Nicco Corporation Ltd vs Technology Develoopment Board

Company Appeal (AT) (Insolvency) No. 360 of 2018 (arising out of order dated 6th June, 2018 passed by National Company Law Tribunal, Kolkata Bench, in C.P. (IB) No. 312/KB/2018)

IN THE MATTER OF:

Nicco Corporation Ltd. ...Appellant

Versus

Technology Development Board ...Respondent

Present: For Appellant : Mr. Anirudh Wadhwa, Advocate Ms. Nitu Poddar, PCS Mr. Bunny Sehgal, PCS

For Respondent : Mr. B.B. Sawhney, Senior Advocate with Mr. Lakshay Sawhney and Mr. Yogender Singh, Advocates

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

The Adjudicating Authority (National Company Law Tribunal), Kolkata

Bench passed an order for liquidation of 'Nicco Corporation Ltd.' (Corporate

Debtor). During the liquidation, the respondent - 'Technology Development

Board' ('Board' for short), Government of India, a 'Financial Creditor' filed its

claim, part of which was rejected by the 'Liquidator'. In view of the aforesaid

rejection, the 'Board' filed an appeal before the Adjudicating Authority under

Section 42 of the Insolvency & Bankruptcy Code 2016 (for short, 'the I&B

Code'). The said appeal having allowed by the Adjudicating Authority by the 2

impugned order dated 6th June, 2018 it has been challenged by the

'Liquidator'.

2. The brief facts of the case are as follows.

The 'Board' provided two loans to the 'Corporate Debtor', namely-

(i) Term Loan of Rs. 5.62 Crores under the Loan

Agreement dated 16th December, 1997 for

XLPE Project; and

(ii) Term Loan of Rs. 18.46 Crores under Loan

Agreement dated 28th July, 1999 for

Irradiation Project.

Security /charge were created separately for each of the two Term Loan

Agreements. Deed of Hypothecation dated 12th December, 2000 in respect of

loan amount of Rs. 18.46 Crores was created.

3. The 'Corporate Debtor' defaulted in effecting repayments and

approached the 'Board' for restructuring the debt. By the 'Debt Restructuring

Agreement' dated 24th March, 2004, the debt was restructured whereby, inter

alia, the principal amount of Irradiation Project Loan of Rs. 18.46 Crores was

agreed to be converted to redeemable preference shares as per Clause 4

coupled with firm binding obligation of the 'Corporate Debtor' to redeem the

shares in three instalments on specified fixed future dates by paying the

principal amount and fixed accrued dividend amounts [Clause 4.3].

The accrued unpaid interest relating to the loan of Rs. 18.46 Crores was

agreed to be paid after a moratorium of 2 years in 3 equal instalments [Clause

5.2(a)].

Company Appeal (AT) (Insolvency) No. 360 of 2018 3

4. Clause 3.1(d) of the Debt Restructuring Agreement provides as follows:

"(d) The borrower issuing an undertaking to the

Board that it shall continue to observe and be

bound by obligations in accordance with the

Irradiation Project Loan Agreement and the

XLPE Cable Project Loan Agreement to the

extent that such obligations have not been

modified by the Agreement."

5. The 'Supplementary Agreement' was reached between the parties on

19th January, 2011 whereby dates of redemption of shares and repayments

were deferred/rescheduled. 'Clause 1' of the 'Supplementary Agreement'

reads :

"1. This agreement shall form part of and shall be

attached to and read with the Loan Agreements

dated 16th December 1997 and 28th July 1999,

and the Debt Restructuring Agreement dated

24th March 2004."

6. 'Clause I' of the said 'Supplementary Agreement' reads as follows:

"I. The Borrower has agreed that in case of default

in payment of the loan etc. as rescheduled in

the Supplementary Agreement to the Debt

Company Appeal (AT) (Insolvency) No. 360 of 2018 4

Restructuring Agreement as above, this

agreement shall be treated as cancelled and

the Borrower will be required to pay the entire

amount in terms of the Loan Agreement without

any remission.

The purpose and intent of this provision clearly

is that in case of default by the Company of

terms thereof, not only will the supplementary

agreement relaxing restructuring conditions be

treated as cancelled but the Company will also

become liable to pay the entire amount due in

terms of the Loan Agreement. In other words,

in case of default financial obligations of the

company will revert back to those provided in

the Loan Agreement."

7. In the aforesaid background the respondent made claim and taken plea

that the 'Corporate Debtor' defaulted in effecting repayments as rescheduled

thereby it became liable to pay in terms of the original Loan Agreement dated

28th July, 1999 without any remission. The Board, is a 'Financial Creditor' in

respect of the loan of Rs. 18.46 Crores and interest thereon.

