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Judgment
B.S.V. Prakash Kumar, J
HEARD AND DICTATED IN OPEN COURT ON 14.01.2020
C.A. No. 2876(PB)/2019 & C.A. No. 1785(PB)/2019
On both of these applications one of which namely C.A. No. 2876(PB)/2019 filed by ICICI Bank stating that the part of the claim application of the applicant has been put on hold by the
Resolution Professional without deciding as to whether it is admissible or not, and another application C.A. No. 2876(PB)/2019 being filed by applicant namely Acreage Properties Private Limited stating that its claim is also put on hold, the Resolution Professional having given an undertaking that he/she would dispose of these two claims forms within three days thereof, these applications are hereby disposed of directing the Resolution Professional to consider these two applications in accordance with law within three days hereof.
In aforesaid C.A. No. 2876(PB)/2019 filed by applicant namely Acreage Properties Private Limited, with regard to second relief i.e. seeking forensic audit of the Corporate Debtor, we have not dealt with this relief leaving it open to the party, in the event it is entitled to seek such kind of relief, liberty is given to proceed in accordance with law. C.A. No. 1340(PB)/2019
It is an application filed by a claimant namely Ziasess Ventures Limited for its claim has been rejected on 09.04.2019 by the Resolution Professional on the ground the claim falls within the ambit of equity, not within the ambit of debt.
On perusal of this application, it appears that an investment agreement was entered into between this applicant along with Green Park Buildwell with the Corporate Debtor on 23.06.2010. As per the agreement, the applicant invested (???) 24.99 crores towards issual of Compulsory Convertible Debentures (CCD) and perhaps (???) 10 towards issual of one share.
It appears that by virtue of this investment, this applicant has got participation rights as well as affirmative rights in the Corporate Debtor. By looking at these two rights in favour of this applicant, the Resolution Professional rejected its claim on 09.04.2019 treating it as a equity.
The reason given by the Resolution Professional for rejection is as follows:
"Dear Mr. Pavlos Pavlou
I would like to bring to your attention the following observations which arose in the discussion with the lawyers while discussing your claim 1. You have been issued Fully Compulsory Convertible Debentures by the Corporate Debtor.
The debentures under any circumstances are not redeemable or refundable to you in cash for consideration.
The said debentures are required to be fully converted into shares as and when any of the clause of the debenture agreement are triggered.
Under the rules and regulations of FEMA the said amount paid by you against the debentures is treated as equity and I presume that you must have filed your papers with the RBI accordingly.
On conversion of the said debentures the same will be treated as equity.
Therefore in view of the above and in view of the laws prevailing for the time being in force your CCD's have been treated as equity of the corporate debtor and hence your claim as financial creditor is rejected. Thanking you Amiyt Agarwal"
On the claim being rejected by this Resolution Professional, the applicant has filed this application stating that it has invested money on issuance of compulsorily convertible debentures (CCD) and token one share in the company so as to have some control over the investment it has made in the Corporate Debtor Company.
The applicant counsel says that the Corporate Debtor issued CCD's against the consideration for time value of money as the Corporate Debtor assured fixed returns on periodical basis, therefore it is a clear financial debt falling under the definition of financial debt as envisaged under Section 5(8) of the Insolvency and Bankruptcy Code (the Code).
While arguing this case, the applicant counsel says that it is financial debt because money has been invested through debentures on the condition that the Corporate Debtor would pay interest over the Debentures through coupons. He says that this claim is covered with a right to receive fixed assured returns from the Corporate Debtor. Moreover, as on the date of admission of this case, its debentures not being converted into equity, it shall be treated as debt but not as equity.
In support of his argument, the applicant counsel has drawn our attention to the Balance Sheet of the Debtor Company reflecting its claim as a long term borrowing and showing TDS as paid on interest over the debentures. Now after having all along treated it as debt, this RP cannot now go against the very statement in the balance sheet filed by the Corporate Debtor therefore, the applicant counsel has prayed this Bench to allow its claim.
As against this argument, the Resolution Professional counsel has argued that this applicant by virtue of having participation in control over the affairs of the company and there being an affirmative vote in favour of the applicant, though investment has been shown as compulsorily convertible debentures, for this debenture principal sum not being repayable to the applicant, it cannot be called as debt.
To substantiate this point, the counsel has relied upon a judgment of Hon'ble the Supreme Court rendered in the case of Narendra Kumar Maheshwari v. Union of India, [1990 (Supp) SCC 440] paragraphs 97 and 98 which are as follows:
"97. It has to be borne in mind that convertible debentures is a new type of instrument introduced in this case and these appear to have caught the imagination of the investors. It has been asserted before us that subsequent to RPL issue, others have also gone for this type of project. Our attention was drawn to Rule 2(b)(x) of Companies (Acceptance of deposits) Rules, 197 which provided clearly that a convertible debenture was not to be included in the definition of debenture. It was further asserted that the security visualised in clauses (5) and (6) of the prospectus was one which was prevalent and customary in corporate practice and was regarded as valid and adequate Nothing contrary to this was indicated before us.
Our attention was drawn to Section 2(12) of the Companies Act under which a debenture need not be secured at all. In that light the guidelines should be interpreted. Therefore, it was submitted, guideline 10, reasonably interpreted, means that such security should be provided as is customarily adopted in corporate practice in the matter of issuing debentures. It has to be borne in mind that the debentures issued in the present case are compulsorily convertible. Therefore, no repayment of principal is really involved. The question of security becomes relevant for the purpose of payment of interest on these debentures and the payment of principal only in the unlikely event of winding up. The debentures need not necessarily be secured. Guidelines do not provide for quantum and nature of the security. A debenture has been defined to mean essentially as an acknowledgement of debt, with a commitment to repay the principal with interest (Palmer's Company Law, p. 672, 24th Edition). Reference, in this connection, may be made to British India Steam Navigation Co. v. The Commissioner of Inland Revenue 1881 7 QBD 165. A debenture may contain charge only on a part of the assets of the company (Re. Colonial Trusts Corporation 1879 (15) Ch. 465 or it may not contain any charge on any of its assets (See Speyer Brothers v. The Commissioner of Inland Revenue 1907 1 KB 246; and Lemon v. Austin Friars Investment Trust Ltd. 1926 (1) Ch 15. A debenture may, therefore, be secured or unsecured (Palmer's Company Law, p. 675, 24th Edition). An ordinary debenture has to be distinguished from a 'mortgage debenture' which necessarily creates a mortgage on the assets of a company (See Palmer's Company Law, pg. 706). A compulsorily convertible debenture does not postulate any repayment of the principal. Therefore, it does not constitute a 'debenture' in its classic sense. Even a debenture, which is only convertible at option has been regarded as a 'hybrid' debenture by Palmer's Company Law (para 44.07 at page 676). In this connection, reference may be made to the "Guidelines for the protection of Debenture Holders" issued on the 14th January, 1987 which have recognised the basic distinction between a convertible and a non-convertible debenture. It is apparent that these were issued for the purpose of ensuring the serviceability and repayment of debentures on time. It has been asserted before us that the compulsorily convertible debentures in corporate practice was adopted in India some time after the year 1984. Wherever the concept of compulsorily convertible debentures is involved, the guidelines treat these as "equity". This is clear from Guideline IV (i) read with IV (iii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and guideline No. 8 and 11 of the Employees Stock Option Guidelines. These two sets of guidelines clearly indicate that any instrument which is compulsorily convertible into shares, is regarded as a "equity" and not as a loan or debt. Even a non-convertible debenture need not be always secured. In fact, modern tendency is to raise loan by unsecured stock, which does not create any charge on the assets of the company (The Encyclopaedia of Forms and Precedents, 4th Edn. Vol. 6 para 17 at pages 1094, 1095 and para 22 at pages 1097-1098). Whenever however, a security is created, it is invariably in the form of a floating charge (See The Encyclopaedia of Forms and Precedents, 4th Edn. Vol. 6 para 25 at page 1099). It follows, therefore, that the secured debenture almost invariably contains a floating charge. In addition to the floating charge, debentures are frequently secured by trust deed also as has happened in the present case where specific property, land, etc. has been mortgaged to trustees."
In addition to the above argument, he has taken us to FEMA Regulations for showing the definition of 'Capital' to say that convertible debentures are covered under the definition of 'Capital'. Further reliance has been placed on a Form filed by the applicant before Reserve Bank of India in respect of investment made by the applicant showing it as capital.
As against this submission, the applicant counsel has simultaneously taken us to the filings the Corporate Debtor earlier made, reflecting an amount of (???) 24,99,40,000 against Compulsorily Convertible Debentures, but not as equity.
Upon hearing the submissions of either side, now the point for consideration is as to whether this investment is an equity or debt.
