Maif Investments India Pte Ltd vs Ind-Barath Energy (Utkal) Ltd

(Arising out of Order dated 29th August, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad, in C.P. (IB) No. 192/7/HDB/2018)

IN THE MATTER OF:

MAIF Investments India Pte. Ltd. ...Appellant

Vs

M/s. Ind-Barath Energy (Utkal) Limited ....Respondent

Present:

For Appellant: Mr. Arun Kathpalia, Senior Advocate with Mr. Krishnendu Datta, Mr. Lzafeer Ahmed, Ms. Bani Brar, Mr. Rhia Mehta and Mr. Parinaz Vakil, Advocates.

For Respondent: Mr. Niraj Kumar, Mr. K. Aravind and Mr. Satendra K. Rai, Advocates.

Mr. Yogesh Kumar Jagia and Ms. Tanya Nagi, Advocates.

J U D G M E N T

SUDHANSU JYOTI MUKHOPADHAYA, J.

The Appellant- 'MAIF Investments India Pte. Ltd.' filed an application

under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("I&B Code"

for short) against 'M/s. Ind-Barath Energy (Utkal) Limited'- ('Corporate

Debtor'). The 'Bank of Baroda' another 'Financial Creditor' also filed an

application under Section 7 of the 'I&B Code'. By the impugned order dated

29th August, 2018 passed by the Adjudicating Authority (National Company 2

Law Tribunal), Hyderabad Bench, Hyderabad, Section 7 application filed by

the Bank of Baroda has been admitted and 'Interim Resolution Professional'

has been appointed but Section 7 application preferred by the Appellant-

'MAIF Investments India Pte. Ltd.' has been dismissed on the ground that

default is deemed to have been repaid in view of the invocation of pledge of

shares and conversion of 'Compulsorily Convertible Debentures' ("CCD" for

short) into equity shares.

2. The brief fact of the case is that 'M/s. Ind-Barath Energy (Utkal)

Limited'- ('Corporate Debtor') is a Public Limited Company engaged in the

business of developing, constructing, operating power generation and

related transmission and distribution facilities and is a subsidiary of 'Ind-

Barath Thermotek Private Limited' ("IBTPL" for short). The 'IBTPL' is, in

turn, a subsidiary of 'Ind-Barath Power Infra Limited' ("IBPIL" for short).

3. The case of the Appellant is that 'MAIF Investments India Pte. Ltd.'

and one 'MAIF Investments India 2 Pte. Ltd. ("MAIF-II or 2" for short) are

promoters and 'IBTPL', 'IBPIL' and 'M/s. Ind-Barath Energy (Utkal)

Limited'- ('Corporate Debtor') along with one 'Arkay Energy Rameswaran

Limited' entered into a Subscription Agreement on 23rd December. 2016 in

terms of which the Appellant provided a bridge loan for a sum of Rs.102

Crores by subscribing to 10,200,000 'Optionally Convertible Debentures'

("OCD" for short) of the 'Corporate Debtor' at Rs.100/- per 'OCD' (in

February 2017) for an aggregate consideration of Rs.102 Crores.

4. Further, the case of the Appellant is that separately and independent

of the Subscription Agreement, the Appellant and its sister entity, 'MAIF-II' Company Appeal (AT) (Insolvency) No. 597 of 2018 3

had also subscribed to certain 'Non-Convertible Debentures' ("NCD" for

short) and 'CCD' in the holding company of the 'Corporate Debtor'

(unrelated to the present transaction) by way of Investment Agreement and

a Debenture Trust Deed.

5. Clause 9.1 of the Subscription Agreement of 2016 contemplates that

a default under either agreement i.e. the Investment Agreement or the

Debenture Trust Deed shall be considered as a default under the

Subscription Agreement of 2016.

6. On 21st May, 2017 and 21st August, 2017 and thereafter till August,

2018, the interest payments on the 10,200,000 'OCDs' held by the

Appellant was required to be made by the 'Corporate Debtor' in terms of

Clause 10.1 of the Subscription Agreement of 2016.

7. It is alleged that no such payments, as mandated by the terms of the

Subscription Agreement of 2016, were made by the 'Corporate Debtor'

resulting in an event of default under the Subscription Agreement of 2016.

Further, admittedly, all three events of defaults have also occurred under

the Investment Agreement.

