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TMI Blog2024 (5) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... it s investment is to be treated as equity, under the waterfall principle nothing will come its way. Thus, while other creditors benefit, the Appellant will not get anything. The salient clauses of the DSA have been reproduced earlier. An examination of the DSA shows that the debentures issued to the Appellant were compulsorily convertible into equity and the only option to the Appellant was to get it converted to shares even prior to the stipulated period of 10 years, failing which the CCDs were to automatically convert into equity shares at the end of 10 years. There was no liability or obligation to repay the debt. A convertible debenture can be regarded as debt or equity based on the test of liability for repayment. If the terms of convertible debentures provide for repayment of borrower s principal amount at any time, it can be treated as a debt instrument but if it does not contemplate repayment of the principal amount at any time, that is, if it compulsorily leads to conversion into equity shares, it is nothing but an equity instrument. Respectfully following the judgment of the Hon ble Supreme Court in the case of M/s IFCI Limited vs. Sutanu Sinha Ors., [ 2023 (12) TMI 129 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said IA filed counter before the Ld. NCLT seeking directions to the IRP to re-examine the claim of the Appellant and consequential reconstitution of CoC. 4. The Ld. NCLT considered the objections raised by the Operational Creditor that the Appellant herein cannot be included in the list of Financial Creditors. After examining the Debenture Subscription Agreement (hereinafter referred to as DSA ), the Ld. NCLT held that the inclusion of the Appellant herein in the list of Financial Creditors is impermissible under law and consequently the prayer to receive the revised list of members of CoC is unacceptable and is liable to be rejected. The said IA was dismissed thereby the Appellant was not accepted as Financial Creditor and the revised CoC was not taken on record. 5. In its oral and written submissions, the Learned Counsel for the Appellant submitted as under: i) The Appellant had advanced unsecured loans to the Corporate Debtor in the period 2012 to 2020. Interest has accrued on these loans from year to year on which tax was deducted and paid to the Income Tax Department but the balance interest was not paid out except for small instalments. The total amount due from the Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP date is the cut-off date on which the liabilities of a Corporate Debtor are required to be determined. The un-matured CCDs are debt and Appellant has no rights as a shareholder on the date of initiation of CIRP. xiv) In conclusion, it was submitted that the Appellant s unmatured CCDs must be treated as a financial debt and RP had rightly admitted its claim as financial debt and had allowed Financial Creditor with a seat in the CoC, which needs to be restored. 6. In its oral and written submissions, the Learned Counsel for 2nd Respondent submitted as under: i) The Appellant is only a CCD holder, whose only remedy is redemption of the said CCD as there is no right of repayment in respect of the said CCDs. ii) The terms of the DSA dated 02.03.2020 clearly show that there is no obligation to repay, that the only option available to the Appellant was to convert the CCD, at any time within the period of 10 years, failing which it shall automatically stand converted to shares. iii) The mere fact that the date of conversion to equity shares has not arisen, is no reason to change the character of the debentures, considering the fact that it carries with it no obligation of repayment. iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revised list of members of CoC is unacceptable and liable to be rejected and has proceeded with dismissing the said Application bearing IA No. 1384 of 2022. It is further submitted that in compliance with the same, the answering respondent herein/RP has removed all the three CCD holders from COC on 25.04.2023 and re-constituted the COC with immediate effect and an Application bearing IA No. 761 of 2023 was moved before Hon'ble NCLT on 27.04.2023 through e-filing (physically filed on 28.04.2023), inter-alia seeking to take on record the updated summary of claims and reconstituted Committee of Creditors after the Hon'ble Tribunal's order dated 18.04.2023 in IA No. 1384 of 2022. The Hon'ble NCLT vide its order dated 21.06.2023 (Order copy made available on 26.06.2023) has taken on record reporting reconstituted CoC and accordingly, the said application was disposed of. It is further submitted that in the light of the order passed in IA No. 1384/2022 on 18.04.2023, the RP/answering respondent herein had not insisted for deciding the matters in IA No. 