The Insolvency & Bankruptcy Code 2016 (IBC) defines a 'Financial Debt' under §5(8) as being essentially a debt which is disbursed against consideration for time value of money. Sub-clauses under §5(8) of the IBC supplement this definition by providing a list of examples of a financial debt, which includes "moneys borrowed against the payment of interest" and "any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument".

Applying these provisions, the Principal Bench (Delhi) of the National Company Law Tribunal (NCLT), in an application moved by a financial creditor, Ziasess Ventures Limited (Ziasess), in the main petition of SGM Webtech Pvt Ltd v Boulevard Projects Pvt Ltd1, has set aside the resolution professional's (RP) decision to reject the claim submitted on the basis that, inter alia, fully and compulsorily convertible debentures (FCCDs) are not debentures, but rather equity, particularly when the investment has been made by a foreign entity in the real estate sector governed by Foreign Exchange Management Act 1999 and regulations made thereunder.

Brief Facts

In 2010, Ziasess, a foreign entity, had invested ₹24.99 Crores in an Indian real-estate development company (Corporate Debtor) by way of FCCDs. Key features of the FCCDs in question were as follows:

  1. The FCCDs were to be converted into equity shares upon maturity in 2026.
  2. Until their maturity and conversion into equity shares, interest was to be paid to Ziasses at a fixed coupon rate on an annual basis.
  3. The FCCDs were governed by the FDI Policy and various FEMA regulations.

In 2019 the Corporate Debtor was admitted into insolvency, and Ziasess had filed a claim as a 'financial creditor' based on the unconverted FCCDs and accrued interest of ₹15.92 Crores.

The RP of the Corporate Debtor had rejected Ziasses' claim treating it as "equity" under the FEMA and FDI rules. The RP also reasoned that the moneys paid by Ziasses were not repayable in cash and were only repayable by conversion into shares.

Aggrieved by the RP's rejection of the claim, Ziasses had approached the NCLT.

Decision of the NCLT

While allowing Ziasess' application for admission of the entire claim, inclusive of interest, the NCLT held that the FCCDs shall be treated as a financial debt under §5(8) of the IBC, inter alia, since:

  1. The real-estate company (i.e. the corporate debtor) had classified the FCCDs under "Long Term Borrowings" in its Balance Sheets and also had deposited TDS on the interest accrued, but not paid out, on such FCCDs;
  2. Reliance on the FEMA rules and regulations by the RP is misplaced, and, in any event, the IBC has an overriding effect on other laws;
  3. The IBC unequivocally treats "debentures" as a financial debt, and there are no exclusions or limitations assigned to it;
  4. Until conversion of the FCCDs into equity shares, the instrument remains a debenture (debt). Therefore, if a company is admitted into insolvency prior to such conversion, the position of the instrument as on date of admission of the IBC proceedings will have to be taken into consideration;
  5. If the Corporate Debtor was a running entity, then it could have possibly taken the argument that the FCCDs could not have been encashed.

Concluding Remarks

Although, the issue of the manner in which optionally or partially convertible debentures ought to be treated has been considered in the past, the treatment of unconverted FCCDs/CCDs, made by a foreign investor under the FDI route, has been assessed by the NCLT in this decision.

Additionally, commercial aspects and other practical implications, such as the cut-off date for determining the nature of the instrument as being the date on which CIRP has been initiated, have also been kept in mind by the NCLT while delivering its decision.

In effect, the decision upholds the primacy and overriding effect of the IBC in case of any alleged conflict with deeming provisions in any other special statutes designed to serve a specific purpose novel to that statute or any rules and regulations framed thereunder. 

Ziasses was represented by Tuli & Co before the NCLT.


1. Order dated 31 January 2020 [CA No 1340 (PB)/2019 in (IB)-967 (PB)/2018].

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