8. On 9th June, 2017 (till 11th July, 2018), the Appellant's agent 'SBI-SG

Global Securities Pvt. Ltd.' demanded interest payments on the 'OCDs'

falling due on 21st May, 2017, 21st August, 2017 and thereafter on 21st

November, 2017, 21st February, 2018, 21st May, 2018 and 16th August,

2018.

Company Appeal (AT) (Insolvency) No. 597 of 2018 4

9. The Appellant and 'MAIF-II' also addressed a letter dated 15th April,

2018 to the 'Corporate Debtor', 'IBPIL', 'IBTPL', the Promoters and 'Arkay

Energy Rameswaram Limited' inter alia calling upon them to redeem the

'OCDs' in terms of Clause 3.3 read with Clause 9.4 of the Subscription

Agreement of 2016. However, no payments were made by the 'Corporate

Debtor' despite the amounts becoming due and payable. It was in this

background, the Appellant filed an application under Section 7 of the 'I&B

Code'.

10. Learned counsel for the Appellant submitted that the 'Corporate

Insolvency Resolution Process' having initiated against 'M/s. Ind-Barath

Energy (Utkal) Limited'- ('Corporate Debtor'), the dismissal of Section 7 has

lost its force but the question remains as to whether the Appellant comes

within the meaning of 'Financial Creditor' or not for the purpose of

constitution of the 'Committee of Creditors' and determining its claim.

11. Reliance has been placed on the Investment Agreement dated 25th

June, 2015 and the Subscription Agreement dated 23rd December, 2016,

pursuant to which, the investments were made in the 'Corporate Debtor'

and its holding Company. According to the Appellant, both the Agreements

are inter-connected so much so that event of default is common to both

agreements, relevant of which as detailed below:

AGREEMENT DT NATURE OF APPEALLANT MAIF-2 INVESTMENT 25/06/2015 Equity Shares 1 0 23/12/2016 OCD 102 Crore

Company Appeal (AT) (Insolvency) No. 597 of 2018 5

Investment made in holding company of corporate debtor

AGREEMENT DT NATURE OF APPEALLANT MAIF-2 INVESTMENT 25/06/2015 CCD 9,06,559 NCD 699 Crore Additional NCD 80 Crore

12. According to the Promoters, on 29th August, 2017, demand notice

was issued jointly by the Appellant and 'MAIF-2' under both the agreements

to 'Corporate Debtor', its holding company and step up holding company

asking to redeem 'NCD' and convert 'CCD'. They also informed about their

entitlement to vote based on the securities pledged. On failure to redeem,

on 31st August, 2017, the Appellant and 'MAIF-2' invoked pledge of 49%

equity shares of the 'Corporate Debtor' and 51% equity of holding company.

13. According to learned counsel for the Promoters, invocation of pledge

is not in dispute before any forum. It was submitted that with invocation of

pledge, the Appellant became equity shareholder of the 'Corporate Debtor'

of 49% and 51% of holding company; hence the Appellant got control on

management of the 'Corporate Debtor'. On 12th September, 2017, the

Appellant and 'MAIF-2' through their trustee issued notice under Section

100(2) of the Companies Act, 2013 to holding company to hold EoGM to

convert 'CCD' and reconstitute Board of Directors so as to give 100%

control on holding company. This was stayed by the National Company Law

Tribunal at the instance of holding company but subsequently the

Company Petition was withdrawn on 6th March, 2018 and on 26th March,

2018 by giving notice 'CCD' were converted into equity which gave rise to

filing of petition under Section 59 of the Companies Act, 2013 by the

Company Appeal (AT) (Insolvency) No. 597 of 2018 6

Appellant and dismissal order of the appeal which was fixed for 20th

December, 2018.

14. It is submitted that by order dated 20th June, 2018, both the

petitions under Section 7 of the 'I&B Code' and Section 59 of the

Companies Act, 2013 were taken together. By letter dated 21st December,

2017, the Appellant agreed for 100% equity of the 'Corporate Debtor'. On

3rd April, 2018, the Appellant filed Contempt Petition under Section 425 of

the Companies Act, 2013 and the same is pending before the National

Company Law Tribunal. On 15th April, 2018, the Appellant with 'MAIF-2'

jointly issued demand notice for redemption of 'OCD' of 102 Crores by

claiming independent right under the Subscription Agreement dated 23rd

December, 2016 and subsequently filed petition under Section 7 of the 'I&B

Code'.

