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In a judgement that would have far-reaching consequences on the banking sector, National Company Law Tribunal has ruled that loans converted into equity prior to the start of bankruptcy and insolvency process for a company can’t be considered as debt at the time of settling dues of financial creditors.

In the ongoing resolution of the erstwhile construction major IVRCL, Hyderabad bench of NCLT has also ruled that bank guarantees be considered as debt, which would bring relief to the banking system that regularly issues such undertakings to corporates.

Canara Bank in its plea claimed that conversion of debt of erstwhile construction major IVRCL into equity as part of a debt restructuring plan is only an arrangement to attract a strategic buyer and that the dues retain the nature of debt.

The lender argued that such converted equity is not required to be disclosed under Accounting Standard 23, the objective of which is to set out principles and procedures for recognising in the consolidated financial statements the effects of the investments in associates on the financial position and operating results of a group.

“The applicant bank has not been able to show any provision of the scheme under Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR) or any regulations or guidelines issued by the Reserve Bank of India that the amount converted into equity will revert to the category of debt the moment the CDR/SDR fails,” Judge Anantha Padmanabha Swamy said in a 14-page verdict.

Aggregate claims against the Hyderabad-based diversified construction major were arrived at Rs 13,406 crore after accounting for claims from about 38 financial institutions, over 2,815 operational creditors and 3,368 unpaid workers.

Among the major financial creditors, ICICI Bank tops the list with a claim of Rs 913.30 crore, followed by Canara Bank at Rs 899.90 crore.

Canara Bank also claimed that uninvoked bank guarantee of Rs 304.15 crore and Rs 137.33 crore of debt converted into equity be treated as debt. Resolution professional Sutanu Sinha, however, had argued that these were not actual debts and rejected both the claims.

NCLT has now accepted resolution professional’s stand on converted debt but rejected the argument against treating guarantees as debt.

“The order has a far-reaching impact as it clarifies the view of the law on bank guarantees and converted debt as both of these are widely used financial instruments,” Sinha told DNA Money.

Sinha had argued that the action of conversion of debt into equity is irreversible and once having chosen to convert, that portion of the debt is extinguished, and hence there is no claim to be admitted.

NCLT, however, rejected Sinha’s argument on the bank guarantee issue.

“In case the uninvoked bank guarantee is not admitted as a claim, it will be seriously jeopardising the interest of the applicant bank,” the order said.

SHEDDING LIGHT

  • Canara Bank claimed that uninvoked bank guarantee of Rs 304.15 crore and Rs 137.33 crore of debt converted into equity be treated as debt  
  • NCLT has accepted resolution professional’s stand on converted debt but rejected the argument against treating guarantees as debt  
  • It said in case the uninvoked bank guarantee is not admitted as a claim, it will be seriously jeopardising the interest of the applicant bank

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