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: