CORPORATE LAW CORNER

4.  Eight Capital India (M) Ltd.
vs. Wellknit Apparels (P) Ltd. [2020] 115 taxmann.com 279 (NCLT-Chen.) IBA No.
312 of 2019 Date of order: 11^th December, 2019

Section 5(8) r/w/s 7 of Insolvency and
Bankruptcy Code, 2016 – A fully convertible debenture which has not been
converted into equity qualifies as a ‘Financial Debt’ – Application was
admitted when there was default in payment of such debentures

FACTS

E Co (the ‘financial creditor’) was a
private limited company incorporated in Mauritius which gave a loan of US$
37,15,000 (equivalent to Rs. 15 crores) as project finance and was issued fully
convertible debentures by W Co (the ‘corporate debtor’). The latter issued
40 debentures of Rs. 25 lakhs each for an amount of Rs. 10 crores on 20^th
August, 2007 and 20 debentures of Rs. 25 lakhs each totalling Rs. 5 crores on
20^th November, 2007; the total value of the debentures was Rs. 15
crores.

The financial creditor and the
corporate debtor entered into a Debenture Subscription Agreement dated 21^st
May, 2007 and a Master Facility Agreement also dated 21^st May,
2007. As per the terms of the agreement, the subscription to the debenture was
done for a period of 84 months and interest was to be paid at the rate of 12%
p.a. An additional interest of 6% p.a. was payable on default.

The corporate debtor made a repayment
only once during the period, for the quarter ended 30^th September,
2007 for an amount of Rs. 39,86,371. The corporate debtor was in default on all
other payments specified in the agreement till 20^th May, 2014. The
financial creditor alleged that the corporate debtor failed to convert the
debentures as agreed.

Article 8 of the agreement specified
that the financial creditor could initiate action against the corporate debtor
upon occurrence of an event of default which included appointment of receiver,
liquidator or making an application for winding up. The financial creditor had
moved the Madras High Court for recovery of interest and for restraining the
corporate debtor from alienating the assets. An application filed by the
corporate debtor opposing the suit had been dismissed by the Madras High Court
on the ground that the suit was a continuing breach of tort, with every act of
breach giving rise to fresh cause of action.

On 18^th April, 2017 a
Memorandum of Agreement (‘MOA’) was executed between the financial creditor and
the corporate debtor, which is stated to have been confirmed and made binding
by the Madras High Court on 14^th July, 2017. The corporate debtor
did not co-operate with the financial creditor to monetise the assets and to
make the payments to the financial creditor as was agreed in the MOA.

The corporate debtor admitted that the
MOA was entered into for a compromise which provided for resolving the disputes
amicably but not to admit or determine its quantum of liability. It was further
stated that the MOA was executed in a spirit of goodwill and compromise and to
put a quietus to the litigation whereby it agreed to share 50% of the
net assets after deducting / adjusting certain statutory dues, etc. which was
higher than the maximum of 37.5% equity entitlement of the financial creditor.
The corporate debtor stated that the claims were sought to be settled on the
basis of the assets available and not on the basis of any liability admitted or
otherwise.

The corporate debtor further contended
that the MOA constituted a separate contract distinguishable from the Master
Facility Agreement. The MOA superseded the earlier contract and clearly
explained the mode and the time of performance of the respective obligations.
The MOA was conditional upon the sale of the property by the authorised officer
of MEPZ.

The corporate debtor also contended
that the action of entering into an MOA which contemplated the sale of assets
and dividing the surplus in an agreed manner, only reinforced the proposition
that the applicant was a stakeholder in the equity and not a financial creditor
as there was no debt involved. The applicant claimed that he fell in the
definition of a financial creditor as he had all along been a debenture holder
and the debentures were never converted into equity at any point in time.
Besides,  he corporate debtor in its
balance sheet for the year  nding 2016-17
had shown the applicant as a ‘debenture holder’ establishing the fact that it
was a ‘financial debt’ that was due to the ‘financial creditor’.

HELD

The NCLT heard both the parties. It was
observed that the intention of both the parties was manifested in the Master
Facility Agreement and the Debenture Subscription Agreement. The investment was
sought to be made by the financial creditor by way of subscribing to the
debentures in consideration of the money brought in by him into the coffers of
the corporate debtor.

NCLT observed that fully convertible
debentures were a financial instrument within the meaning of section 5(8) of
the Insolvency and Bankruptcy Code, 2016. A convertible debenture which was in
the nature of financial debt (though hybrid in nature), could not be treated as
equity unless conversion was actually done. It could not take on the
characteristics of equity until it was converted.

It was further held that the financial
creditor had taken all precautions to safeguard its interest so long as the
convertible debenture remained a debenture. It was observed that a simple
mortgage was created in favour of the financial creditor which shows that there
was debt which is a financial debt based on the principle that ‘once a
mortgage; always a mortgage’. It postulates that unless and until a mortgage is
discharged it remains a mortgage and as such a financial debt.

The NCLT also
noted that apart from the payment of a sum of Rs. 39,86,371.36 for the quarter
ending September, 2007, interest amount was not paid for the remaining period
by the corporate debtor which constituted a clear default.

The application was thus admitted by
the NCLT and consequential orders including appointment of Interim Resolution
Professional and imposing of moratorium were passed.

