GVFL Trustee Company Private Limited vs Ultravolt Power Private Limited

[Oral Judgment : Justice Sharad Kumar Sharma, Member (Judicial)]

The Appellant in the instant Company Appeal puts a challenge to the Impugned Order dated 29.04.2021, as it has been rendered by the National Company Law Tribunal, Chennai Bench in IBA No.201/2019. By virtue of Impugned Order the application made by the Appellant praying for initiation of CIRP, under Section 7 of the I & B Code, 2016, has been rejected. The prime question, which would be the subject matter of detailed consideration in the instant appeal, would be a question of mixed facts and law as it would be requiring a consideration of the agreements, which have been entered into between the parties, in order to determine, as to whether under the given set of circumstances, the subject matter that is, the amount in question, which was principally extended by way of an Investment cum Shareholder Agreement dated 07.09.2013, could be taken as to be a “debt” for the purposes of initiation of proceedings under Section 7 of I & B Code. In a nutshell, we can summarise the question as to: -

whether an amount extended by way of an Investment Agreement, could at all be treated as to be a “debt” for the purposes of initiation of Section 7 of I & B proceedings?

For the said purpose apart from appreciating the arguments of the Learned Counsel for the parties, at a later stage, this Appellate Tribunal feels it apt to deal with the terms of the successive agreements, which have been entered into between the parties invariably qualifying the earlier terms and conditions with regards to the rights created by virtue of such agreements.

The first one would be that of the Investment cum Shareholder Agreement, as it stood executed on 07.09.2013. While scrutinizing the said document, this Appellate Tribunal feels that, it would be apt to determine the subject, which was under consideration at the stage when parties have unanimously agreed to execute the agreement itself, titled as “Investment cum Shareholders Agreement”. The language in itself, when it uses the word ‘Investor’ in para 1 of the agreement, that itself denotes that, the Appellant was an “investor” to the activities which were carried out by the Respondent Company and that, by the said agreement, he was not extending any amount of finances by way of debt or loan to the Respondent as a “debt”. This aspect has to be considered in terms of clause – F & G of the said agreement, where it was settled, that the amount thus agreed to be extended to the Respondent Company would be payable in two tranches, the first tranche of payment was to be made as per clause 3.2.1, to the extent of Rs. 29 crores, against issue of 2.9 crores of “Compulsory Convertible Debenture” (CCDs) by the Respondent and Rs. 50 lakhs against subscription of Class B equity shares. The use of the funds thus invested under the agreement by the Appellant was subject to the conditions contained under terms of the Clause 7.1 of the agreement.

It is contended by the Appellant while filing of the application under Section 7 of the I & B Code, that the Respondent had failed to use the amount thus given under the said agreement of 07.09.2013 and thus he had violated the terms of agreement as agreed under clause 7.2 of the Investor cum Shareholder Agreement, that as per agreement he has to repay the dues which he has failed to do and as a consequence thereto, it would necessitate the initiation of the CIRP proceeding under Section 7. In this Application, Appellant has treated the amount thus extended under the Investors cum Shareholder Agreement, as to be a “financial debt” for the purposes of invoking Section 7 of the I & B Code, as against the Respondent. The relevant terms and conditions regarding the usage of the amount extended under the terms of the Investor cum Shareholder Agreement; particularly, that as referred to in Clause 7.2.1 which was addressed upon by the Learned Counsel for the Appellant is extracted hereunder: -

It is submitted by the Learned Counsel for the Appellant, that when the conditions stipulated with regards to the use of the proceeds thus extended under Clause 7 of the agreement, and the time lines under which the amount thus extended by way of an investment, are to be deployed were not met, the Appellant extended the time period for utilization of the amount that even after extending the timelines the Respondent failed to utilize the invested amount and therefore he issued letters seeking refund of the investment amount. Subsequently, by mutual consent, a Settlement Agreement was executed on 06.09.2016, whereby the Respondent agreed to pay a sum of Rs.32.57 crores consisting of Rs.29,32,000/- towards the redemption/ purchase of the CCDs, Rs.84,39,000/-towards outstanding interest payable on CCDs and Rs.2,40,61,000/- towards buyback / purchase of 5,00,000 Class B equity shares held by GVFL. Particularly the reference may be had to Clause 2 of the Settlement Agreement dated 06.09.2016, which is extracted hereunder: -

