CCD with no Obligation to Repay is Financial Debt under IBC: NCLAT

The Chennai Bench of the National Company Law Appellate Tribunal ( NCLAT ) held that the Compulsory Convertible Debentures ( CCD ) in the absence of obligation to repay is Financial Debt under the Insolvency and Bankruptcy Code, 2016 ( IBC ).

An application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘IBC’) filed by Vajra IOT Private Limited (formerly known as Green Ark Enersol Pvt. Ltd.) (‘Operational Creditor’ or ‘OC’) against the M/s Navayuga Infotech Private Limited (‘Corporate Debtor’ or ‘CD’) was admitted on 16.09.2022 and Corporate Insolvency Resolution Process (‘CIRP’) was initiated against the M/s Navayuga Infotech Private Limited. Consequent to admission into CIRP of the Corporate Debtor, Mr. Kotoju Vasudeva Rao was appointed as the Interim Resolution Professional (‘IRP’).

The NCLT considered the objections raised by the Operational Creditor that the Appellant herein cannot be included in the list of Financial Creditors. After examining the Debenture Subscription Agreement (‘DSA’), the NCLT held that the inclusion of the Appellant herein in the list of Financial Creditors is impermissible under law and consequently the prayer to receive the revised list of members of CoC is unacceptable and is liable to be rejected.

The counsel for the appellant submitted that the mode of discharge of a debt/liability does not change the character of the debt/liability. CCDs, like debentures are an acknowledgement of debt, remains a debt/liability till converted into shares and are distinct from shares.

In conclusion, it was submitted that the Appellant’s un-matured CCDs must be treated as a ‘financial debt’ and RP had rightly admitted its claim as financial debt and had allowed Financial Creditor with a seat in the CoC, which needs to be restored.

A Two-Member Bench comprising Justice Rakesh Kumar Jain, Member (Judicial) and Ajai Das Mehrotra, Member (Technical) observed that “r. An examination of the DSA shows that the debentures issued to the Appellant were compulsorily convertible into equity and the only option to the Appellant was to get it converted to shares even prior to the stipulated period of 10 years, failing which the CCDs were to automatically convert into equity shares at the end of 10 years. There was no liability or obligation to repay the debt.”

“A convertible debenture can be regarded as “debt” or “equity” based on the test of liability for repayment. If the terms of convertible debentures provide for repayment of borrower’s principal amount at any time, it can be treated as a debt instrument but if it does not contemplate repayment of the principal amount at any time, that is, if it compulsorily leads to conversion into equity shares, it is nothing but an equity instrument” the Tribunal noted.

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