NCLT Chennai decision threatens enforcement matrix of investors using debt instruments – By Adv. Adhitya Srinivasan

Adv. Adhitya Srinivasan
(An Advocate based out of Delhi and a qualified Solicitor in England & Wales)

NCLT Chennai decision threatens enforcement matrix of investors using debt instruments


The Insolvency and Bankruptcy Code, 2016 (“IBC”) defines a “financial debt” to mean a debt along with interest, if any, which is disbursed against consideration for the time value of money. Section 5(8)(a) of the IBC specifically includes ‘money borrowed against the payment of interest’ within the definition of financial debt. Section 5(8)(c) of the IBC covers amounts raised pursuant to the issue of bonds, notes, debentures, loan stock or any similar instrument.

In its decision in M/s. GVFL Trustee Company Pvt. Ltd. v M/s. Ultravolt Power Pvt. Ltd. (2021) 243 NCLT, the National Company Law Tribunal, Chennai (“NCLT Chennai”) appears to have carved out an exception to sections 5(8)(a) and 5(8)(c) inasmuch as it refused to treat money borrowed from an investor against the issue of interest-bearing debt instruments as a financial debt.


The relevant facts are as follows: The financial creditor is GVFL Trustee Company Limited, which is the sole trustee of GVFL Venture Capital Fund. Pursuant to the terms of an ‘Investment-cum-Shareholders Agreement’, the fund completed an investment in Ultravolt, which consisted of a small equity shares component and a much larger compulsorily convertible debentures (CCDs) component. Owing to non-utilisation of the investment amount by Ultravolt, the fund sought a refund of its investment. This led to the parties entering into a Settlement Agreement which provided for the repayment of amounts towards redemption of CCDs, equity shares and other interest amounts payable. Further the CCDs stood converted into non-convertible debentures (NCDs). When Ultravolt failed to honour its repayment obligations under the Settlement Agreement (even after the repayment scheduled was renewed at its request), the fund (acting through its trustee) took steps to initiate insolvency proceedings against Ultravolt.


NCLT Chennai held that no ‘financial debt’ was made out in the above facts and that the applicant (i.e. GVFL Trustee acting for GVFL Venture Capital Fund) could not be regarded as a ‘financial creditor’ within the meaning of the IBC. In arriving at its decision, NCLT Chennai relied extensively on the governance provisions of the Investment-cum Shareholders Agreement, which provided certain monitoring powers to the investor including representation on the board of directors, the right to have a separate observer on the board, the ability to approve the annual business plan of the company, etc. and held that the nature of the transaction is an “investment based upon an ‘Approved Business Plan’” rather than a financial debt.


With respect, the decision of NCLT Chennai runs contrary to the decision of the National Company Law Appellate Tribunal in MAIF Investments India Pte. Ltd. v M/s. Ind-Barath Energy (Utkal) Limited (2019) 307 NCLAT and is flawed on various other counts. Some of these are summarised below:

First, under the scheme of the IBC, the existence of a financial debt determines whether or not a person is a financial creditor and not the other way round. Section 5(7) of the IBC defines a ‘financial creditor’ to mean a person to whom a financial debt is owed. NCLT Chennai appears to have gone about it the other way and has considered the relationship between the parties in order to decide whether or not a financial debt existed. Having determined that the applicant was an investor, it concluded that there was no financial debt.

Second, the fact that money was borrowed from an investor who had negotiated a robust monitoring mechanism does not take away from the fact that money was borrowed against the payment of interest. An investor may well have extended a ‘financial debt’ to a borrower. In other words, there is no reason why the applicant could not be an investor and a financial creditor at the same time – the two are not mutually exclusive. NCLT Chennai, however, seems to have drawn the opposite conclusion.

Third, up to the point of conversion, CCDs are recorded as a borrowing in the balance sheet, which reflects its character as a debt. By contrast, equity shares (which was also a component of the investment made by the applicant in Ultravolt) would be recorded under shareholders’ funds. This ought to have made clear that the CCDs component of the investment could not be regarded as equity.


This decision is significant because it treats financial creditors and investors as mutually exclusive categories, which effectively means that an investor (who structures its investment using debt instruments) cannot also be a financial creditor and cannot therefore avail itself of the enforcement mechanism and remedies available to a financial creditor under the IBC. Moreover, it would also mean that such an investor would feature at a lower rung of the waterfall if the company went into liquidation. Neither of these is a desirable outcome and if this proposition is upheld by higher authorities, it may cause investors to rethink the terms on which they participate in investments.

About the Author

The author is an Advocate based out of Delhi and a qualified Solicitor in England & Wales. He graduated with a B.A. LL.B (Hons.) from the National Law Institute University, Bhopal in 2013 and an LL.M. from Harvard Law School in 2016.

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