M/S Ifci Limited vs Sutanu Sinha

2023 INSC 1023 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4929/2023

M/S. IFCI LIMITED ...APPELLANT(S)

VS.

SUTANU SINHA & ORS. ..RESPONDENT(S)

J U D G M E N T

SANJAY KISHAN KAUL, J.

1. Commerce has evolved. The documents forming the

base of commerce have also evolved and created a

hybrid nature of documents. Thus, what was earlier

labelled as a debenture, now has hybrid versions

such as partly convertible debentures, optionally

convertible debentures and Compulsorily Convertible

Debentures (CCDs). We may note that traditionally

debentures were treated as a floating security with

a covenant for payment on a specified date.1

2. In the factual scenario of the present case, we

are concerned with a Highway project in which the

Signature Not Verified appellant has made investments through the CCDs. Digitally signed by ASHA SUNDRIYAL Date: 2023.11.25 13:12:32 IST Reason: The National Highways Authority of India (NHAI) had

awarded the project in question in terms of a

1 In re Crompton & Co. Ltd. [1914] 1 Ch. 954. 2 CIVIL APPEAL NO.4929/2023

Concession Agreement dated 25.03.2010 executed

between it and the IVRCL Chengapalli Tollways Ltd

(ICTL). ICTL was in turn a subsidiary Company of

IVRCL which was holding 100 per cent share capital

of ICTL. A consortium of lenders had provided term

loan facility to the ICTL to execute various

documents including the company loan agreement dated

24.11.2010 and the balance project was to be

financed by IVRCL through equity infusion. As a

part of the equity component of the project, the

financing was to be obtained through CCDs. It is

not in dispute that what the appellant subscribed to

was the CCDs, albeit with other debentures being

executed simultaneously. The date of conversion into

equity from the CCDs was December, 2017. The formal

issuance of shares was however, not done after the

said date. We may note that the appellant had

agreed to subscribe to the CCDs at the request of

ICTL and amount of Rs.125,00,00,000/- in terms of a

Debenture Subscription Agreement dated 14.10.2011.

In terms of the aforesaid agreement, there was a

“put option” and thus, in the event of default on

part of ICTL during the window period, these CCDs

could be sold to a third party but the principal

obligation of IVRCL continued to be in place.

However, the factual scenario in respect thereof 3 CIVIL APPEAL NO.4929/2023

never arose.

3. It appears that the project ran into financial

difficulties and ICTL even suggested a one time

settlement which had been agreed to but even terms

thereof were not honoured. Corporate guarantees of

IVRCL were invoked by the appellant. Corporate

Insolvency Resolution Process was initiated both by

the appellant and the State Bank of India and claims

were filed. The process under the Insolvency and

Bankruptcy Code, 2016 (hereinafter referred to as

the said Code) was thereby triggered.

4. The appellant claimed that the amount owing to

it had a status of a debt, and lodged a claim in

that behalf. However, this was rejected by the

Resolution Professional vide letter dated

09.08.2022.

5. The entire amount claimed was refused and the

reasons for the non-admission were recorded after

noting that various inter se correspondence and

supporting documents had been supplied. It would be

relevant to reproduce the grounds for rejection as

under:-

“a. As per Debenture Subscription Agreement (“DSA”) dated 14th October, 2011 entered between ICTL/Corporate Debtor, IVRCL Limited (erstwhile IVRCL. Assets & Holdings Limited) and IFCI, Compulsorily Convertible Debentures 4 CIVIL APPEAL NO.4929/2023

(“CCDs”) were to be treated as equity. The same is observed from the recording of the CCDs component as equity under Schedule III of the DSA. The CCDs are also approved as equity under the financial package for the Concession Agreement dated 25th March, 2010 executed between ICTL/Corporate Debtor and National Highways Authority of India (“NHAI”). b. The CCDs were part of equity in the project cost approved by NHAI and debt equity ratio is required to be maintained by IVRCL Limited. There was no recategorization of the CCDs from equity to debt and as stated in your email of 19th May, 2022, no approval was sought from NHAI in this respect. The DSA recognizes that any act in contravention of the Concession Agreement is void.

c. Lenders consortium had approved the treatment of CCDs as equity and no approval for conversion to debt was sought from NHAI. d. All repayment obligations under the DSA are that of IVRCL Limited and not of ICTL/Corporate Debtor.

e. The notes to the balance sheets of ICTL/Corporate Debtor also clarify that the repayment obligations are that of IVRCL

Limited and not ICTL/Corporate Debtor. f. The CDs were mandatorily convertible to equity in December, 2017, and only corporate actions for the conversion was pending.” 5 CIVIL APPEAL NO.4929/2023

6. It will be noticed from the aforesaid that the

fundamental principal for rejecting the debt claim

was that in view of the appellant having invested

the amount as per the CCDs, the same was to be

treated as equity. The CCDs had been approved as

equity under the financial package for the

Concession Agreement dated 25.03.2010 and were

towards the part of equity of the project cost

approved by the NHAI having a debt equity ratio.