Company Appeal (AT) (Insolvency) No. 360 of 2018 5

8. The stand of the 'Board' that preference shares would stand invalidated

and converted/reverted back to the original loan was not accepted by the

'Liquidator'. According to the learned counsel for the 'Liquidator' the

redemption of 18,46,000 Preference Shares were deferred to 1st April, 2014,

1st April, 2015 and 1st April, 2016. Subsequently, the 'Corporate Debtor'

continued to be in financial distress and consequently the 'corporate

insolvency resolution process' was initiated under the I&B Code.

9. According to the 'Liquidator' a claim of 'Board' was rejected as it is not

a 'creditor' for the amount of Rs. 18.46 crores or alleged interest thereon. In

fact the amount has been redeemed and converted as preferential shares of

18,46,000 with face value of Rs.100/- each. For the first time, during the

'Liquidation', the 'Board' took plea that the shares were redeemable

preferential shares and converted into the loan outstanding against

'Irradiation Project'.

10. Reliance has been placed on the decision of the Hon'ble High Court of

Bombay in 'Aditya Prakash Entertainment Pvt. Ltd. v. Magikwand Media

Pvt. Ltd.' - '2018 SCC OnLine Bom 551' and the decision of the Hon'ble High

Court of Andhra Pradesh in 'Lalchand Surana & Ors. vs. M/s. Hyderabad

Vansaspathy Ltd.' - '1988 SCC OnLine AP 290' to suggest that a preference

shareholder is a contributor to the capital of the company; and is not and

cannot claim to be a 'creditor' even in default on redemption. Further

according to the learned counsel for the 'Liquidator' the amount of Rs. 18.46

Crores converted to and treated to be a part of the shareholder capital cannot

Company Appeal (AT) (Insolvency) No. 360 of 2018 6

be reverted back or treated to be a loan upon the alleged default of

redemption.

We have heard the learned counsel for the parties and perused the

record.

11. 'Debt Restructuring Agreement' dated 24th March, 2004 reached

between the 'Board' and the 'Corporate Debtor' deals with 'preference shares'

and its redemption, which reads as follows:

"4.1 Issue and allotment

No later than 10(ten) days from the date

of receipt by the Borrower of the notice from the

Board referred to in Clause 3 2(b) of this

Agreement, the Borrower shall issue and allot

18,46,000 cumulative convertible preference

shares to the Board ("Preference Shares")

against the Irradiation Project Principal

Amount. The date of such allotment shall

hereinafter be referred to as the "Allotment

Date."

Company Appeal (AT) (Insolvency) No. 360 of 2018 7

4.2 Dividend

No dividend shall be paid on any shares

of the Borrower (whether equity or preference)

unless dividend or the Preference Shares due to

the Board has been paid in full. If no dividend

is paid by the Borrower on the Preference

Shares for any given year then such dividend

shall accrue on the Preference Shares and shall

be paid cumulatively to the Board in such

subsequent year for which dividend is declared

by the Borrower.

4.3 Redemption

Subject to Clause 4.4 of this Agreement

the Preference Shares shall be redeemed by the

Borrower in the following manner:

(a) Series A of the Preference Shares shall be

redeemed by the Borrower on the date

which is the 7th anniversary of the

Allotment Date:

Company Appeal (AT) (Insolvency) No. 360 of 2018 8

(b) Series B of the Preference Shares shall be

redeemed by the Borrower on the date

which is the 8th anniversary of the

Allotment Date: and

(c) Series C of the Preference Shares shall be

redeemed by the Borrower on the date

which is the 9th anniversary of the

Allotment Date.

4.4 Conversion

At any time prior to the redemption of the

Preference Shares or part thereof, the Board

may be written notice to Borrower convert the

Preference Shares or Part thereof into equity

shares of the Borrower at par and on such other

terms as may be considered reasonable by the

Board. No later than 30(thirty) days of receipt

of such notice, the Borrower shall take all such

steps (including obtaining necessary approvals

and consents and undertaking all formalities)

Company Appeal (AT) (Insolvency) No. 360 of 2018 9

as may be necessary to convert the Preference

Shares or part thereof into such equity shares.

12. Clause 5 therein relates to 'Rescheduled Loan & Interest', which is as

follows:

"5. RESCHEDULED LOAN & INTEREST

5.1 XLPE Cable Project Principal Amount

With effect from all the Allotment Date, the

repayment of the XLPE Cable Project Principal

Amount by the Borrower to the Board shall be

subject to a 7(Seven) year moratorium.

5.2 Rescheduled Accrued Interest Amount

With effect from the Allotment Date, the

Rescheduled Accrued Interest Amount shall be

repaid by the Borrowed to the Board after a

2(two) year moratorium in 3(three) years in

equal instalments, as set out in Annex 1. The

"Rescheduled Accrued Interest Amount"

shall be equal to the sum of the following

amounts.

