Debentures Issues

Whether Compulsorily Convertible Debentures(CCD) which do not carry any obligation to repay should be treated as Financial Debt under IBC – Shubham Corporation Pvt. Ltd. Vs. Mr. Kotoju Vasudeva Rao, IRP of Navayuga Infotech Pvt. Ltd. and Ors. – NCLAT Chennai

Hon’ble NCLAT held that 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

Whether Compulsorily Convertible Debentures(CCD) which do not carry any obligation to repay should be treated as Financial Debt under IBC – Shubham Corporation Pvt. Ltd. Vs. Mr. Kotoju Vasudeva Rao, IRP of Navayuga Infotech Pvt. Ltd. and Ors. – NCLAT Chennai Read Post »

CIRP under Sec. 7 of IBC cannot be initiated on the basis of Transfer Agreement/promise for Purchase of Debentures from Financial Creditors – Edelweiss Asset Reconstruction Company Ltd. Vs. Ajmera Realty and Infra India Ltd. – NCLT Mumbai Bench

Hon’ble NCLT Mumbai Bench holds that:
(i) The relation between the Financial Creditor and the Corporate Debtor under the Transfer Agreement herein was that of a transferor and transferee. The transaction was for purchase of debentures secured, redeemable and non-convertible debentures from the Financial Creditor/Transferor for a consideration.
(ii) Merely provide that the Corporate Debtor was liable to pay the balance purchase price towards purchase of debentures, mere stipulation in an agreement stating that the transferor shall be considered as a Financial Creditor of Guarantor, will not rendered the outstanding amount receivable by the Petitioner herein a Financial Debt within the meaning of the Code.
(iii) The transaction ex facie is of purchase of NCD’s in lieu of Rs.31.99 Crore and lacks the basic element of disbursal against the consideration for time value of money.

CIRP under Sec. 7 of IBC cannot be initiated on the basis of Transfer Agreement/promise for Purchase of Debentures from Financial Creditors – Edelweiss Asset Reconstruction Company Ltd. Vs. Ajmera Realty and Infra India Ltd. – NCLT Mumbai Bench Read Post »

The Debenture Holders have right to initiate proceeding under Section 7 of the Code – Harish Raghavji Patel v. Clearwater Capital Partners Singapore Fund IV Pvt. Ltd. – NCLAT New Delhi

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The Debenture Holders have right to initiate proceeding under Section 7 of the Code – Harish Raghavji Patel v. Clearwater Capital Partners Singapore Fund IV Pvt. Ltd. – NCLAT New Delhi Read Post »

Whether any instrument which is convertible into shares with Put Option is regarded as Financial Debt under IBC?, Obligations of Sponsor Company in a Debenture Subscription Agreement, Jurisdiction under Section 62 of Code – IFCI Ltd. Vs. Sutanu Sinha & Ors. – Supreme Court

In this case, Appellant had agreed to subscribe to the CCDs at the request of ICTL(Corporate Debtor). In terms of the agreement, there was a “put option” and thus, in the event of default on part of ICTL(Corporate Debtor) during the window period, these CCDs could be sold to a third party but the principal obligation of IVRCL continued to be in place. It also provides for automatic conversion into equity shares of ICTL on the relevant date.
Hon’ble Supreme Court held that:
(i) The debenture subscription agreement clearly defines ICTL(Corporate Debtor) as the special purpose vehicle while IVRCL is the sponsor company and IFCI is the lender. The appellant was provided security under the Debentures Subscription Agreement but the obligations are of the sponsor company.
(ii) A contract means as it reads. It is not advisable for a Court to supplement it or add to it.
(iii) Our jurisdiction comes from Section 62 of the Code. The jurisdiction is restricted to a question of law akin to a second appeal. The law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters.

