AI Drafter 
TaxTMI 
TaxTMI 
2024 (12) TMI 411
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....eat in the Committee of Creditors ("CoC"). The Appellant aggrieved by the order has come up in this Appeal. 2. Brief facts of the case necessary for deciding the Appeal are : (i) The Appellant had sanctioned financial assistance to the Corporate Debtor ("CD") - M/s Taxus Infrastructure and Power Projects Pvt. Ltd. On account of default committed by the CD, the Appellant filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "IBC"). (ii) The Adjudicating Authority vide order dated 10.10.2022 admitted Section 7 Application and initiated CIRP against the CD. IRP made a public announcement on 12.10.2022. Respondent No.1 filed its claim in Form-C claiming an amount of Rs.21,45,42,466/-, which included Rs.11,45,42,466 as interest and Rs.10,00,00,000/- as principal amount. (iii) In the claim form, Respondent No.1 relied on Arbitral Award dated 31.12.2021. In the claim Respondent No.1 had pleaded that it had funded the CD by subscribing 1,00,000 secured Compulsory Convertible Debentures of face value of Rs.1,000/- each for a period of 65 months. Respondent No.1 did not receive the payment under the Proj....
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....rror in holding the transaction as a 'financial debt'. The investment had no time value of money, which is sine qua non under Section 5 sub-section (8) of the IBC. It is submitted that even if the failure to redeem the CCD was considered as an event of default, it is in the form of damages or penalty for breach of terms of DSA and the said payment in the form of penalty, in no manner, can be construed as a financial debt in terms of Section 5, sub-section (8). It is submitted that Arbitral Award cannot be relied for classification of the claim amount as financial debt. The Arbitral Award has already been challenged under Section 34 of the Arbitration Act by the RP, which is pending consideration. DSA provided for a compulsorily and mandatorily conversion of the CCDs into equity shares within a period of 65 months from the date of allotment. Respondent No.1 issued a letter dated 08.12.2017 prior to maturity date, seeking repayment or in alternative conversion of the CCDs into equity shares. On the date of issuing the said letter Respondent No.1 had only option to seek conversion of CCDs into equity and it could not have asked for repayment. Learned Counsel for the Appellant however ....
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....it was subsequently, the RP changed his position and rejected the claim of Respondent No.1, leading Respondent No.1 to file IA No.2068 of 2023. 6. Learned Counsel for RP also contended that Arbitral Award cannot be basis for accepting the claim of Respondent No.1 as Financial Creditor. The learned Counsel for RP submits that Award cannot be treated as an order of Court or Tribunal. It is submitted that legal status of CCD is in nature of equity and cannot be accepted as debt. 7. We have considered the submissions of learned Counsel for the parties and have perused the records. The learned Counsel for the parties have relied on various judgments in support of their respective submissions, which shall be noticed hereinafter. 8. Before we enter into respective submissions of the parties, certain clauses of Debenture Subscription Agreement dated 16.10.2012 need to be noticed to find out the real nature of transaction reflected by DSA. The DSA states that Issuer is in the business of developing power projects and infrastructure projects in various part of India. It also noticed that issue requires surplus capital to fund its various new projects. Clauses-E and F of DSA are as f....
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....sorily convertible into equity shares of the Company at the option of the Investor as per terms of this Agreement." 13. The above definition indicates that debentures are compulsorily convertible into equity shares of the Company at the option of the Investor. Clause 3.2 deals with 'Conversion', which is as follows: "3.2 Conversion The CCDs shall be compulsorily and mandatorily convertible into Equity Shares of the Company within a period of 65 Months from the date of allotment of the CCDs to the Investor ("Long Stop Date") as per this Agreement." 14. Clause 4.1 again provides that Investor shall have the option to convert the CCDs into equity shares of the Company by giving one month notice. Clause 4.1 and 4.2 are as follows: "4.1. The Investor shall have the option to convert the CCDs into Equity Shares of the Company by giving I (one) month notice ("Conversion Notice") in writing to the Company. 4.2 Notwithstanding anything contained in Clause 4.1, the maximum duration for conversion of the CCDs into Equity Shares shall not exceed beyond the Long Stop Date. CCDs into Equity Shares shall not exceed beyond the Long Stop Date" 15. Clause....
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....,86,301 (Rupees Five Crore Sixty Three Lacs Eighty Six Thousand Three hundred and One Only) towards interest thereon calculated at the rate of 11% from October 16, 2012 to November 30, 2017. In the alternative, and/ or failing which, we call upon you to convert the 1,00,000 Debentures of Face value Rs. 1000/- each issued to us under the DSA into such number of fully paid up equity shares of Taxus as would constitute 49.93% of its paid up equity capital in accordance with clause 4 thereof. In that regard, you are liable for obtaining the necessary approvals and permissions, if any required for conversion of the debentures into such equity shares." 17. Respondent No.1's case is that despite letter given on 08.12.2017, neither the payments were made nor conversion into equity was allowed, hence, triggering event of default. Various clauses of DSA indicate that Investor has option to request for conversion of CCD into equity, which option was to be exercised within a period of 65 months from the date of allotment. Respondent No.1 has also by the letter noticed above, asked for payment of amount with interest. Event of default occurred, since even after the letter issued by Responden....
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.... Supreme Court in paragraph 6 has observed as follows: "6. It will be noticed from the aforesaid that the fundamental principal for rejecting the debt claim was that in view of the appellant having invested the amount as per the compulsorily convertible debentures, the same was to be treated as equity. The compulsorily convertible debentures had been approved as equity under the financial package for the concession agreement dated March 25, 2010 and were towards the part of equity of the project cost approved by the National Highways Authority of India having a debt equity ratio. There was never any re-categorization of compulsorily convertible debentures from equity to debt. The lenders' consortium had also approved the term of compulsorily convertible debentures as equity. The endeavour of the appellant to challenge the position of the resolution professional vide I.A. No. 1465 of 2022 did not succeed in terms of an order dated March 14, 2023 [IFCI Ltd. v. Sutanu Sinha, (2024) 248 Comp Cas 179 (NCLT).] , the said order relied upon the judgment of this court in Narendra Kumar Maheshwari v. Union of India [1990 Supp SCC 440.] . It would be useful to extract that part of th....
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....mpulsorily convertible debentures, along with the differential interest, defaulted amount, etc. would automatically get converted into equity shares of the ICTL at a price on par with the promoters of ICTL, i.e., at a premium of Rs. 90 per share at the end of 6 years from the date of issue (i.e., in case both the call and the put options are not exercised by the sponsor and the IFCI respectively or, at an earlier date as per other terms of this agreement)." 17. The aforesaid clause thus provides for automatic conversion into equity shares of ICTL on the relevant date for which there is no dispute, i.e., November 9, 2017." 22. The Hon'ble Supreme Court further noticed that the Appellant was provided security under the debentures subscription agreement but the obligations are of the sponsor company. In paragraph 20 of the judgment, following has been observed: "20. A reading of all the aforesaid leads to a conclusion that 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 for us to appreciate how the obligation is of the SPV, i.e., ICTL. Unless th....