Scrutinising CCDs through the lens of IBC: Has the Supreme Court ended the debate?

Scrutinising CCDs through the lens of IBC: Has the Supreme Court ended the debate?

Recently, in a landmark judgment, the Supreme Court of India (the “SC”), via its order dated: November 09, 2023 in the case of IFCI Limited vs Sutanu Sinha and Ors, while upholding the order of National Company Law Appellate Tribunal (“NCLAT”) held that Compulsorily Convertible Debentures (“CCDs”) should be treated as equity under Insolvency and Bankruptcy Code, 2016 (the “IBC”).


The case relates to a highway project concerning which a Concession Agreement (“Concession Agreement”) was entered into by the National Highway Authority of India (“NHAI”) and IVRCL Chengapalli Tollways Ltd (the “ICTL”) on March 25, 2010. ICTL was incorporated as a subsidiary of IVRCL Ltd (“IVRCL”) for the project.

For financing of the project, a consortium of lenders provided term loan to ICTL and executed various documents including the company loan agreement dated November 24, 2010 (“Loan Agreement”) and the remaining funds were to be provided through equity infusion. A part of this equity infusion, was obtained through CCDs which was invested by IFCI Limited, the appellant (the “Appellant”).

The Appellant subscribed to CCDs , amounting to INR. 125,00,00,000/-, and executed a Debenture Subscription Agreement (“DSA”) dated October 14, 2011. Interestingly, the fine print of the DSA required IVRCL to provide corporate guarantee and make the coupon payments instead of ICTL. The DSA also provided a ‘put option’ (which was not exercised) obligating ICTL, at IFCI’s discretion, to buy back CCDs at any time between the end of 3rd year and 6th year from the date of issue of CCDs.

Subsequently, the project faced financial difficulties and a one-time settlement was offered and agreed, which was later revoked. Subsequently, the corporate guarantee given by IVRCL was invoked by IFCI. Accordingly, IFCI and State Bank of India initiated the Corporate Insolvency Resolution Process (“CIRP”) against ICTL under IBC.

Rejection of IFCI’s claim by the Resolution Professional

The Resolution Professional ("RP”) on August 9, 2022 rejected IFCI’s entire claim on the following grounds:

  • According to the Schedule III of the DSA, CCDs were to be considered as equity. Additionally, the same was reiterated under the Agreement;
  • The Agreement stipulated a debt equity ratio which was to be maintained by the ICTL and amendment to which would require NHAI’s approval. Considering, no approval was sought from NHAI to recategorize CCDs as debt, the CCDs remain as equity component. Additionally, DSA stipulated that any act in contravention of the Agreement is void;
  • Obligation of repayment was imposed on IVRCL and not ICT. Further, notes to the balance sheet of ICTL also record the repayment obligations of IVRCL; and 
  • CCDs were already converted into equity in December 2017, and only corporate actions for the same were pending.

IFCI’s Appeal to NCLT and NCLAT

IFCI appeal before National Company Law Tribunal (“NCLT”) to challenge the decision of the RP, failed. The order of the NCLT dated March 14, 2023 relied on the judgment of Narendra Kumar Maheshwari v. Union of India (“Narendra Kumar Judgment”) which stated that “CCDs do not postulate any repayment of the principal amount. Any instrument which is compulsorily convertible into shares is regarded as an “equity” and not a loan or debt.”

The NCLT also relied on the para 4 and sub para 4.6 of RBI Master Direction on Foreign Investment in India (Updated up to March 17, 2022), to conclude that CCDs, unlike optionally convertible debentures, were 2equity and not debt.

NCLT’s order was upheld by NCLAT on June 5, 2023. NCLAT while reiterating the Narendra Kumar Judgment also observed that NCLT correctly relied on para 4 and sub para 4.6 of RBI Master Direction on For3eign Investment in India in concluding that Debentures which are fully, compulsorily and mandatorily convertible are to be treated as ‘Equity Instrument’. The NCLAT further noted that the DSA along with other agreements does not provide any provision which changes the nature of the CCDs in the ‘happening of any event’ and the only exit option for IFCI is buy-back of CCDs by the IVRCL or conversion of CCDs into equity.

IFCI’s arguments before the SC

IFCI argued that:

  • Even after the maturity of CCDs, the conversion of CCDs into equity became impossible due to the insolvency of the ICTL, and thus, IFCI is left remediless as in effect IFCI will neither be treated as a shareholder nor as a creditor.
  • Whether CCDs should be categorized as debt or equity should depend on the status of the
  • maturity of the CCDs and the position of the investor at the inaugural time. Considering the
  • CCDs was not actually converted into equity, it should be treated as debt. Narendra Kumar Judgment can be distinguished on the ground that it was rendered in the context of a public interest litigation, while the present case revolves around the genuine intention to categorize CCDs as debt.

