2023 (12) TMI 129 - SC - IBC

Compulsorily convertible debentures held equity not debt under Section 3(11); SPV no liability, appeal dismissed

SC dismissed the appeal, holding the compulsorily convertible debentures and accompanying documents created equity rights, not a debt under Section 3(11), ... CIRP - Equity or financial debt - RP rejected the claim of the appellant - Whether the CCDs along with the other documents can be said to be really a debt and not an equity despite the wording of the CCDs which must be read along with the other documents and communications inter se the parties? - Maintainability of appeal after statutory period of limitation. HELD THAT:- The definition of debt under Section 3(11) of the Code would be the liability or obligation in respect of a claim which is due from any person. ICTL does not have a liability or obligation qua the appellant because the appellant is actually an equity participant and does not have a debt to be repaid. The success of a commercial venture pays benefit to the equity participants but with income, which would not inhere in case of the the failure of the venture - if it was a simpliciter debenture, it would have fallen under the category of a financial debt along with bonds etc. However, we are not concerned with a debenture per se. The debenture subscription agreement clearly defines ICTL as the special purpose vehicle while IVRCL is the sponsor company and IFCI is the lender. In terms of Clause 2.4, the rate of interest/coupon rate of 11 per cent per annum, payable quarterly, is applicable till either the buy back of all the CCDs (an option available to the borrowers) or conversion of CCDs into equity. The liability is of the sponsor company for making coupon payments and not of the SPV/ICTL. Further, under Clause 2.8, the buy back is also an arrangement inter se the Sponsor company and IFCI - the appellant was provided security under the Debentures Subscription Agreement but the obligations are of the sponsor company. That being the position, it is difficult to appreciate how the obligation is of the SPV i.e. ICTL. Unless the debt is of the ICTL, the appellant cannot seek a recovery of the amount on the basis of being a creditor of the SPV ICTL. The effect of the aforesaid is that a contract means as it reads. It is not advisable for a Court to supplement it or add to it. It is an unfortunate scenario where the appellant is being left high and dry as there is nothing which it can recover from the sponsor company, there being no assets and funds. The investment was clearly in the nature of debentures which were compulsorily convertible into equity and nowhere is it stipulated that these CCDs would partake the character of financial debt on the happening of a particular event. - The appellant has invoked the guarantees and sought remedy against the sponsor company. The fact that it is not serving any fruitful purpose is not something which can weigh with us. Maintainability of appeal after statutory period of limitation. - 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. Thus, the lis inter se the parties has to be analyzed within the four corners of the ambit of the statutory jurisdiction conferred on this Court. The appeal does not raise any such question of law and that the findings of the Courts below are in accordance with settled principles - Appeal dismissed. Issues Involved:1. Classification of Compulsorily Convertible Debentures (CCDs) as debt or equity.2. Rejection of the appellant's claim by the Resolution Professional.3. Interpretation of the Debenture Subscription Agreement and related documents.4. Jurisdiction of the Supreme Court under Section 62 of the Insolvency and Bankruptcy Code, 2016.Summary:1. Classification of Compulsorily Convertible Debentures (CCDs) as debt or equity:The appellant invested in a highway project through CCDs, which were to be converted into equity by December 2017. The appellant argued that the CCDs should be treated as debt due to financial difficulties faced by the project. The Resolution Professional and the National Company Law Appellate Tribunal (NCLAT) rejected this claim, stating that CCDs are treated as equity as per the Debenture Subscription Agreement and the Concession Agreement with NHAI. The Supreme Court upheld this view, citing the judgment in *Narendra Kumar Maheshwari v. Union of India & Ors.*, which states that instruments compulsorily convertible into shares are regarded as 'equity' and not a loan or debt.2. Rejection of the appellant's claim by the Resolution Professional:The Resolution Professional rejected the appellant's claim for repayment, stating that CCDs were treated as equity under the financial package approved by NHAI and the lenders' consortium. The appellant's challenge to this position was dismissed by the NCLAT, and the Supreme Court found no reason to overturn this decision.3. Interpretation of the Debenture Subscription Agreement and related documents:The Supreme Court examined the Debenture Subscription Agreement, which defined the obligations of the sponsor company and the security provided for the debentures. The Court concluded that the appellant's investment was in the nature of equity and not debt, as the agreement provided for automatic conversion of CCDs into equity shares of ICTL. The Court emphasized that commercial agreements should be interpreted as they are written, without adding implied terms.4. Jurisdiction of the Supreme Court under Section 62 of the Insolvency and Bankruptcy Code, 2016:The Supreme Court noted that its jurisdiction under Section 62 is limited to questions of law arising out of the NCLAT's order. The Court found that the appeal did not raise any substantial question of law and that the findings of the lower courts were in accordance with settled principles. Consequently, the appeal was dismissed, with parties bearing their own costs.Conclusion:The Supreme Court upheld the classification of CCDs as equity, rejected the appellant's claim for repayment, and emphasized the importance of interpreting commercial agreements as written. The appeal was dismissed on the grounds that it did not raise any substantial question of law.