NCLT Judgement on Treatment of CCD in case of Company goes under CIRP Process under IBC

Agritrade Power Holding Mauritius Limited (Applicant) filed an application with Hon’ble NCLT Mumbai Bench against the rejection of its claim by the Respondent/Resolution Professional of SKS Power Generation (Chhattisgarh) Limited (“Corporate Debtor/SPGCL”) as a financial creditor by virtue of Holding Compulsory Convertible Debentures of Corporate Debtor.

Facts of the case: –

1. The Applicant is the holder of 38,05,576 Compulsory Convertible Debentures (CCD’s) with the face value of Rs.1000/- each carrying interest @ 11.5% per annum. The total face value of the CCDs is circa ₹380 Crores.
2. The total interest payable on such debentures till 28.04.2022 amounts to Rs.1,36,72,81,334.
3. Corporate Insolvency Resolution Process (CIRP) Application against the corporate debtor was admitted on 29.04.2022.
4. The Corporate Debtor owed a sum of ₹517 Crores which includes the interest as financial debt to the Applicant. The Applicant submitted Form-C to the Respondent on 13.05.2022 and furnished clarification/ information from time to time.
5. The Applicant’s claim was rejected by the Respondent stating that

“The books of accounts reflect the CCDs as ‘Other Equity’ and not as debt, indicating that the same has been considered as an equity or quasi-equity instrument and not as a debt instrument. Further, the books of account of SPGCL also record the CCDs as ‘Other Equity’ and not debt.”

Appellant preferred appeal against Rejection of Claim before Hon’ble NCLT on following grounds: –

1. Referred to the Judgement of Hon’ble Principal Bench of NCLT at Delhi in the matter of “SGM Webtech Pvt. Ltd. Vs. Boulevard Projects Private Limited, CP(IB) 978 (PB)/ 2018” passed by the Principal Bench of this Tribunal wherein it was held that CCDs, till the time they do not mature, are to be considered as debentures and consequently qualified debt.
2. It was also pleaded that characterization in the books of account of the Company cannot be conclusive of the nature of transaction.

Reply of Respondent: –

1. The claim of the Applicant is not maintainable as barred by limitation since the books of the Corporate Debtor did not acknowledge liability arising from CCDs as a financial debt and has been shown as equity.
2. Also placed provisions of FEMA Regulations with respect to Debentures (Extract: – As per Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017): – Regulation 2(v) of these regulations defines capital instruments which states it includes debentures which are fully, compulsorily, and mandatorily convertible debentures).
3. Also placed relevant provisions of IND AS 32 in this regard.

Hon’ble NCLT partly allowed the application considering interest component as financial debt based on following grounds: –

1. Terms of Conversion of CCDs in the present case states that it was mandatorily convertible at mandatory conversion date which is stated earlier of
   1. Expiry of period of 10 years from the date of certificate; or
   2. In the case of any winding up, liquidation or dissolution of the Company (or any analogous event) or the last date permitted under applicable laws for the conversion of the investor’s CCDs;
   3. In the case of happening of any initial public offering, the last date permitted under applicable laws for the conversion of the investor CCDs;
   4. The conversion could take place before mandatory conversion date at the option of debenture holder;
   5. The aggregate principal amount of the CCDs were to be converted.
2. Definition of “Financial Debt” as per IBC means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. In the present case, the subscription to CCDs was made against interest @ 11.5% per annum and such interest constitutes disbursement against the consideration of time value and money.
3. CCDs are debt so long as they are not converted into equity of the Company. Accordingly, till the date of occurrence of mandatory conversion date, it was a nature of debt and disbursed as such.
4. Decision of Principal Bench of NCLT in the case of SGM Webtech Pvt. Ltd.” is distinguishable on facts of the present case.
5. As per Terms of Conversion stated aforesaid Mandatory conversion date arises on Any Analogous event, resolution process contemplated under IBC is an analogous event and accordingly, the mandatory conversion date arises on the date of commencement of resolution process. Thus, the Company’s obligations towards principal component of CCDs ceases to exist on that day and accordingly, no debt to the extent of Principal amount of CCDs can be said to exist at commencement of CIRP.
6. has to be ascertained from the understanding between the parties.
7. CCDs contemplated compulsory conversion of only principal amount, interest accrued thereupon till the date of conversion is certainly an obligation or liability of the Corporate Debtor, thus amount of accrued interest till the mandatory conversion date of CCDs i.e., CIRP commencement date is a financial debt and deserves to be admitted as such.

Status of the total claim against the corporate debtor and total admitted by the RP (last updated on 3.4.2023) is as follows:

*Please note: All the amounts are rounded off

Conclusion: –

Compulsory Convertible Debentures (CCDs) are a type of financial instrument (debt securities) issued by companies to raise funds that can be converted into equity shares of the issuing company at a pre-determined price and within a specified time-period or pre-determined conditions.

CCDs are often used by companies to raise funds from investors who may not be willing to invest directly in equity shares but are still interested in benefiting from the potential upside of the company’s future growth. For the company it can get a influx of capital without dilution of stake until the time of mandatory conversion.

In this case the conversion or maturity of CCDs are linked with any analogous event. Hon’ble NCLT held that commencement of CIRP Process is an analogous event and CCDs are mandatorily converted as Equity and hence not considered as financial debt. Definition of Financial Debt under IBC includes any amount raised by debentures.

Thus, as we know CCDs are treated quasi debt, but treatment of the same in CIRP Process depends on the terms of the issue and conversion.