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TaxTMI 
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2026 (1) TMI 284
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.... Hemant Kothari, Adv., Mr. Kartikeya Sharma, Adv., Mr. Kartik Pandey, Adv., Ms. Nitika Grover, Adv., Mr. Nishant Anshul, Adv., Mr. Sameer Rohatgi, Adv. And Mr. Muthu Thangathurai, Adv. JUDGMENT ALOK ARADHE, J.: INTRODUCTION 1. The present appeal, instituted under Section 62 of the Insolvency and Bankruptcy Code, 2016 (hereinafter, referred to as the 'Code') calls in question the judgment dated 24.01.2024 rendered by the National Company Law Appellate Tribunal (NCLAT), whereby, the NCLAT affirmed the order passed by the adjudicating authority (NCLT). The challenge in this appeal is confined to the findings recorded by NCLAT on Question No. (II), which are contained in paragraphs 48 to 59 of the impugned judgment. 2. For proper appreciation of the controversy involved, the material facts giving rise to the present appeal are set out hereinafter. (ii) FACTUAL BACKGROUND 3. One Electrosteel Limited (ESL) had availed of financial assistance amounting to INR 500 crores from SREI Infrastructure Finance Limited (SREI), vide sanction letter dated 26.07.2011. SREI was the original creditor, which subsequently assigned all its rights and interest in favour of UV Asset Rec....
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....mitted on 20.07.2017. Thereafter, by an order dated 17.04.2018, passed under Section 31 (1) of the Code, the NCLT Kolkata, approved the Resolution Plan submitted by Vedanta for acquisition of ESL. Under the approved Resolution Plan, Vedanta was required to make a deposit of INR 5320 crores as upfront cash payment under the Resolution Plan in an escrow account to be distributed to the creditors of ESL towards 'Sustainable Debt'. The entire remaining financial debt amounting to INR 7399.13 crores was categorised as 'unsustainable debt' and was converted into 739,91,32,055 fully paid-up equity shares of ESL with face value of INR 10 each, as part of the Resolution Plan. SREI received INR 241.71 crores in cash and equity shares worth INR 336.19, crores in lieu of its total admitted claim of INR 577.90 crores. 9. Upon implementation of the Resolution Plan, SREI issued an unconditional 'no dues certificate' to ESL certifying full discharge of ESL's liability. However, SREI subsequently claimed that it was allotted reduced number of shares upon conversion of balance debt. On 30.06.2018, SREI executed a Deed of Assignment in favour of the ARC, purporting to assign the alleged residual d....
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....of debt into equity, and that conversion of debt into equity results in irrevocable discharge of the debt. It was submitted that the audited financial statement of ESL reflected no haircut, and subsequent reduction of share capital could not revive the debt. 14. It was argued that there is no concept of debt subsisting only against a guarantor, once it is discharged against the principal borrower and that Clause 3.2 (ix) of the Resolution Plan would have no application where the debt stood fully extinguished. It is urged that, it is a well settled position in law that once a debt is converted into equity, the debt is discharged and pursuant to conversion, the creditor ceases to be a creditor and transforms, into a shareholder of the issuing company. In support of aforesaid submissions, reliance has been placed on a decision of Delhi High Court [Commissioner of Income Tax v. Rathi Graphics Technologies Ltd. - 2015 SCC Online Delhi 14470] 15. It is pointed out that there was no haircut to the financial creditors of ESL, as any haircut accepted by the lenders is a profit to the borrower which would have been recorded in the profit and loss account of ESL. It is submitted that ca....
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....financial creditors. After upfront payment of sustainable debt to all financial creditors, an amount of INR 7619.24 crores was treated as unsustainable debt. The said amount of unsustainable debt was to be converted to new equity shares of ESL amounting to INR 7619.24 crores. As per the Resolution Plan, the share capital of INR 2409.24 crores was to be added to the new equity shares of INR 7619.24 crores. Thus, total issued, subscribed paid up equity share capital of ESL was to become INR 10,028.44 crores comprising 1002.84 crores shares of Rs.10 each fully paid up. 20. The Resolution Plan contemplated steps to be taken which constituted an integral part of the Resolution Plan. Step 2 which was an integral part of the Resolution Plan contemplated that face value of entire ESL share capital, including the newly allotted 761.92 crores shares, was to be reduced from INR 10 each fully paid up to INR .20 fully paid up. As a result of reduction in the face value of the shares, the paid-up share capital of ESL was to be reduced from 10,028.44 crores. 21. Thus, the number of shares reduced from 1002.84 crores of INR .20 each to 20.06 crores shares of INR 10 each. Clause 3.2 (vii)(B) ....
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....created pledge over shares of Electrosteel Castings Limited or the Company), makes any claim against the Company or Vedanta or the SPV on account of any invocation/enforcement of such guarantee or security provided, as the case may be (including the invocation of pledge over shares of Electrosteel Castings Limited or the Company) by the Financial Creditors of the Company in any circumstance (including on account of subrogation or equity), its Claim shall be settled at NIL value at par with the Claims of Operational Creditors as set out in Section 3.4 ii of this Resolution Plan." 23. Thus, from perusal of the aforesaid Clause, it is evident that the Resolution Plan unequivocally provides that rights against any third party, including a security provider/existing promotor in relation to any portion of unsustainable debt, secured or guaranteed by such third parties, will not be extinguished. It further provides that, if any third-party security provider (including the Existing Promoter) who has guaranteed or secured any portion of debt availed by ESL prior to insolvency commencement date, including the Existing Promoter who have created pledge of shares of ECL or ESL, makes any cla....