Money Raised out of Optional Convertible Debentures Classifiable as Financial Debt u/s 5(8): NCLAT Dismisses Appeal of IREDA [Read Order]

While dismissing the appeal of Indian Renewable Energy Development Agency Limited(IREDA), the New Delhi bench of the National Company Law Appellate Tribunal (NCLAT) has held that raising money by issuance of convertible debentures with an option to be later converted into equity shares can be classified as a financial debt if a default is committed by the corporate debtor.

An application was filed under section 7 of the code by the appellant when the corporate debtor defaulted in repaying the amount. The Adjudicating Authority admitted the corporate debtor into insolvency on October 10, 2022. The Respondent filed its claims before the RP on the basis of an arbitral award, Debenture Subscription Agreement (DSA) and related documents.

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The status of the Respondent by the RP as a financial creditor was initially accepted but later rejected on the ground that the award had not attained finality. An IA was filed by the Respondent against this decision of the RP and the Adjudicating Authority after hearing the parties, disposed of the Application, accepting the claim of Respondent No.1 as Financial Creditor. Against this order of the AA, the present appeal has been filed.

The appellant submitted that there was no provision for redemption of the Compulsory Convertible Debenture (“CCD”) under the DSA. The transaction of conversion into equity shares was not a 'financial debt'. The DSA does not support any mechanism for the redemption of the CCDs and it only provided for compulsory conversion into equity.

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It was further argued that even if the failure to redeem the CCD was considered as an event of default, it is in the form of damages or penalty for breach of terms of DSA and the said payment in the form of penalty, in no manner, can be construed as a financial debt in terms of Section 5, sub-section (8).

It was contended that transaction contained a financial debt, since by debenture, financial assistance was extended by Respondent No.1 to the CD by DSA. It further argued that the very definition of CCD as contained in Clause-1, mentions that the debenture are compulsory convertible debentures into equity shares of the Company at the option of the Investor as per the terms of DSA.

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The bench of Justice Ashok Bhushan (Judicial Member), Barun Mitra (Technical Member) and Arun Baroka (Technical Member) observed that by issuing debenture, the Issuer has raised money for its capital and on plain reading of definition of 'financial debt', the debentures are fully covered under Section 5, sub-section (8) (c).

The Tribunal viewed that the transaction, which was entered between the parties has time value of money and the redemption of debenture was also contemplated and conversion of debenture was operational at the option of Investor. The Issuer has raised the amount by issuance of debenture, which was clearly a 'financial debt' within the meaning of Section 5, subsection (8).

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While dismissing the appeal, the tribunal held that there is no ground to interfere with the order of the Adjudicating Authority, allowing the Application of Respondent No.1.

To Read the full text of the Order CLICK HERE

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