The Supreme Court, vide its judgment dated November 9, 2023, in the matter of M/s. IFCI Limited v. Sutanu Sinha and Others [Civil Appeal No. 4929/2023], has held that as per the facts in the present case, compulsorily convertible debentures (“CCDs”) should be treated as an equity instrument instead of a debt instrument, since it was not stipulated that these CCDs would partake the character of financial debt on the happening of a particular event.

Facts

IVRCL Chengapalli Tollways Limited (“ICTL” / “Corporate Debtor”) and the National Highways Authority of India (“NHAI”) had executed a concession agreement dated March 25, 2010 (“Concession Agreement”), for giving effect to a project awarded by the NHAI. ICTL was incorporated as a wholly-owned subsidiary of IVRCL Limited (“IVRCL”), and secured a term loan from a consortium of lenders as part of the debt component to finance the project. The remaining funds were to be provided by IVRCL through equity infusion, with a portion to be sourced through CCDs. M/s. IFCI Limited (“Appellant”) invested in these CCDs.

The Debenture Subscription Agreement dated October 14, 2011 (“DSA”) required IVRCL to make coupon payments, provide security, and grant a ‘put option’ to the Appellant, thus allowing the latter to sell the CCDs to a third party in case of default. The project encountered financial challenges, leading to non-payment to the Appellant. Although the Corporate Debtor proposed a one-time settlement, it was subsequently revoked, prompting the Appellant to invoke the corporate guarantee provided by IVRCL, following which, both Appellant and the State Bank of India initiated the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Appellant submitted his claim as a financial debt to the resolution professional (“Respondent”) which was rejected by the Respondent based on the following grounds: (i) the nature of CCDs issued was recorded as an equity instrument in all the agreements executed between the parties, including the Concession Agreement and the DSA; (ii) the project cost approved by the NHAI and lenders consortium recognized the CCDs as the part of equity, and at no point in time did the Appellant sought for re-categorization of the CCDs to debt or the approval from NHAI for such conversion; (iii) the payments obligations under the DSA were that of IVRCL and the balance sheet of the Corporate Debtor also clarifies that; and (iv) the CCDs were mandatorily convertible in December, 2017.

The Appellant, vide IA No. 1465/2022, filed an application before the National Company Law Tribunal (“NCLT”) against the rejection of its claim by the Respondent. NCLT, vide its order dated March 14, 2023, rejected the claim of the Appellant, by placing reliance on the judgment of the Supreme Court in the case of Narendra Kumar Maheshwari v. Union of India and Others [(1990) Suppl. SCC 440] (“Narendra Kumar Case”), wherein it was held that any instrument which is compulsorily convertible into shares is regarded as an “equity” and not a loan or debt. The said order was also upheld by National Company Law Appellate Tribunal (“NCLAT”), vide its order dated June 5, 2023.

The present appeal has been filed by the Appellant against the impugned order of NCLAT under Section 62 (Appeal to Supreme Court) of IBC before the Hon’ble Supreme Court.

Issue

Whether CCDs could be treated as a debt instrument instead of an equity instrument.

Arguments

Contentions of the Appellant:

The Appellant submitted that in the event the Appellant is treated neither as a shareholder nor as a financial creditor, the Appellant will be rendered remediless.

The Appellant distinguished the Narendra Kumar Case on the basis that the context in the said judgment was a public interest litigation, and has referred to the concept of the debentures which are intrinsically in the nature of debt, whereas the present case deals with the question as to the treatment of CCDs as equity or debt.

The Appellant contended that the entire principal amount along with the interest became due and payable under the CCD, since the conversion of CCDs to equity actually became impossible due to the insolvency of the Corporate Debtor. The Appellant further contended that the nature of the CCDs should be ascertained based on the status of the maturity of the CCDs and the position of the investor at the inaugural time, and this would vary in the facts and circumstances of each case.

Contentions of the Respondent:

The Respondent submitted that the concept of compulsorily convertible instruments including CCDs falls within the definition of equity as opposed to debt which has been defined as liability or obligation in respect of a claim which is due from any person. The Respondent further stated that the Corporate Debtor does not have a liability towards the Appellant, since the Appellant is an equity participant who would receive benefit on the success of a commercial venture, and would not inhere in case of the failure of such commercial venture.

The Respondent also submitted that prior written approval of lenders was required before the Corporate Debtor could issue any debentures or raise any loans, and the Corporate Debtor at no occasion has sought the approval of the lenders to issue any debentures or debt to the Appellant. The Respondent contended that the financing plan itself envisaged CCDs as part of the equity portion of the funding.

The Respondent lastly contended that if the instrument was a simpliciter debenture, it would have fallen under the category of a financial debt but the present case deals with CCDs. The primary obligations of coupon payments, buy back and security is on the part of IVRCL, resulting in no liability on the part of the Corporate Debtor towards the Appellant.

Observations of the Supreme Court

The Supreme Court analyzed the DSA which clearly defined the role of the Corporate Debtor as the special purpose vehicle, IVRCL as the sponsor company and the Appellant as the lender. The clauses also clarified the position that the Appellant was provided security under the DSA and the primary obligations such as making coupon payments, providing security were that of IVRCL, moreover, the buy-back arrangement was also entered into between the Appellant and IVRCL. The Supreme Court further observed that unless the debt is of the Corporate Debtor, the Appellant cannot seek a recovery of the amount on the basis of being a creditor of the Corporate Debtor.

The Supreme Court, placing reliance on Nabha Private Limited v. Punjab State Power Corporation Limited [(2018) 11 SCC 508], also stated that a contract means as it reads, and it is not advisable for a court to supplement it or add to it.

The Supreme Court noticed that the terms of the various agreements prohibited the Corporate Debtor from taking further debt without the consent of the assignees. Further, no approval was sought or taken from NHAI. Hence, the amount was treated as an equity alone and not as a debt.

With respect to the appellate jurisdiction of the Supreme Court under IBC, the Supreme Court clarified that the jurisdiction is restricted to a question of law, akin to a second appeal. The law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters. Thus, the dispute has to be analyzed within the four corners of the statutory jurisdiction conferred on the Supreme Court.

Decision of the Supreme Court

The Supreme Court upheld the order of NCLAT opining that the issue has been correctly crystallized as to whether CCDs could be treated as a debt instead of an equity instrument. Treating the CCDs as debt would tantamount to breach of the Concessional Agreement and the common loan agreement. The investment was clearly in the nature of debentures which were compulsorily convertible into equity and nowhere is it stipulated that these CCDs would partake the character of financial debt on the happening of a particular event.

VA View:

The present judgment clarifies the treatment of compulsorily convertible instruments as equity. It has become a settled position of law that when an investment is made in the nature of debentures which are compulsorily convertible into equity and nowhere is it stipulated that the CCDs would partake the character of financial debt on the happening of a particular event, the CCDs are to be treated as equity.

The Supreme Court further limited the powers of the court to interpret any commercial contract. It held that a contract means as it reads, and it is not advisable for a court to supplement it or add to it. The Supreme Court also deduced its appellate jurisdiction under IBC to hold that law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters and the jurisdiction of the Supreme Court under Section 62 of IBC is restricted to a question of law, akin to a second appeal.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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