[Raghav Bhatia is an Advocate practising at the Supreme Court of India and High Court of Delhi and Lishika Sahni is a 4th year law student at Dr. RMLNLU, Lucknow].
In December last year, in Indian Renewable Energy Development Agency Limited v. Waaree Energies Limited, the National Company Law Appellate Tribunal (“NCLAT”) observed that compulsorily convertible debentures (“CCDs”) may be debt or equity in a given case depending upon the specific terms of the agreement between the parties.
Background
Indian Renewable Energy Development Agency Limited (“IREDA”) had provided financial assistance to the corporate debtor, i.e., Taxus Infrastructure and Power Projects Pvt. Ltd. On account of corporate debtor’s default, IREDA filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), which was admitted by the National Company Law Tribunal, New Delhi (“NCLT”) by way of its order dated October 10, 2022. Accordingly, the corporate insolvency resolution process (“CIRP”) was initiated against the corporate debtor.
Upon initiation of CIRP, Waaree Energies Limited (“WEL”) filed its claim in Form-C, claiming an amount of Rs. 21,45,42,466/-. In support of its claim, WEL relied on an arbitral award dated December 31, 2021, which had awarded it Rs. 10,00,00,000/- along with 24% interest per annum, amounting to Rs. 21,45,42,466/- (Rs. 10,00,00,000/- as principal amount + Rs. 11,45,42,466/- as interest). WEL contended that it had provided funding to the corporate debtor under a Debenture Subscription Agreement (“DSA”) dated October 16, 2012, under which it had subscribed to 1,00,000 CCDs “of face value of Rs. 1,000 each for a period of 65 months”. As WEL did not receive this amount back, it was constrained to initiate arbitral proceedings which culminated in the award dated December 31, 2021.
Initially, the resolution professional had accepted WEL’s claim and allowed it to participate in the meetings of the Committee of Creditors (“CoC”) as a financial creditor. However, as objections were raised with respect to the status of WEL, the resolution professional concluded that WEL was not a financial creditor on the strength of the arbitral award, which had not even attained finality. Simultaneously, the resolution professional filed an application under section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) before the Bombay High Court for setting aside the arbitral award.
Aggrieved, WEL preferred an application before the NCLT for a direction to treat it as a financial creditor and restore its position in the CoC. The NCLT allowed the application of WEL and held that WEL is entitled to participate in CoC meetings being a financial creditor on the strength of the arbitral award. It was observed that the debentures in this case, although being titled as CCDs, had “an interest component payable in case of default, signifying the Time Value for Money, hence, the same has to be categorized as a ‘Debt’”.
Aggrieved, IREDA approached the NCLAT in the instant proceedings.
Proceedings before the NCLAT
At the outset, the NCLAT noted that under the DSA the intention of corporate debtor was to fund its upcoming power and infrastructure projects and hence required surplus capital. Relying upon the definition of ‘financial debt’ under section 5(8) of the IBC and that of ‘debenture’ under section 2(30) of the Companies Act, 2013, it was observed that a debenture is an instrument ‘evidencing a debt’ and are thus fully covered under section 5(8)(c) which provides for an inclusive definition of financial debt by stating “any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument”.
Thereafter, the NCLAT analysed clause 1.1 of the DSA which defines CCDs and states that CCDs “shall refer to the debentures issued by the Company and allotted to the Investor as per the applicable laws of the Act, and which are compulsorily convertible into the equity shares of the Company at the option of the Investor as per terms of this Agreement”. Additionally, clause 4.1 of the DSA provides that “The Investor shall have the option to convert the CCDs into Equity Shares of the Company by giving I (one) month notice (“Conversion Notice”) in writing to the Company”.