There was never any re-categorization of CCDs from

equity to debt. The lenders’ consortium had also

approved the term of CCDs as equity. The endeavour

of the appellant to challenge the position of the

Resolution Professional vide IA No.1465/2022 did not

succeed in terms of an order dated 14.03.2023, the

said order relied upon the judgment of this Court in

Narendra Kumar Maheshwari v. Union of India & Ors.2

It would be useful to extract that part of the

judgment which has also been extracted in the

impugned order of National Company Law Appellate

Tribunal (NCLAT) as under:

“A Compulsory Convertible Debenture does not postulate any repayment of the principle. The question of security becomes relevant for the purpose of payment of interest on these debentures and the payment of principle only in the unlikely event of winding up. Therefore,

2 (1990) Suppl. SCC 440 6 CIVIL APPEAL NO.4929/2023

it does not constitute a ‘debenture’ in its classic sense. Even a debenture, which is only convertible at option has been regarded as a ‘hybrid’ debenture. Any instrument which is compulsorily convertible into shares is regarded as an “equity” and not a loan or debt.” (emphasis supplied)

7. We may note that the aforesaid order of the

National Company Law Tribunal was further assailed

before the NCLAT which dismissed the appeal as per

the impugned order dated 05.06.2023. In the

meantime, the Committee of Creditors (CoC) granted

its approval on 08.03.2023 which was followed by the

Adjudicating Authority accepting the resolution plan

on 01.05.2023. This has not been specifically

assailed by the appellant.

8. The very substratum of the submissions of the

learned counsel for the appellant is that the

appellant has been left high and dry. If its

investment is to be treated as equity, under the

waterfall principle nothing will come its way. Thus,

the other creditors benefit but not the appellant.

It is learned senior counsel’s say that even after

the relevant date when the CCDs matured, it was

really treated as a debt on account of the financial

difficulty of ICTL.

7 CIVIL APPEAL NO.4929/2023

9. He submits that the principle issue is whether

the CCDs along with the other documents can be said

to be really a debt and not an equity despite the

wording of the CCDs which must be read along with

the other documents and communications inter se the

parties. The judgment in Narendra Kumar Maheshwari’s

case (supra) is sought to be distinguished on the

ground that it was in the context of a public

interest litigation, and has referred to the concept

of the debentures which are intrinsically in the

character of a debt. It is towards the objective of

financing these infrastructure projects, it is

submitted, that a set of documents have been

devised, and the real objective was that the amount

advanced was to be treated as a debt. The conversion

of CCDs to equity actually became impossible due to

the insolvency of the ICTL and thus, the entire

principal amount along with the interest became due

and payable.

10. Learned senior counsel contends that in effect

the appellant is neither treated as shareholder nor

as a financial creditor leaving the appellant

remediless. He further sought to emphasise that ICTL

was a subsidiary of IVRCL, which was really holding

100 per cent shareholding of ICTL.

8 CIVIL APPEAL NO.4929/2023

11. We may note that it is not disputed by him that

the put option was never exercised. In effect, his

submission was that whether CCDs should be

categorized as debt or equity would depend on the

status of the maturity of the CCDs and the position

of the investor at the inaugural time, and this

would vary in the facts and circumstances of each

case.

12. In order to appreciate this submission, we may

note the submission of Mr.Shyam Divan, learned

senior counsel for the respondent No.1 who has drawn

our attention to the Concessionaire Agreement with

the NHAI defining equity as under:-

“Equity” means the sum expressed in Indian Rupees representing the paid up equity share capital of the Concessionaire for meeting the equity component of the Total Project Cost, and shall for the purposes of this Agreement include convertible instruments or other similar forms of capital, which shall compulsorily convert into equity share capital of the company, and any interest free funds advanced by any shareholder of the Company for meeting such equity component, but does not include Equity Support.”

13. Thus, his submission is that the concept of

convertible instruments including CCDs falls within

the definition of equity. In order to support his 9 CIVIL APPEAL NO.4929/2023

contention, he has also referred to the common loan

agreement dated 24.11.2010 inter alia to the

stipulation that prior written approval of lenders

was required before the borrower could issue any

debentures or raise any loans. We may also appreciate

this aspect in the context of the submission of Mr.

Ramji Srinivasan, learned senior counsel that the

lenders had put certain restrictions to ensure that

their pool is not expanded which had the potential of

casting doubt on the full recoverability of their

debt. Thus, while 70 per cent of the funding to the

debt equity ratio was under the category of debt, 30

per cent was equity and it is this equity portion

which was partly funded by the initial promoters and

the remaining through the appellant. The financing

plan itself envisaged CCDs as part of the equity

portion of the funding. The aforesaid submissions

have to be appreciated in context of the said Code

where section 3 is the definition Clause, and as per

Clause 11, debt as been defined as under:-

Section 3

(11) "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

10 CIVIL APPEAL NO.4929/2023 14. The definition of debt under Section 3(11) of

the Code would be the liability or obligation in

respect of a claim which is due from any person.

