TMI Blog2020 (9) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... the Financial Creditor bearing No. 234327 for an amount of ₹ 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th April, 2016 but was returned as dishonored . This is an application alleging default in performing the part of obligation on the side of the CD as per the terms of subscription agreement and according to the applicant the CD has defaulted the terms as on March 31,2013 and has been continuously defaulting since the said date. What is defaulted is not repayment of debt, but not redeeming the preferential shares at the option exercised on the side of the applicant. Admittedly, the applicant is a holder of preference shares in the CD Company. The applicant's claim in no way falls under any of the Clauses of Sub Section (8) of Section 5 of the Code and therefore, what is claimed is not a financial debt under section 5(8) of the Code. It is also true that as per the existing provisions of the Company law and the judgments on the issue, a holder of Redeemable Preference shares cannot sue the Company for redeem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions mentioned in the Sanction Letter, followed by a subscription agreement dated 28th February, 2013 whereby the Financial Creditor subscribed to 6,25,000 Cumulative Non-Convertible Redeemable Preference Shares (RPS) of the face value of ₹ 100/- each which were issued at a premium of ₹ 540/- for an aggregate consideration amount of ₹ 40,00,00,000/- (Rupees Forty Crore Only). 3. It is further submitted that under the aforesaid subscription agreement, the Financial Creditor was to be paid dividend on a cumulative basis, calculated at a fixed rate of 11.50% p.a. payable quarterly on the face value of each of the preference shares with effect from the closing date i.e. 6th March, 2013. It is further submitted that the tenure of the RPS was 7 years to be redeemed in 8 equal quarterly installments in the 6th 7th year. At the end of the 7th year and final redemption, the Corporate Debtor was to pay the redemption premium so that the internal rate of return (IRR) on the investment would be 16%, along with the obligation of the Corporate Debtor under the Subscription Agreement by providing a non-disposal undertaking over 63,29,698 shares held by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of RPS in full and called upon the Corporate Debtor to honor the same latest by 30th November, 2015. The Corporate Debtor issued a cheque to the Financial Creditor bearing No. 234327 for an amount of ₹ 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th April, 2016 but was returned as dishonored . In the meanwhile the Financial Creditor came to know that the Corporate Debtor had considered and approved a scheme of amalgamation between EMC Limited, the Corporate Debtor, MSEL and Kilburn Engineering Limited in terms of Section 391 to 394 of the Companies Act, 1956 and therefore committed another event of default by not seeking prior approval of the Financial Creditor before considering and approving the Scheme of amalgamation. 8. The Financial Creditor thus issued a notice dated 9th June, 2016 for redemption of the RPS in full and called upon the Corporate Debtor to honor the Subscription Agreement and redeem the entire RPS by paying a total amount of ₹ 54,86,56,777/- (Rupees Fifty Four Crore Eighty Six Lakh Fifty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alance outstanding redemption amount of ₹ 31,96,99,577/- (Rupees Thirty One Crore Nine Six Lakh Ninety Nine Thousand Five Hundred Seventy Seven Only) as on 2nd August, 2018. In view of the continuing default, the Financial Creditor vide letter dated August 14, 2018 called upon the Corporate Debtor to create a first ranking pledge over the specified shares of MSEL within 7 days to ensure a security cover of an amount of ₹ 66,82,00,000/- (Rupees Sixty Six Crore Eighty Two Lakh Only). 11. The Financial Creditor, vide letter dated 24th September, 2018 informed the Corporate Debtor of its classification of the investment in RPS of the Corporate Debtor as a Non-Performing Asset and requested the Corporate Debtor to make payment of the outstanding Redemption amount of ₹ 32,59,65,472/- (Rupees Thirty Two Crore Fifty Nine Lakh Sixty Five Thousand Four Hundred Seventy Two Only). It is stated that a total sum of ₹ 29,21,73,696.48 (Rupees Twenty Nine Crore Twenty One Lakh Seventy Three Thousand Six Hundred Ninety Six and Paise Forty Eight Only) is due and payable by the Corporate Debtor to the Financial Creditor as on February 12,2019. The Corporate Debtor has defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The preference shareholder and its dividend are paid out of the profits of the company and not its Capital and in case it is paid out of the capital, it would amount to a fraudulent act. 15. It is submitted that the preference shareholder cannot in any way become the Creditor of the Company as the Preference shares form a part of the capital and it is not a debt and cannot be treated as such. It is submitted in the reply that the purported Financial Creditor is not entitled to any relief. 