In the instant case, the Applicant filed a petition under section 7 against the allegedly Corporate debtor for a debt by way of equity investment in the shares of Corporate Debtor for a total amount of rs. 43054200/- as principal and Rs. 99695800/- as Internal rate of Return calculated at 26% of the principal.As per the petitioner, there is a default under section 7 of the IBC, 2016 as its put option was not entertained, when the said demand notice was sent to the Respondent CD demanding exit by way of “put option”.

Question: The Bench has to see whether the claim of applicant as a shareholder of the allegedly CD in exercise of its put option tantamount to “Finaicial Debt”?

The Bench noted the definition of Financial Debt as given under the Code as laid down its observation that a shareholder is different from a lender in terms of the right entitlement and the risk it undertakes by investing in the shares.The shareholder derives its return by way of profits in the form of dividend and capital appreciation in the value of the shares held by it in the company in the name of Capital Gains. However, the lender gives loan to derive profits in the form of “Interest”. The bench noted that as per Shareholder Agreement, The applicant inveted in the CD by purchasing its shares,this cannot be termed as an investment by way of loan. The money paid for the acquisition of shares in the company cannot be contstrued as a consideration for the time value of money.The Bench also noted that as per shareholder agreement, the petioner enjoyed several rights with regard to appointment of Director in the Board of the Company, excercising voting rights in AGM/ EGM and veto votes. however the lender does not acquire any voting rights in terms of loan agreement. Therefore, the court is of the view that Equity is not a debt as such any contract for the acquisition of shareholding in a body corporate does not result in thye formation of debt. Further The IRR cannoy be equated with interest payments. The relevance of IRR for an investor in shares is in relation to expected profits and dividend payouts and capital appreciation of the shares which is totally different to the interest which is return for any investment by way of loan. Therefore, the Bench is of the opinion that the applicant is entitled to the claim under the Shareholder Agreement as a Shareholder of the CD and the claim of the applicant cannot be termed as a Financial Debt as contemplated inder IBC.

Branch: NCLT

Link: https://ibclaw.in/gvfl-trustee-company-pvt-ltd-vs-hubtown-ltd-nclt-mumbai-bench/