15. From the record, it appears that Clause 9 of the Subscription

Agreement stipulates mechanism of redemption. Clause 9.2 provides for

put option to enable to buy 'OCD', Clause 9.3 is for failure to purchase

'OCD', Clause 9.4 stipulates creation of redemption reserve account after

12 months and to redeem 'OCD' out of this fund only.

16. According to the Promoters, the Appellant in compliance of Clause

9.2 never issued notice for put option because debt was satisfied by

invocation of pledge and the Appellant issued notice on 15th April, 2018 for

redemption contrary to Clause 9.2 of the Subscription Agreement and

hence neither debt was owed nor due.

Company Appeal (AT) (Insolvency) No. 597 of 2018 7

17. According to learned counsel for the 'Resolution Professional', the

Appellant has made a total claim of about Rs.143.02 Crores and 'MAIF-2'

has made a total claim of about Rs.1439.34 Crores. The basis of the

Appellant's claim is stated to be on account of a Subscription Agreement

dated 23rd December, 2016 entered into by the Investors with 'IBTPL' and

the 'Corporate Debtor', amongst others, for subscribing to 102,00,000

'OCDs' issued by the 'Corporate Debtor'.

18. According to the 'Resolution Professional', upon review of the claims,

it was seen that the claims of the Investors primarily arise out of the

Investment Agreement. From the documents submitted by the Investors

along with the claim form, it was noted that:

a. Pursuant to the Investment Agreement, the Investors had made

investments in the Respondent and 'IBTPL' in the following

manner:

a) Appellant subscribed to the following securities:

i. 906559 (Nine Lakhs Six Thousand Five Hundred and

Fifty Nine Only) 'CCDs' of Rs.10/- each in 'IBTPL';

ii. 1 equity share of 'IBTPL';

iii. 1 equity share of the Respondent;

b) 'MAIF-II' subscribed to 'NCDs' issued by 'IBTPL' for a total

subscription amount of Rs. 799 Crores;

b. By the Share Pledge Agreement, the Respondent, 'IBTPL' and

'IBPIL' pledged over 5100 equity shares representing 51% of share

capital of 'IBTPL' and 505,779,500 equity shares representing

48.99% of share capital of the Respondent. For this purpose, Company Appeal (AT) (Insolvency) No. 597 of 2018 8

separate powers of attorneys dated 9th July, 2015 were also

executed in favour of the Debenture Trustee.

c. Subsequently, since the Respondent was in need of temporary

financing for certain purposes (as set in the Subscription

Agreement), the Respondent and the promoters of the group

requested the Appellant to subscribe to 102,00,000 'OCDs' to be

issued by the Respondent. Accordingly, Appellant subscribed to

the said 'OCDs' for a total consideration of Rs.102 Crores.

d. Under the terms of clause 2.1 of the Subscription Agreement, the

Respondent, 'IBTPL' and 'IBPIL', amongst others, were required to

comply with their obligations under Investment Agreement.

e. Under clause 7.2 of the Subscription Agreement, the Investors

were entitled to the benefit of indemnification under clause 10 of

the Investment Agreement.

f. Under clause 8.2 of the Subscription Agreement, the Respondent,

'IBTPL' and 'IBPIL', amongst others, were jointly and severally

liable to ensure the performance of the Subscription Agreement.

g. Admittedly, on account of defaults committed by the 'Corporate

Debtor' and 'IBTPL', the Investors sought to exercise their rights

under the Investment Agreement, the Debenture Trust Deed and

the Share Pledge Agreement and on 31st August, 2017, the

Debenture Trustee invoked the pledge of the shares in its favour

in terms of the Share Pledge Agreement.

19. The Adjudicating Authority on consideration of the matter held that

the default, if any, committed by the 'Ind-Barath Energy (Utkal) Limited' is Company Appeal (AT) (Insolvency) No. 597 of 2018 9

deemed to have been repaid in view of invocation of pledge shares and the

conversion of 'CCDs' into equity shares.

20. The questions arise for consideration in this appeal is:

(i) Whether the Appellant is a 'Financial Creditor' of the 'Corporate

Debtor'? and;

(ii) Whether the debt of the Appellant stands paid as held by the

Adjudicating Authority?

