An appeal was filed under section 62(1) of the Insolvency and Bankruptcy Code, 2016 (IBC)IBC, challenging the decision of the National Company Law Appellate Tribunal’s (NCLAT) which held that Compulsorily Convertible Debentures (CCDs) issued under “put option” are to be treated as equity for the purposes of the treatment under the IBC. Although the hon’ble Supreme Court of India (Supreme Court) has upheld this judgment of the NCLAT, the same was restricted only to the given set of facts. Thus, the law in relation to the same still remains unanswered.


In the judgment by the NCLAT, it was held that any instrument having the characteristics of compulsory conversion into shares, took the colour of equity and could not be treated as Financial Debt. However, the NCLAT further clarified that at the time of disbursal of the amount, whether the amount is to be treated as equity alone and not as ‘debt’, would depend on the facts of each case. As per the given set of facts, since the CCDs stood matured at the time of initiation of the Corporate Insolvency Resolution Process, the same were treated as equity.


The Supreme Court, while quoting the limited jurisdiction conferred under section 62 of the IBC, refrained itself from dwelling into the facts, dismissed the appeal and observed that in the definition of “Debt” as defined under section 3(11) of the IBC it is a liability or obligation in respect of a claim which is due from any person. Hence, if the said debentures were normal debentures, without the “put option”, the same would have been accounted for as “debt” and be treated as “Financial Debt”.


A perusal of NCLAT’s judgment suggests that an important factor while categorization of CCDs is ‘the time of maturity of the instrument’ and the judgment of the NCLAT was based on the given set of facts wherein the question of categorization arose after the CCDs stood matured. However, it appears that the Supreme Court has adopted a mechanical approach in holding that CCDs did not fall within the ambit of ‘Financial Debt’.


What remains unanswered is what would be the nature of the CCDs that do not mature at the time of initiation of CIRP. If the CIRP is commenced prior to the conversion event of the CCDs, then it is likely that the CCDs may be construed as ‘Financial Debt’ under the IBC, as the same had the effect of commercial borrowing at the given point.