The Supreme Court’s recent decision in M/s. ICFI Limited v. Sutanu Sinha & Others[1] on the treatment of Compulsorily Convertible Debentures (“CCD”) under Insolvency and Bankruptcy Code, 2016 (“Code”), again underscores the importance of contractual obligations in determination of whether CCDs will be treated as debt or equity in any proceedings under the Code. In making its decision, the Supreme Court relied on the clear provisions of the contract as well as the manner in which the parties represented the nature of CCDs to third parties in concluding that the CCDs were, and were intended by the parties to be treated as, equity.

The Supreme Court, while holding that the CCDs held by IFCI Limited (“IFCI”) in IVRCL Chengapalli Tollways Limited (“ICTL”), a 100% subsidiary of IVRCL Limited (“Sponsor”), are to be treated as equity, relied on the following factors:

    1. The debenture subscription agreement executed between the ITCL, Sponsor and IFCI, treated the CCD as equity and recorded them as part of the equity of ICTL;
    2. The CCD were part of the equity in the project cost approved by National Highway Authority of India (“NHAI”) and were taken as equity for determination of the debt equity ratio as mandated by NHAI. The project lenders also treated the CCDs as part of the equity contribution for the purpose of the financial package for ICTL’s project;
    3. All payment obligations in respect of CCDs, i.e. payment of interest, repayments, and the put option under the aforesaid debenture subscription agreement, were cast upon the Sponsor and not ICTL. Further, ICTL’s financial statements also recorded this as a liability of the Sponsor and not of ICTL; and
    4. The CCDs were mandatorily convertible on a pre-determined date, which date had expired prior to the initiation of the corporate insolvency resolution plan of ITCL.

The fact that the CCDs did not cast any financial obligation on ITCL was critical to the Supreme Court’s decision in holding that they could not be regarded as a debt. In deciding so, the Supreme Court reiterated that “it should certainly not be an endeavor of commercial courts to look into implied terms of contract[2]. It further emphasized that commercial documents “are not layman’s agreements but agreements vetted by experts and thus each of the parties knows its obligations and benefits which can arise from the agreement” and that “it is not advisable for a court to supplement it or add to it”.

In line with this, the Supreme Court referred to the plain terms of the agreements and upheld the resolution professional’s decision that the investment made by IFCI was clearly in the nature of equity as no provision had been made in the agreements and there was no conduct between the parties to reflect that the CCDs issued by ICTL would partake the character of debt in any event.

In our view, reading the Supreme Court’s decision to imply that CCDs will mandatorily take the nature of equity would be misinterpretation of the decision. The Supreme Court has, on the contrary, emphasized that in deciding the treatment of the instrument, reference has to be made to both, the clear terms of the contract between sophisticated commercial parties as well as the manner in which such transaction is positioned by such parties, therefore leaving the door open for this issue to be debated and decided differently under a dissimilar set of circumstances.


[1] M/s. IFCI Limited vs. Sutanu Sinha & Ors(Civil Appeal No.4929/2023)

[2] Nabha Private Limited v. Punjab State Power Corporation Limited, (2018) 11 SCC 508

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