Company Appeal (AT) (Insolvency) No. 360 of 2018 10

(a) the accrued interest (excluding

additional interest of 10% per annum) on

the Irradiation Project Principal Amount

calculated in accordance with the

Irradiation Project Loan Agreement for the

Period up to the Allotment Date, as more

particularly set out in Annex II(a)

("Irradiation Project Interest

Amount"); and

(b) the accrued interest (excluding additional

interest of 10% per annum) on the XLPE

Cable Project Principal Amount calculated

in accordance with the XLPE Cable Project

Loan Agreement for a period up to the

Allotment Date, as more particularly set

out in Annex II(b) (XLPE Cable Project

Interest Amount").

Company Appeal (AT) (Insolvency) No. 360 of 2018 11

5.3 Interest

With effect from the Allotment Date,

the Borrower shall pay to the Board

interest on the XLPE Cable Project

Principal Amount and interest thereon, as

may be outstanding from time to time

calculated with effect from the Allotment

Date at the rate of 5% simple interest per

annum. The Borrower acknowledges and

agrees that the Board shall be entitled in

its sole discretion to revise, upwards or

downwards, the rate of interest from time

to time having regard to its prevailing

policy on interest."

13. In the record of the 'Corporate Debtor' towards 'Irradiation Project Loan'

as on 31st March, 2004, the principal amount and dividend payable on

different dates has been shown as under:

Company Appeal (AT) (Insolvency) No. 360 of 2018 12

'Irradiation Project Loan Rs. In Lakhs

Principal outstanding - 846 (As on 31.03.2004)

Cumulative Dividend from 1.4.2004 to 31.03.2011

Conversion of Irradiation Project Loan in to Preference Shares

Rs. In Lakhs

Sl. Due Dates Principal Dividend Total No. Amount Payable Amount Payable Payable

1. 1st April 2011 (7th Anniversary of 615.00 215.37 830.37 Allotment date)

2. 1st April 2012 (8th Anniversary of 615.00 276.92 891.92 Allotment date)

3. 1st April 2013 (9th Anniversary of 615.00 246.16 862.16 Allotment date) Total 1,846.00 738.45 2,584.55

14. As noticed earlier in the 'Supplementary Agreement on Debt' reached

between the 'Corporate Debtor' and the 'Respondent Board' dated 19th

January, 2011, the Clause (I) shows that the borrower had agreed that in-

case of default in repayment of loan etc. as scheduled in 'Supplementary

Agreement to the Debt Restructuring Agreement' will be treated as cancelled

and the borrower will be required to pay the entire amount in terms of the

'Loan Agreement' without any remission.

15. In 'SJK Steel Plant Limited vs. Meegada Sudhakar Reddy & Ors.'

- 'CP No. 100 of 2007' the Hon'ble High Court of Andhra Pradesh by judgment

dated 4th December, 2007, while deciding the objection of the Central

Government in respect of conversion of preference shares with accumulated

dividend thereon into FITL and waiver of preference shares on proportionate

basis on repayment of term loan the Hon'ble High Court held that the same

Company Appeal (AT) (Insolvency) No. 360 of 2018 13

is contrary to Section 80(1)(a) of the Companies Act, 1956. The Hon'ble High

Court of Andhra Pradesh held that Section 80 of the Companies Act, 1956

deals with power of the Company which issued redeemable preference shares.

When preference shares are issued, it is not always necessary that they shall

have to be redeemed. Sub-Section (1) of Section 80 of the Companies Act,

1956 clearly provides that "such preference shares are liable to be redeemed",

at the option of the company.

16. In view of the decision of the Hon'ble High Court of Andhra Pradesh and

reading all the relevant portions of the 'Agreement' particularly the

'Supplementary Agreement' and Section 80(1) of the Companies Act, 1956 (now

Section 55 of the Companies Act, 2013) we hold that the borrower having agreed

that in case of default of repayment of loan etc., the agreement will be treated as

cancelled and the borrower will be required to pay the entire amount in terms of

the loan agreement without any remission. It is not open to the 'Liquidator' to

argue on behalf of the 'Borrower' (Corporate Debtor') that the borrower is not

liable or required to pay the entire amount in terms of the 'Loan Agreement'. We

find no merit in this appeal. It is accordingly dismissed. No cost.

[Justice S.J. Mukhopadhaya] Chairperson

[ Justice Bansi Lal Bhat ] Member (Judicial) New Delhi

30th April, 2019.

//ns//

Company Appeal (AT) (Insolvency) No. 360 of 2018