73/2023 and IA No. 290/2023, which were subsequently dismissed by Hon'ble NCLT Hyderabad Bench vide its order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AND PRINCIPLES OF INTERPRETATION 1.1 Definitions .. CCD shall mean and refer to the issued and paid-up debenture of the Company having the face value of INRs. 10/- (Indian Rupees Ten only), which is compulsorily and mandatorily convertible Into Equity Shares of the Company, in accordance with the terms and conditions mentioned in Annexure A; Conversion Date shall have the meaning ascribed to such term in clause 2.1 of Annexure A of this Agreement; Debenture Certificate shall mean a certificate issued by the Company to SCPL evidencing the title of SCPL to CCDs issued by the Company; 2. SUBSCRIPTION TO THE CCDS 2.1 Subscription to the CCDs SCPL had agreed and subscribed to the CCDs for Rs.110,85,44,770 consisting of 11,08,54,477 CCDs of Rs.10/- each and the Company shall issue and allot CCDs which shall be governed by the terms and conditions as mentioned in Annexure A. ( Emphasis Supplied ) 3 COMPLETION 3.1 The Company shall issue and allot the CCDs to SCPL in accordance with Clause 2.1 and agrees to register SCPL as the registered holder of CCDs in its books and to issue debenture certificate for such CCDs to SCPL 3.2 Post Completion The Company shall make all filings and reporting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions given at the back of the said debenture certificate are as follows: 1. Zero Coupon Compulsory Convertible Debentures (CCDs) are convertible into equity shares not later then Five Years. 2. Upon conversion one (1) equity shares will be issued for One (1) CCD. 3. Interest: Zero Coupon 8.9 It is seen that while conditions No. 2 and 3 are similar to prescription in the DSA, in condition No. 1 the maximum prescribed period of compulsory conversion to equity shares has been reduced from 10 years to 5 years. The DSA had given this option of reducing maximum prescribed period for conversion to the Appellant in 2.1(a) of Annexure A of the DSA. 8.10 The perusal of the relevant clauses of the DSA, Annexure A of the DSA and the Debenture Certificate clearly shows that the only obligation of the Corporate Debtor was to issue shares in exchange of the said debentures. These debentures are not interest bearing and are Zero Coupon CCDs. As per the DSA, the debentures have to be compulsorily converted into shares and do not carry any obligation towards repayment of the original debt. The Appellant, through the DSA dated 02.03.2020 and issue of CCD Certificate dated 31.03.2020, had voluntari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any repayment of the principal. The question of security becomes relevant for the purpose of payment of interest on these debentures and the payment of principal only in the unlikely event of winding up. Therefore, it does not constitute a debenture in its classic sense. Even a debenture, which is only convertible at option has been regarded as a hybrid debenture. Any instrument which is compulsorily convertible into shares is regarded as an equity and not a loan or debt. (emphasis supplied) 8.12.4 The Hon ble Supreme Court noted that the very substratum of the submissions of the Appellant is that it has been left high and dry. If it s investment is to be treated as equity, under the waterfall principle nothing will come its way. Thus, while other creditors benefit, the Appellant will not get anything. 8.12.5 The Hon ble Supreme Court noted that DSA provides for automatic conversion into equity shares. In para 21, 22 and 23 of the aforesaid judgment, the Hon ble Supreme Court held as under: 21. We must note that the complexities of commercial documents depending on the nature of business. These are not layman s agreements but agreements vetted by experts and thus each of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 these CCDs would partake the character of financial debt on the happening of a particular event. 8.12.7 In conclusion, the Hon ble Supreme Court in the said judgment of IFCI cited supra, upheld the decision of NCLT and NCLAT for treatment of CCD as equity. 8.13 The term debt is defined in clause 11 of Section 3 which is reproduced below: Section 3 (11) debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; 8.14 The salient clauses of the DSA have been reproduced earlier. An examination of the DSA shows that the debentures issued to the Appellant were compulsorily convertible into equity and the only option to the Appellant was to get it converted to shares even prior to the stipulated period of 10 years, failing which the CCDs were to automatically convert into equity shares at the end of 10 years. There was no liability or obligation to repay the debt. 8.15 We have noted the guidance approved by the Hon ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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