Loan converted into equity not to be termed as financial debt under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has recently pronounced a judgment saying that once the debt is converted into capital (equity), it cannot be termed as financial debt, and hence the insolvency proceedings cannot be initiated under Section 7 of the Insolvency and Bankruptcy Code (IBC).

Hearing an appeal filed by one Rita Kapur of Noida, where she has said that she had given a loan of Rs 40 Lakh to Invest Care Real Estate LLP, incorporated under the LLP Act, 2008, and the same was to be repaid in four instalments.  However, Invest Care Real Estate paid neither the principal amount nor the interest.

She had also made the charge that the ‘loan’ has been converted into ‘equity’ on 25 March 2014. She has also alleged that there is irregularity in purchase of Non-judicial e-Stamp paper of dated 05th June 2013 and amount paid from the account of Invest Care Real estate.

She has also alleged that the loan has been converted into equity, which is against the terms and conditions of ‘Loan Agreement’ dated 9 July 2013. The ‘Loan Agreement’ is elaborate and contains terms of repayment including penalty. She also submitted that in the same LLP, her late husband – Sudhir Kapur — had also invested Rs 1 Crore, and in this case also the neither the principal amount nor interest has been paid.

She has also argued that she is a financial creditor and that she is eligible to file insolvency petition under Section 7 of the IBC. It is to be mentioned here that NCLT had already dismissed her insolvency petition against Invest Care Real Estate LLP.

The Respondents – Invest Care Real Estate and others – on their part argued that the appellant – Rita Kapur– was initially just a loan-provider (in July 2013). However,  later the agreement was amended 0n 1 December 2013, wherein all the ‘Investors’ (40 in all) became either designated partner or general partner.

The respondents also furnished ‘Supplementary Agreement’ dated 25 March 2014 executed by all the partners including appellant. They also produced the Auditor certificate certifying the investment as capital contribution which includes the name of the Appellant also. The Respondent, therefore, submitted that the Appellant is not a Financial Creditor rather a related party and hence in no way she can be treated as a ‘Financial Creditor’.

 The appellate tribunal, while admitting that irregularities have been committed by Invest Care Real estate and that appellant Rita Kapur’s complaints have merits, it averred that neither the NCLT nor the NCLAT are the right forum for her to seek justice.

The NCLAT also found no merit in appellant’s argument that she is a financial creditor, and hence observed that debt converted into capital cannot be treated as financial debt and hence her appeal is dismissed.