Arvind Kumar (Suspended Director Of Arcturus Developers Private Limited) vs Beacon Trusteeship Limited & Anr.

Ashok Bhushan, J.

This Appeal by a Suspended Director of the Corporate Debtor (“CD”) – Arcturus Developers Pvt. Ltd. has been filed challenging the order dated 20.01.2026 passed by National Company Law Tribunal, New Delhi Bench (Court-II) admitting a Section 7 petition filed by Beacon Trusteeship Ltd. (the Financial Creditor).

Brief facts giving rise to the Appeal needs to be noted.

We have heard Shri Virender Ganda, learned Senior Counsel, Shri Arun Kathpalia, learned Senior Counsel and Shri Krishnendu Datta, learned Senior Counsel appearing for the Appellant; Shri Abhijeet Sinha, learned Senior Counsel appearing for Respondent No.1; and Shri Kunal Tandon has appeared for Respondent No.2.

Learned Counsel for the Appellant challenging the order of Adjudicating Authority submits that Debenture Holder having elected to exercise the conversion option, could not have exercised the put option. It is submitted that on issuance of conversion notice on 06.01.2021, the instruments therefrom were automatically deemed to be treated as equity shares. Learned Counsel relying on Clause 6(b) of Schedule 1 of the DTD submits that the Clause clearly provided that with effect from date Debenture Holder issue conversion notice, the Debenture Holder, be deemed and be treated by the Company for all purposes as the Holder of the relevant number of equity shares. It is submitted that language of Clause 6(b) is unambiguous and consciously inserted into the DTD by the parties. The conversion notice initially provided 36 months, which was extended to 54 months by second conversion notice dated 05.01.2024. The 54 months’ period was to come to an end till 05.07.2025, which period was available to the CD to comply with procedural compliances, hence, Debenture Holder has no jurisdiction to exercise put option notice by issuing notice dated 07.01.2025. The put option notice dated 07.01.2025 cannot be issued in the period during which the CD is entitled to convert the OCDs into CCD/ equity shares. It was submitted that the DTD was originally for 60 months, which expired in June 2024 and ISIN was expired in June 2024, which required reactivation. The CD sent an email dated 25.09.2024 to the Debenture Holder to provide its consent letter, which was not provided. The Adjudicating Authority failed to deal with deeming provision i.e. Clause 6(b) of Schedule 1 of the DTD and exclusively relied on ministerial acts. The debentures having been converted into equity shares, there is no financial debt, on the basis of which Section 7 petition, could have been filed. The CD has already passed a Board Resolution and Shareholder’s Resolution on 28.12.2024. Learned Counsel for the Appellant further referred to the balance sheet of the CD for Financial Year 2024-25, where conversion of OCDs into equity shares have been mentioned. It is submitted that Adjudicating Authority committed error in admitting Section 7 petition.

Learned Senior Counsel appearing for Respondent No.1 refuting the submission of learned Counsel for the Appellant submitted that the CD in pursuance of conversion notice dated 06.01.2021 and 05.01.2024 never converted the OCD into equity instruments. In reply, which was filed by the CD to put option notice dated 07.01.2025, it was admitted that OCDs were not converted into equity instruments, since ISIN of the Appellant was inactive. The claim of the Appellant of passing Board Resolution and Shareholder’s Resolution on 28.12.2024 has no meaning. The alleged audited balance sheet, which is claimed by the Appellant in the Appeal was never placed before the NCLT, nor have been uploaded on the MCA website. The submission of the Appellant that due to absence of active ISIN, the conversion could not have been effected, proves that the CD admittedly did not effect the conversion, post conversion notice. There is no filing with the Registrar of Companies to evidence that the Debenture Holder became an equity shareholder. The Debenture Holder is not reflected as shareholder in register of members, ROC filings or depository records. The submission of the Appellant that OCDs were converted into equity shares automatically on issuance of conversion notices is factually unsupported, statutorily non-compliance and legally untenable. Clause 6(b) is a relating back provision that fixes the effective date of conversion only if the conversion is completed. It does not determine when conversion took effect, nor whether it occurred at all. Clause 6(b) cannot be read as a deem conversion occurred automatically upon issuance of notice, nor can it override mandatory statutory procedures for allotment. It is submitted that put option under Clause 10 could have very well been exercised by the Debenture Holder after expiry of 60 months from the date of allotment. The submission of the CD that put option could not have been exercised during the subsistence of conversion rights, is incorrect. When conversion has not been effected, the put option can be validly exercised. Upon failure to convert, constitute an event of default under Clause 11.1 of the DTD and upon occurrence of event of default, the Debenture Holder is at liberty to avail any or all remedies under Clause 11.2 of DTD. Despite issuance of put option notice dated 07.01.2025, calling upon the CD to redeem debentures and pay outstanding amount, the CD having failed to effect payment, the default has been committed, entitling the Financial Creditor to file petition under Section 7. DTD provides unfettered rights to Debenture Holder to exercise the put option after 60 months from the date of allotment. The CD has neither allotted equity shares to the Debenture Holder even after issuing conversion notice, nor has made payment of the outstanding amount. The Adjudicating Authority has rightly admitted Section 7 petition.

