NCLAT upholds financial creditor status of Compulsorily Convertible Debentures holders
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has clarified that Compulsorily Convertible Debentures (CCDs) can be treated as financial debt during the insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. The case involved Indian Renewable Energy Development Agency Limited (IREDA) and Waaree Energies Limited.
The Case:
IREDA had provided financial assistance to Taxus Infrastructure and Power Projects Private Limited, which defaulted on its payment obligations. IREDA initiated insolvency proceedings against the company. Waaree Energies, a creditor holding Compulsorily Convertible Debentures, claimed financial creditor status based on an arbitral award.
The Dispute:
The key question before the NCLAT was whether CCDs, which are eventually convertible into equity shares, can be considered financial debt. IREDA argued that since CCDs are convertible into equity, they do not constitute financial debt.
NCLAT’s Ruling:
The NCLAT disagreed with IREDA’s argument. It held that the Compulsorily Convertible Debentures , with their interest component and time value of money, qualify as financial debt under the IBC. The tribunal emphasized that the Debenture Subscription Agreement (DSA) explicitly provided for interest payment in case of default, further solidifying the financial nature of the claim.
Implications of the Ruling:
This ruling has significant implications for creditors holding CCDs. It clarifies that even if CCDs are eventually converted into equity, they can be treated as financial debt during insolvency proceedings. This allows such creditors to participate in the Committee of Creditors (CoC) and have a say in the resolution process.
However, it’s important to note that the applicability of this ruling to CCDs subscribed to by foreign investors under the Foreign Direct Investment (FDI) route remains to be tested.
Illume Advisory’s Perspective:
Illume Advisory, a legal and financial advisory firm, commented on the ruling, stating that it reinforces the understanding of CCDs as financial debt under the IBC, especially when they carry an interest component. The firm further highlighted the significance of the arbitral award in supporting Waaree Energies’ claim as a financial creditor, despite being challenged.
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