Supreme Court Upholds NCLAT Judgment, Treats CCDs in Highway Project as Equity

Supreme Court Upholds NCLAT Judgment, Treats CCDs in Highway Project as Equity

In a recent ruling, the Supreme Court has dismissed M/s. IFCI Limited's appeal, reaffirming the National Company Law Appellate Tribunal's (NCLAT) decision that Compulsorily Convertible Debentures (CCDs) issued for a highway project should be classified as equity rather than debt.

The controversy centred on a highway project where the appellant, IFCI Limited, had invested via CCDs. The National Highways Authority of India (NHAI) awarded the project to IVRCL Chengapalli Tollways Ltd (ICTL) through a Concession Agreement. ICTL, a subsidiary of IVRCL, obtained a term loan facility from a consortium of lenders, while the remaining project costs were to be financed by IVRCL through equity infusion, including CCD issuances. The conversion of CCDs into equity was slated for December 2017, but the formal issuance of shares did not materialize after that date. The appellant had consented to subscribe to the CCDs, which came with a 'put option', enabling the sale of CCDs to a third party if ICTL defaulted, with IVRCL retaining the principal obligation.

Despite a proposed and agreed-upon one-time settlement, the project faced financial hurdles, and the terms were not fulfilled. The appellant invoked IVRCL's corporate guarantees, prompting the initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) by both the appellant and the State Bank of India. The Resolution Professional rejected the appellant's claim, which asserted the amount owed as debt, on the grounds that the CCDs were to be treated as equity, not debt. The National Company Law Tribunal (NCLT) and subsequently the NCLAT upheld the rejection. The NCLAT's judgment was based on the understanding that Compulsorily Convertible Debentures, by their nature, do not involve principal repayment and are considered equity rather than debt, especially if they are compulsorily convertible into shares.

The appellant's counsel presented the central argument that the appellant had been placed in an untenable position. If the investment were classified as equity, adhering to the waterfall principle, the appellant would not receive any proceeds. As a result, while other creditors were compensated, the appellant remained unrecompensed. The counsel contended that the appellant was not treated as either a shareholder or a financial creditor in practice, leaving the appellant without recourse under the law.

A three-judge bench comprising Justices Sanjay Kishan Kaul, Sudhanshu Dhulia, and Ahsanuddin Amanullah ruled that the appellant had been granted security under the Debentures Subscription Agreement, but the obligations were ultimately the responsibility of the sponsoring firm. As a result, the Court found it difficult to comprehend how the obligation fell upon the Special Purpose Vehicle (SPV), ICTL.

The Bench highlighted that the intricacies embedded in commercial agreements are dependent on the distinct nature of the businesses involved. The agreements under consideration were not deemed ordinary layman's agreements, as they were carefully reviewed by experts, and each party was presumed to have a thorough grasp of their respective obligations and the potential advantages arising from the agreements.

The Bench further emphasised, citing the precedent set in Nabha Private Limited Vs. Punjab State Power Corporation Limited [LQ/SC/2017/1463], the principle that contracts should be interpreted in accordance with their written terms and no implied terms should be added unless absolutely unavoidable. The Bench clarified that Courts should not supplement or expand contracts beyond their explicit provisions.

The Bench noted that the central question arising from the impugned judgment was whether CCDs could be classified as debt rather than equity. Treating CCDs as debt would violate the concession agreement and the common loan agreement, as the investment was clearly in the form of compulsorily convertible debentures. The Bench observed that there was no provision indicating that these CCDs would transform into financial debt upon the occurrence of a specific event.

The Bench also recognised a crucial aspect mentioned in the challenged order. It was underscored that the terms of the agreements stipulated that the corporate debtor was not authorised to take on additional debt without the consent of the assignees. The Bench observed that no such authorisation had been sought or obtained, and the amount in question was categorized as equity, not debt.

The Bench noted that the NCLAT had considered the remedy available to the appellant and concluded that the appellant had failed to avail of the remedy within the prescribed time frame. The NCLAT asserted the time-bound nature of the proceedings under the Code, highlighting that the appellant's claim had been rejected on August 9, 2022, and the appellant had not raised the issue again until November 30, 2022, a delay of three months.

The Court acknowledged that its authority stemmed from Section 62 of the Code. This section grants any person aggrieved by an order of the NCLAT the right to appeal to the Supreme Court, but only on questions of law arising from such order under the Code. The Court stated that this jurisdiction was narrow, akin to a second appeal, and subject to a strict filing deadline of 45 days from the date of receiving the order.

“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,” the Bench held.

Upon evaluating the appeal, the Court decided that there were no substantial legal issues raised and that the lower court's findings were in line with established legal principles. Consequently, the appeal was dismissed.