TaxTMI 
TaxTMI 
2025 (4) TMI 670
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.... with the Respondent for setting up a fertilizer complex for production of ammonia-urea complex at Panagarh Industrial Park, Distict Burdwan, West Bengal on 11.12.2009. Contracts for onshore supply, offshore supply as well as engineering and construction were entered between the parties in the year 2010. (ii) Amounts became due and payable by the Respondent towards the Appellant in pursuance of the contract. The Respondent on 28.04.2015 wrote a letter to the Appellant requesting Essar Projects (India) Ltd. (earlier name of the Appellant) to consider converting the amounts outstanding as subordinated debt. (iii) The Appellant sent its agreement vide letter dated 08.05.2015 to give an extended credit upto Rs.403 Crores against their receivables from Matix. (iv) A resolution dated 30.07.2015 was passed by the Appellant giving consent to make investment upto Rs.400 Crores into 8% Cumulative Redeemable Preference Shares (hereinafter referred to as 'CRPS') of Rs.10/- each of Matix Fertilizer and Chemicals Limited (Matix) in one or more tranches. (v) The Respondent responded to the e-mail of the Appellant dated 31.07.2015 on 26.08.2015 that the decision....
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....ion, as noted in Para 14.2 of the order, which are as follows : "14.2. The issues that have cropped up for determination are as follows: (i) Whether a Preference Shareholder is a Creditor of a Company. (ii) Whether an application under Section 7 of I&B Code filed by a Preference Shareholder is maintainable. (iii) Whether Cumulatively Redeemable Preference Shares ("CRPS" for brevity) was in the nature of an investment or a financial debt having commercial effect of borrowing." (xii) The Adjudicating Authority after considering various facts and circumstances and precedent relied by the parties held that the Cumulative Redeemable Preference Shares are not payable, hence, no default is established. In Para 14.4 the Adjudicating Authority made following observations: "14.4. It is evident that 'Preference Shares' are not defined in the I&B Code. Therefore, one must then look into its definition and meaning assigned to preference shares under the Companies Act. Companies Act is a complete code enacted to consolidate and amend the law relating to companies and the legislature was conscious of this fact in drafting the I&B Code. It is a....
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.... Kathpalia, learned senior counsel appearing for the Respondent. 4. Shri Niranjan Reddy, learned senior counsel for the Appellant challenging the impugned order submits that the Cumulative Redeemable Preference Shares (CRPS) were allotted by the Respondent in lieu of the debt which was owed by the Respondent to the Appellant, which is an admitted fact. It is submitted that the Respondent has also admitted the debt of amount of Rs.310 Crores and claims its adjustment in the outstanding amount payable to the Respondent as per his case. It is submitted that the transaction under which the CRPS were allotted is a commercial transaction and the transaction is fully covered by Section 5 Sub-section (8) Sub-clause (f). The transaction having commercial effect of borrowing is a financial debt and the Adjudicating Authority committed error in rejecting the application filed by the Appellant under Section 7. It is submitted that it was Respondent who requested the Appellant to convert the amount outstanding from Matix to Appellant as Subordinated Debt. Matix clearly communicated that Matix has raised equity and the same will be earmarked for paying of this subordinate debt of Appellant [E....
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....e of shares made for the purposes of such redemption. It is submitted that the Company did not earned any profit in the relevant year so as to preferential shares could have been redeemed nor any amount was available towards fresh issue of shares for redeeming the preferential shares. No payment could have been made in the preferential shares as no amount was due nor any default could said have been committed. It is submitted that the Appellant has filed an application under Section 7 on the basis of 25 Crore CRPS which was foundation of Section 7 application. The nature of debt has to be found out from the transaction which culminated in 25 Crore CRPS. The CRPS is not a financial debt. The legislature is fully conversant of the law which it enacts. The legislature was well aware with the concept of preferential shares, debentures and in Section 5(8)(c) expression 'debentures' has been used but there is no mention of preferential shares. The legislature was fully aware that a preferential shareholder is not a financial creditor. It is submitted that written contract between the parties must be interpreted on its terms alone and any other evidence to interpret the same, must be excl....
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....oard of Directors of the Company be and is hereby accorded to make investment upto Rs. 400 Crores into 8% Cumulative Redeemable Preference Shares of Rs. 10/- each of Matix Fertilizer and Chemicals Limited (Matix) in one or more tranches. RESOLVED FURTHER THAT either of the followings namely 1) Mr, A V. Amarnath 2) Mr. Chander Krishnamoorlhy 3) Mr. Vasant Savla 3) Mr. D. V Prasad 4) Mr Raghupati Mishra 5) Ms. Yogita Purohit (hereinafter referred to as "the Authorised Executives") be and are hereby severally authorised to take all decisions and steps in respect of the above investment as may deem appropriate, and to do and perform all such acts, deeds, matters and things, as may be necessary or expedient in this regard and to exercise all the rights and powers which would vest in the Company in pursuance of such investment. RESOLVED FURTHER THAT a copy of the foregoing resolution duly certified by any Director or Company Secretary be forwarded as may be required." For Essar Projects (India) Limited Yogita Purohit Company Secretary ACS 29624" 8. The above resolution dated 30.07.2015 was communicated to Matix and Matix after rece....
