TaxTMI 
TaxTMI 
2020 (9) TMI 506
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....neering Company Limited, a Corporate entity, having its Registered Office at Kolkata, West Bengal, hereinafter referred to as the "Corporate Debtor". The Financial Creditor has proposed the name of Mr. Bijay Murmuria, an Insolvency Professional, who vide his letter dated 14th February, 2019 addressed to this Tribunal has agreed to accept the appointment as IRP, if an order of admission is passed in the present application. 2. It is submitted in the application that the Corporate Debtor had approached the Financial Creditor for seeking financial assistance to shore up the net worth of the Corporate Debtor and improve the debt equity ratio as required by the Bankers. The Financial Creditor thus issued Sanction Letter dated November 30, 2012 expressing their interest in subscribing to Redeemable Preference Shares of the Corporate Debtor subject to various terms and conditions mentioned in the Sanction Letter, followed by a subscription agreement dated 28th February, 2013 whereby the Financial Creditor subscribed to 6,25,000 Cumulative Non-Convertible Redeemable Preference Shares (RPS) of the face value of Rs. 100/- each which were issued at a premium of Rs. 540/- for an aggregate c....
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....Crores Only) and assured infusion of a much larger amount. It, however, admitted the revised rating downgrade by CARE of BBB (minus) and attributed the same to the prevailing market condition. 6. On December 22, 2014 the Corporate Debtor vide its e-mail assured the Financial Creditor that they were in the process of raising Rs. 200,00,00,000/- (Rupees Two Hundred Crores Only) equity capital by March, 2015 and would pay the entire dividend due regularly while reiterating that there would be no issue in redemption of RPS from 2019 onwards but the Corporate Debtor once again defaulted in fulfilling the assurance by raising capital by March, 2015. 7. The Financial Creditor vide letter dated 6th July, 2015 and 16th October, 2015 wrote to the Corporate Debtor and reiterated its desire to exercise the option of early redemption of RPS in full and called upon the Corporate Debtor to honor the same latest by 30th November, 2015. The Corporate Debtor issued a cheque to the Financial Creditor bearing No. 234327 for an amount of Rs. 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed b....
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....ted that between March to October, 2017, the Corporate Debtor merely identified and effected part redemption of RPS to few buyers mentioned in the application and failed to complete the process of redemption by September, 2017. On June 28, 2018 the Financial Creditor called upon the Corporate Debtor to pay the outstanding Redemption amount of Rs. 36,32,07,895/- (Rupees Thirty Six Crore Thirty Two Lakh Seven Thousand Eight Hundred Ninety Five Only) as on June 30, 2018. On August 3, 2018, the Financial Creditor informed the Corporate Debtor that out of the total outstanding redemption amount as per the letter dated June 28, 2018 only an amount of Rs. 5,00,00,000/-(Rupees Five Crore Only) has been received from Williamson Financial Services. The Financial Creditor called upon the Corporate Debtor to repay the balance outstanding redemption amount of Rs. 31,96,99,577/- (Rupees Thirty One Crore Nine Six Lakh Ninety Nine Thousand Five Hundred Seventy Seven Only) as on 2nd August, 2018. In view of the continuing default, the Financial Creditor vide letter dated August 14, 2018 called upon the Corporate Debtor to create a first ranking pledge over the specified shares of MSEL within 7 days....
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....ceedings before this Tribunal. 14. It is submitted that the Financial Creditor has not disclosed the details regarding number of shares which it has actually sold and number of shares currently held by it. The Corporate Debtor has denied all the allegations, contentions and claims made against it by the Financial Creditor in the said application. It is further submitted that the preference shareholder is a shareholder and not a creditor. The application has been filed as a creditor and thus it does not bring about any actionable claim under the provisions of the code against the Corporate Debtor. It is submitted that the preference shareholder invests in the resources of the Company and has voting rights thereby as a shareholder he becomes an owner of the company and not its creditor. The preference shareholder and its dividend are paid out of the profits of the company and not its Capital and in case it is paid out of the capital, it would amount to a fraudulent act. 15. It is submitted that the preference shareholder cannot in any way become the Creditor of the Company as the Preference shares form a part of the capital and it is not a debt and cannot be treated as such. It....