Upon a conjoint reading of the aforementioned clauses, the NCLAT concluded that under the DSA the “debentures are compulsorily convertible into equity shares” only at the option of the investor. It was further noted that under the DSA, one of the events triggering default was failure of the corporate debtor to redeem the debentures. The NCLAT further placed reliance on the letter dated December 08, 2017 issued by WEL to the corporate debtor wherein WEL demanded redemption of debentures, or, in the alternative, conversion of debentures into fully paid equity shares.
It was observed that in the instant case there was an event of default as, even after WEL had issued letter dated December 08, 2017, the corporate debtor neither redeemed the debentures and nor were the debentures converted into equity shares, thereby entitling WEL to invoke clause 8.1 of the DSA. Clause 8.1 of the DSA stipulates that upon occurrence of an event of default, the debentures and the amount payable towards redemption become due and the debenture holder is entitled to receive the defaulted amount along with interest at 24% per annum. Therefore, it was observed that the transaction under the DSA “had a time value of money” and was thus within the ambit of ‘financial debt’ as defined under section 5(8) of the IBC.
Before the NCLAT, IREDA had relied upon the judgment of the Supreme Court of India in IFCI Limited v. Sutanu Sinha in which it was observed that CCDs are in the nature of equity and not a loan or debt. However, the judgment in IFCI Limited was distinguished by the NCLAT on the ground that the Supreme Court’s reasoning in the aforementioned judgment was based on an analysis of the specific nature of transaction and relevant clauses of the agreement entered into between the parties therein. In IFCI Limited, the relevant terms of the agreement provided for an automatic conversion of debentures into equity shares on a particular date.
Similarly, the NCLAT also distinguished its previous judgment in Shubham Corporation Pvt. Ltd. v. Mr. Kotoju Vasudeva Rao wherein it was observed that CCDs held by Shubham Corporation were in the nature of equity. Pertinently, even in Shubham Corporation Pvt. Ltd., the agreement between the parties provided that “debentures were to be automatically converted into equity shares at the end of 10 years from the date of allotment, if option not exercised earlier by the Appellant”.
In view of the aforesaid, the NCLAT concluded that upon an analysis of the relevant clauses of the DSA, it was clearly evident that the transaction between the parties contemplated time value for money as redemption of debentures was expressly provided under the DSA and even conversion of debentures into equity shares was optional. By issuing debentures, the corporate debtor had raised capital and thus the same was in the nature of ‘financial debt’ as provided for under section 5(8) of the IBC. Accordingly, the appeal was dismissed.
Analysis
In IFCI Limited, the Supreme Court had itself observed that commercial documents such as DSA are not drafted by laypersons but by experts of the relevant field who have agreed upon rights and obligations of all the involved parties and thus should be read as it is, without reading anything into it.
Therefore, while CCDs might be in the nature of equity by its very nature, in this case, the specific terms of the DSA, which clearly contemplated redemption, or in the alternative, option of conversion of debentures into equity, demonstrated the intention of the parties that the instrument in question was in the nature of debt. Accordingly, the NCLAT rightly upheld the bargain between the parties.
In IFCI Limited, the Supreme Court also noted that what was earlier simplistically referred to as a debenture now has hybrid versions including CCDs, optionally convertible debentures and convertible debentures. Interestingly, the NCLAT in Santosh Kumar v. ASK Trusteeship Services (P) Ltd., while placing reliance on its previous judgment in Maif Investments India Pte. Ltd. v. Ind-Barath Energy (Utkal) Limited, concluded that optionally convertible debentures constituted ‘financial debt’ under section 5(8)(c) of the IBC. In the instant case as well, the DSA clearly demonstrated that the debentures in question were in reality optionally convertible in nature and hence constituted ‘financial debt’ under section 5(8)(c) of the IBC.
The authors agree with the conclusion of NCLAT and are of the viewpoint that such an interpretation would not lead to ambiguity or absurdity. Rather, the authors submit that such an approach will uphold commercial bargain between parties and highlight efforts of Indian courts to strictly go by express terms of the contract between the parties.
– Raghav Bhatia & Lishika Sahni
