Insolvency Law: Put Option = Financial Debt?
The NCLT noted that shareholders assume the risk of their investments and cannot claim status of a financial creditor.
A contract for acquisition of shareholding in an entity cannot be termed as a financial debt under the Insolvency and Bankruptcy Code, 2016, the Mumbai bench of the National Company Law Tribunal has held.
GVFL Trustee Company Pvt. had approached the NCLT with a Section 7 application against Hubtown Ltd. after the latter refused to honour the put option. A put option is a right granted to an investor allowing it to sell its shares at a pre-determined price.
Under the Insolvency Code, Section 7 allows a financial creditor to initiate insolvency proceedings.
The Genesis Of The Dispute…
IL&FS Group had bought shares in Hubtown Bus Terminal (Mehsana) Pvt., a special purpose vehicle formed to develop commercial and residential property at Mehsana in Gujarat.
Later, GVFL Trustee bought these shares from IL&FS for Rs 4.3 crore. Under the shareholders agreement, to which Hubtown was a party, GVFL also got certain rights, namely right to nominate one director on HBT Mehsana's board, right to vote in AGM/ EGM, special veto power, annual put option etc.
When Hubtown failed to give it exit via the put option, GVFL moved insolvency proceedings against it. Hubtown, on the other hand, challenged the petition on grounds of maintainability.
The debt claimed by GVFL at the time of filing the petition was Rs 4.30 crore, along with an internal return rate of 26%.
Disagreeing with GVFL's stance, the NCLT rejected the petition at the stage of maintainability.
It held that the claim of the company as a shareholder with right to exercise the put option will not amount to financial debt under the IBC. A shareholder undertakes the risk by investing in shares and gets returns in profits through dividends and appreciation in the share prices, the tribunal noted.
Buying shares, the bench presided by HV Subba Rao said, cannot be termed as investment through a loan. No voting right is accrued to a financial creditor in any AGM/EGM, it pointed out.
The SPA and SHA are both contracts in relation to GVFL acquisition of equity shareholding in HBT Mehsana. The internal rate of return on the investment also cannot be equated with interest payment.NCLT, Mumbai
The relevance of IRR for an investor in shares is in relation to expected profit and dividend payout and capital appreciation of the shares which is totally different from the interest which is return for any investment by way of loan, the tribunal said in its order.
The determination of whether such an investment can qualify as debt is done by courts on a case-to-case basis, Ajay Shaw, partner at law firm DSK Legal, said
If the put option was structured as a guarantee, then it may fall under the definition of a financial debt but a simple right to create an equity purchase is not enough to become a financial creditor.Ajay Shaw, Partner, DSK Legal
The NCLT judgment is in line with the restrictive interpretation of a financial creditor, especially after the Anuj Jain Vs Axis Bank judgment of the top court, Shaw said. On the mere covenant under a shareholders agreement with respect to put option, you cannot claim it as a financial debt, he added.