16. In the rejoinder, the Financial Creditor has refuted the defence sought to be raised by the Corporate Debtor and submitted that the Corporate Debtor had admittedly raised finance to the extent of ₹ 40 crores from the Financial Creditor by issuing cumulative non-convertible redeemable preference shares with an obligation of repayment. The Financial Creditor had disbursed the said amount against consideration of time value and money. It is submitted that there was a clear default committed by the Corporate Debtor under the transaction documents which are reflected by the Corporate Debtor in its Annual Report and that there is no dispute on the liability of the Corporate Debtor to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of argument, Ld. Counsel for the Financial Creditor submitted that the Corporate Debtor has no dispute at all on the question of disbursal of the amount but the only grounds on which the Corporate Debtor is challenging the application are (1) that the applicant is not a Financial Creditor, therefore, this is not maintainable, (2) the document is in sufficiently stamped and (3) that the Financial Creditor has already enforced the Arbitration Agreement. It is submitted by the Financial Creditor that the Financial Creditor is a non banking finance Company and it fulfilled all the ingredients of Section 5(8) of the Insolvency Bankruptcy Code. He submitted that in a letter dated November 13, 2012 written by the Financial Creditor to the Corporate Debtor containing the terms and conditions against PURPOSE, it is written to shore up the net worth of the Company and improve the debt equity ratio as required by existing Bankers . Against the redemption , it was agreed that to be redeemed in 8 equal quarterly installments in 6th 7th year at the end of the 7th year and final redemption the issuer shall pay the redemption premium so that the IRR on the investment shall be 16% (inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable Law) in reference to its investment or contribution to the share capital of the Issuer, which, in the sole opinion of the Subscriber, warrants it to discontinue its investment or cease to remain invested in the Issuer. 8.3.2: Upon the occurrence of an Early Redemption Event or Accelerated Redemption Event or Event of Default (at any time after the Closing Date), the Subscriber shall be entitled to require the Issuer to redeem the Preference shares and the Issuer shall redeem the Preference Shares for the Redemption Amount subject to the Applicable Law. Provided that, in the event of the Issuer raising funds through a rights issue/any equity issue during the term of the Preference Shares, the Issuer may redeem all (and not less than all) the outstanding Preference Shares for the Redemption Amount. 22. The Ld. Counsel for the Financial Creditor further submitted that the cheque issued by the Corporate Debtor was dishonored when presented for payment. It is submitted by the Financial Creditor that the application for the purpose of initiation of the Corporate Insolvency Resolution Process of the Corporate Debtor might be admitted. 23. The Ld. Counsel for the Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Shailesh Sangani vs. Joel Cardoso Anr. Reported in Company Appeal (AT)(Insolvency) No. 616 of 2018, the Hon'ble Tribunal held that:- 6. A plain look at the definition of financial debt' brings it to force that the debt along with interest, if any, should have been disbursed against the consideration for the time value of money. Use of expression 'if any'/as suffix to 'interest' leaves no room for doubt that the component of interest is not a sine qua non for bringing the debt within the fold of 'financial debt'. The amount disbursed as debt against the consideration for time value of money may or may not be interest bearing. What is material is that the disbursement of debt should be against consideration for the time value of money. Clauses (a) to (i) of Section 5(8) embody the nature of transactions which are included in the definition of financial debt'. It includes money borrowed against the payment of interest. Clause (f) of Section 5(8) specifically deals with amount raised under any other transaction having the commercial effect of a borrowing which also includes a forward sale or purchase agreement. It is manifestly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reating the amount at par with loan' in their return. Thereby, the amount invested by appellants come within the meaning of 'Financial Debt', as defined in Section 5(8)(f) of I B Code, 2016, subject to satisfaction as to whether such disbursement against the consideration is for time value of money. 27. In case of Mack Soft Tech Pvt. Ltd. vs. Quinn Logistics India Limited reported in Company Appeal (AT) (Insolvency) No. 1543 of 2017, the Hon'ble NCLAT looked into the books of accounts of the Corporate Debtor and concluded that the amount advanced by the Financial Creditor is reflected as a liability and hence a financial debt under Section 5(8). 