The Appellant further submitted that as per clause 2 of this settlement agreement, the CCDs stood converted into Non-Convertible Debentures (NCDs) which are essentially long term debt instruments, that as per clause 3, GVFL shall convert CCDs worth Rs.20,22,61,000/- into NCDs on date of signing of the agreement and UPHPL (Respondent) shall redeem them, that as per clause 4, UPHPL will redeem the balance CCDs as per clause 3 above, that as per clause 6 interest @ 15% will be paid in case of default in payment as per schedule note and that as per clause 7 the promoter of Respondent Company will provide Demand Promissory Note for the balance amount of Rs.11,50,00,000/- to be honoured immediately on demand by the Appellant. The Appellant has further submitted that the Respondent paid Rs.22,80,41,000/- and failed to return the balance of Rs.11,50,00,000/- as per schedule despite providing a demand promissory note and upon his request, in good faith, executed an Addendum to the Settlement Agreement dated 06.09.2016 that this Addendum was executed on 25.11.2016 whereby the CCDs were agreed to be converted into Optionally Convertible Debentures (OCDs) without any changes in the debt obligations therein. This Addendum also modified the payment / redemption schedule. Apart from this, other terms and conditions of agreement dated 06.09.2016 remained unchanged. Relevant extract providing for debenture conversion as per Debenture Certificate provided as under: -

During the course of argument, the Learned Counsel for the Appellant had further submitted that, if the provisions contained in the aforesaid documents, governing redemption of debentures, are taken into consideration, from the terms the Settlement Agreement of 06.09.2016 and its Addendum dated 16.11.2016 executed on 25.11.2016, it provides the Respondent had agreed to pay the entire Rs.32,57,00,000/- towards redemption of CCDs / OCDs as per the schedule therein, that the promoter of the Respondent had agreed to provides for the demand promissory note for the balance Rs.11,50,00,000/- to be honoured by him immediately on demand by the Appellant / Investors that the agreement provides for the payment of interest by the Respondents @ 15% in case of default. He has further argued that the Respondent had only repaid Rs.22,80,41,000/- against the admitted dues of Rs.32,80,41,000/-, that the balance sheet of the Respondent Company for FY 2018-19 reflect the debt pursuant to issuance of debentures and therefore it is evident that the financial debt owed by the Respondent to the Appellant is admitted and undisputed.

The Respondent has contended that the investment/infusion of funds by the Appellant was against issue of 2.90 crore CCDs and 5,00,000 equity shares with face value of Rs.10/- each, which is basically investment and not debt instruments. Only NCD is a debt instrument and though the Investor-cum-Shareholder agreement had a provision to convert CCDs into NCDs, the same can be done by a notice of conversion and no such notice was given. The settlement agreement was only for repayment of money and hence the commitment to repay cannot be classified as financial debt, for the reason being that the settlement agreement including its addendum incorporates the original investor-cum-shareholder agreement. Further the balance payment of Rs.11.5 crore which is the subject matter of the present controversy, is only upon purchase/redemption of NCDs, for which certain procedure has to be followed which has not been done by the Appellant. Further, the present claim is not a financial debt, it is disputed and for resolution of dispute, arbitration is provided in the Agreement. Already the Appellant has filed a petition in R/IAAP (Petition under Arbitration Act) No.60 of 2020 and his application under Section 7 of I & B Code is not maintainable and accordingly Learned Adjudicating Authority has rightly rejected the Section 7 application of the Appellant.

In fact, if all these settlements and particularly the ‘Investment cum Shareholder Agreement’, are taken into consideration, the ‘Investor cum Shareholder Agreement’, in itself describes in it as to what the investor would mean. According to the settled terms of the Investors cum Shareholder Agreement, in its definition clause apart from the fact that it had dealt with the description of the CCDs and the right of conversion has been reserved under the terms and conditions contained under the Investor cum Shareholder Agreement, where the “investor” was described therein as to be “M/s. GVFL Venture Capital Fund represented by its sole trustee of GVFL Trustee Company Private Limited in relation to its Golden Gujarat Growth Fund-I Scheme”. The definition clause of the said “Investor cum Shareholder Agreement”, when it describes the present applicant/appellant as to be the investor, the amount thus extended either by way of purchase of CCDs or by purchase of Class B shares, will naturally take the shape of investment since it was falling to be under the conversion clause, as given under the agreement itself. The question which arose in debate was as to whether the amount extended under the nomenclature of Investment cum Shareholder Agreement, would be treated as to be a “debt” in order to make it as a “financial debt”, for resorting to the proceeding under Section 7 of the I & B Code.

