2024 (1) TMI 1433 - AT - IBC

Corporate debtor's appeal dismissed as optionally convertible debentures ruled financial debt under Section 5(8)(c)

Santosh Kumar Versus ASK Trusteeship Services Private Limited and Nobility Estates P. Ltd., Gurugram

NCLAT Principal Bench dismissed appeal challenging admission of Section 7 application. Corporate debtor argued optionally convertible debentures were ... Admission of Section 7 application filed by the Respondent No.1 - no debt due to the Financial Creditor since the optionally convertible debentures are in the nature of equity - Financial Creditor is related party of the Corporate Debtor - Violation of Principles of Natural Justice since the Adjudicating Authority relied on the Rejoinder filed by the Applicant - Impugned order passed on the basis of instruments which are stamped insufficiently and are not admissible evidence - Admission of section 7 application when Corporate Debtor is a going concern. No debt due to the Financial Creditor since the optionally convertible debentures are in the nature of equity - HELD THAT:- In present case, DSA in question is not CCD rather DSA in question is OCD with regard to which there is no dispute between the parties - the Respondent has rightly relied on judgment of this Tribunal in MAIF Investments India Pte. Limited [2019 (4) TMI 1903 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], where Section 7 application was filed by the Financial Creditor which was dismissed by the Adjudicating Authority. The Financial Creditor has entered into subscription agreement subscribing OCDs. Appeal was filed by the Financial Creditor challenging the order rejecting the application. This Tribunal in the aforesaid case examined the DAS and held that OCDs are financial debt within the meaning of Section 5(8)(c). - This Tribunal allowed the appeal and set aside the order and held the Appellant to be treated as Financial Creditor. The above judgment fully supports the submission of learned counsel for the Respondent. Financial Creditor is related party of the Corporate Debtor - HELD THAT:- The said plea has not been taken by the Appellant in the appeal or in the reply. However, it is not the case of the Appellant that application filed by the Financial Creditor is not maintainable it being related party. On the said submission no mileage can be taken by the Appellant nor on this ground it can be held that application was not maintainable. Violation of Principles of Natural Justice since the Adjudicating Authority relied on the Rejoinder filed by the Applicant - HELD THAT:- The fact is that the arguments did not proceed on that day and matter was adjourned to give opportunity to the Corporate Debtor. The Adjudicating Authority gave opportunity to the Corporate Debtor to make his submissions on the next date and submissions were not heard on 11.10.2023 since Rejoinder was served on the Corporate Debtor only on 09.10.2023. Matter was heard thereafter on 07.11.2023 and after hearing the matter judgment was reserved. There are no substance in the submission of the Appellant that there is any violation of Principles of Natural Justice. Impugned order passed on the basis of instruments which are stamped insufficiently and are not admissible evidence - HELD THAT:- Relying on the material on record, the Adjudicating Authority concluded that there are sufficient materials to prove financial debt and default by the Corporate Debtor. Learned counsel for the Respondent has relied on the judgment of Hon’ble Supreme Court in M. Suresh Kumar Reddy vs. Canara Bank & Ors. [2023 (5) TMI 570 - SUPREME COURT] where the Hon’ble Supreme Court after referring to the earlier judgment of Hon’ble Supreme Court in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd. [2022 (7) TMI 581 - SUPREME COURT] held that in the application under Section 7, the Adjudicating Authority has to look into the debt and default. Admission of section 7 application when Corporate Debtor is a going concern - HELD THAT:- Respondent is right in his submission that judgment of Hon’ble Supreme Court in Vidarbha is on its own facts and reasons and no ratio can be culled out from the said judgment that if Corporate Debtor is a going concern, Section 7 application has to be rejected on this ground. Conclusion - There is sufficient material on record that proves the existence of financial debt and default. There are no error in the order of the Adjudicating Authority admitting Section 7 application. Appeal dismissed. The judgment from the National Company Law Appellate Tribunal (NCLAT) involves an appeal against the admission of a Section 7 application by the Adjudicating Authority, which was filed by the Financial Creditor against the Corporate Debtor. The appeal was filed by the Suspended Director of the Corporate Debtor, challenging the order that admitted the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).Issues Presented and ConsideredThe core issues considered in this judgment were:Whether optionally convertible debentures (OCDs) constitute financial debt under the IBC.Whether the Financial Creditor is a related party to the Corporate Debtor, affecting the maintainability of the Section 7 application.Whether there was a violation of the Principles of Natural Justice in the proceedings before the Adjudicating Authority.Whether the instruments relied upon were stamped insufficiently, affecting their admissibility as evidence.Whether the Corporate Debtor being a going concern impacts the admission of the Section 7 application.Issue-wise Detailed Analysis1. Nature of OCDs as Financial DebtThe primary issue was whether the OCDs subscribed to by the Financial Creditor constitute financial debt. The Appellant argued that OCDs are akin to equity and not debt, relying on a Supreme Court judgment concerning compulsorily convertible debentures (CCDs). The Tribunal distinguished between CCDs and OCDs, noting that the latter are considered financial debt under Section 5(8)(c) of the IBC, as previously held in the case of 'MAIF Investments India Pte. Limited vs. Ind Bharath Energy (Utkal) Limited.' The Tribunal concluded that OCDs are indeed financial debt, supporting the Adjudicating Authority's decision.2. Related Party AllegationThe Appellant claimed that the Financial Creditor was a related party, which would affect the application's maintainability. However, this argument was not substantiated in the appeal or in earlier proceedings. The Tribunal found no merit in this claim, noting that the related party issue was not a ground for rejecting the application.3. Principles of Natural JusticeThe Appellant contended that the Adjudicating Authority violated the Principles of Natural Justice by relying on a Rejoinder filed by the Financial Creditor without allowing the Corporate Debtor to respond. The Tribunal reviewed the procedural history and found that the Adjudicating Authority had provided sufficient opportunity for the Corporate Debtor to address the Rejoinder, thus dismissing the claim of procedural unfairness.4. Insufficient Stamping of InstrumentsThe Appellant argued that the instruments relied upon were insufficiently stamped and thus inadmissible. The Tribunal noted that the Corporate Debtor had admitted to the debt and default, which was corroborated by the Record of Default from NeSL. The Tribunal concluded that the stamping issue did not affect the finding of debt and default.5. Corporate Debtor as a Going ConcernThe Appellant argued that since the Corporate Debtor is a going concern, the Section 7 application should not be admitted. The Tribunal referred to the Supreme Court's judgment in 'Vidarbha Industries Power Ltd. vs. Axis Bank Ltd.,' clarifying that the going concern status does not preclude the admission of a Section 7 application if debt and default are established.Significant HoldingsThe Tribunal upheld the Adjudicating Authority's decision to admit the Section 7 application, establishing the following core principles:OCDs qualify as financial debt under Section 5(8)(c) of the IBC.The related party status must be substantiated with evidence to impact the maintainability of a Section 7 application.Adherence to the Principles of Natural Justice is satisfied if parties are given adequate opportunity to present their case.The admissibility of evidence is not solely dependent on the sufficiency of stamping when debt and default are admitted.The going concern status of a Corporate Debtor does not negate the existence of debt and default for the purposes of Section 7.The Tribunal dismissed the appeal, affirming the Adjudicating Authority's order to admit the Section 7 application, citing sufficient material evidence of financial debt and default.