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....9;s advances to the Corporate Debtor was in the nature of a debt. It is submitted that this financial transaction which falls squarely within the definition of Financial Debt. 19. It is submitted that the Financial Creditor is justified in approaching this Tribunal for initiating Corporate Insolvency Resolution Process against the Corporate Debtor and the Corporate Debtor is making erroneous and legally misplaced averments before this Tribunal with a view to avoid its repayment obligations. It is submitted that since the debt has been admitted by the Corporate Debtor, they cannot now raise an objection on the document being insufficiently stamped. It is submitted that on 30th September, 2013 the Corporate Debtor had failed to comply with the provisions of 6.2.31 of the agreement. 20. During the course of argument, Ld. Counsel for the Financial Creditor submitted that the Corporate Debtor has no dispute at all on the question of disbursal of the amount but the only grounds on which the Corporate Debtor is challenging the application are (1) that the applicant is not a Financial Creditor, therefore, this is not maintainable, (2) the document is in sufficiently stamped and (3) t....
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....on the non occurrence of this event, the Issuer shall issue equity/preference shares by preferential allotment for an amount of Rs. 35,00,00,000/- (Rupees Thirty Five Crores Only) on or prior to September 30, 2013. 8.1: Events of default. Each of the events set out below is an "Event of Default" (whether or not caused by any person whatsoever outside the control of the Issuer or of any other Person.) 8.1.15 Rating The credit rating of the Issuer falls below "A". 8.2: Early Redemption Events: The occurrence of the following event shall, at the option of the Subscriber, be an "Early Redemption Event". (a) Occurrence of the date falling 4 (four) years from the Closing Date; (b) Any introduction or change in the Applicable Law and/or any compliance to be made by the Subscriber (as a result of change in Applicable Law) in reference to its investment or contribution to the share capital of the Issuer, which, in the sole opinion of the Subscriber, warrants it to discontinue its investment or cease to remain invested in the Issuer. 8.3.2: Upon the occurrence of an Early Redemption Event or Accelerated Redempti....
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....al rate of return on the investment would be 16%. The fixed minimum rate of return on the investment in preference shares is the "time value for money advanced". 25. It is submitted that the sum advanced towards preference shares of the Corporate Debtor thus qualifies as a financial debt under the IBC. The Ld. Counsel further submitted that the purchase of investment as enumerated in sanction letter dated 30th November, 2012 makes it abundantly clear that the purpose for investing in the preference shares of the Corporate Debtor is to shore up the net worth of the Company and improve the debt equity ratio as required by the existing Bankers. 26. The Ld. Counsel for the Financial Creditor has referred to and relied upon various judgments of Hon'ble National Company Law Appellate Tribunal, New Delhi, and the Hon'ble High Court of Gujarat which are discussed as under:- in the case of Shailesh Sangani vs. Joel Cardoso & Anr. Reported in Company Appeal (AT)(Insolvency) No. 616 of 2018, the Hon'ble Tribunal held that:- "6. A plain look at the definition of financial debt' brings it to force that the debt along with interest, if any, should have bee....
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....concept of 'time value of money' was further elaborated in case of Anil Mahindroo v. Earth Iconic Infrastructure Company Appeal (AT) No. 74 of 2017 whereby the Hon'ble NCLAT held that: "12. From the Agreement/Memorandum of Understanding, we find the appellants are also 'investors' and have chosen 'committed return plan' like 'Nikhil Mehta and Sons v. AMR Infrastructure Ltd." Thereby we hold that the amount as is due to the appellants, come within the meaning of "debt" as defined in Section 3(11) of the 'I&B Code'. 13. The Balance Sheet has been enclosed by the appellants, wherein the amount deposited by 'persons', including the appellants as shown also suggest that the Respondent 'Corporate Debtor' treated the appellants as 'investors' and borrowed the amount pursuant to sale purchase agreement for their 'commercial purpose' treating the amount at par with loan' in their return. Thereby, the amount invested by appellants come within the meaning of 'Financial Debt', as defined in Section 5(8)(f) of I&B Code, 2016, subject to satisfaction as to whether such disbursement against the considerat....