The I & B Code in itself does not describe the term “investor” or the “investment”. In fact the implication or the expression, laying down the gravamen pertaining to the investor and the investment, it has to be derived from the general law, as to what would be the status of the present appellant in terms of the conditions contained under the Investment-cum-Shareholder Agreement, for which we have to consider as to what literally the term “investment” means. The term “investment” means ‘investment of one’s capital in shares, stocks, bonds, debentures or securities issued by the Government or the local authority or other marketable securities of a like nature for profitable return’s. In further elaboration, it means that it is the investment by an assessee in any of eligible securities in accordance with the scheme as envisaged in terms of the investment itself’. In some of the literature pertaining to the expression “investment”, it means to subscribe, acquire, hold or transfer securities or a unit issued by a person, which was inclusive of transfer of debentures with certain conditions contained in it with regards to its convertibility!

The aforesaid issue is being considered owing to the fact of there being a vacuum prevailing as to how the term “investor” would be determined. It was found that since the term Investment or Investor has not been defined under the Companies Act, 2013, nor it has been defined under the Income Tax Act, 1961, but it cannot be ignored that, when the Act does not define and lay down the terms and expression defined therein, as to who would be classified as to be the investor or whether it could be the investment or not, it shall have the same meaning as given to them under the Companies Act, in a particular context. Although the legislature has amended the Companies Act from time to time till the enactment of 2013 Act, it did not define in itself the two terms “investment” or “investor”, the term investment in the context in which it occurs, since not being a term which warrants of giving it a restricted meaning, as given in the expression under the terms of agreement which has been settled between the parties. The aforesaid mode of determination of the terms “investor” and “investment” was considered by the Hon’ble Apex Court in the matters of the Commissioner of Income Tax Vs J.K. Commercial Corporation Limited & Ors., in a Judgment as reported in AIR 1977 SC Page 459. The relevant para is extracted hereunder: -

The controversy herein is pertaining to determine the status of the Appellant for the purposes of Section 7 of the I & B Code, which has had to be read in the context of controversy, which was raised before the National Company Law Tribunal, which required determination of the status of the Appellant only after determining the contents of the Investment Agreement, Settlement Agreement and its consequential Addendum. On simple reading it provides that, there is an Investment Agreement, where it clearly stipulates the nature of the investment to be that of the CCDs and which is admittedly permitted to be converted into equity shares at the end of the term or to be converted into NCDs, once the terms and conditions of conversion were fulfilled, at the option of the Appellant, the only stipulation required being that there has had to be a notice. Viewed in this way, the document in itself would have be treated as to be an Investment Agreement and it will not be treated as to be a ‘debt’ as defined under the I & B Code, because the Investment Agreement or the subsequent Settlement Agreement emanating therefrom, as it would be apparent from the contents of the agreements brought on record and which was also the subject matter of consideration before the Learned Adjudicating Authority, reflect that there was no element of borrowing of money by the Respondent which was contained in the agreements, and that the infusion of funds was only in the nature of equity, at present and in future into the Respondent Company. Further, under the Settlement Agreement, the Respondent has already made the payment to the tune of Rs.22.8 Crores, which has been accepted by the Appellant and this very act of the Appellant of accepting the amount returned under the Settlement Agreement will create a bar in the way of the amount to be treated as a debt, except for the fact that, only a balance payment of Rs.11 Crores, was left over to be remitted which is the subject matter of the petition initiated under Section 7 of the I & B Code, 2016, before Learned NCLT.

