Status of Compulsorily Convertible Debentures Under the IBC – By Rahul Rajpal

Status of Compulsorily Convertible Debentures Under the IBC

-By Rahul Rajpal, 5th Year student of Gujarat National Law University


Companies looking to grow but lacking capital rely on two sources of funding: debt and equity. Investment received is often coupled with obligations and liabilities. A debenture is one such debt instrument issued in return for capital which represents a liability to repay the capital, with or without interest, over a period of time. A Compulsorily Convertible Debenture (“CCD“) is a type of debenture, although it lacks the fundamental quality present in other debt instruments: the liability to repay capital borrowed. CCDs are issued for a period of time and upon reaching maturity, are converted into shares in the company. Despite a debenture generally being considered as a debt instrument, a CCD does not possess the fundamental requirement to classify it as debt. This issue, with respect to the Insolvency and Bankruptcy Code, 2016 (“IBC“), arose before the Principal Bench of the National Company Law Tribunal (“NCLT“), in the matter of SGM Webtech Pvt. Ltd. vs Boulevard Projects Pvt. Ltd. The bench was faced with a claim by an applicant to be added to the list of financial creditors on the grounds of holding CCDs which had not yet reached the maturity date. The bench relied on the general understanding of a debenture which represents a debt which is to be repaid over a period of time. In addition, the corporate debtor, in its books of accounts, had entered this debenture under debt for which Tax Deducted at Source (“TDS“) was being paid for the interest based on a fixed coupon rate, paid annually. Despite the Corporate Debtor and the Resolution Applicant bringing up the status of CCDs under the FEMA Guidelines, specifically regulation 2(v) of the Foreign Exchange Management (Transfer or Issue of a Security by a person resident outside India) Regulations, 2017, the bench held that the position under the IBC would trump other legislations, owing to the non-obstante clause under section 238 of the IBC.

Debt under IBC: Requirement to Repay

The NCLT, in my opinion, has erred in its classification of CCDs as they fail to fulfil the fundamental requirement of any debt instrument. Section 5(8) of the IBC has defined ‘financial debt’ as a debt along with interest, which is disbursed against the consideration for the time value of money. This definition includes, but not limited to, amount raised through bonds, notes, debentures, loan stock, etc. Section 3(11) has defined debt as a liability or obligation in respect of a ‘claim’, which has been defined under section 3(6) as a right to payment, irrespective of whether it is disputed. A CCD, unlike ordinary or optionally convertible debentures or any other debenture, does not provide for repayment of debt, instead only being converted into shares at the end of the maturity period. Along with this, the Supreme Court of India in Innoventive Industries vs ICICI Bank [2017] 02 SC has stated that the primary requirement for a financial creditor to initiate insolvency proceedings under section 7 is the presence of a debt which is owed by the corporate debtor. The presence of a ‘debt’, which is an obligation to payback a certain amount, is the qualifying factor for a financial creditor. The Apex Court in Anuj Jain vs Axis Bank [2020] 06 SC held that the basic elements of a ‘financial debt’ is that it should be disbursed against consideration for the time value of money. This remains an essential part even for all transactions listed under sub-clauses (a) to (i) of section 5(8), which includes debentures. Furthering this, it was laid down that a debt refers to a liability or obligation in respect of a claim, which includes financial debt and operational debt. The absence of this obligation or liability in case of a CCD should be the determining factor, despite being under the same umbrella as other debt instruments.


The generalisation of all debentures will lead to a grave precedent for companies in the midst of insolvency, thereby putting further stress on the company’s limited resources. Even though debentures are generally regarded as debt instruments, it should be seen that each type of debenture also satisfies the essential requirement of debt under the IBC. With respect to CCDs, the intention of both parties is for it to be converted to shares in the company upon the completion of the maturity period. This intention is reflected by absence of requirement to pay-back the capital amount. Keeping this intention of the parties and the absence of a fundamental requirement of debt, date of insolvency, either before or after the date of maturity of the CCD, should not have any effect on the status of a CCD.

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