NCLAT Delhi: Optionally Convertible Debentures Constitute 'Financial Debt' U/s 5(8)(c) Of IBC

The National Company Law Appellate Tribunal ('NCLAT') New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member), and Mr. Arun Baroka (Technical Member) held that the Optionally Convertible Debentures ('OCDs') are Financial Debt within the meaning of Section 5(8)(c) of Insolvency and Bankruptcy Code, 2016 ('IBC'). Background Facts: ASK Trusteeship Services Pvt. Ltd. (Respondent 1), a Financial Creditor subscribed to unlisted OCDs under a Debenture Subscription Agreement (DSA) aggregating to Rs.125 crores issued by Nobility Estates Pvt. Ltd. (Corporate Debtor). The redemption date under the DSA was 06.10.2020. On 03.10.2020, the Corporate Debtor via letter requested Respondent 1 for an extension of 290 days i.e. up to 31.07.2021 for the redemption of OCDs to which Respondent 1 consented. However, the Corporate Debtor failed to redeem the OCDs on 31.07.2021. A Corporate Insolvency Resolution Process ('CIRP') application was filed by Respondent 1 under Section 7 of IBC against the Corporate Debtor on 24.05.2023 and has been admitted by NCLT New Delhi via Order dated 24.11.2023. The present appeal has been preferred by Santosh Kumar (Appellant) who is the Suspended Director of the Corporate Debtor challenging NCLT New Delhi's Order dated 24.11.2023 admitting the CIRP application. NCLAT Verdict: The NCLAT New Delhi dismissed the appeal and held that OCDs are Financial Debt within the meaning of Section 5(8)(c) of IBC. NCLAT pointed out that the Appellant has placed reference to the Supreme Court decision in IFCI Limited vs. Sutanu Sinha & Ors. wherein it noticed the reason for rejection of the claim and observed that the ground for rejection of the debt claimed was that the Appellant had invested the amount as per compulsorily convertible debentures ('CCDs) which has to be treated as equity. It also held that nowhere it is stipulated that investment as CCDs would partake in the character of financial debt. However, the Appellate Tribunal observed that the judgment cannot be taken into account as the DSA in question is OCD and not CCD. Further, in MAIF Investments India Pte. Ltd. vs. Ind-Barath Energy (Utkal) Ltd., the NCLAT had held that OCDs are financial debt within the meaning of Section 5(8)(c) and supports the present case. Further, there is no violation of Principles of Natural Justice as NCLT New Delhi granted an opportunity to the Corporate Debtor to make his submissions by adjourning the matter to 18.10.2023 and only post that was the judgment reserved. In conclusion, NCLAT observed that no error exists in NCLT New Delhi's Order admitting the CIRP of the Corporate Debtor and that there is sufficient material on record that proves the existence of financial debt and default. Case Title: Santosh Kumar vs. ASK Trusteeship Services Pvt. Ltd. Case No.: Company Appeal (AT) (Insolvency) No.1575 of 2023 Counsel for Appellant: Mr. Abhijeet Sinha, Advocate with Mr. Krish Kalra, and Mr. Kartik Waxar, Advocates Counsel for Respondents: Mr. Arun Kathpalia, Sr. Advocate with Mr. Arunav Guha, Ms. Vala Srihitha, Ms. Diksha Gupta, Mr. Aditya Dhupar, Advocates for FC Mr. Prashant Mehta, Ms. Prachi Kohli, Advocates for Interveners/homebuyers Click Here to Read/Download Order

NCLAT Delhi: Optionally Convertible Debentures Constitute 'Financial Debt' U/s 5(8)(c) Of IBC

Sachika Vij

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