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Supreme Court of India (SC) interprets categorisation of CCDs as equity

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SC in a landmark judgment in IFCI LIMITED V. Sutanu Sinha & Ors (2023 INSC 1023) rules regarding the classification of Compulsorily Convertible Debentures (CCDs); whether it should be categorised as debt or equity under the IBC as debt weighs higher in preference over equity under the waterfall mechanism.

The case pertains to a project awarded by the NHAI, leading to a concession agreement between ICTL and National Highway Authority of India (NHAI). ICTL, a wholly-owned subsidiary of IVRCL Limited, sought financing through a term loan from a consortium of lenders. The remaining funds were to be infused by IVRCL through equity, including a portion raised through CCDs, in which IFCI Ltd invested.

IFCI subscribed to the CCDs under a Debenture Subscription Agreement with ICTL and IVRCL, explicitly categorizing them as equity instruments. However, financial challenges prompted CIRP proceedings against ICTL. In response, IFCI asserted its claim on the CCDs as ‘debt,’ seeking recovery under the IBC before the RP.

Before the SC, IFCI argued that treating its investment as equity would leave it without recourse under the waterfall principle. They stressed that the genuine intent was for the advanced amount to be treated as debt. The classification of CCDs as debt or equity, they contended, should hinge on their maturity status and the investor’s position at inception. On the contrary, the respondents contended that convertible instruments, including CCDs, fall within the definition of equity.

Supreme Court, in dismissing the appeal, observed that under IBC, debt is defined as a liability or obligation in respect of a claim due from any person. As ICTL was an equity participant, it lacked the liability towards IFCI that would categorize the CCDs as debt. The Court, examining the agreement, noted that the obligations rested with the sponsor company, IVRCL, rendering IFCI ineligible to seek recovery as a creditor of ICTL.

The court then relied upon its earlier decision which held that the commercial courts should not endeavour to look to implied terms of contract. The court stated that contract means as it reads. It is not advisable for a Court to supplement it or add to it. The Court concurred with the NCLAT’s stance that treating CCDs as debt would violate the concessional agreement and common loan agreement. It was thereafter observed that the investment was explicitly in debentures, compulsorily convertible into equity, with no stipulation that these CCDs would assume the character of financial debt under specific circumstances. Hence, the Supreme Court did not interfere in NCLAT’s decision to treat CCDs as equity, while also holding that it is not a ‘question of law’ requiring determination under section 62 of IBC.

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