No corporate insolvency proceedings once debt is converted to equity: NCLAT


The National Company Law Appellate Tribunal (NCLAT) said Wednesday that insolvency proceedings cannot be initiated on the basis of debt that has been converted into equity, such as a company’s equity.

The Appeals Tribunal also stated that not every 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 “debt” and “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.

She had claimed that she was a financial creditor of the company based on the investment in the company, which had alleged that she had failed to repay her repayment and had converted loans into equity.

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 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 received neither principal nor 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, that she had 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 applied to the NCLT under Section 7 to seek the commencement of insolvency proceedings against Invest Care Real Estate LLP. The plea was rejected by the NCLT.

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