IBC UPDATE | RIGHT TO RECEIVE MONEY UNDER A PUT OPTION - FINANCIAL DEBT
INTRODUCTION
National Company Law Appellate Tribunal (NCLAT) has recently held in the case of Jignesh Shah vs IL&FS Financial Services Limited & Anr that a put option exercised by a party amounts to a financial debt under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).
National Company Law Appellate Tribunal (NCLAT) has recently held in the case of Jignesh Shah vs IL&FS Financial Services Limited & Anr that a put option exercised by a party amounts to a financial debt under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC).
- IL&FS Financial Services Limited (IFIN) purchased 2.46 % of the equity share capital of MCX-SX pursuant to a Share Purchase Agreement (SPA) with MCX and MCX-SX. Simultaneously, a Letter of Undertaking (LOU) was executed between La-Fin Financial Services Limited (La-Fin) and IFIN whereby La-Fin agreed to purchase the shares held by IFIN in MCX-SX for a consideration that would give IFIN a minimum 15% return on its investment, within a period 3 years from the date IFIN purchased such shares pursuant to the SPA.
- IFIN received a letter dated in August 2010 from MCX-SX stating that La-Fin’s obligations under the LOU had become infructuous on account of a scheme of reduction of capital being approved by the Bombay High Court. IFIN then filed a suit against La-Fin for specific performance of the LOU and also filed a petition for winding up of La-Fin, under the provisions of the Companies Act, 1956. The said petition was later transferred to the NCLT and was converted into an application under Section 7 of the IBC.
- NCLT admitted the said IBC application filed by IFIN and the Corporate Insolvency Resolution Process was initiated in respect of La-Fin. The said order admitting the application filed by IFIN was appealed before the NCLAT by the shareholders of La-Fin.
- The Appellants inter-alia contended that there was no financial debt between La-Fin and IFIN as defined by the IBC and hence, IFIN was not a financial creditor. The Appellants further contended that the exercise of the option would lead to sale and purchase of goods (being shares of MCX-SX) and hence could not be a financial debt. Further, if the option was not exercised IFIN would continue to remain invested in MCX-SX negating the requirements of a financial debt.
DECISION OF NCLAT:
NCLAT dismissed the appeals holding that IFIN had purchased the shares of MCX-SX with an object of having an economic gain which had the commercial effect of borrowing. The NCLAT also observed that the transaction not only involved the purchase of shares but it also stipulated that the amount was to be repaid within a certain time period by the repurchase of the shares of MCX by La-Fin. One of the terms of the transaction was the internal rate of return of 15 % that had to be paid to IFIN which meets the element of time value of money, one of essential ingredients of a financial debt under the IBC. Hence, the NCLAT held that the amount to be received under the put option fell under purview of a financial debt.
NCLAT dismissed the appeals holding that IFIN had purchased the shares of MCX-SX with an object of having an economic gain which had the commercial effect of borrowing. The NCLAT also observed that the transaction not only involved the purchase of shares but it also stipulated that the amount was to be repaid within a certain time period by the repurchase of the shares of MCX by La-Fin. One of the terms of the transaction was the internal rate of return of 15 % that had to be paid to IFIN which meets the element of time value of money, one of essential ingredients of a financial debt under the IBC. Hence, the NCLAT held that the amount to be received under the put option fell under purview of a financial debt.
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