Whether any instrument which is convertible into shares with Put Option is regarded as Financial Debt under IBC?, Obligations of Sponsor Company in a Debenture Subscription Agreement, Jurisdiction under Section 62 of Code – IFCI Ltd. Vs. Sutanu Sinha & Ors. – Supreme Court Read Post »

Merely because Debenture Trustee has also filed a petition under section 7 of the Code, it does not mean that the individual Debenture Holders do not have the right to approach the Adjudicating Authority under Section 7 of IBC – Sri Girija Prasanna Cotton Mills Ltd. & Ors. Vs. DDK Infratech Pvt. Ltd. – NCLT Mumbai Bench

NCLT Mumbai Bench held that:
(i) The provisions of Civil Procedure Code, 1908 are not made fully applicable to the proceedings before the Adjudicating Authority/NCLT. This Tribunal is not a ‘court’ in a strict sense but a quasi-judicial body. It is well-settled that NCLT has been constituted as an Adjudicating Authority under the Code. The process of adjudication by NCLT under the Code is summary in nature and does not involve “trial of any suit”. Unlike a civil court, the NCLT does not have general jurisdiction under section 9 of the CPC. The principle of res sub judice enshrined in Section 10 of the CPC will have no applicability in the peculiar facts and circumstances of this case.
(ii) As regards the parallel proceedings initiated by the Debenture Trustee as well as the individual Debenture Holders under Section 7 of the Code, if either of the petitions is admitted, the other will become infructuous. Therefore, the above plea taken by the Corporate Debtor is found to be misconceived and is accordingly rejected.
(iii) It is a settled position in law that when an agreement clearly stipulates the interest clause, the claim amount has to be considered along with the interest accrued thereon.
(iv) There was no need of obtaining any Special Resolution etc. by the individual Debenture Holders while filing the present petition
(v) A financial creditor can trigger insolvency by filing an application directly under Section 7 of the Code without having to serve any demand notice on the corporate debtor.
(vi) There is no doubt that the subscription made by the Financial Creditors to the NCDs issued by the Corporate Debtor in the instant case is in the nature of a “financial debt” within the meaning of Section 5(8)(c) of the Code.
(vii) The law with respect to the right of the individual Debenture Holders to proceed under the Code is well-settled and that the pendency of separate petition filed by the Debenture Trustee in the matter cannot limit the Debenture Holders’ right to prefer the present petition for initiation of CIRP of the Corporate Debtor.

Merely because Debenture Trustee has also filed a petition under section 7 of the Code, it does not mean that the individual Debenture Holders do not have the right to approach the Adjudicating Authority under Section 7 of IBC – Sri Girija Prasanna Cotton Mills Ltd. & Ors. Vs. DDK Infratech Pvt. Ltd. – NCLT Mumbai Bench Read Post »

Securing cash flow arising out of lease agreement by Debenture Trustee of a Lessor, on rental are being paid by Corporate Debtor cannot be equated with a Financial Debt under IBC – Axis Trustee Services Ltd. Vs. Mr. Vijaykumar V. Iyer – NCLT Mumbai Bench

Vide Master Lease Agreement certain assets were given by Bhavna Asset Operators Pvt. Ltd. (BAOPL) to the Corporate Debtor on an operating lease basis and the CD was required to pay monthly lease rentals on each payment date. BAOPL, CD and the Debenture trustee also entered into a Tripartite Agreement. BAOPL defaulted in payment of its obligations under the debentures. The Debenture trustee, therefore, lodged its claim on as a Financial Creditor of the CD which had guaranteed to make the outstanding payments due and payable by BAOPL.

NCLT Mumbai Bench held that:
(i) The obligations of BAOPL in respect of NCDs are to be secured, inter alia, by the creation of first ranking exclusive mortagage over the cash flows and receivables arising out of the MLA and all cash flows and receivable arising out of the MLA are to be directly deposited by CD into an escrow account. Hence, in our view a liability or obligation to pay the lease rentals cannot be equated with a financial debt nor can it be said that the CD stood as guarantor for payment of the NCDs.
(ii) As per the Code, for a person to be designated as a financial creditor of the CD, it has to be shown that the CD owes a financial debt to such person. As already stated, the obligation of the CD is to make payments of lease rentals and other charges to BAOPL as per the terms of MLA.
(iii) Therefore, the essence of the Transaction Documents cannot be taken to be falling within the definition of a financial debt so far as CD is concern. Therefore, the relief sought in the IAs cannot be granted.
Lessor

