Optionally Convertible Debentures are Financial Debt u/s 5(8)(c) of IBC: NCLAT

The New Delhi Bench of the National Company Law Appellate Tribunal ( NCLAT ) observed that the Optionally Convertible Debentures are Financial Debt under Section 5(8)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC).

On 31.07.2021, the Corporate Debtor failed to redeem the OCDs. The Financial Creditor issued a notice dated 05.02.2022 to the Corporate Debtor and the Promoter detailing various defaults committed by the Corporate Debtor. The Financial Creditor called upon the Corporate Debtor and the Promoters to redeem the OCDs by paying Rs.504,50,00,000/- only within a period of 7 days with further coupons and redemption premium till date of payment.

Abhijeet Sinha, counsel for the Appellant challenging the order admitting Section 7 application submits that the optionally convertible debentures were in the nature of equity. It was submitted that the Financial Creditor invested the amount in optionally convertible debentures (OCDs) and there was no debt on basis on which Section 7 application could be entertained.

It was further submitted the Financial Creditor was a related party of the Corporate Debtor. It is submitted that the application under Section 7 was admitted in contravention of Principles of Natural Justice. The Adjudicating Authority placed reliance on the Rejoinder Affidavit filed by the Applicant, although in the hearing dated 11.10.2023, the Applicant offered to withdraw the Rejoinder. Reliance of the Adjudicating Authority on the contents of the Rejoinder without giving opportunity to the Corporate Debtor to respond violates the Principles of Natural Justice. The Respondent is not a Financial Creditor of the Corporate Debtor, hence, application could not have been admitted.

The senior counsel for the Financial Creditor refuting the submissions of learned counsel for the Appellant submits that the optionally convertible debentures are financial debt within the meaning of Section 5(8)(c) of the Code.

It was submitted that the Appellant has not pleaded at any stage that the Financial Creditor is related party of the Corporate Debtor. In the pleadings of the Appeal also no such pleading has been made. In any view of the matter, the Section 7 application filed by the Financial Creditor was fully maintainable. The submission of the counsel for the Appellant that 90 days’ cure period was not allowed was not advanced before the Adjudicating Authority. The said plea is beyond pleading.

A Three-Member Bench comprising Justice Ashok Bhushan, Chairperson, Barun Mitra, Member (Technical) and Arun Baroka, Member (Technical) observed that “The above judgement does not help the Appellant in the present case. In present case, DSA in question is not CCD rather DSA in question is OCD with regard to which there is no dispute between the parties. Learned counsel for the Respondent has rightly relied on judgment of this Tribunal in “MAIF Investments India Pte. Limited”, where Section 7 application was filed by the Financial Creditor which was dismissed by the Adjudicating Authority. The Financial Creditor has entered into subscription agreement subscribing OCDs. Appeal was filed by the Financial Creditor challenging the order rejecting the application. This Tribunal in the aforesaid case examined the DAS and held that OCDs are financial debt within the meaning of Section 5(8)(c).”

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates