Matter: Hubtown Limited v. GVFL Trustee Company Pvt. Ltd.
Order dated: 29 November 2021
Summary:
GVFL Trustee Company Pvt. Ltd (GVFL) filed for initiation of corporate insolvency resolution process (CIRP) against Hubtown Limited for a debt by way of equity investment in shares of Hubtown Bus Terminal (Mehsana) Pvt. GVFL alleged that there was a default as its ‘put option’ was not entertained when a demand notice was sent to Hubtown Limited demanding exit by way of ‘put option’. Hubtown Limited challenged the petition on grounds of maintainability.
Disagreeing with GVFL’s stance, the NCLT rejected the petition at the stage of maintainability by stating that the claim of the company as a shareholder with right to exercise the put option will not amount to financial debt under the Code. This is because a shareholder undertakes the risk by investing in shares and gets returns in profits through dividends and appreciation in the share prices and therefore buying shares cannot be termed as investment through a loan and equity is not a debt. The NCLT further noted that an ‘annual put option’ cannot be considered as a debt which is disbursed against consideration of time value for money and that internal rate of return cannot be equated with interest payments. Internal rate of return for an investor in shares is in relation to expected profit and dividend pay-out and capital appreciation of the shares and is totally different to the interest which is return for any investment by way of loan. Accordingly, GVFL’s claim of financial debt to initiate CIRP was dismissed.
