Debt Arising Out of Optionally Fully Convertible Debentures Needs Case-by-Case Evaluation: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai recently (November 10) held that since Optionally Fully Convertible Debentures (OFCDs) are part debt and part equity instruments, the exact liability arising from them should be determined  after evaluating each situation separately.

The bench, comprising Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain, was hearing an insolvency appeal filed by four personal guarantors of liquidated realty company JBM Homes Pvt. Ltd.

It held that insolvency proceedings against the guarantors could continue, but the precise amount of debt owed must be calculated carefully, given the hybrid nature of OFCDs.

“Though debenture has been included within the definition of financial debt, OFCD is a hybrid instrument, part equity and part debt and in the instant case, it must be determined as to how much of the same will have to be treated as debt, which has not been done,” the tribunal observed.

The bench noted that since the classification of OFCDs as either debt or equity has not been definitively settled, liability must be determined on a case-by-case basis.

"Further, while Non-convertible Debentures (NCD) has been held to be a financial debt and Compulsorily Convertible Debentures (CCD) has been held to be a kind of equity as per the judgement of Hon'ble Apex Court in the matter of IFCI Limited vs. Sutanu Sinha & Ors in Civil Appeal No. 4929/2023, no such clear cut findings have been made in respect of OFCD which is as per existing financial literature is part-equity and part-debt and the extent of each will have to be worked out by the specific terms of Agreement in each individual case."

In the JBM Homes case, the tribunal observed that two clauses in the investment agreement must be read together, one allowing the debentures to be converted into shares, and another outlining how the company's Board should make such decisions for effecting the conversion and determining related rights and obligations.

It also reminded the guarantors that the fact of default was no longer in dispute, having already attained finality in the CIRP order initiating insolvency against JBM Homes.

The case arose after JBM Homes raised Rs 18.39 crore from LIC HFL Trustee Company Pvt. Ltd. in March 2015 through OFCDs. The company was required to repay or convert the debentures by September 2018 but failed to do so. After liquidation, investors claimed Rs 98.64 crore from the personal guarantors.

The guarantors argued that the debentures should have automatically converted into shares upon default, making the investors shareholders rather than lenders and leaving no debt to guarantee. They also claimed the company's Board was not properly constituted to make valid decisions on default or conversion.

Investors/creditors countered that default had already been settled during insolvency proceedings, noting that the guarantors' own settlement attempts indicated acknowledgment of the debt.

The tribunal noted that the claim had escalated from Rs 18.40 crore to Rs 98.64 crore, reflecting unusually high returns. It observed that the agreement promised investors a minimum return of 32 percent, which is typical of an equity investment, not a secured loan, and said this “dilutes the claim of the respondent that he is a financial creditor.”

While the appeals were dismissed, the tribunal directed the NCLT to instruct the Resolution Professional to determine the actual debt owed, considering that OFCDs do not operate like ordinary loans and that the claimed amount appeared far higher than the original investment.

Case Title: B. Nirmal Kumar v. LIC HFL Trustee Company Pvt. Ltd. & Ors.

Case Number: Company Appeal (AT) (CH) (INS) Nos. 195-198/2025

For Appellant: Advocates G Vairava Subramanian for  B. Raghupathy

For Respondent: Senior Advocates Vairava Subramanian, B. Raghupathy

Click Here To Read/Download The Order