NCLAT: Liability From Optionally Fully Convertible Debentures (OFCDs) Must Be Assessed Individually Due to Their Hybrid Debt–Equity Nature
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, has held that liability arising out of Optionally Fully Convertible Debentures (OFCDs) must be determined on a case-to-case basis, as OFCDs are hybrid instruments possessing both debt and equity characteristics. The ruling was delivered by a Bench comprising Justice Sharad Kumar Sharma (Judicial Member) and Jatindranath Swain (Technical Member) while adjudicating insolvency appeals filed by four personal guarantors of JBM Homes Pvt. Ltd., a real estate company currently in liquidation.
The Bench clarified that although “debenture” is included within the statutory definition of financial debt, OFCDs differ significantly from conventional debentures. They contain an inherent dual nature—part debt and part equity—requiring careful evaluation of the precise extent of debt in each matter. The Tribunal observed that “OFCD is a hybrid instrument, part equity and part debt, and in the instant case, it must be determined as to how much of the same will have to be treated as debt, which has not been done.” The Tribunal therefore held that while insolvency proceedings against personal guarantors may continue, the quantum of liability should be computed only after analysing the specific terms of the investment agreement.
In arriving at this conclusion, the Bench also drew a distinction between various forms of debentures already settled in Indian jurisprudence. Non-Convertible Debentures (NCDs) have been judicially recognised as financial debt, whereas Compulsorily Convertible Debentures (CCDs) have been held to partake the nature of equity, as clarified by the Supreme Court in IFCI Ltd. v. Sutanu Sinha (Civil Appeal No. 4929/2023). However, no similar clarity exists for OFCDs, and therefore, their classification must depend on contractual stipulations governing each transaction.
The dispute arose from financial assistance of ₹18.39 crore extended to JBM Homes in March 2015 through OFCDs issued to LIC HFL Trustee Company Pvt. Ltd. The company failed to either redeem or convert the OFCDs by the stipulated date in 2018, ultimately leading to its liquidation. The investors later claimed a substantially enhanced amount of ₹98.64 crore from the personal guarantors, prompting them to challenge the claim before the NCLT and subsequently before the NCLAT.
The guarantors argued that upon default, the OFCDs should have been automatically converted into shares, thereby transforming the investors into shareholders rather than financial creditors. They claimed that the absence of a valid Board of Directors prevented any lawful action on conversion, and therefore, no debt existed for which personal guarantees could be enforced. They further contended that the steep increase in claimed amount reflected equity-like expectations rather than debt obligations.
The investors countered these arguments by highlighting that default had already been conclusively established in the CIRP proceedings against JBM Homes, which had attained finality. They further pointed out that the guarantors themselves had attempted settlement during the CIRP, thereby acknowledging the underlying liability. The NCLAT noted that the extraordinary escalation in the claim—from ₹18.40 crore to nearly ₹98.64 crore—suggested unusually high returns more aligned with equity investments rather than secured lending, stating that the promised minimum return of 32% “dilutes the claim of the respondent that he is a financial creditor.”
While dismissing the appeals and permitting continuation of insolvency proceedings against the guarantors, the NCLAT directed the NCLT to issue appropriate instructions to the Resolution Professional for determining the actual debt owed, after segregating the debt and equity components embedded in the OFCDs. The Tribunal emphasised that OFCDs cannot be treated as standard loan instruments and that their financial implications must be examined with precision to avoid unjust enrichment or excessive claims.
Cause Title: B. Nirmal Kumar v. LIC HFL Trustee Company Pvt. Ltd. & Ors.
Case No: Company Appeal (AT) (CH) (INS) Nos. 195-198/2025
Coram: Justice Sharad Kumar Sharma (Judicial Member), Jatindranath Swain (Technical Member)
