Name of the case: M/s. IFCI Ltd. Vs. Sutanu Sinha & Ors.

Case Number: Civil Appeal No. 4929/2023

Name of Judges: Justice Sanjay Kishan Kaul,  Justice. Sudhanshu Dhulia,  Justice Ahsanuddin Amanullah

Order Date: 9/11/2023

Facts of the Case:

• In the present case, the NHAI has awarded a highway construction project to a company IVRCL Chengapalli Tollways Ltd (ICTL), a wholly owned subsidiary of IVRCL, by way of a Concession Agreement. A consortium of lenders had provided the company loan for some of its purposes and the balance of the project was to be carried out through equity infusion by IVRCL. As a part of this the firm issued Compulsorily Convertible Debentures (CCDs) which are a type of bond which must be converted into stock by a specified date.
• The appellant initially agreed to subscribing to the Compulsorily Convertible Debentures (CCDs) for an amount of Rs. 125,00,00,000 on 14/10/2011. However, the company encountered financial difficulties and subsequently failed to settle the amount reached with its creditors, leading to the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code by various stakeholders, including the appellant. In response to the insolvency proceedings, the appellant sought priority status as a ‘debtor’ by filing a claim with the Resolution Professional. This claim was based on the appellant’s ownership of the debentures issued by the company. Unfortunately, the Resolution Professional rejected this request and instead categorized the appellant as an equity holder.
• The resolution professional in his reasoning for the rejection stated that the CCDs were to be treated as equity as per the  Debenture Subscription Agreement, as funds raised by equity in the earlier concession agreement with NHAI and as equity by the lenders consortium. The appeal against this was rejected by the NCLAT and an appeal against this was filed in the Supreme court, which is considered by the court here. Meanwhile, the CoC had come up with a resolution plan which was accepted by the adjudicating authority on 01.05.2023.

The Hon’ble Supreme Court observed and held as follows:

• The court rejected the argument of the appellant that the debentures are intrinsically in the character of a debt, the court here observed that commerce has evolved and with this the nature of various securities for example with introduction of Hybrid securities such as CCDs.  The court further rejected the contention that CCDs were intended to be a debt as the earlier agreement with NHAI clearly brings compulsorily convertible instruments issued by the company within the ambit of Equity.
• The court looking at the definition of Debt under IBC code which means ‘a liability or obligation in respect of a claim’, stated that in the present case the appellant becomes an equity participant of the company here as  according to the subscription agreement in case of   failure to buyback the shares within  a particular period, the debentures automatically converts  into equity shares  and therefore  the company does not owe him any amount.
• The court then looked into the subscription agreement securing the debentures with the assets of the holding company, here ICLT merely being the special investment vehicle in this case. Here the court questioned how the debtor can bring in an action against ICLT. The court observed that the contracts that are made are highly technical in nature requiring great mental effort with the great opportunity for both the parties to discuss and clarify on various matters and held  that a contract normally  should be read as it reads, as per its express terms and not to look into implied terms unless such special circumstances such as when Penta test comes, rejecting the contention of the appellant that many of the provisions implied a relationship that is in the nature of debt between the appellant and ICLT.
• The court further held that jurisdiction of the Supreme Court under IBC is limited to the question of law and unlimited layers of scrutiny are not available to the appellant . Thus, the provision of appeal against NCLAT orders is limited and available only when there is a question of law.