In order to further elaborate on the issue, the agreement of 25.11.2016, which was an Addendum to the Settlement Agreement of 06.09.2016, the parties have admittedly knowingly had amended the nature of the instrument making the CCDs, as to be optionally convertible debentures (OCDs) for which terms and conditions, were specifically set out to be exercised in the terms of the Addendum Settlement Agreement of 25.11.2016, which was not a disputed fact by the Appellant, who is the party to the proceedings. In the case at hand, the Appellant has not invoked the provisions for conversion, as set out under the terms and conditions of the Settlement Agreement, referred to herein above. Instead, he has simply sought for the return of money payable under the Settlement Agreement, which has also been partially received back by him except for the balance amount of Rs.11.5 Crores. This act of the Appellant itself makes the amount, in terms of the Investment cum Shareholder Agreement of 07.09.2013, as to be an “investment” and not a “debt”, much less a “financial debt”, which was sought to be established by the applicant/appellant so as to enable the proceedings to be initiated under Section 7 of the I & B Code. In fact, if the interpretation to the terms of the Settlement Agreement and its Addendum is taken into consideration the manner in which the terms and conditions therein have been couched, it rather takes the shape of not being a simpliciter debenture agreement, but a hybrid instrument and it has been dealt by the Hon’ble Apex Court in the Judgment reported in 2023 SCC Online SC 1529, IFCI Limited Vs Sutanu Sinha & Ors., wherein para 6, 14 & 15 of the said Judgment, the Hon’ble Apex Court has observed as under. The relevant paragraphs are extracted hereunder: -

If the preceding paragraph no.14 of IFCI Ltd (Supra) is taken into consideration for the purposes of analysing the conclusion arrived by the Hon’ble Apex Court in Para 15 of the said Judgment, which have been extracted, it has provided that the simpliciter debenture agreement, which is hybrid by introduction of certain terms and conditions by reserving the right of convertibility, then the funds infused through such hybrid instruments under the Settlement Agreement or the Investment Agreement, cannot be exclusively taken as to be a “financial debt”, for the purposes of initiation of proceedings under Section 7 of the I & B Code and hence the proceeding itself would be bad and not sustainable in the eyes of law. If the said Judgment itself is taken into consideration, it has conclusively dealt with the issue, that merely the Settlement Agreement, itself will not constitute as to be a relationship between the Applicant/Appellant and the Respondent, as to be that of the Financial Creditor or the Financial Debtor, because the issue has already been dealt in terms of the Investors cum Shareholder Agreement of 07.09.2013, to be read with the Settlement Agreement of 06.09.2016 and the Addendum Agreement of 25.11.2016, where the CCDs were sought to be converted into OCDs. In these eventualities, the funds infused into the Respondent Company under the said agreement was through hybrid instrument in form of OCDs and thus the agreements relied upon by the Appellant for the purposes to determine the status of the Respondent as to be that of the Financial Debtor, is not made out from the terms of the agreement itself and particularly with regards to the conduct of the Appellant too.

This controversy has also to be considered from yet another perspective as to whether the Appellant acquires the status of being the Financial Creditor in itself and whether the partial acceptance of the amount and the balance, which allegedly remains due to be paid under the settlement agreement, which was made as the subject matter of Section 7 proceedings under I & B Code would amount to be a debt in itself. In addition, interpretation is also required to be given to the term “Financial Creditor”, as it has been used under the I & B Code and the definition of the word “default” as contained under the Section 3 (12) of the I & B Code. On an harmonious construction, we are of the view that, owing to the terms of the Settlement Agreement dated 06.09.2016, which has to be read with the Addendum Agreement of 25.11.2016, the said agreed amount and the methodology, which has been adopted for the purposes of repayment of the money under the terms of agreement in itself will not make the amount thus extended under the Investor-cum-Shareholder Agreement, as to be the financial debt so as to enable the Appellant to invoke Section 7 of the I & B Code, for the purposes of initiation of the CIRP proceedings.

We feel it apt to observe that an agreement or an obligation to pay an amount under an agreement, will have to be backed with, justification to have it be first classified to be a “debt” for the purposes of attracting Section 7 of I & B Code. On the reading of the document itself, as already observed and that too, when the amount was extended by way of an investment owing to the fact that the investor itself was defined in the agreement, the status of the Appellant will not change into that of the Financial Creditor to enable him to invoke Section 7 of I & B Code and the agreement in itself will not provide him. The status of being the financial creditor to be able to invoke Section 7 of the I & B Code. The obligation to pay will not itself amount to be a disbursal of the amount under consideration as against a debt once it has not been backed by the satisfaction of the aspects pertaining to the time value of money and a breach thereof. The satisfaction of these two factors, that is “time value of money”, and a “breach” thereof would be a precondition that is to be satisfied in order to trigger an Insolvency Process by invoking Section 7 of I & B Code and until and unless the amount thus extended by the Appellant under the Investment-cum-Shareholder Agreement is backed with the time value of money, and the breach thereof, it will not amount to be a financial debt. The said principle was considered by the NCLAT, Principal Bench in Company Appeal (AT) (Ins) No.1005/2020, Amrit Kumar Agarwal Vs Tempo Appliances Private Limited. In the instant case if we go through the agreements including the Addendum in its entirety which has been referred to, what we find is that none of the covenants contained in the agreement gives the ‘Funds’ infused into the Respondent Company given by the Appellant a shape that could be said to be backed with satisfaction of the preconditions for determining the amount as to be having an element of the ‘time value of money’ and the ‘breach’ thereof. In that eventuality, once these two prime factors are not satisfied it will not amount to be a financial debt, non-repayment of which could be taken as to be a default for the purposes of invocation of Section 7 of I & B Code, and hence the proceedings initiated would be bad in the eyes of law. It will be appropriate at this stage to refer to the observations made by the NCLAT, Principal Bench in the aforesaid Judgment of Amrit Kumar Agarwal (supra), made in para 4 of the said Judgment which is extracted hereunder:-