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....sting Not to be listed 9 Rights These CRPS carry a preferential right with respect to- a) payment of dividend, and b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up 10 Modification of terms Can be modified before redemption with mutual discussions and written consent of both the parties. We request your confirmation by signing as EPILs acceptance to proceed with documentation and other necessary compliances Thanking you Accepted by For Matix Fertrilisers And For Essar Projects Chemicals Limited India Limited Company Secretary. Company Secretary" 9. Thus, the resolution of the Appellant, as noticed above, as well as the letter dated 26.08.2015 captures the transaction between the parties which indicate that the Matix has allotted 25 Crore 8% CRPS of Rs.10/- each to the Appellant. A letter was sent on 20.08.2018 on behalf of the EPC Constructions India Ltd. informing the Respondent to take steps to redeem the CRPS aggregating to Rs.310 Crores....
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....Company's liability towards redemption of CRPS along with cumulative dividend at the rate of 8% p.a. for three years, aggregating of Rs. 310.00 Crores, is considered as adjusted against of our filed claim of Rs. 377.87 Crores (excluding claim on account of Performance LD (Provisional Future Claim) of Rs. 160.00 Crores), and we shall appreciate for payment of balance amount of our claim after adjusting the amount of aforesaid CRPS at the earliest. Hence, payment of CRPS amount aggregating to Rs. 310.00 Crores will be Rs. NIL as on 25th August, 2018 (the date of redemption of CRPS). Thanking you. Your sincerely, FOR MATIX FERTRILISERS AND CHEMICALS LIMITED AUTHORISED SIGNATORY Encl.:- The copy of the letter date 5th June, 2018 as Annexure-A. CC:- Mr. Abhijit Guhathakurta Regn. No.: IBBI/IPA-003/IP-N000103/2017-2018/111S8 Insolvency Professional of EPC Constructions India Limited Deloitte Touche Tohmatsu India LLP Indiabulls Finance Centre, Tower 3, 27th Floor, Senapati Bapat Marg, Elphinestone Road (West), Mumbai - 400 013." 10. The demand was issued by....
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.... 2 [Provided that- (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 (2 of 1934); and (b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture;]" 12. Section 43 of the Companies Act deals with 'Kinds of Share Capital'. Share Capital are equity share capital or preference share capital. Section 43 of the Companies Act is as follows: "43. Kinds of share capital.-The share capital of a company limited by shares shall be of two kinds, namely:- (a) equity share capital- (i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and (b) preference share capital: Provided that nothing contained in this Act shall affect the rights of the preference share holders who are entitled to participate in the proceeds of winding up before the commencement of this Act. Explanation.-For the purposes of this section,- (i) "equity share capital", with reference....
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....ed 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 this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also that premium, if any, payable on redemption of any preference shares issued on or before ....
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....Respondent has relied on judgment of Hon'ble Delhi High Court in "Commissioner of Income Tax-V vs. Rathi Graphics Technologies Limited, 2015 SCC Online Del 14470". The Delhi High Court in Para 15 made following observations: "15. When pursuant to a settlement the creditor agrees to convert a portion of interest into shares, it must be treated as an extinguishment of liability to pay interest to that extent. In essence there will be no further outstanding interest to that extent. Consequently, the situation where an interest payable on a loan is converted into shares in the name of the lender/creditor is different from the situation envisaged in Explanation 3C to section 43B of the Act, viz., conversion of interest into "a loan or borrowing". In the latter instance, the liability continues, although in a different form. However, where the interest or a part thereof is converted into equity shares, the said interest amount for which the conversion is taking place is no longer a liability." 17. Another judgment relied by learned counsel for the Respondent is judgment of this Tribunal in "Rita Kapur vs. Invest Care Real Estate LLP, 2020 SCC Online NCLAT 627". In the above c....
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....kash Entertainment Pvt. Ltd. vs. Magikwand Media Pvt. Ltd., 2018 SCC Online Bom 551". In the said case also Petitioner was a shareholder holding preferential redeemable preference shares. Application by the Petitioner was filed for winding up of the Company, in which case the Bombay High Court held that holder of preferential shares does not assume character of creditor. In Para 9 of the judgment following was laid down: "9. In this case, there is no dispute to the fact that petitioner was a shareholder holding preferential redeemable preference shares. The only question that requires to be considered is whether petitioner would be a creditor of the company. Sub-section 1 of Section 80 says, subject to the provisions of this section, a company limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Proviso, however, states that no such shares shall be redeemed except out of 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 the redemption. This aspect, in my view, shows that wher....
