In Civil Appeal No. 4929/2023 -SC- Supreme Court upholds NCLAT’s decision: CCDs in highway project treated as equity, not debt
Justice Sanjay Kishan Kaul, Justice Sudhanshu Dhulia & Justice Ahsanuddin Amanullah [09-11-2023]

Read Order: M/s. IFCI Limited V. Sutanu Sinha & Ors

Chahat Varma

New Delhi, November 28, 2023: In a recent decision, the Supreme Court has dismissed an appeal filed by M/s. IFCI Limited, upholding the decision of the National Company Law Appellate Tribunal (NCLAT) that Compulsorily Convertible Debentures (CCDs) issued in relation to a highway project should be treated as equity and not debt.

The dispute revolved around a highway project in which the appellant, IFCI Limited, invested through CCDs. The National Highways Authority of India (NHAI) had awarded the project to IVRCL Chengapalli Tollways Ltd (ICTL) through a Concession Agreement. ICTL, a subsidiary company of IVRCL, received a term loan facility from a consortium of lenders, and the remaining project was to be financed by IVRCL through equity infusion, including the issuance of CCDs. The conversion of the CCDs into equity was scheduled for December 2017, but the formal issuance of shares did not occur after that date. The appellant had agreed to subscribe to the CCDs, which included a ‘put option’, allowing for the sale of the CCDs to a third party in the event of default by ICTL, with IVRCL retaining the principal obligation.

However, the project encountered financial difficulties, and despite a one-time settlement being suggested and agreed to, the terms were not honoured. Corporate guarantees of IVRCL were invoked by the appellant, leading to the initiation of the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 (IBC) by both the appellant and the State Bank of India. The appellant's claim, asserting the amount owed as a debt, was rejected by the Resolution Professional on the grounds that the CCDs were to be treated as equity, not debt. The rejection was upheld by the National Company Law Tribunal and subsequently by the NCLAT. The judgment of the NCLAT was based on the understanding that Compulsorily Convertible Debentures, by their nature, do not involve the repayment of the principal amount and are considered as ‘equity’ rather than debt, particularly if they are compulsorily convertible into shares.

The core argument presented by the counsel for the appellant was that the appellant had been left in a precarious position. If its investment were to be considered as equity, according to the waterfall principle, it would receive no proceeds. Consequently, while other creditors benefited, the appellant did not. The counsel argued that, in practice, the appellant was neither treated as a shareholder nor as a financial creditor, leaving the appellant without a legal remedy.

A three-judge bench of Justice Sanjay Kishan Kaul, Justice Sudhanshu Dhulia and Justice Ahsanuddin Amanullah held that the appellant had been provided security under the Debentures Subscription Agreement, but the obligations rested with the sponsor company. Therefore, it was challenging for the court to understand how the obligation lay with the Special Purpose Vehicle (SPV), i.e., ICTL.

The bench emphasized that the complexities inherent in commercial documents were contingent upon the specific nature of the businesses involved. The agreements in question were characterized as not being typical layman's agreements, as they were scrutinized by experts, and each party was deemed to have had a comprehensive understanding of their respective obligations and the potential benefits stemming from the agreements.

Further, the bench, referring to Nabha Private Limited Vs. Punjab State Power Corporation Limited [LQ/SC/2017/1463], emphasized the principle that contracts should be interpreted as they are written, without adding implied terms unless absolutely necessary. The bench clarified that a contract should not be supplemented or added to by the court.

The bench observed that in the present case, the crucial issue crystallized in the impugned judgment was whether CCDs could be treated as a debt instead of an equity instrument. It was noted that treating CCDs as a debt would constitute a breach of the concessional agreement and the common loan agreement, as the investment was clearly in the nature of debentures compulsorily convertible into equity. The observation highlighted that there was no stipulation indicating that these CCDs would assume the character of financial debt upon the occurrence of a specific event.

The bench also took note of a significant aspect mentioned in the impugned order. It was highlighted that the terms of the various agreements prohibited the corporate debtor from incurring further debt without the consent of the assignees. The bench observed that no such approval was sought or obtained, and the amount in question was treated as equity rather than debt.

Furthermore, the bench also acknowledged the NCLAT’s consideration of the remedy available to the appellant. The NCLAT expressed the view that the appellant did not avail the remedy within the stipulated time, emphasizing the time-bound nature of processes under the Code. The rejection of the appellant's claim occurred on 09.08.2022, and the appellant attempted to raise the issue again on 30.11.2022, after a lapse of three months from the initial rejection.

The Court observed that its jurisdiction was derived from Section 62 of the Code. According to this section, any person aggrieved by an order of the NCLAT had the right to file an appeal to the Supreme Court, limited to a question of law arising from such order under the Code. The Court noted that this jurisdiction was restricted, resembling a second appeal, and had a specific timeframe for filing, i.e., within forty-five days from the date of receiving the order.

“The law does not envisage unlimited tiers of scrutiny and every tier of scrutiny has its own parameters. Thus, the lis inter se the parties has to be analyzed within the four corners of the ambit of the statutory jurisdiction conferred on this Court,” remarked the bench.

Thus, the Court, upon reviewing the appeal, concluded that there were no significant legal questions raised and held that the findings of the lower courts were in accordance with settled legal principles.

Accordingly, the present appeal was dismissed.Top of Form