21. Section 3(11) defines 'debt' means:

"3. Definition.─ (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;

22. Section 5(7) defines 'Financial Creditor' whereas Section 5(8) defines

'Financial Debt', which reads as follows:

"5. Definitions.─ (7) "financial creditor" means

any person to whom a financial debt is owed and

includes a person to whom such debt has been

legally assigned or transferred to"

"5 (8) "financial debt" means a debt along with

interest, if any, which is disbursed against the

Company Appeal (AT) (Insolvency) No. 597 of 2018 10

consideration for the time value of money and

includes--

(a) money borrowed against the payment of

interest;

(b) any amount raised by acceptance under

any acceptance credit facility or its de-

materialised equivalent;

(c) any amount raised pursuant to any note

purchase facility or the issue of bonds, notes,

debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of any

lease or hire purchase contract which is

deemed as a finance or capital lease under the

Indian Accounting Standards or such other

accounting standards as may be prescribed;

(e) receivables sold or discounted other than

any receivables sold on non-recourse basis;

(f) any amount raised under any other

transaction, including any forward sale or

purchase agreement, having the commercial

effect of a borrowing;

[Explanation.- For the purposes of this sub-

clause,-

Company Appeal (AT) (Insolvency) No. 597 of 2018 11

(i) any amount raised from an allottee

under a real estate project shall be

deemed to be an amount having

the commercial effect of a

borrowing; and

(ii) the expression, "allottee" and "real

estate project" shall have the

meanings respectively assigned to

them in clauses (d) and (zn) of

section 2 of the Real Estate

(Regulation and Development Act,

2016 (16 of 2016);]

(g) any derivative transaction entered into in

connection with protection against or benefit

from fluctuation in any rate or price and for

calculating the value of any derivative

transaction, only the market value of such

transaction shall be taken into account;

(h) any counter-indemnity obligation in respect

of a guarantee, indemnity, bond, documentary

letter of credit or any other instrument issued

by a bank or financial institution;

(i) the amount of any liability in respect of any

of the guarantee or indemnity for any of the

Company Appeal (AT) (Insolvency) No. 597 of 2018 12

items referred to in sub-clauses (a) to (h) of this

clause;"

23. In the present case, there has been a disbursal of Rs.102 Crores in

favour of the 'Corporate Debtor' by way of 'OCDs'. In terms of Section

5(8)(c), any amount raised pursuant to any note purchase facility or the

issue of bonds, notes, debentures, loan stock or any similar instrument,

comes within the meaning of 'financial debt'. Therefore, from the aforesaid

fact, we find that there is a disbursal of Rs. 102 Crores in favour of the

'Corporate Debtor' and the 'OCDs' originally met is against time value of

money and per se, constitute 'financial debt' in the light of Section 5(8)(c) of

the 'I&B Code'.

24. The next question is whether the debt amount payable by 'M/s. Ind-

Barath Energy (Utkal) Limited'- ('Corporate Debtor') is deemed to have been

repaid in view of invocation of pledge shares and the conversion of 'CCDs'

into equity shares?

25. Admittedly, by Subscription Agreement dated 23rd December, 2016,

the Appellant provided a bridge loan for a sum of Rs. 102 Crores by

subscribing to 10,200,000 'Optionally Convertible Debentures' ("OCD" for

short) of the 'Corporate Debtor' at Rs.100/- per 'OCD' (in February 2017).

The interest payments on the 10,200,000 'OCDs' held by the Appellant

were required to be made by the 'Corporate Debtor' in terms of Clause 10.1

of the Subscription Agreement of 2016. The Appellant's agent 'SBI-SG

Global Securities Pvt. Ltd.' demanded interest payments on the 'OCDs'

falling due on 21st May, 2017, 21st August, 2017 and thereafter on 21st Company Appeal (AT) (Insolvency) No. 597 of 2018 13

November, 2017, 21st February, 2018, 21st May, 2018 and 16th August,

2018. However, such interest payments on the 'OCDs' as were due have not

been paid by the 'Corporate Debtor'.

26. Admittedly, the Appellant and 'MAIF-II' also addressed a letter on 15th

April, 2018 to the 'Corporate Debtor', 'IBPIL', 'IBTPL', the Promoters and

'Arkay Energy Rameswaram Limited' inter alia calling upon them to redeem

the 'OCDs' in terms of Clause 3.3 read with Clause 9.4 of the Subscription

Agreement of 2016. However, no payments were made by the 'Corporate

Debtor' despite the amounts becoming due and payable.