5. Deorao Shriram Kalkar vs. Registrar of Companies [2020] 113
taxmann.com 292 (NCLAT) Date of order: 6^th December, 2019

Where company had fixed deposit
receipts (FDRs) with bank and was regularly receiving interest on the same and
TDS was being deducted by the bank on payment of interest and being deposited
with Income tax authorities, it could not be said that company was
non-operational – It would be just that the name of company be restored in the
Register of Companies

FACTS

T Private Ltd. (T Co) is a company
incorporated under the Companies Act, 1956 and having its registered office at
Pune. T Co and its directors were served STK 1, a notice u/s 248(1)(c)
of the Companies Act, 2013 on 11^th March, 2017. In its reply dated
29^th March, 2017, the company intimated the ROC that inadvertently
regulatory filings for the years ending 31^st March, 2015 and 2016
were not filed and it was in the process of completing the same at the
earliest. Thereafter, a public notice was issued on 7^th April, 27^th
April and 11^th July, 2017 and T Co’s name was struck off from the
register of companies.

This order was challenged by T Co
before the NCLT, Mumbai. However, NCLT dismissed the appeal on the ground that
the company did not generate any income / revenue from its operations since the
financial year ending 31^st March, 2014 and till 31^st
March, 2017; the company did not spend any amount towards employee benefit
expenses and the fixed assets of the company were Nil and its tangible assets
were also Nil; therefore the action taken by the ROC was justified and the
Bench did not find any ground to interfere with the action of striking off the
name by the ROC. Being aggrieved, T Co preferred this appeal before the
Appellate Tribunal (AT).

T Co submitted that it had a Fixed
Deposit Receipt (FDR) with the Bank of Maharashtra amounting to Rs. 1,50,00,000
(Rs. 1.50 crores) and a performance bank guarantee was issued in favour of one
of the vendors which was valid up to 11^th November, 2017; the same
was further extended up to 10^th November, 2018. T Co was regularly
receiving interest on the said FDR from the bank and TDS was being deducted by
the Bank on the interest and deposited with the Income tax authorities. T Co
further submitted that the company was regularly filing the Income tax returns.
In addition, T Co submitted that after the expiry of the term of the bank
guarantee, the funds of the company would be released and the Directors of the
company would be in a position to take necessary decisions about its working.

However, counsel for the ROC stated
that due to failure in filing of the statutory returns for a continuous period
of more than two years, the name of T Co was considered for striking off by the
ROC, Pune in a suo motu action under the provisions of section 248 of
the Companies Act, 2013. It was further argued that the STK 1 notice
dated 11^th March, 2017 was issued to T Co with the direction to
submit any representation against the proposed striking off of its name. It was
stated that the fact of non-filing of the statutory returns was admitted by T
Co. But the ROC counsel submitted that on an analysis of the balance sheet and
the Profit & Loss account of the appellant it was observed that the company
had not generated any income / revenue from its operations since the financial
year ending 31^st March, 2014 and till 31^st March, 2017.
Besides, the company did not spend any amount towards employee benefit expenses
for these financial years. At the same time, both the fixed assets and tangible
assets of the company were Nil. The counsel for ROC insisted that the ROC had
rightly taken the decision to strike off the name of T Co.

The matter was considered by the AT
which noted that during the course of arguments T Co had admitted that it had
not filed the statutory returns for more than two years as per the Companies
Act, 2013. On receipt of the STK 1 notice from the ROC, T Co vide
its reply had intimated the ROC that regulatory filings for the years ending 31^st
March, 2015 and 2016 were not filed inadvertently. However, it also
stated that the annual returns and financial statements were ready and could be
filed immediately. The AT also observed that T Co had an FDR with the bank to
the tune of Rs. 1,50,00,000; interest was being received by the company and it
was duly making provision of income tax in its balance sheet. It was further
observed by the AT that T Co had also given a performance guarantee. This was
an attempt to secure business for the company.

The AT further observed that in such
cases the ROC has also to see that the compliance of section 248(6) of the
Companies Act, 2013 is met.

Section 248(6) of the Companies Act,
2013 reads as under:

‘The Registrar, before passing an order
under subsection (5), shall satisfy himself that sufficient provision has been
made for the realisation of all amounts due to the company and for the payment
or discharge of its liabilities and obligations within a reasonable time and,
if necessary, obtain necessary undertakings from the Managing Director,
Director or other persons in charge of the management. Provided that
notwithstanding the undertakings referred to in this sub-section, the assets of
the company shall be made available for the payment or discharge of all its
liabilities and obligations even after the date of the order removing the name
of the company from the Register of Companies.’

However, the ROC counsel in written
submissions stated that the ROC has not received any reply from the company and
its Directors. The AT noted that the appellant has replied vide its
letter dated 29^th March, 2017 and the said letter has the
acknowledgement of the ROC, Pune.

Therefore, the AT observed that it
cannot be said that T Co has not replied. Further there is nothing on record to
show that the compliance of section 248(6) of the Companies Act, 2013 has been
made by the ROC.  his fact has also not
been noted in the NCLT order.   Without
complying with this provision, the ROC vide Form STK 5 dated 7^th
April, 2017 has struck off the names of various companies including T Co. The
AT reiterated that the company is having an FDR with the bank and a performance
guarantee has been given and income tax is being deposited on the interest
received on fixed deposits.

From the above discussions and
observations, the AT came to the conclusion that it would be just that the
name of the company be restored.

HELD

The following order / directions were
passed: