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Arbitration & Commercial LawSupreme Court of India

M/S IFCI Limited vs. Sutanu Sinha & Ors.

Civil Appeal · 2023 INSC 1023Decided 9 Nov 2023
Civil Appeal No. 4929 of 2023
Sanjay Kishan Kaul · Sudhanshu Dhulia · Ahsanuddin Amanullah

Background

IFCI Limited had invested Rs. 125 crore in a highway project (via IVRCL Chengapalli Tollways Ltd, a subsidiary of IVRCL) by subscribing to Compulsorily Convertible Debentures (CCDs) under a 2011 agreement. When the project ran into financial trouble and insolvency proceedings began against the company, IFCI claimed its investment should be treated as a "debt" so it could recover money as a financial creditor. The Resolution Professional rejected this claim, holding that the CCDs had always been treated as equity, not debt, under the project's financing documents.

Decision Breakdown

The Supreme Court held that CCDs, being compulsorily convertible into equity shares (as they were meant to convert in December 2017), are equity instruments and not debt, since they do not require repayment of principal in the ordinary course. The Court examined the debenture agreement, the loan agreement, and the concession agreement with the National Highways Authority of India, all of which classified the CCDs as part of the equity component of project financing. It held that commercial contracts drafted by experts must be read as they are written, without adding implied terms, and since the obligations were of the sponsor company (IVRCL) and not the entity IFCI sought to claim against, IFCI could not be treated as a financial creditor of that entity. The appeal was dismissed, leaving IFCI without recourse to recover its investment as a debt claim in the insolvency process.

Lesson Learnt

Investors and businesses should carefully read the fine print of investment instruments before subscribing: "hybrid" instruments like Compulsorily Convertible Debentures may look like a loan but can be legally treated as equity, drastically changing rights of recovery in the event of the company's insolvency.

M/S IFCI Limited vs. Sutanu Sinha & Ors. – Legal Case Shots | LegalAware