Hubtown Limited vs GVFL Trustee Company Pvt. Ltd.

Per: Shri Chandra Bhan Singh, Member (Technical)

GVFL Trustee Company Pvt Ltd (GVFL) is an Applicant who have filed Section 7 Petition bearing CP No. CP(IB)-4129/2018 against Hubtown Limited for a debt by way of equity investment in shares of Hubtown Bus Terminal (Mehsana) Pvt Ltd for a total amount of Rs.4,30,54,200/- as principal and Rs.9,96,95,800/- as Internal Rate of Return (IRR) calculated at 26% of the principal up to 31.08.2018. As per the Petitioner there is a default under Section 7 of IBC, 2016 as its “put option” was not entertained when the said demand notice dated 02.01.2018 was sent to the Respondent M/s. Hubtown Limited demanding exit by way of “put option”.

The Respondent (Corporate Debtor) in the main CP has separately filed the present Miscellaneous Application (MA) No. 2412/2019 raising preliminary issues regarding maintainability of the said Petition. The Applicant in this MA 2412/2019 (Hubtown Limited) was earlier known as Ackruti City Ltd. The Applicant is a shareholder in a Company called Hubtown Bus Terminal (Mehsana) which is a SPV incorporated to inter alia undertake and complete reconstruction and development of commercial and residential property at Mehsana, Gujarat by Hubtown Ltd.

There are three other projects for which three Special Purpose Vehicle companies were separately incorporated by Hubtown Ltd. These are the subject matter of CP No. CP(IB)-4128/2018 (HBT Vadodara), CP No. CP(IB)-4130/2018 (HBT Ahmedabad) and CP No. CP(IB)-4131/2018 (HBT Adajan). For these three CPs, maintainability Application has been filed by the original Respondent. These MAs are MA 2411/2019 in CP(IB)-4128/2018, MA 2413/2019 in CP(IB)-4130/2018, MA 2414/2019 in CP(IB)-4131/2018 respectively. This Bench, during the hearing, as brought out by the Applicant and Respondent noted that the outcome of the maintainability Application in case of HBT Mehsana will also be applicable to other MAs viz. MA 2411/2019, MA 2413/2019 and MA 2414/2019.

A Share Subscription and Shareholders Agreement (SHA) dated 24.09.2010 was signed between IL&FS Trust Company Limited (ILFS), IIRF India Realty XVIII Limited (IIRF) and Hubtown Ltd and two other Promoters of HBT Mehsana. Consequent to this Agreement, IL&FS and IIRF invested in HBT Mehsana by subscribing to Class ‘A’ equity shares, Class ‘B’ equity shares and Class ‘D’ equity shares. Subsequent to this investment the shareholding in HBT Mehsana was as under:-

On 29.05.2013 a Share Purchase Agreement (SPA) was executed between the Petitioner GVFL in CP No. 4129/2018, the ILFS group, Hubtown Limited and two other Promoters of HBT Mehsana. In terms of this Agreement, GVSL purchased the shares (Class ‘D’ shares) of HBT Mehsana from the ILFS group for a total amount of Rs.4,30,54,200/-. These shares were reclassified as Class ‘E’ and Class ‘F’ equity shares. Pursuant to this purchase of shares by GVFL the shareholding in HBT Mehsana became as under:-

Under the SHA, GVFL was provided with Shareholders’ rights like right to nominate one Director on the Board of the Company, right to vote in AGM/ EGM, special veto power etc. Other shareholders right which accrued to GVFL included giving various exit options under SHA which has been enumerated at Clause 13.1 of the SHA which reads as under:-

Here it may be noted that these options are part of a shareholder’s right. The claim of GVFL is that the payments by GVFL was to purchase shareholding in HBT Mehsana. The GVFL has sought to exercise its right under the “Put” option for the first time in December 2013 and this Petition was filed by them in November 2018 purportedly for a debt amount of Rs.4,30,54,200/- along with return calculated at IRR of 26% till 31.08.2018.

The issue before the Bench is whether GVFL is a Financial Creditor and whether the debt claimed in the Petition is a Financial Debt as per the IBC 2016. The relevant definition under the IBC 2016 of the Financial Creditor and Financial Debt are as under:-

This Bench, therefore, has to see whether the claim of GVFL as a Shareholder of HBT Mehsana in exercise of its ‘put option’ tantamount to a financial debt. The Bench is of the view that a shareholder is different from a lender. The shareholder undertakes the risk by investing in shares and derives its return by way of profits in the form of dividends and appreciation in the value of shareholding, i.e., capital gains. In contrast, the Lender gives loans for which the payment is by way of Interest.

The Bench notes that as per the SHA, GVFL invested in HBT Mehsana by purchasing the shares of ILFS group. This cannot be termed as an investment of GVFL by way of a loan. The money paid by GVFL to acquire the share of HBT Mehsana cannot be construed as a consideration for time value of money and it was solely for the purchase of shares of HBT Mehsana held by ILFS group to become a shareholder in the Company. The Bench also notes that as per shareholder of HBT Mehsana, GVFL had acquired various rights including that of appointing a Director, exercising votes in AGM/ EGM and exercising veto votes. It is abundantly clear to the Bench that no voting rights ever accrues to a Financial Creditor in any AGM/ EGM. Therefore, the rights enjoyed by GVFL in HBT Mehsana like exercising votes in the AGM/ EGM are typically the rights of a Shareholder and not a Financial Creditor. This is because, Equity is not a debt and as such any contract for acquisition of shareholding in a body corporate can never result in the formation of a debt. The SPA and SHA are both contracts in relation to GVFL acquisition of equity shareholding in HBT Mehsana.

The Bench is of the view that share purchase in HBT Mehsana by GVFL with exit option of inter alia “Annual Put Option” cannot be considered as a debt which is disbursed against consideration of time value for money. The Bench also notes that Internal Rate of Return (IRR) cannot be equated with interest payments. The relevance of IRR for an investor in shares is in relation to expected profit and dividend pay out and capital appreciation of the shares which is totally different to the interest which is return for any investment by way of loan.

The Bench is of the view that the GVFL may be entitled to this claim under the SHA as a Shareholder of HBT Mehsana. However, the Bench has no doubt that the claim of GVFL cannot be termed as a Financial Debt as contemplated under IBC. Therefore, the MA 2412/2019 regarding maintainability of CP(IB)-4129/2018 is “Allowed” and CP No. CP(IB)-4129/2018 is not maintainable under Section 7 of IBC and therefore is “dismissed”.

Similarly, based on the above other MAs viz. MA 2411/2019 in CP 4128/2018, MA 2413/2019 in CP 4130/2018 and MA 2414/2019 in CP 4131/2018 regarding maintainability of Company Petition are also “Allowed” and the Company Petitions No. CP(IB)-4128/2018, CP(IB)-4130/2018 and CP(IB)-4131/2018 filed u/s 7 of the IBC are “dismissed” as not maintainable.