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....preference shares which are irredeemable. (2) A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed. Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders: Provided further that- (a) No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) No such shares shall be redeemed unless they are fully paid; (c) Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of t....
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....e Shareholder and owner of the Company to the extent of its shareholding. The Ld. Counsel has referred to the contents of the letter dated November 30, 2012 admittedly written by the Financial Creditor to the Corporate Debtor. The contents of "other conditions" No. 4 reads as under:- "4. The issue shall follow all the statutory laws/by-laws namely but not limited to the following: * There must be a provision in the Articles of Association regarding the issuance/redemption of preference shares. * The redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted into fully paid up shares before redemption. * The redeemable preference shareholders should be paid out of undistributed profit/distributable profit or out of fresh issue of shares for the purpose of redemption." 31. The Ld. Counsel for the Corporate Debtor, with a view to distinguish the Redeemable Preference Shares from Debentures or for that matter of debt, referred to clause 6.2.35 and submitted that it shall ensure that the redemption premium shall be provided out of its profits and sufficient amounts are maintained in its securities ....
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....; is not a legal term of art, but a commercial expression used to indicate the total amount borrowed by a company otherwise than by short and medium term borrowing. Loan capital will be represented by mortgages, debentures and loan stock, and the law relating to these securities, which is vastly different from that relating to share capital, will be dealt with in Chapter 12. Loan capital appears on the liabilities side of the company's balance sheet beneath share capital and reserves, but unlike share capital, it does represent indebtedness by the company, and holders of loan capital have the remedies of creditors to recover what the company owes them." (Page 164) Consequently, when the date for the redemption of redeemable preference shares has passed, their holders cannot sue the company for the repayment of their capital as creditors though they may petition for the winding up of the company as shareholders." 33. The Ld. Counsel for the Corporate Debtor also referred to and relied upon judgment passed by the High Court of Bombay in the case of Aditya Prakash Entertainment Pvt. Ltd. vs. Magikwand Media Pvt. Ltd. reported in Company petition No. 404 of 2016. The relevant ex....
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....1956, as also similar provisions in the English company law we cannot persuade ourselves to accept the contentions of the assesse and hold that when a company issues redeemable preference shares it is in fact obtaining a loan as it could by issuing debentures. There is a fundamental difference between the capital made available to a company by issue of share and money obtained by a company under a loan or a debenture. Respective incidences and consequences of issuing a share and borrowing money on loan or on a debenture are different and distinctive. A debenture-holder as a creditor has a right to sue the company, whereas a shareholder has no such right. Apart from that the scheme of the Companies Act and in particular the forms and contents of its balance-sheets are extremely rigid and, in our view, by reason of the specific compartments in such accounts it is not possible to convert an item of capital into an item of loan as has been suggested on behalf of the assesse." 34. The Ld. Counsel for the Corporate Debtor also referred to and relied upon judgments passed by Andhra High Court in the case of Lalchand Surana And Ors. vs. Hyderabad Vanaspathy Limited. . The relevant extra....
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....inancial creditor, burden is heavy on the side of the applicant to prove that the debt allegedly due and payable by the CD would falls under the purview of "Financial Debt" as defined under section 5(8) of the Code. At the outset, we would say that the applicant has miserably failed to convince us that the debt allegedly due and payable is a financial debt as claimed by the applicant. 36. According to the Ld. Counsel for the Corporate Debtor, the redeemable preference shares cannot be termed as a "debt" because it is a shareholding and cannot be covered under Section 5(8) "Financial Debt" and according to the Ld. Counsel, the judgments cited by the Ld. Counsel for the Financial Creditor relate to "Loan" and would not be applicable to the facts of the present case. We find some merits in the said submission on the side of the CD. 37. It is significant to note here that this is not an application filed based on the dishonored cheque issued for a consideration of Rs. 2 crores. The Corporate Debtor had issued a cheque to the Financial Creditor bearing No. 234327 for an amount of Rs. 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheq....