9911796707
TMI Blog2025 (4) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... mplex for production of ammonia-urea complex at Panagarh Industrial Park, Distict Burdwan, West Bengal on 11.12.2009. Contracts for onshore supply, offshore supply as well as engineering and construction were entered between the parties in the year 2010. (ii) Amounts became due and payable by the Respondent towards the Appellant in pursuance of the contract. The Respondent on 28.04.2015 wrote a letter to the Appellant requesting Essar Projects (India) Ltd. (earlier name of the Appellant) to consider converting the amounts outstanding as subordinated debt. (iii) The Appellant sent its agreement vide letter dated 08.05.2015 to give an extended credit upto Rs.403 Crores against their receivables from Matix. (iv) A resolution dated 30.07.2015 was passed by the Appellant giving consent to make investment upto Rs.400 Crores into 8% Cumulative Redeemable Preference Shares (hereinafter referred to as 'CRPS') of Rs.10/- each of Matix Fertilizer and Chemicals Limited (Matix) in one or more tranches. (v) The Respondent responded to the e-mail of the Appellant dated 31.07.2015 on 26.08.2015 that the decision of Appellant in converting outstanding receivables from Matix to the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n are as follows: (i) Whether a Preference Shareholder is a Creditor of a Company. (ii) Whether an application under Section 7 of I&B Code filed by a Preference Shareholder is maintainable. (iii) Whether Cumulatively Redeemable Preference Shares ("CRPS" for brevity) was in the nature of an investment or a financial debt having commercial effect of borrowing." (xii) The Adjudicating Authority after considering various facts and circumstances and precedent relied by the parties held that the Cumulative Redeemable Preference Shares are not payable, hence, no default is established. In Para 14.4 the Adjudicating Authority made following observations: "14.4. It is evident that 'Preference Shares' are not defined in the I&B Code. Therefore, one must then look into its definition and meaning assigned to preference shares under the Companies Act. Companies Act is a complete code enacted to consolidate and amend the law relating to companies and the legislature was conscious of this fact in drafting the I&B Code. It is accordingly that Section 3(37) of the I&B Code states that "words and expressions used but not defined in this Code but defined in the ...Companies Act, 2013(18 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Preference Shares (CRPS) were allotted by the Respondent in lieu of the debt which was owed by the Respondent to the Appellant, which is an admitted fact. It is submitted that the Respondent has also admitted the debt of amount of Rs.310 Crores and claims its adjustment in the outstanding amount payable to the Respondent as per his case. It is submitted that the transaction under which the CRPS were allotted is a commercial transaction and the transaction is fully covered by Section 5 Sub-section (8) Sub-clause (f). The transaction having commercial effect of borrowing is a financial debt and the Adjudicating Authority committed error in rejecting the application filed by the Appellant under Section 7. It is submitted that it was Respondent who requested the Appellant to convert the amount outstanding from Matix to Appellant as Subordinated Debt. Matix clearly communicated that Matix has raised equity and the same will be earmarked for paying of this subordinate debt of Appellant [EPCC]. It is submitted that the nature of transaction is basis for determining the nature of debt. The present is a case which clearly proves that there was financial debt in the transaction entered betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as available towards fresh issue of shares for redeeming the preferential shares. No payment could have been made in the preferential shares as no amount was due nor any default could said have been committed. It is submitted that the Appellant has filed an application under Section 7 on the basis of 25 Crore CRPS which was foundation of Section 7 application. The nature of debt has to be found out from the transaction which culminated in 25 Crore CRPS. The CRPS is not a financial debt. The legislature is fully conversant of the law which it enacts. The legislature was well aware with the concept of preferential shares, debentures and in Section 5(8)(c) expression 'debentures' has been used but there is no mention of preferential shares. The legislature was fully aware that a preferential shareholder is not a financial creditor. It is submitted that written contract between the parties must be interpreted on its terms alone and any other evidence to interpret the same, must be excluded. There is no obligation to redeem preference shares when the company has not made any profit, and dividend has not been declared. I&B Code is a complete code, hence, the financial debt has to be prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowings namely 1) Mr, A V. Amarnath 2) Mr. Chander Krishnamoorlhy 3) Mr. Vasant Savla 3) Mr. D. V Prasad 4) Mr Raghupati Mishra 5) Ms. Yogita Purohit (hereinafter referred to as "the Authorised Executives") be and are hereby severally authorised to take all decisions and steps in respect of the above investment as may deem appropriate, and to do and perform all such acts, deeds, matters and things, as may be necessary or expedient in this regard and to exercise all the rights and powers which would vest in the Company in pursuance of such investment. RESOLVED FURTHER THAT a copy of the foregoing resolution duly certified by any Director or Company Secretary be forwarded as may be required." For Essar Projects (India) Limited Yogita Purohit Company Secretary ACS 29624" 8. The above resolution dated 30.07.2015 was communicated to Matix and Matix after receipt of email dated 31.07.2015 has communicated approval of the Board of Matix as well as Shareholders for allotment of 25 Crore 8% CRPS of Rs.10 each. Copy of