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March 7, 2019

TREATMENT OF PUT OPTION AND BUY-BACK OBLIGATION UNDER IBC been affirmed by the Hon’ble Supreme Court in K. Sashidhar v. Indian
Overseas Bank1, wherein it was held that the scope of review by the National
The law on insolvency in India is still evolving since the provisions of the
Company Law Appellate Tribunal (“NCLAT”) or the National Company Law
Insolvency and Bankruptcy Code, 2016 (“IBC” or “Insolvency Code”)
Tribunal (“NCLT”) is confined only to the grounds set out under Section
came into effect on December 1, 2016. No doubt, the Insolvency Code has
30(2) of the Insolvency Code by the NCLT, and Section 61(3) of the
ushered in a new regime to deal with debt default by companies, but the
Insolvency Code by the NCLAT. These grounds are purely a test of whether
courts continue to grapple with interpretation issues on provisions of the
or not the plan conforms to the provisions mandated under law, and the
Insolvency Code.
commercial or business decisions of the financial creditors are not open to
any judicial review by the NCLT or NCLAT.
Under the Insolvency Code, ‘debt’ is classified as either a ‘financial debt’ or
an ‘operational debt’ which is owed to a ‘financial creditor’ or an ‘operational
Thus, it becomes important to understand as to who is a ‘financial creditor’.
creditor’, respectively. The treatment of ‘financial creditor’ under the
According to Section 5(7) of the Insolvency Code, a ‘financial creditor’ is a
Insolvency Code is significant, considering the role of the financial creditor as
person to whom a ‘financial debt’ is owed, which leads to the question as to
member of the committee of creditors (“COC”). The COC constituted under
what constitutes a ‘financial debt’. A perusal of the definition of ‘financial
the Insolvency Code, is a body that is responsible for eventually approving a
debt’ under the Insolvency Code shows that a ‘financial debt’ refers to a
resolution plan or pushing the corporate debtor into liquidation. The COC
debt, which is disbursed against the ‘consideration for time value of money’
also assumes significant responsibility in the running of the corporate
or a guarantee or indemnity given for such debt.
insolvency resolution process (“CIRP Process”) by the resolution
professional (“RP”), including the ability of the COC to replace the RP. Under
It is in this regard, the issue as to whether a monetary obligation of the
the Insolvency Code, the corporate debtor is deemed to be under the control
corporate debtor arising out of a put option (i.e. undertaking to pay in case
of the creditors i.e. the COC, with the RP being the person responsible for
operational / administrative matters of the corporate debtor during the CIRP
Process. The commercial wisdom of the COC and by extension, a financial 1
C.A. No. 10673 of 2018 with C.A. No. 10719 of 2018, C.A. no. 10971 of 2018 and SLP (C) No.
creditor, in determining whether a plan should be accepted or rejected, has 29181 of 2018, Judgment dated February 05, 2019.

1
of exercise of put option by the grantee), or a buy-back arrangement (i.e.
the corporate debtor undertaking to pay against the buy-back transaction),
was recently adjudicated upon by the NCLAT in the matter of Jignesh Shah
v. IL & FS Financial Services & Anr. 2 . The NCLAT in this matter held that the
payment obligations under a put-option and / or buy-back arrangement shall
constitute a ‘financial debt’ of the grantee under the Insolvency Code.
The matter before the NCLAT was arising out of an appeal with respect to
the admission order3 of NCLT, in the application filed by IL & FS Financial
Services (“IL&FS”) under Section 7 of the Insolvency Code against La-Fin
Financial Services Private Limited (“La-Fin”). In the present matter, as per
the mutual negotiations, IL&FS had to purchase equity shares (“Said
Shares”) of MCX Stock Exchange Limited (“MCX – SX”) held by Multi
Commodity Exchange of India Limited (“MCX”), and as a condition to the
purchase of the Said Shares by IL&FS, La-Fin had agreed to buy, or cause to
be bought, from IL&FS the Said Shares at an agreed price, within a pre-
determined period i.e. IL&FS had put option right against La-Fin for the Said
Shares under a Letter of Undertaking (“LOU”) executed by La-Fin.
In furtherance of the aforesaid, a share purchase agreement (“SPA”) for the
purchase of the Said Shares was executed between IL&FS, MCX and MCX -
SX. Simultaneously, the LOU was executed by La-Fin to purchase the Said
Shares within a period of one year, but not later than three years, from the
purchase by IL&FS, with the LOU further indicating the price of purchase
which had to be higher of: (i) the price that would give IL&FS an internal
rate of return (“IRR”) of 15% on its investment; or (ii) the price at which
the most recent transaction of MCX-SX’s equity shares was carried out by the
MCX group.
MCS-SX thereafter contended that the obligations of La-Fin under the LOU
had become infructuous on account of a scheme of reduction, but the
2
Company Appeal (AT) (Insolvency) No. 521 and 643 of 2018, Judgement dated January 21,
2019.
3
T.C.P No. 919/I&BC/NCLT/MB/MAH/2017, Order dated August 28, 2018 read with addendum-
cum-corrigendum order dated August 30, 2018.
2
Hon’ble Bombay High Court, vide its judgement dated March 14, 2012 4, held
that the LOU was lawful and enforceable and performance of obligations
contended in the LOU can be lawfully done. Hence IL&FS filed a winding up
petition against La-Fin to recover the outstanding debt along with further
interest of 15% per annum payable towards sale-purchase of the Said
Shares as per the terms of the LOU, which was subsequently transferred to
the NCLT, on filing of the Section 7 application by IL&FS.
In light of the aforementioned facts, the NCLAT held that the amount
disbursed comes within the meaning of ‘financial debt’ under the Insolvency
Code, the same being disbursed against the ‘ consideration for time value of
money’. The NCLAT further held that IL&FS had disbursed, and La-Fin had
raised the amount, with an object of having economic gain or a commercial
effect of borrowing. The SPA read with the LOU, meant that the transaction
involved not only the purchase of the Said Shares, but it showed the date by
which the amounts under the transaction were to be repaid by La-Fin.
Furthermore, since the proposed buy-back of the Said Shares provided for an
IRR of 15% per annum, time value of money was also shown. Once the
option was exercised by IL&FS, La-Fin became obligated to purchase the
Said Shares. Therefore, the NCLAT held that on the exercise of put-option or
buy-back arrangement, the failure of the other party to honor such
arrangement would amount to a ‘financial debt’ under the Insolvency Code.
We note that this judgement of the NCLAT has broadened the interpretation
of ‘financial debt’ by including put option / buy-back arrangements with
respect to equity shares under its ambit, and has considered the concept of
‘consideration for time value of money’ in order to prove obligation on part of
the ‘debtor’. Considering that ‘debt’ has conventionally been understood as a
loan with / without interest, in light of this judgement, the interpretation of
‘consideration for time value of money’, while determining as to what
constitutes a ‘financial debt’, in the context of other similar arrangements
entered into by parties, remains to be seen.
Authored by Ajay Shaw, Vardhman Mehta and Kevin Joseph
4
Writ Petition No. 213/2011.
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