Compulsory convertible debentures qualifying as financial debt under the Insolvency and Bankruptcy Code must reflect a time value of money and repayment obligation, as determined by the contractual terms.

JUDGMENT

ASHOK BHUSHAN, J.

This Appeal has been filed challenging order dated 29.05.2024 passed by National Company Law Tribunal, New Delhi (Court-II) in IA No.2068 of 2023 in CP (IB) No.360 (ND)/2021. IA No.2068 of 2023 filed by Respondent No.1 herein was disposed of accepting the claim of Respondent No.1 of a Financial Creditor and restoring its seat in the Committee of Creditors (“CoC”). The Appellant aggrieved by the order has come up in this Appeal.

2. Brief facts of the case necessary for deciding the Appeal are:

(i) The Appellant had sanctioned financial assistance to the Corporate Debtor (“CD”) – M/s Taxus Infrastructure and Power Projects Pvt. Ltd. On account of default committed by the CD, the Appellant filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC”)

(ii) The Adjudicating Authority vide order dated 10.10.2022 admitted Section 7 Application and initiated CIRP against the CD. IRP made a public announcement on 12.10.2022. Respondent No.1 filed its claim in Form-C claiming an amount of Rs.21,45,42,466/-, which included Rs.11,45,42,466 as interest and Rs.10,00,00,000/- as principal amount.

(iii) In the claim form, Respondent No.1 relied on Arbitral Award dated 31.12.2021. In the claim Respondent No.1 had pleaded that it had funded the CD by subscribing 1,00,000 secured Compulsory Convertible Debentures of face value of Rs.1,000/- each for a period of 65 months. Respondent No.1 did not receive the payment under the Project Agreement, hence, initiated arbitration proceedings and an Award was given. The copy of the Debenture Subscription Agreement (“DSA”) dated 16.10.2012, Shares Pledge Agreement and Promissory Notes were also relied by Respondent No.1 as well as Award dated 31.12.2021.

(iv) The Resolution Professional (“RP”) accepted the claim of Respondent No.1 and permitted Respondent No.1 to participate in the meeting of the CoC as Financial Creditor. Certain objections were raised against the status of Respondent No.1. The RP after obtaining the legal opinion, took the view that on the basis of Arbitration Award, which has not attained finality, Respondent No.1 is not a Financial Creditor. RP on 20.01.2023 filed an Application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Bombay High Court for setting aside the Arbitral Award.

(v) Aggrieved by the decision of RP to reject the claim of Respondent No.1, Respondent No.1 filed an IA No.2068 of 2023 seeking a direction to accept the Appellant as Financial Creditor, which Application was opposed by RP.

(vi) The Adjudicating Authority after hearing the parties, disposed of the Application, accepting the claim of Respondent No.1 as Financial Creditor. The Adjudicating Authority held that Applicant – Respondent No.1 is entitled to participate in the Meeting of CoC. It was held that Arbitral Award being in favour of the Applicant, the claim could not have been rejected. It was held that although the financial instrument in the present case, though coming under the broad term Compulsory Convertible Debenture (“CCD”), has an interest component payable in case of default, signifying the Time Value for Money, hence, the same has to be categorized as a ‘Debt’. Aggrieved by which order, this Appeal has been filed.

3. We have heard learned Counsel for the Appellant, learned Counsel for Respondent No.1 as well as learned Counsel for RP.

4. Learned Counsel for the Appellant challenging the order of Adjudicating Authority submits that there was no provision for redemption of the CCDs under the DSA. The transaction of conversion into eq