Securing cash flow arising out of lease agreement by Debenture Trustee of a Lessor, on rental are being paid by Corporate Debtor cannot be equated with a Financial Debt under IBC – Axis Trustee Services Ltd. Vs. Mr. Vijaykumar V. Iyer – NCLT Mumbai Bench Read Post »

NCLT approves Consolidated Resolution Plan of Rs. 14,867.50 crores submitted by NARCL in group insolvency of SREI Equipment Finance Ltd. and SREI Infrastructure Finance Ltd., FSP – Rajneesh Sharma, Administrator of SREI Equipment Finance Ltd. and SREI Infrastructure Finance Ltd. Vs. National Asset Reconstruction Company Ltd. (NARCL) – NCLT Kolkata Bench

On 11.08.2023, NCLT Kolkata Bench has approved the Resolution Plan of National Asset Reconstruction Company Ltd. (NARCL) in consolidated CIRP of SREI Equipment Finance Ltd. and SREI Infrastructure Finance Ltd.
NARCL is a government entity, has been incorporated on 07.07.2021 with majority stake held by Public Sector Banks and balance by Private Banks with Canara Bank being the Sponsor Bank. NARCL is registered with the Reserved Bank of India as an Asset Reconstruction Company under SARFAESI Act, 2002.
NARCL and IDRCL will infuse funds into the Corporate Debtors and other funds towards Assignment Payments, and provide for Corporate Debtors to undertake repayment obligations in the manner set out in this Resolution Plan, aggregating to INR 14,867.50 crores, which amount shall be utilized for funding payments proposed to be made to the stakeholders of the Corporate Debtors, subject to the terms of this Resolution Plan.

NCLT approves Consolidated Resolution Plan of Rs. 14,867.50 crores submitted by NARCL in group insolvency of SREI Equipment Finance Ltd. and SREI Infrastructure Finance Ltd., FSP – Rajneesh Sharma, Administrator of SREI Equipment Finance Ltd. and SREI Infrastructure Finance Ltd. Vs. National Asset Reconstruction Company Ltd. (NARCL) – NCLT Kolkata Bench Read Post »

Even if amount is reflected in Financial Statements of Corporate Debtor under Liability head, it would depend on the facts of each case as to whether such an entry in the balance sheet construes a Financial Debt as defined under the Code – M/s IFCI Ltd. Vs. Sutanu Sinha RP of IVRCL Chengapalli Tollways Ltd. – NCLAT Chennai

In this case, the issue before the NCLAT is whether the fully Convertible Debentures should be treated as an equity instrument or as a debt and if the amount stated to be due and payable, falls within the definition of Financial Debt as defined under the Code.
NCLAT held that (i) The Learned Adjudicating Authority has also rightly placed reliance on the decision of the Hon’ble Supreme Court in Narendra Kumar Maheshwari Vs. UOI and Ors. wherein it is held by the Hon’ble Apex Court that any instrument, which is fully, compulsorily convertible into shares, is regarded as Equity, and not a loan or debt.
(ii) The terms and conditions of the CCD and the intention of the Parties does not anywhere specify that the instrument would take the character of a Financial Debt, in the happening of any event.
(iii) Even if these amounts were reflected in the financial statements of the Corporate Debtor as ‘Other Financial Liability’, it would depend on the facts of each case as to whether such an entry in the balance sheet construes a Financial Debt as defined under the Code.

Even if amount is reflected in Financial Statements of Corporate Debtor under Liability head, it would depend on the facts of each case as to whether such an entry in the balance sheet construes a Financial Debt as defined under the Code – M/s IFCI Ltd. Vs. Sutanu Sinha RP of IVRCL Chengapalli Tollways Ltd. – NCLAT Chennai Read Post »

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