letter dated 20.08.2025 has been brought on record as Annexure A-6, which is as follows: "Matix Fertilisers And Chemicals Ltd. CIN : U24120WB2009PLC153272 Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as EPILs acceptance to proceed with documentation and other necessary compliances Thanking you Accepted by For Matix Fertrilisers And For Essar Projects Chemicals Limited India Limited Company Secretary. Company Secretary" 9. Thus, the resolution of the Appellant, as noticed above, as well as the letter dated 26.08.2015 captures the transaction between the parties which indicate that the Matix has allotted 25 Crore 8% CRPS of Rs.10/- each to the Appellant. A letter was sent on 20.08.2018 on behalf of the EPC Constructions India Ltd. informing the Respondent to take steps to redeem the CRPS aggregating to Rs.310 Crores on 25.08.2018 on which date it is becoming due. Letter on which Appellant has relied is letter of the Matix dated 24.08.2018 where reply was given to the letter dated 20.08.2018 sent on behalf of the Appellant. It is useful to notice letter dated 24.08.2018 written by Matix to the Appellant, which is as follows: "Matix Fertilisers And Chemicals Ltd. CIN : U24120WB2009PLC153272 Poonam Chambers B-Wing, 5th Floor Dr. Annie Besant Road Worli, Mumbai - 400 010 India. T +91 22 61167000 F +91 22 61167011 [email protected] Date:-24th August, 2018 To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AUTHORISED SIGNATORY Encl.:- The copy of the letter date 5th June, 2018 as Annexure-A. CC:- Mr. Abhijit Guhathakurta Regn. No.: IBBI/IPA-003/IP-N000103/2017-2018/111S8 Insolvency Professional of EPC Constructions India Limited Deloitte Touche Tohmatsu India LLP Indiabulls Finance Centre, Tower 3, 27th Floor, Senapati Bapat Marg, Elphinestone Road (West), Mumbai - 400 013." 10. The demand was issued by the Resolution Professional from the Matix on 25.08.2018 of Rs.632.7 Crore which also include 310 Crores towards CRPS and it was thereafter Section 7 application was filed. Part IV of the Section 7 application gives the particulars of financial debt. It is useful to notice Part IV of the application, which is as follows: "PART-IV PARTICULARS OF FINANCIAL DEBT 1 TOTAL AMOUNT OF DEBT GRANTED DATE(S) OF DISBURSEMENT INR 250,00,00,000/- (Rupees two hundred fifty crores) Term-sheet dated 26.08.2015 2 AMOUNT CLAIMED TO BE IN DEFAULT AND THE DATE ON WHICH THE OCCURRED DEFAULT (ATTACH WORKINGS COMPUTATION THE FOR OF AMOUNT AND DAYS OF DEFAULT IN TABULAR FORM) Total Amount: INR 310,00,00,000/- (Rupees three-hundred and ten crores) 26.08.2018 Date On W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided that nothing contained in this Act shall affect the rights of the preference share holders who are entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation.-For the purposes of this section,- (i) "equity share capital", with reference to any company limited by shares, means all share capital which is not preference share capital; (ii) "preference share capital", with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to- (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and (b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company; (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be provided for out of the profits of the company, before the shares are redeemed: Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed." 14. The proviso to the Section 55 provides that 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. 15. The present is a case where Respondent's consistent case is that after allotment of CRPS to the Appellant, Respondent Company never declared dividend or earned profit to redeem the preferential shares. If the preferential shares allotted to the Appellant could not have been redeemed, no debt became due. The fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt relied by learned counsel for the Respondent is judgment of this Tribunal in "Rita Kapur vs. Invest Care Real Estate LLP, 2020 SCC Online NCLAT 627". In the above case, an amended agreement was entered where investment was certified as capital contribution. In the above case, the Adjudicating Authority rejected Section 7 application. This Tribunal affirming the above judgment made following observations in Para 10: "10. From the above provisions of law, it is latently & patently clear that once the 'Debt' is converted into "Capital" it cannot be termed as 'Financial Debt' and the Appellant cannot be described as 'Financial Creditor'." 18. Learned counsel for the Respondent has also relied the judgment of Hon'ble Supreme Court in "Radha Exports vs. KP Jayaram, (2020) 10 SCC 538". In the above case, shares were allotted on request made by the Respondent No.2 and Appellant has allotted shares. The Hon'ble Supreme Court in the above case in Para 42 while dealing with Section 5(8) of the I&B Code held following: "42. The definition of "financial debt" in Section 5(8) makes it clear that "financial debt" means a debt along with interest, if any, disbursed against the consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my view, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a "creditor". The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by afresh issue of shares. This is a limitation which is not applicable to any other creditor of the company. The shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company at the appropriate time. They continue to be shareholders, no doubt subject to certain preferential rights mentioned in Section 85 of the Companies Act, 1956. If they do not become the creditors of the company, they cannot apply for winding up of the company under Section 433(e) of the Companies Act, 1956. 