We have considered the submissions of learned Counsel for the parties and have perused the record.

The Debenture Trust Deed was executed between the CD, Financial Creditor and the Promoters on 29.07.2019. Schedule-I of the DTD contains “Terms and Conditions of the issue of debentures”. Clause 1, which deals with “Basic terms of debentures” is as follows:

Clause 5, which deals with “Conversion of Debentures” of the DTD is as follows:

In the present case, notice was issued by the Debenture Trustee on 06.01.2021 to convert the OCDs into equity shares/ CCD within 36 months from the date of receipt of conversion notice, which period was till 05.01.2024. In reference to earlier notice dated 06.01.2021, vide notice dated 05.01.2024, 54 months were provided instead of 36 months for conversion of OCD into equity shares. On 07.01.2025, the Financial Creditor issued notice in exercise for put option and demanded payment of Rs.1258,73,33,609/- within seven days from the receipt of the notice. Clauses 1 and 2 of the notice provides as follows:

The CD replied to put option notice on 24.01.2025 objecting to issuance of notice for exercise of put option. It was stated that Debenture Holder has extended time period of 54 months to convert the OCD to equity shares, which time expires on 06.07.2025, hence, the Company/ CD has right and was entitled to convert the OCDs till 06.07.2025 and during subsistence of this right, Debenture Holder cannot exercise the put option. It was further stated in the reply that Company could not have converted the said OCD into equity shares without an active ISIN, which has expired on 11.07.2024. It is useful to notice the entire reply, which is as follows:

The reply, which was submitted by the CD clearly stated that the CD could not convert the OCDs into equity shares due to ISIN having expired on 11.07.2024. The reply was a clear admission by the CD that OCDs could not be converted into CCDs due to expiry of ISIN.

Learned Counsel for the Appellant in support of the Appeal relying on Clause 6(b) of Schedule-I of the DTD submits that the conversion is effective and all Debentures shall be forthwith treated as equity shares on and from the date on which the Debenture Holder(s) issue the conversion notice to the Company. It is submitted that the sub-clause 6(b), which contains a deeming Clause has to be read to mean that when a conversion notice is issued by Debenture Holder, debentures shall be forthwith treated as equity shares, which Clause has not been adverted to by the Adjudicating Authority. It is submitted that by virtue of Clause 6(b), the OCDs were converted into equity shares, hence, there was no debt, on the basis of which, petition under Section 7 could have been filed.

Learned Counsel for Respondent No.1 refuting the above submission contended that Clause 6(b) has to be read along with Clause 6(c) and conversion cannot be treated to have completed unless the statutory requirement for conversions are fulfilled. At best, Clause 6(b) only pegs the conversion date, i.e. after completion of conversion of debenture into equity, the date has to be taken as date of notice. To consider the submission of the parties, we need to refer to Clause 6(b) in its entirety. Clause 6 is as follows:

