Financial debt through debentures recognised where the agreement showed time value of money and default-based monetary rights.
Compulsorily convertible debentures and the Debenture Subscription Agreement were held to create a financial debt under the Insolvency and Bankruptcy Code because the transaction involved raising funds through debentures, an equity conversion option, and enforceable monetary consequences on default, including interest on defaulted amounts. On a true construction of the agreement, these features showed disbursal of money against consideration for the time value of money, bringing the claim within the statutory definition of financial debt. The existence of an arbitral award and pending proceedings under section 34 of the Arbitration and Conciliation Act, 1996 did not change the insolvency character of the claim. The respondent was therefore treated as a financial creditor entitled to participate in the Committee of Creditors.
Issues: Whether the compulsorily convertible debentures and the Debenture Subscription Agreement created a financial debt within the meaning of the Insolvency and Bankruptcy Code, and whether the respondent was entitled to be treated as a financial creditor and participate in the Committee of Creditors.
Analysis: The nature of the transaction was determined from the terms of the Debenture Subscription Agreement. The agreement contemplated raising of funds through debentures, contained an option for conversion into equity, provided for an event of default if redemption or repayment did not occur, and also stipulated interest on defaulted amounts. These features showed that the arrangement involved disbursal against consideration for the time value of money. The statutory definition of financial debt includes amounts raised through debentures, and the contractual terms here showed that the debenture holder had enforceable monetary rights on default. The existence of an arbitral award and the pendency of proceedings under section 34 of the Arbitration and Conciliation Act, 1996 did not alter the contractual character of the claim for insolvency purposes.
Conclusion: The debenture-based claim constituted a financial debt, and the respondent was correctly recognized as a financial creditor entitled to participate in the Committee of Creditors.
Final Conclusion: No interference was warranted with the order restoring the respondent's status in the insolvency process, and the appeal failed.
Ratio Decidendi: A debenture arrangement will amount to financial debt where the agreement, on a true construction, shows disbursal of funds with time value of money and provides enforceable monetary consequences on default.
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AI Drafter ✕
TaxTMI 