20. Similar view has also been taken by the Andhra Pradesh High Court in "Lalchand Surana and others vs. M/s Hyderabad Vanaspathy Ltd., 1988 SCC OnLine AP 290" as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.4, a licensee must make quarterly payment in the prescribed format as Annexure II showing the computation of revenue and licence fee payable. The format is part of the licence and is independent of accounting standards and is in tune with the definition of gross revenue, and is the basis for the calculation of licence fee. It is only for uniformity that the account has to be maintained as per accounting standards AS-9 which are prescribed from time to time. Once the licensee provides the details to the Government in format Annexure II along with accounts certified by the auditor, the reconciliation has to take place. The accounting standard AS-9 is relevant only for whether the figure given by the licensee as to gross revenue is maintained in proper manner once gross revenue is ascertained, then after certain deductions, adjusted gross revenue has to be worked out. The accounting standard provided in AS-9 cannot override the definition of gross revenue, which is the total revenue for licence and the finding in Union of India v. Assn. of Unified Telecom Service Providers of India in this regard is final. binding and operative. The accounting standard AS-9 makes it clear that same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the Appellant has relied on judgment of the Hon'ble Supreme Court in "Roop Kumar vs. Mohan Thedani, (2003) 6 SCC 595" in support of his submission that Section 91 of the Evidence Act declare doctrine of substantive law in the case of a written contract, that all proceedings and contemporaneous oral expressions of the thing are merged in the writing or displaced by it. In Para 13 of the judgment regulating principles of Section 91 of the Evidence Act, the Hon'ble Supreme Court has laid down following: "13. Section 91 relates to evidence of terms of contract, grants and other disposition of properties reduced to form of document. This section merely forbids proving the contents of a writing otherwise than by writing itself; it is covered by the ordinary rule of law of evidence, applicable not merely to solemn writings of the sort named but to others known sometimes as the "best-evidence rule". It is in reality declaring a doctrine of the substantive law, namely, in the case of a written contract, that all proceedings and contemporaneous oral expressions of the thing are merged in the writing or displaced by it. (See Thayer's Preliminary Law on Evidence, p. 397 and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or material to show or reflect on the nature of transaction. 27. Learned counsel for the Appellant relied on judgment of this Tribunal in "Sanjay D. Kakade vs. HDFC Ventures Trustee Company Ltd. and Ors., Company Appeal (AT) (Insol.) No.481 of 2023.", where this Tribunal had occasion to consider Share Subscription and Shareholders Agreement between the Promoters and IL&FS Trust Company Ltd., the Financial Creditor. Section 7 application was filed by the Financial Creditor which application was admitted by the Adjudicating Authority. Challenging the said order, the Suspended Director had filed the appeal. It is submitted by learned counsel for the Appellant that in the said case the investment made through Share Subscription and Shareholders Agreement was treated to be financial debt. Learned counsel for the Respondent submits that judgment of this Tribunal in Sanjay D. Kakade is clearly distinguishable since in the said case question involved was not of preferential shares. Sanjay D. Kakade was not a case of preferential shares simpliciter as in the present case. The Share Subscription and Shareholders Agreement which was entered contained various rights including guarantees and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be under an unconditional obligation to buy such Shares on an as if converted basis at the Fair Market Value as determined under clause 19.9 below. For this purpose the IL&FS Investors and/or the HIREF Investors and/or their Affiliates shall serve to the Promoters as put option notice ("Put Option Notice"), and the Promoters shall be obliged to perform their respective obligation as aforesaid, within 60 days from the date of receipt of the Put Option Notice. (b) If the Promoters fail to comply with their obligations to buy Shares held by the IL&FS Investors and/or the HIREF Investors and/or their Affiliates, then each of the IL&FS Investors and/or the HIREF Investors shall forthwith (i) takeover the control and the management of the Company and may consider partial sale of division or assets of the Company and may consider partial sale of division or assets of the Company to recover the IL&FS Investors Capital Investment and HIREF Investors Capital Investment at the Fair Market Value under this Agreement, and (ii) have lien over the Shares held by the Promoters and their Affiliates. The Promoters hereby irrevocably and by way of security for its obligation contemplated herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the HIREF Investors. The Agreement contained other details of terms and conditions." 28. Present is a case where CRPS were allotted to the Appellant, there is no Share Subscription and Shareholders Agreement entered between the parties nor CRPS is hedged by any such condition which may lead to accepting the transaction as financial debt. We, thus, are of the view that judgment of this Tribunal in Sanjay D. Kakade is clearly distinguishable and has not applicability in the facts of the present case. 29. In view of the above discussion and conclusions, we are of the view that the Appellant who is holder CRPS is holder of shares which is in the nature of equity in capital, which is part of preferential share capital as defined in Section 43. Preferential shares being part of the preferential share capital of the Company shall not transfer any debt so as to initiate any Section 7 proceeding. Further, the Company having not earned any profit nor any dividend having been declared, no redemption was permissible by the statutory provision, hence, no debt was due on basis of which Section 7 application could be filed by the Appellant. There is also no material that any proceeds of a fres ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
