NCLAT Dissolves Initiation Of Corporate Insolvency Proceedings When Debt Is Converted Into Capital

New Delhi, Sep 3: The National Company Law Appellate Tribunal (NCLAT) has said insolvency proceedings cannot be triggered on the basis of debt that has been converted into capita,l such as equity of a company.

The appellate tribunal also said any investment cannot be 'financial debt' and the provisions of Section 7 of the Insolvency & Bankruptcy Code provides for initiation of CIRP by a financial creditor only and that too, if there is 'debt' and 'default'.

Corporate Insolvency Resolution Process (CIRP) is creditors’ recovery mechanism in case a corporate is unable to pay debts.

The observations from a two-member NCLAT bench came as it upheld an order of the NCLT that dismissed the plea on November 26, 2019, dismissed the plea seeking initiation of insolvency proceedings against Invest Care Real Estate LLP.

The petitioner claims to be a financial creditor of the company on basis of the investment in the firm, which had allegedly defaulted her repayment and converted loans into equity.

Citing Section 7 of the Code, the appellate tribunal said that it is latently and patently clear that once the 'debt' is converted into 'capital', it cannot be termed as 'financial debt' and the appellant cannot be described as 'financial creditor'.

Accordingly, the appeal is devoid of merits and the same is hereby dismissed, the NCLAT said in the order.

However, the appellate tribunal also granted the appellant liberty to approach an appropriate forum for seeking reliefs for redressal of grievances.

The petitioner had granted a loan of Rs 40 lakh to Invest Care Real Estate LLP, which was to be repaid in four installments. 

The petitioner claimed to have not received either the principal amount or the interest, and its grievance is that the loan was converted into equity on March 25, 2014. This was against the terms and conditions of the loan agreement dated July 9, 2013, she had submitted.

In Care Real Estate LLP, the petitioner’s late husband had also invested Rs 1 crore and was not repaid.

She claimed to be a 'financial creditor' and moved the NCLT under Section 7, seeking to initiate insolvency proceedings against Invest Care Real Estate LLP.

The plea was rejected by the NCLT. 

This was challenged by the petitioner before NCLAT. She disputed the process in which her loan was converted into equity, calling it to be a pre-planned act to deceive and defraud and has alleged illegality in the process.

However, Invest Care Real Estate LLP submitted that she is not a financial creditor rather a related party and hence in no way she can be treated as a ‘Financial Creditor’ under the IBC.