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....tween the parties. 22. Learned counsel for the Respondent has referred to the financial statement of the Matix as on 31.03.2017. In the 'Notes to Financial Statements for the year ended 31 March 2017, Note (b) provides as follows: "b. Redeemable preference shares Under previous GAAP, the redeemable preference shares were classified as equity. Under Ind AS 109, these preference shares have been classified as a financial liability. The effect of this change is decrease in equity and increase in borrowings as at 31 March 2016 of Rs.2,50,00,00,000. Further dividend provided on the same for the year ended 31 March 2016. The effect of this change is increase in CWIP (Finance cost) and other financial liabilities as at 31 March 2016 of Rs.14,37,70,104." 23. Learned counsel for the Respondent has placed reliance on judgment of Hon'ble Supreme Court in "Union of India vs. Assn. of Unified Telecom Service Providers of India, (2020) 3 SCC 525" where noticing the accounting standard AS-9 following was observed in Para 65 and 76: "65. As per Clause 20.4, a licensee must make quarterly payment in the prescribed format as Annexure II showing the computati....
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....n of India v. Assn. of Unified Telecom Service Providers of India. The submission that the contract recognises the applicability of accounting standards, in our opinion, it is only to maintain books of accounts. To a certain extent, it cannot be disputed that to have clarity, uniformity and definitiveness; the accounting standards lay down guidelines with respect to financial terms. However, when the financial terms in the agreement are clear in the form of definition of gross revenue governed by Clause 19.1 of the agreement, the definition of Accounting Standard 9 cannot supersede it which is a general one." 24. We may notice the judgment of Hon'ble Supreme Court in "Global Credit Capital Ltd. & Anr. vs. Sach Marketing Pvt. Ltd. & Anr., Civil Appeal No.1143 of 2022, decided on 25.04.2024" where Hon'ble Supreme Court held that for determining the nature of debt, the real nature of transaction has to be looked into. Where in Para 14 of the judgment observed, "Therefore, it is necessary to determine the real nature of the transaction on a plain reading of the agreements". 25. Learned counsel for the Appellant has relied on judgment of the Hon'ble Supreme Court in "Roop Kumar vs....
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.... On the contrary there are also certain fundamental elements common to all and capable of being generalised. Every jural act may have the following four elements: (a) the enaction or creation of the act; (b) its integration or embodiment in a single memorial when desired; (c) its solemnization or fulfilment of the prescribed forms, if any; and (d) the interpretation or application of the act to the external objects affected by it." 26. The present is a case where both the parties are relying on written correspondence including the letter dated 26.08.2015 by which 25 Crore CRPS were allotted to the Appellant. The Hon'ble Supreme Court with regard to Section 91 held "this section merely forbids proving the contents of a writing otherwise than by writing itself". Section 91, thus, itself does prevent to look into any other material except written letter brought by the Appellant itself to know the nature of the transaction. When the CRPS have been allotted in favour of the Appellant, submission of the Appellant has to flow from the said shares and it is precluded to lead any other evidence or material to show or reflect on the nature of transactio....
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....ial Creditor, by virtue of Clause 2 of the Agreement, agreed to pay a sum of Rs.72,86,65,720/. For shares, under Clause 14, there was certain encumbrance to sell or transfer the shares. The Financial Creditor had pre-emption right in their favour in event of any of the Promoters of the Corporate Debtor desires to transfer his shares. Clause-16 of the Agreement provided for 'Exit Mechanism' to the Investors. Put Option was also contained in Clause 16.4. As per Clause-16.4, Promoters were under unconditional obligation to buy shares on an as if converted basis at the Fair Market Value as determined under Clause 19.9. Clause 16.4, is as follows: "16.4 Put Option (a) In the event the Promoters and the Company are unable to provide an exit to the IL&FS Investors and/ or the HIREF Investors and/ or their Affiliates before March 31, 2015 in any manner as specified in Clauses 16.1 to 16.2 above, without prejudice to any other rights or remedies available to the IL&FS Investors and/or the BIREF Investors, the IL&FS Investors and/or the HIREF Investors shall have the option to require the Promoters to buy their Shares and the Promoters shall be under an unconditional obliga....
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....-defaulting HIREF Shareholders have also exercised their right under Clause 19.6(a), the Defaulting Shareholders Group shall purchase all the Shares held by the Non-defaulting Shareholders and Non-defaulting HIREF Shareholders; and *** *** *** 19.6 The Non-defaulting HIREF Shareholders shall, without prejudice to any other rights they may have under this Agreement or otherwise, have the right, at their sole discretion to either: (a) require the Defaulting Shareholders Group to purchase from the Non-defaulting HIREF Shareholders all the Shares held by the Non-defaulting HIREF Shareholders at a price that provides the Non-defaulting HIREF Shareholders an Internal Rate of Return of 15% per annum compounded annually, or the Fair Market Value, whichever is higher, subject applicable laws. Provided if the Non-defaulting Shareholders have also exercised their similar right under Clause 19.1(a), the Defaulting Shareholders Group shall purchase either all the Shares held by the Non-defaulting HIREF Shareholders and the Non-defaulting Shareholders; and" 13. Clause-21 provided for 'Indemnity', which was given by the Company and the Promoters to indemnify th....