By looking at the agreement entered into between the parties, this money has been shown as money paid towards fully and compulsorily convertible debentures for the value mentioned therein, it is not the case of the Corporate Debtor that this money has not come into the account, indeed it is the case of the Corporate Debtor until before this case is filed that this is a long term borrowings as per the balance sheet of the Company and it is also the case of the Corporate Debtor that TDS has been deducted on the interest accrued against the compulsorily convertible debentures held by the applicant.
When a party admits a factual aspect stating that applicant is a creditor, debentures are lying in its name and the debt is shown as long term borrowing, then such party cannot take out diametrically opposite stand stating that the debt being shown as capital under FEMA or under some other Regulations, therefore it is not a debt.
As to civil rights are concerned, as long as such rights are not prohibited under any law, a rule or definition given in some provision of some other civil law, cannot change the rights agreed between the parties. Here in this case, this Corporate Debtor all through mentioned and shown this claim as a debt in the books of it. In view of the same, today this Corporate Debtor by relying upon some FEMA Regulations cannot say that it is not a debt, it is an equity invested by the applicant.
As to this aspect, the applicant counsel has stated that the submission of the debtor counsel saying that this money is shown as equity in the Form filed before RBI is factually incorrect, because debt and equity are separately shown in the said Form.
As to the judgment refereed by the Resolution Professional counsel, to our understanding, this ratio has been decided with regard to the Guideline IV (i) r/w IV (iii) of the Guidelines for Issue of Cumulative Convertible Preference Shares and Guideline No. 8 and 11 of the Employees Stock Option Guidelines. These Guidelines being in relation to Employees Stock Option Guidelines and Issue of Cumulative Convertible Preference Shares, this ratio cannot be extended to say that debentures also fall under this category. Therefore, we believe that the ratio decided in Narendra Kumar Maheshwari (supra) is not applicable to the present facts of the case.
Moreover, since Insolvency and Bankruptcy Code, 2016 has overriding effect over other enactments, the debentures being treated as debt under IBC, this value of debentures shall be treated as debt, not as equity. In any event, since it is not the case of this Corporate Debtor that it is not a debt as per its books, the debtor counsel cannot come out with a new argument saying that these debentures shall be treated as equity.
Another argument advanced by the Resolution Professional counsel is that the nature of investment being compulsorily convertible debentures, the applicant cannot claim the value of the investment except to the extent of interest. As to this point, if a company is a running company and regularly paying interest, it is understandable that this RP Counsel can come with this argument to say that it is not repayable to the claimant because over a period of time these debentures would be converted into equity. This situation will arise when this debt is converted into equity as on the date of admission. But as on the date of admission, when the debentures are not matured for conversion and the debtor already defaulted paying interest, where is the question of treating it as equity. Assuming this RP counsel argument is correct, when a Company has become insolvent, the only right available to the debentures holder is to claim his money from the proceeds of the Corporate Debtor, that being the situation, today this Corporate Debtor cannot say that since a clause is not there for repaying the principal amount to the applicant, it cannot be treated as debt and it has to be treated as equity.
Basically, we do not find any sense in this argument because when a company is in the process of winding up or company has become insolvent, as on the date of admission, whatever is shown as debt in the books of the Corporate Debtor, such debt shall continue as debt. Whoever is shown as shareholder, he/she/it will continue as shareholder, in this case, as on the date of admission of the petition, this is shown as debt.
It is true that in the agreement, that after 15 years, these debentures would become equity, but until such time the Corporate Debtor shall pay fixed returns to this applicant. The RP merely by showing this, the RP Counsel cannot come with an argument to say that this is to be treated as equity for redemption of debentures has not been envisaged in the agreement. At the time of winding up or admission of a case under IBC, if the debentures are not matured and not convertible for the period for redemption is not complete, they shall be treated as debentures and the consequence is, it will remain as debt. Same is the case here, debentures are not matured for conversion, interest shall be paid through coupons periodically. That has also not complied with.
In view thereof, this application is hereby allowed directing the Resolution Professional to admit the claim as Financial Debt as envisaged under Section 5(8) (c) of the Insolvency and Bankruptcy Code, 2016. Accordingly, this application is allowed.
As to other applications pending, wherever the Resolution Professional is shown as Respondent, he is at liberty to place his defence by way of written submissions along with material papers within ten days hereof with a copy to the other side. As to other applications wherever notice has not reached to the Respondents, the applicants are hereby directed to serve a copy of the application upon them within three days hereof and the Respondents therein to place their defence on or before next date of hearing.
With respect to applications C.A. No. 1785(PB)/2019 & 1101(PB)/2019 hearing, the case shall be taken up for hearing on 03.02.2020.
Other applications shall be taken up for hearing on07.02.2020.