highways Authority of India (NHAI) had awarded the project in question in terms of a Concession Agreement dated 25.03.2010 executed between it and the IVRCL Chengapalli Tollways Ltd (ICTL). ICTL was in turn a subsidiary Company of IVRCL which was holding 100 per cent share capital of ICTL. A consortium of lenders had provided term loan facility to the ICTL to execute various documents including the company loan agreement dated 24.11.2010 and the balance project was to be financed by IVRCL through equity infusion. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were part of equity in the project cost approved by NHAI and debt equity ratio is required to be maintained by IVRCL Limited. There was no recategorization of the CCDs from equity to debt and as stated in your email of 19th May, 2022, no approval was sought from NHAI in this respect. The DSA recognizes that any act in contravention of the Concession Agreement is void. c. Lenders consortium had approved the treatment of CCDs as equity and no approval for conversion to debt was sought from NHAI. d. All repayment obligations under the DSA are that of IVRCL Limited and not of ICTL/Corporate Debtor. e. The notes to the balance sheets of ICTL/Corporate Debtor also clarify that the repayment obligations are that of IVRCL Limited and not ICTL/Corporate Debtor. f. The CDs were mandatorily convertible to equity in December, 2017, and only corporate actions for the conversion was pending." 6. It will be noticed from the aforesaid that the fundamental principal for rejecting the debt claim was that in view of the appellant having invested the amount as per the CCDs, the same was to be treated as equity. The CCDs had been approved as equity under the financial package for the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the other documents and communications inter se the parties. The judgment in Narendra Kumar Maheshwari's case (supra) is sought to be distinguished on the ground that it was in the context of a public interest litigation, and has referred to the concept of the debentures which are intrinsically in the character of a debt. It is towards the objective of financing these infrastructure projects, it is submitted, that a set of documents have been devised, and the real objective was that the amount advanced was to be treated as a debt. The conversion of CCDs to equity actually became impossible due to the insolvency of the ICTL and thus, the entire principal amount along with the interest became due and payable. 10. Learned senior counsel contends that in effect the appellant is neither treated as shareholder nor as a financial creditor leaving the appellant remediless. He further sought to emphasise that ICTL was a subsidiary of IVRCL, which was really holding 100 per cent shareholding of ICTL. 11. We may note that it is not disputed by him that the put option was never exercised. In effect, his submission was that whether CCDs should be categorized as debt or equity would dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not have a liability or obligation qua the appellant because the appellant is actually an equity participant and does not have a debt to be repaid. The success of a commercial venture pays benefit to the equity participants but with income, which would not inhere in case of the the failure of the venture. 15. Thus, if it was a simpliciter debenture, it would have fallen under the category of a financial debt along with bonds etc. However, we are not concerned with a debenture per se. 16. The debenture subscription agreement clearly defines ICTL as the special purpose vehicle while IVRCL is the sponsor company and IFCI is the lender. In terms of Clause 2.4, the rate of interest/coupon rate of 11 per cent per annum, payable quarterly, is applicable till either the buy back of all the CCDs (an option available to the borrowers) or conversion of CCDs into equity. The liability is of the sponsor company for making coupon payments and not of the SPV/ICTL. Further, under Clause 2.8, the buy back is also an arrangement inter se the Sponsor company and IFCI. The conversion into equity takes place as per Clause 2.9 and the put option as per Clause 2.11. It would suffice to reproduce C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may also note the clause 3.3 which provides for an overriding effect of the Concessionaire Agreement and Clause (b) of the same reads as under:- "3.3 Overriding effect of the Concession Agreement: b) Notwithstanding anything to the contrary contained in this Agreement, and subject always to the overall supremacy of the Concessional Agreement, the Parties herein agree not to enforce the Put Option and/or otherwise take only direct/indirect action; without the prior written approval of NHAI when any such single and/or multiple act(s) taken simultaneously or otherwise under and/or in pursuance of this Agreement and/or the Pledge Agreement, read with the Power of Attorney jointly or severally constitute Change in Ownership per Clause 5.3 of the Concession Agreement. Any such act(s) if taken without prior written approval of the NHAI shall be treated as having been carried out in contravention of the Concessional Agreement and thus void ab initio as per subclause (a) above. It is hereby specifically clarified that for purposes 'Change in Ownership' under the Concession Agreement and all stipulations thereto including inter alia as provided in clause 5.3, the lender (the IFCI) shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract means as it reads. It is not advisable for a Court to supplement it or add to it. It is an unfortunate scenario where the appellant is being left high and dry as there is nothing which it can recover from the sponsor company, there being no assets and funds. While in the ICTL it is being treated as a shareholder and thus, does not benefit as none of the shareholders i.e. original investors and the appellant get any benefit under the scheme which has been approved. The debt assigned was of a lower rate, repurchased by a third party. However, these are commercial decisions of the respective parties. The obligations were of the sponsoring company and IVRCL in terms of Clause 2.4. 24. A reading of the impugned judgment, specifically the rationale from para 19 onwards shows that the issue has been correctly crystallized as to whether CCDs could be treated as a debt instead of an equity instrument. In that sense, it was observed that treating them as a debt would tantamount to breach of the concessional agreement and the common loan agreement. The investment was clearly in the nature of debentures which were compulsorily convertible into equity and nowhere is it stipulated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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