RP’s arguments before the SC

The Respondent argued that:

  • The definition of ‘equity’ under the DSA, includes convertible instruments i.e., CCDs, which shall compulsorily convert into equity share capital of the company.
  • The financing plan itself envisaged CCDs as part of the equity portion of the funding. As 70% of the funding was under the category of debt, 30% was equity and it is this equity portion which was partly funded by IFCI. Any amendment to the said ratio would require prior approval of the lenders which was never sought. 
  • ICTL does not have a liability or obligation towards IFCI because IFCI is actually an equity participant and accordingly, ICTL does not have a debt to be repaid. In view of the same, RP placed reliance on Section 3 (11) of the IBC that debt is the liability or obligation in respect of a claim which is due from any person. 
  • If it would have been a simpliciter debenture, it would have fallen under the category of a financial debt. However, the instant case concerns CCDs which according to the DSA were eligible for coupon payments, buy back and security all of which concerned with IVRCL and not ICTL.


The Hon’ble Supreme Court while dismissing the appeal, observed that the security under the DSA was provided by the IVRCL and not ICTL. Further, the DSA nowhere provided that the CCDs would partake the character of financial debt on happening of an event, thus no obligation arrived for ICTL to repay the CCDs amount. The SC also noted the same, in light of Section 3(11) of the IBC which defines debt as liability or obligation in respect of a claim which is due from any person. Therefore, since ICTL was not obligated to repay any amount, IFCI cannot seek any recovery on the basis of being a creditor of the ICTL.

The SC further observed that commercial agreements are always vetted by experts and thus

reading into it or adding to what is said in the document about a CCDs would be futile. Supporting its statement, the SC referred to the case of Nabha Private Limited v. Punjab State Power Corporation Limited (“Nabha Judgment”). Placing reliance on this judgment, the SC stated that a contract means as it reads. It is not advisable for a court to supplement it or add to it.

While upholding NCLAT’s order, SC noted that the issue as to whether CCDs could be treated as a debt instead of an equity instrument was correctly crystallized by the NCLAT, as treating them as a debt would tantamount to breach of the Loan Agreement and the Concession Agreement (which has an overriding effect). The investment was clearly in the nature of debentures which were compulsorily convertible into equity, with no specification indicating that these CCDs would assume the nature of financial debt following the occurrence of a specific event. If the Appellant wanted the CCDs to be considered as a debt, it should have taken prior approval of the lenders, which was never sought, therefore, these CCDs should only be considered as equity and not debt.


The definition of ‘financial debt’ under the IBC includes any amount raised pursuant to issue of debentures. This lies into the heart of the controversy that whether debenture also include CCDs which are essentially a hybrid instrument compulsorily convertible into equity upon happening of an event. Over the years, there have been various judgements by NCLTs and NCLATs regarding the said issue, however, determination by the SC was much needed.

This is a welcome judgement which crystallises the findings of the NCLT and NCLAT. However, considerin7g the facts of the case where the CCDs were already matured and the guarantee was provided by the IVCL and not ICTL, the judgement may not be applicable in other scenario. Nevertheless, the judgement along with findings of NCLTs and NCLATs and various other cases, provides takeaways (few are set out below) which may be incorporated while drafting a debenture subscription agreement to make a best case for treating CCDs as debt in event of insolvency or other events of default:

  • The DSA may provide for clear provisions that upon happening of an event (including an event of default), the CCDs along with the interest would partake the character of financial debt and the same should be payable back on demand;
  • The DSA should record that CCDs should ideally be recorded as a financial debt within the records of the issuing company including books of accounts / financial statement until conversion happens;
  • The primary guarantee and liability of the CCDs along with the coupon payment should be provided by the company issuing the CCDs and not a third party. This is in light of Section 3(11) of the IBC which defines debt as liability or obligation in respect of a claim which is due from any person; and
  • The right of conversion of CCDs should be at the option of the CCD holder and not be linked to winding up, dissolution or liquidation of the issuer company, or any other analogous event, which could be construed to include the initiation of CIRP.

The above suggestions are curated basis the reasoning and finding of various courts over the years. However, the same may raise some challenges in transactions falling within the ambit of Foreign Exchange Management Act, 1999. As per Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 debentures which are fully, compulsorily and mandatorily convertible are treated as equity instruments and vice versa as a debt instrument. Thus, if the terms of the CCDs include an option to repay the principal and interest at the discretion of the subscriber (even though on select instances such as on commencement of CIRP), this may be viewed as a debt instrument triggering the applicability of ECB.


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