27. According to the Promoters, on failure to redeem, on 31st August,

2017, the Appellant and 'MAIF-2' invoked pledge of 49% equity shares of

the 'Corporate Debtor' and 51% equity of holding company. However, it has

not been made clear as to why such plea was not taken when the Appellant

and 'MAIF-2' addressed a letter on 15th April, 2018 to the 'Corporate

Debtor', 'IBPIL', 'IBTPL', the Promoters and 'Arkay Energy Rameswaram

Limited', wherein they inter alia called upon them to redeem the 'OCDs' in

terms of Clause 3.3 read with Clause 9.4 of the Subscription Agreement of

2016.

28. The redemption of the 'NCD' and the 'CCD' are different than the

conversion within the 'OCD'. What has been stated to have been redeemed

is relating to 'NCD' and the 'CCD' and not the 'OCD'. On 12th September,

2017, the Appellant and 'MAIF-2' through their trustee issued notice under

Section 100(2) of the Companies Act, 2013 to holding company to hold

EoGM to convert 'CCD' as distinguished from the 'OCDs' for which Rs. 102 Company Appeal (AT) (Insolvency) No. 597 of 2018 14

Crores were disbursed by the 'Corporate Debtor'. At the instance of the

holding Company, the matter which was pending before the National

Company Law Tribunal was stayed which was reason for withdrawal of the

Company Petition. Subsequently, the petition under Section 59 of the

Companies Act, 2013 was filed by the Appellant, which was dismissed on

20th December, 2018.

29. The aforesaid fact shows that the dispute relating to redemption of

'NCD' and 'CCD' were alleged to have been converted into equity

shareholder of the 'Corporate Debtor' with 49% and 51% of holding

company. Apart from the fact that it does not relate to the 'OCD', the

dismissal of the application under Section 59 of the Companies Act, 2013

shows that it has not been accepted by the National Company Law Tribunal

that the debenture stands converted as share in favour of the Appellant.

30. Such a finding given on a petition under Section 59 of the Companies

Act, 2013 by the National Company Law Tribunal, the same National

Company Law Tribunal being the Adjudicating Authority in the application

under Section 7 filed by the Appellant was wrong to hold that by invocation

of pledge of shares and conversion of 'CCD' into equity shares the debt

amount stands paid. Under the law, there is no presumption of payment of

debt merely on the invocation of the pledge till conversion of the debenture

into share is accepted under the law. Further, the 'OCD' being the subject

matter for disbursement of amount of Rs.102 Crores, it cannot be linked

with 'NCD' and 'CCD', which were subscribed pursuant to an agreement

Company Appeal (AT) (Insolvency) No. 597 of 2018 15

which is independent to Subscription Agreement dated 23rd December,

2016.

31. The Promoters confused the Adjudicating Authority by co-relating the

two independent agreements i.e. one Subscription Agreement dated 23rd

December, 2016 and the separate agreement which the Appellant and its

sister entity, 'MAIF-II' has entered into for subscription to certain 'NCD' and

'CCD' in the holding company of the 'Corporate Debtor' which are unrelated

to the agreement dated 23rd December, 2016. The Adjudicating Authority

failed to consider the same and thereby, wrongly held that the debt has

been paid and there was no default on conversion of the 'CCD'. It also failed

to consider that the interest to which the Appellant was entitled for

different debt for which notice was given and, as discussed above, had not

been paid by the 'Corporate Debtor' and there was a default of more than

Rs.1 Lakh on the part of the 'Corporate Debtor'.

32. For the reasons aforesaid, we hold that the Appellant- 'MAIF

Investments India Pte. Ltd.' is a 'Financial Creditor' of 'M/s. Ind-Barath

Energy (Utkal) Limited'- ('Corporate Debtor'). Further, we hold that by the

invocation of the pledge of shares pursuant to the Subscription Agreement,

no presumption can be drawn that the disbursement of Rs.102 Crores so

made was towards the 'OCD' and stands paid.

33. We, accordingly, set aside the impugned order and direct the

'Resolution Professional' to treat the Appellant as a 'Financial Creditor' for

the purpose of constitution of the 'Committee of Creditors' and allow the

Appellant- 'MAIF Investments India Pte. Ltd.' to take part as a member of Company Appeal (AT) (Insolvency) No. 597 of 2018 16

the 'Committee of Creditors' with voting share to the extent of the amount

disbursed and claimed by it.

34. The appeal is allowed with aforesaid observations and directions. No

cost.

[Justice S.J. Mukhopadhaya] Chairperson

[Justice Bansi Lal Bhat] Member (Judicial)

NEW DELHI

23rd April, 2019

AR

Company Appeal (AT) (Insolvency) No. 597 of 2018