ICTL does not have a liability or obligation qua the

appellant because the appellant is actually an equity

participant and does not have a debt to be repaid.

The success of a commercial venture pays benefit to

the equity participants but with income, which would

not inhere in case of the the failure of the venture.

15. Thus, if it was a simpliciter debenture, it

would have fallen under the category of a financial

debt along with bonds etc. However, we are not

concerned with a debenture per se.

16. The debenture subscription agreement clearly

defines ICTL as the special purpose vehicle while

IVRCL is the sponsor company and IFCI is the lender.

In terms of Clause 2.4, the rate of interest/coupon

rate of 11 per cent per annum, payable quarterly, is

applicable till either the buy back of all the CCDs

(an option available to the borrowers) or conversion

of CCDs into equity. The liability is of the sponsor

company for making coupon payments and not of the

SPV/ICTL. Further, under Clause 2.8, the buy back is

also an arrangement inter se the Sponsor company and

IFCI. The conversion into equity takes place as per

Clause 2.9 and the put option as per Clause 2.11. It 11 CIVIL APPEAL NO.4929/2023

would suffice to reproduce Clause 2.9 which reads as

under:-

“2.9 Conversion into equity

In the event of default of payment of return or buy back of 12.50 Crore CCDs in two tranches anytime between the end of the 3rd year and 6th year from the date of issue of CCDs giving an effective transaction IRR (including processing charges payable by the sponsor company) of 15,50 % p.a. If it is exercised anytime between 3rd and 5th year, else, a rate of 15% p.a., would be applicable between the 5th and 6th year from the date of subscription/first disbursement (including upfront interest payable by the Sponsor Company), the outstanding CCDs, along with the differential interest, defaulted amount, etc. would automatically get converted into equity shares of the ICTL at a price on par with the promoters of ICTL i.e. at a premium of Rs.90/- per share at the end of 6 years from the date of issue (i.e. in case both the Call and the Pul Options are not exercised by the Sponsor and the IFCI respectively or, at an earlier date as per other terms of this Agreement.)”

17. The aforesaid clause thus provides for automatic

conversion into equity shares of ICTL on the relevant

date for which there is no dispute i.e. 09.11.2017.

18. In order to secure the appellant, it has been

pointed out to us, that Clause 3.1 provides for

security for the debentures. Clause 3.1 reads as 12 CIVIL APPEAL NO.4929/2023

under:-

“3.1 Security for the Debentures

The Debentures together with interest, costs, charges, expenses and other charges payable to IFCI in respect of the said Debentures under this Agreement shall be secured by the following:

a) An unconditional and irrevocable Corporate Guarantee of IVRCL Assets & Holdings Limited i.e., Sponsor Company,

b) Pledge of shares in Demat form of ICTL held by the Sponsor Company amounting to not less than 49% of the paid up equity capital of the SPV company, to be maintained throughout the tenure of the funding. However, pledge shall be invoked only after IVRCL Assets & Holdings Ltd., the Sponsor Company, fails to honour its guarantee obligation.

c) Give an undertaking that in case of enforcement of securely by senior lenders of the project, IFCI would have a charge on the residuals available with the Sponsor Company after meeting all the requirements as per Escrow Agreement, and ICTL will route the final proceeds received by it, through a separate account suggested by IFCI Ltd.”

19. We may also note the clause 3.3 which provides

for an overriding effect of the Concessionaire

Agreement and Clause (b) of the same reads as under:-

“3.3 Overriding effect of the Concession Agreement:

b) Notwithstanding anything to the contrary 13 CIVIL APPEAL NO.4929/2023

contained in this Agreement, and subject always to the overall supremacy of the Concessional Agreement, the Parties herein agree not to enforce the Put Option and/or otherwise take only direct/indirect action; without the prior written approval of NHAI when any such single and/or multiple act(s) taken simultaneously or otherwise under and/or in pursuance of this Agreement and/or the Pledge Agreement, read with the Power of Attorney jointly or severally constitute Change in Ownership per Clause 5.3 of the Concession Agreement. Any such act(s) if taken without prior written approval of the NHAI shall be treated as having been carried out in contravention of the Concessional Agreement and thus void ab initio as per sub-

clause (a) above. It is hereby specifically clarified that for purposes ‘Change in Ownership’ under the Concession Agreement and all stipulations thereto including inter alia as provided in clause 5.3, the lender (the IFCI) shall at all times to be treated as the ‘acquirer’ of Equity and/or the person directly/indirectly acquiring control of the Board of Directors of the Borrower (the Concessionaire).”

