Corporate insolvency cannot proceed once debt is converted to equity: NCLAT


The National Company Law Appellate Tribunal (NCLAT) said insolvency proceedings cannot be initiated based on debt that has been converted into capital, such as a company’s equity. The appeals tribunal also said that no investment can be a “financial debt” and that the provisions of Article 7 of the Insolvency and Bankruptcy Code provide for the initiation of CIRP by a financial creditor only. and that too, if there is a “debt” and a “default”. CIRP is the corporate insolvency resolution process.

Submissions from a two-member NCLAT bench came as it upheld an order from the National Company Law Tribunal (NCLT), which on November 26, 2019, dismissed a plea from individual Rita Kapur seeking the opening of insolvency proceedings against Invest Care Real. Estate LLP.

Kapur had claimed that she was a financial creditor of the company based on the investment in the company, which allegedly defaulted and converted the loans into shares. Citing section 7 of the Code, the appeals tribunal stated that it is patently and latently clear that once “debt” is converted into “capital”, it cannot be characterized as “financial debt” and that the appellant cannot be qualified as a “financial creditor”. ‘.

Accordingly, the appeal is without merit and is hereby dismissed, the NCLAT said in the order. However, the appeals tribunal also granted the appellant the freedom to go to an appropriate forum to seek remedies for the redress of grievances.

Kapur had given a loan of Rs 40 lakh to Invest Care Real Estate LLP which was to be repaid in four instalments.
According to her, she was not paid either in principal or interest and her grievance is that the loan was converted to principal on March 25, 2014. This was contrary to the terms and conditions of the loan agreement dated July 9, 2013 , she submitted.

In Care Real Estate LLP, her 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 Kapur before NCLAT. She challenged the process in which her loan was converted into equity, alleging it was a pre-planned act to deceive and defraud and alleged the illegality of the process. However, Invest Care Real Estate LLP argued that it is not a financial creditor but rather a related party and therefore cannot be treated as a financial creditor under the IBC in any way.


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