28. In case of Rajesh Gupta vs. Mr. Dinesh Chand Jain Others reported in Company Appeal (AT) (Insolvency) No. 317 of 2018, the National Company Law Appellate Tribunal, New Delhi held that:- The manner and circumstances in which the amount of loan was borrowed by the Corporate Debtor from Respondents No. 1 and 2 from time to time with stipulation of interest, leaving an outstanding liability of ₹ 18,67,11,000/- coupled with the fact that the Corporate Debtor jointly undertook to refund such unsecured loan t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are deemed; (e) Provided also that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. (ii) In a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to clause 6.2.35 and submitted that it shall ensure that the redemption premium shall be provided out of its profits and sufficient amounts are maintained in its securities premium account or profit and loss account or general reserve account in accordance with applicable law. It is submitted by the Ld. Counsel for the Corporate Debtor that the Financial Creditor has already sold part of its holdings. 32. The Ld. Counsel for the Corporate Debtor referred to and relied upon judgments passed by the High Court of Calcutta in the case of Hindustan Gas and Industries Limited vs. Commissioner of Income Tax reported in Income Tax Reference No. 487 of 1972 for asstt. Year 1964-1965. The relevant extract of the judgment is reproduced as under:- Mr. Sengupta also submitted that the holder of a redeemable preference share did not stand on the same footing as a creditor and could not sue the company for redemption of the shares as an ordinary creditor. In support of his contentions Mr. Sengupta cited the following passages from the Company Law by Robert R. Pennington, 2nd edn. At pages 127-128 and at page 164: A shareholder is not a creditor of the company for his share capital, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court of Bombay in the case of Aditya Prakash Entertainment Pvt. Ltd. vs. Magikwand Media Pvt. Ltd. reported in Company petition No. 404 of 2016. The relevant extract of the judgment is reproduced as under:- In this case, there is no dispute to the fact that petitioner was a shareholder holding preferential redeemable preference shares. The only question that requires to be considered is whether petitioner would be a creditor of the company, Sub-section 1 of Section 80 says, subject to the provisions of this section, a company limited by shares may, if so authorized by its articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. Proviso, however, states that no such shares shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my view, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a 'creditor'. The reason is that his sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to and relied upon judgments passed by Andhra High Court in the case of Lalchand Surana And Ors. vs. Hyderabad Vanaspathy Limited. . The relevant extract of the judgment is reproduced as under:- It is not necessary for the present purpose to notice the Explanation to sub-section (1). In this case, the memorandum or articles of association do not expressly say that these preference shares will carry a preferential right to be paid a fixed amount towards dividends. Nor do they say that, on winding up of the company, these shares shall be entitled to a preferential right to be repaid the amount of paid up capital. Indeed, they purport to be redeemable preference shares which means that, after the specified period of 15 years, the amount due thereunder, along with, the accumulated dividend, becomes payable. In this sense, they do not strictly fall within the meaning of preference shares as defined in section 85(1). But, in view of the pleadings before me, if is not permissible for me to go into the question, whether they are preference shares at all, or whether, in truth and reality, their character is different, though called preference shares . Both the parties have proceede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Creditor bearing No. 234327 for an amount of ₹ 2,00,00,000/- (Rupees Two Crore Only) and requested the Financial Creditor not to deposit the cheque for a few days, to which the Financial Creditor agreed but eventually the said cheque was deposited on 13th April, 2016 but was returned as dishonored . This is an application alleging default in performing the part of obligation on the side of the CD as per the terms of subscription agreement and according to the applicant the CD has defaulted the terms as on March 31,2013 and has been continuously defaulting since the said date. What is defaulted is not repayment of debt, but not redeeming the preferential shares at the option exercised on the side of the applicant. Admittedly, the applicant is a holder of preference shares in the CD Company. The applicant's claim in no way falls under any of the Clauses of Sub Section (8) of Section 5 of the Code and therefore, what is claimed is not a financial debt under section 5(8) of the Code. A reading of section 5(8) (c) makes it clear that redemption of preferential shares is excluded from its purview. The submission on the side of the applicant that in the financial statement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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