20. A reading of all the aforesaid leads to a

conclusion that the appellant was provided security

under the Debentures Subscription Agreement but the

obligations are of the sponsor company. That being

the position, it is difficult for us to appreciate

how the obligation is of the SPV i.e. ICTL. Unless 14 CIVIL APPEAL NO.4929/2023

the debt is of the ICTL, the appellant cannot seek a

recovery of the amount on the basis of being a

creditor of the SPV ICTL.

21. We must note that the complexities of commercial

documents depending on the nature of business. These

are not layman’s agreements but agreements vetted by

experts and thus each of the parties knows its

obligations and the benefits which can arise from the

agreement. We thus find it difficult to read into or

add to what the document says about a CCD.

22. Suffice for us to say that the aspect of

interpretation of commercial documents was in extenso

analyzed in Nabha Private Limited Vs. Punjab State

Power Corporation Limited3. In respect of the factual

scenario before us, it would suffice to extract para

72 as under:

“72. We may, however, in the end, extend a word of caution. It should certainly not be an endeavour of commercial courts to look to implied terms of contract. In the current day and age, making of contract is a matter of high technical expertise with legal brains from all sides involved in the process of drafting a contract. It is even preceded by opportunities of seeking clarifications and doubts so that the parties know what they are getting into. Thus, normally a contract should be read as it reads, as per its express terms. The implied terms is a concept,

3 (2018) 11 SCC 508 15 CIVIL APPEAL NO.4929/2023

which is necessitated only when the Penta test referred to aforesaid comes into play. There has to be a strict necessity for it. In the present case, we have really only read the contract in the manner it reads. We have not really read into it any “implied term” but from the collection of clauses, come to a conclusion as to what the contract says. The formula for energy charges, to our mind, was quite clear. We have only expounded it in accordance to its natural grammatical contour, keeping in mind the nature of the contract.”

23. The effect of the aforesaid is that a contract

means as it reads. It is not advisable for a Court to

supplement it or add to it. It is an unfortunate

scenario where the appellant is being left high and

dry as there is nothing which it can recover from the

sponsor company, there being no assets and funds.

While in the ICTL it is being treated as a

shareholder and thus, does not benefit as none of the

shareholders i.e. original investors and the

appellant get any benefit under the scheme which has

been approved. The debt assigned was of a lower rate,

repurchased by a third party. However, these are

commercial decisions of the respective parties. The

obligations were of the sponsoring company and IVRCL

in terms of Clause 2.4.

16 CIVIL APPEAL NO.4929/2023

24. A reading of the impugned judgment, specifically

the rationale from para 19 onwards shows that the

issue has been correctly crystallized as to whether

CCDs could be treated as a debt instead of an equity

instrument. In that sense, it was observed that

treating them as a debt would tantamount to breach of

the concessional agreement and the common loan

agreement. The investment was clearly in the nature

of debentures which were compulsorily convertible

into equity and nowhere is it stipulated that these

CCDs would partake the character of financial debt on

the happening of a particular event.

25. The appellant has invoked the guarantees and

sought remedy against the sponsor company. The fact

that it is not serving any fruitful purpose is not

something which can weigh with us.

26. A significant aspect taken note of in the

impugned order is that the terms of the various

agreements prohibited the corporate debtor from

taking further debt without the consent of the

assignees. No such approval was sought or taken. The

amount was treated as an equity alone and not as a

debt.

27. The NCLAT has also touched on the issue of the

remedy which was available to the appellant which, in

its view, was not availed within time a time bound 17 CIVIL APPEAL NO.4929/2023

process being of the essence in the Code. The claim

of the appellant was rejected on 09.08.2022 and the

appellant only sought to again raise the issue which

could not extend the period of time.

28. The challenge to the rejection was laid only on

30.11.2022, after a period of three months from the

rejection of the claim.

29. Last but not the least, we must also note that

our jurisdiction comes from Section 62 of the Code.

The said section reads as under:

“62. (1) Any person aggrieved by an order of the National Company Law Appellate Tribunal may file an appeal to the Supreme Court on a question of law arising out of such order under this Code within forty-five days from the date of receipt of such order”

30. The jurisdiction is restricted to a question of

law akin to a second appeal. 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.

31. We are thus of the view that the appeal does not

raise any such question of law and that the findings

of the Courts below are in accordance with settled

principles.

18 CIVIL APPEAL NO.4929/2023

32. We thus dismiss the appeal leaving parties to

bear their own costs.

……………...…………………………..J. [SANJAY KISHAN KAUL]

……………...………………………...J. [SUDHANSHU DHULIA]

……………...………….………………..J. [AHSANUDDIN AMANULLAH]

NEW DELHI, NOVEMBER 09,2023.