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

NCLAT Principal Bench dismissed appeal challenging admission of Section 7 application. Corporate debtor argued optionally convertible debentures were equity instruments, not debt, and raised procedural objections including natural justice violations and insufficient stamping. NCLAT held OCDs constitute financial debt under Section 5(8)(c), citing precedent. Court found no natural justice violation as corporate debtor received adequate hearing opportunity. Insufficient stamping did not invalidate evidence proving debt and default. Corporate debtor's status as going concern irrelevant to Section 7 admission. Appeal dismissed with costs.

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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 Considered

The 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 Analysis

1. Nature of OCDs as Financial Debt

The 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 Allegation

The 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 Justice

The 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 Instruments

The 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 Concern

The 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 Holdings

The 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.

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