|
Powered by AltAlpha AI
|
By Kaishena Chauhan, 4th year student at the O.P. Jindal Global Law School
Background
The term “debt” under Section 3 of the Insolvency and Bankruptcy Code, 2016 (IBC) means “a liability or obligation in respect of a claim which is due from any person…”. Any creditor to whom a debtor owes a debt can claim to recover their debt at the time of the debtor’s insolvency or liquidation. The existence of this debt is the primary precondition for IBC claims. A debenture is a debt instrument under IBC. However, the issue that is not settled is regarding hybrid forms of debentures. Compulsory Convertible Debentures (CCD) is a hybrid form under Section 71(1) of the Companies Act, 2013 and, can be converted on redemption.
Challenge
Different treatments are given to the CCDs under other laws. For instance, under Foreign Exchange Management Regulations, 2017 (FEMA) they are treated as equity from day one and not as debt. The reference to FEMA is made in almost every rebuttal against the IBC debt claim. Therefore, the concern that comes up is whether the CCDs should be considered as debt or equity under the IBC. Consequently, whether the holder of CCDs should be allowed to submit a financial debt claim for recovery. The stand on these concerns is not yet solidified, posing a consistent challenge for the insolvency framework and the CCD holders. This paper aims to discuss the varied reasonings attempting to resolve this challenge and give further suggestions for developing a better redressal framework.
Judicial Considerations
The case of M/s IFCI Limited v. Sutanu Sinha heavily relied on the financing plan, concessional agreement, and common loan agreement to ascertain the nature of CCDs. It was noted that the documents clearly stated the CCDs to be equity and that they even matured before insolvency. The case prioritised the contractual or proprietary right to treat the CCDs as equity instruments. However, it is argued that the ratio of this case is now as it is applied in the recent cases where the facts are not the same or similar, or there is no contractual stipulation of CCD’s nature, or where they have not yet matured or converted.
In Shubham Corporation Private Limited v. Kotoju Vasudeva Rao, the issued CCDs were to be converted into equity either before or at the end of the ten years. The appellate tribunal here applied the ‘test of repayment’ to determine if they were to be included in either debt or equity. Since the only role or nature of these CCDs was to become equity at some point, and not attract any liability of repayment, they were concluded to be an equity instrument. The case noted that the precondition of a ‘debt’ for an insolvency claim is to have an element of obligation of repayment.
If the obligation of repayment is considered to be a judging criterion for a CCD to be debt, for what this repayment obligation exists, becomes the next question. M/s IFCI Limited v. Sutanu Sinha links this repayment to the principal amount means that only if the borrowed principal amount is payable at any point in time, then it will be a debt instrument under IBC. However, on the contrary, in Narendra Kumar Maheshwari v. Union of India & Ors., the SC observed that CCDs do not “postulate any repayment of principal”. Moreover, in Agritrade Power Holding Mauritius Limited and Ors. v. Ashish Arjunkumar Rathi, where there was no repayment of the principal amount due maturing of the CCDs, the interest accrued till the date of conversion nonetheless became payable as financial debt. Now, if the test is strictly followed then the determination of CCD on the sole basis of principal amount will lead to absurdity when the facts differ. This shows the inconsistency in interpreting the repayment obligation. Therefore, it is argued that the test of repayment obligation is ineffective in deciding the nature of CCD in insolvency claims. Rather an approach favouring the holders of CCDs is to be contemplated.
Recommendations
There are three broader terms in which CCDs can be issued and they should be considered while formulating a better method of determination. First, where there is an amount, principal, or interest, due for repayment, which is not yet paid, then that amount must for all IBC purposes be considered to be debt. Here, if it is paid already before the insolvency process, then it cannot be accounted as debt.
Second, when no amount is due for repayment, and only the conversion at maturity is due, then if the CCDs are not yet matured, the CCDs are to be considered as debt and not equity to churn out some benefit to the holder. In this case, the holder has already paid for the debentures in the view of getting a future benefit and then this future benefit is negated by the insolvency. Consequently, as relief, the claim by the holder for the amount of the CCDs should be allowed as debt. This situation and the approach were recognised in SGM Webtech Pvt. Ltd. v. Boulevard Projects Pvt. Ltd., where the NCLT noted that “if the debentures are not matured and not convertible for the period of redemption is not complete, they shall be treated as debentures and as a consequence, it will remain as debt”. Moreover, it was also supported in Srei Multiple Asset Investment Trust v. IDBI Bank Ltd. and Ors.
Third, where no amount is due for repayment, and only conversion on maturity is associated with the CCD. Here, if the CCDs have already matured before the initiation of insolvency, then they can be considered as equity since the promised benefit has already been accrued and used by the holder and no extra benefit can be conferred on such holder by counting it as debt.
Conclusion
Therefore, the position under IBC, being a special legislation should supersede the conflicting position under FEMA. Since under IBC there exist divided opinions, the one which provides leniency and relief to the creditors against their claims should be given a preference. Here, a claim that fits to be a debt should be taken as debt only and not equity. Moreover, in any case, it should be mandated to have a clause stipulating the treatment for conversion or non-conversion of the CCDs date on winding up, dissolution, insolvency, or liquidation, i.e., the clause must stipulate the nature of the issued CCDs as either debt or equity beforehand to account for the future mentioned probable causes. It is established that the commercial courts should not delve into the implied contractual terms and read them as it is; therefore, an express stipulation for the CCDs makes the judgment easy without fetters. Finally, the IBC itself can include treatments for CCDs at its different stages in different scenarios to make the Code more comprehensive without uncertainties.