The three member bench of the NCLAT, has dealt with the impact as to what actually the financial debt would mean by extracting its implication from Sub-Section (8) of Section 5 of I & B Code and ultimately it has arrived at a conclusion in its para 4 of the Judgment referred above that, mere obligation under a Settlement Agreement to pay an amount in itself will not amount to be a disbursal of an amount for consideration against time value of money or a breach of a contract. Thus initiation of the CIRP proceedings under Section 7 of I & B Code in the instant case, merely based upon an alleged obligation, which has been based upon a Settlement Agreement and its Addendum Agreement in itself will not trigger the proceedings under Section 7 of the I & B Code, 2016.

There is yet another factor, which is required to be taken into consideration in the instant case. The said Investment-cum-Shareholder Agreement as executed on 07.09.2013 between the parties, contains a dispute redressal forum for the parties, in an event of any dispute arising from the covenants of the agreement itself and it is not in dispute that, based upon the controversy which has arisen, where the Appellant has accused the Respondent of violating/contravening the terms and conditions of the said Agreement and it has already invoked the Arbitration Clause as contemplated under clause 21.7 of the said Agreement. The proceeding under Arbitration & Conciliation Act of 1996, in the said matter is already pending consideration. When a claim is disputed and when the Agreement itself provides the remedy for the resolution of the dispute, the treatment of such claim under the framework of I & B Code is an aspect which had been considered by the Hon’ble Apex Court in the Judgment reported in 2018 Volume 1 SCC Page 407, Innoventive Industries Limited Vs ICICI Bank and Another.

The relevant para 28 of Innoventive Industries Limited (Supra) is extracted hereunder:-

In the instant case, there is an alleged default in terms of Settlement Agreement, and the Investment Agreement and the parties have already resorted to the remedies as agreed upon between them under the agreement by invoking the Arbitration Clause, and therefore it may not be a dispute where the aspect of debt is required to be determined, but a dispute concerning violation of the terms and conditions of the agreement and therefore the Section 7 proceeding may not be available to the Appellant as per the principles laid down in the para 28 of the above stated Judgment supra.

Coming to the Impugned Order under challenge, if the observation made by the Learned Adjudicating Authority are taken into consideration, particularly, that as observed after considering the terms and conditions of the various settlement and addendum agreements in para 9, of its order the Tribunal has observed that on a detailed scrutiny of the contents of the agreement in itself, it will amount to be an Investment Agreement and not an agreement for extension of debt by way of a financial assistance on grounds of Appellant having place in Board of Respondent Company, approving of Business Plan & taking part in decision making in the Respondent Company and thus acting more in the manner of equity investor than a pure creditor, and thus the status of the Appellant would be that of the “Investor” and not a “Financial Creditor”. The Learned Adjudicating Authority has further observed that as per the Appellant will not be a Financial Creditor as per the provisions contained under Section 5(7) & 5(8) of the I & B Code, on the basis of the reasons given therein, the amount thus claimed by issuance of a notice under Section 8 of I & B Code, prior to the initiation of proceedings under Section 7 of I & B Code, will not be a “debt” under Section 3(11) nor it will be a ‘default’ under Section 3(12) and hence the rejection of Section 7 application by the Learned Adjudicating Authority by the Impugned Order under challenge does not suffer from any apparent error which could call for any interference by this Appellate Tribunal in the exercise of its Appellate Jurisdiction under Section 61 of the I & B Code. Thus, this Company Appeal lacks merits and the same is accordingly dismissed.