Clause 6, sub-clause (a) casts a mandatory duty on the Company, i.e. CD that within seven days following the receipt of a conversion notice, the Company shall convert the Debentures into equity shares. Sub-clause (b) is a clarificatory Clause, which provides that conversion is effective and all debentures shall be forthwith treated as equity shares on and from the date on which the Debenture Holder(s) issue the conversion notice to the Company and each shareholder with effect from conversion date, be deemed and be treated by the Company for all purposes as the Holder of the relevant number of equity shares. Sub-clause (b) also uses expression “Equity Shares issued upon conversion and the Company shall immediately record the details of such holder of equity shares issued pursuant to the conversion of Debentures in the relevant statutory registers of the Company”. When Clause 6(b) read in whole, it clarifies that conversion is effective ‘on and from the date on which the Debenture Holder(s) issue the conversion notice’, which is used with further requirement “Equity Shares issued upon conversion”, thus, issuance of equity shares is also condition precedent for the deeming date of conversion. Clause 6(c) further explains the requirement. Sub-clause (c) requires all statutory compliances to effect the conversion of debenture into equity shares, including the increase in authorized capital of the Company. Sub-clause (b) has to be read with sub-clause (c), which clarifies that unless all actions required or permitted or applicable are taken, the deemed date of conversion as referred to in sub-clause (b) is meaningless. The present is a case where from the reply submitted by the CD to put option notice dated 07.01.2025, as noticed above, it is clear that debentures were not converted into equity shares due to expiry of ISIN, which is a case of the CD itself. When infact, the conversion never took place, nor there was any statutory compliances done for conversion, it is futile for the Appellant to rely on Clause 6(b) to claim that conversion shall be deemed to have happened on the date of issuance of conversion notice. The above argument of the Appellant is fallacious due to one more reason. Admittedly, the first conversion notice was issued on 06.01.2021 and in event, from the date of issuance of conversion notice under Clause 6(b) debentures shall be treated to be equity shares from 06.01.2021, there was no occasion for issuance of another notice on 05.01.2024 by the Debenture Holder. The CD in its reply to put option notice, pleaded that due to notice dated 05.01.2024, the CD has 54 months’ time for conversion, i.e. 06.07.2025. The plea of the CD is that during the aforesaid period, i.e. till 05.07.2025, the put up option could not have been exercised by the Debenture Holder. Clause 10 of the DTD deals with “Put option”, which is as follows:

Clause 11 deals with “Event of default and remedies” and sub-clause 11.1 deals with “Event of default” mention in sub-clause 11.1(xxviii) is as follows:

Consequence of event of default is provided in Clause 11.2. If Company fails to convert debentures into equity shares, i.e. event of default and as a consequence of which ‘exercise put option’ can be made by virtue of Clause 11.2 (ix). When the debentures were not converted into equity shares and Debenture Holder continue to be Debenture Holder, there is no fetter in the right of Debenture Holder to exercise put option as per the DTD.

Learned Counsel for the Appellant sought to rely on Board Resolution and Shareholders’ Resolution dated 28.12.2024 and Form MGT-14 and further relied on the audited balance sheet of Financial Year 2024-25. An objection has been raised by the Respondent that the said balance sheet was never part of the record of the NCLT. The CD has filed the limited reply before the NCLT, which has been brought on record along with the additional affidavit filed by the Appellant itself. In the limited reply, which has been brought on the record, there is no reference of audited balance sheet. Moreover, without actually converting the OCDs into CCDs any unilateral mention in the balance sheet by the CD shall have no effect on the facts and events which transpired in the present case.

Learned Counsel for the Appellant has also contended that after expiry of ISIN in June 2024, an email was sent to the Debenture Holder to give its consent and consent having not been given, the ISIN could not be made active. Learned Counsel for the Respondent replying to the submission, submitted that the Appellant did not effect conversion after receipt of notice on 06.01.2021, when it had active ISIN, nor it converted after receipt of the subsequent notice on 05.01.2024. It is submitted by the learned Counsel for the Respondent that ISIN is shown active in the record and activating the ISIN was the obligation of the CD. Be that as it may, when fact remains that OCDs were never converted into CCDs, Debenture Holder continues to remain Debenture Holder and had every right to exercise put option. The Adjudicating Authority has also after hearing the parties returned a finding that there was no actual allotment of the converted securities and completion of corporate actions including active ISIN. The Adjudicating Authority has returned such findings in Paragraph-9, which is to the following effect:

We fully concur with the above findings returned by the Adjudicating Authority that there was no actual conversion of OCDs into CCDs, hence, the Debenture Holder(s) had every right to exercise their put option.

We, thus, are satisfied that Financial Creditor has successfully proved the default on the part of the CD. There being debt and default, the Adjudicating Authority has rightly passed an order admitting Section 7 petition. We do not find any error in the order of Adjudicating Authority, warranting interference by this Tribunal in exercise of its appellate jurisdiction. The Appeal is dismissed. There shall be no order as to costs.