### Unallotted Equity Shares Following Conversion Notice Do Not Extinguish Financial Debt or Bar Put Option Exercise

In brief

The question

Whether the issuance of a conversion notice by the Debenture Holder results in an automatic "deemed" conversion into equity shares under Clause 6(b) of the DTD, despite the non-fulfillment of statutory corporate actions

The court held

The NCLAT dismissed the appeal and upheld the NCLT’s order

It also directed

The Court held that in the absence of actual allotment of shares, credit of securities, and filing of statutory forms (Form PAS-3) with the RoC, the beneficiary does not cease to be a "debenture holder/creditor"

The right to issue a put option notice was validly exercised, and the subsequent non-payment established a default under Section 7 of the IBC

No costs were awarded

01Facts

The Corporate Debtor (CD), Arcturus Developers Pvt. Ltd., issued 50,00,000 Optionally Convertible Debentures (OCDs) in 2019, governed by a Debenture Trust Deed (DTD)

¶ 2(i)-(ii)

The Financial Creditor (Respondent 1) issued conversion notices in 2021 and 2024 to convert OCDs into equity; however, the CD failed to complete the conversion, citing an inactive International Security Identification Number (ISIN)

¶ 2(iii)-(v)

On January 7, 2025, the Financial Creditor exercised a "put option" under Clause 10 of the DTD, demanding redemption of the debt

¶ 2(v)

When the CD failed to pay, the Financial Creditor filed a Section 7 petition under the IBC, which was admitted by the NCLT on January 20, 2026

¶ 2(vi)-(vii)

The Appellant challenged this, arguing that the OCDs were "deemed" converted to equity upon the issuance of the conversion notice, thus extinguishing the debt

¶ 4

02Issues

i.Whether the issuance of a conversion notice by the Debenture Holder results in an automatic "deemed" conversion into equity shares under Clause 6(b) of the DTD, despite the non-fulfillment of statutory corporate actions

¶ 12

ii.Whether the Financial Creditor was entitled to exercise the "put option" for redemption while a right to convert the instruments into equity was still subsisting

¶ 5/16

03Law Applied

The court applied Section 5(8)(c) of the Insolvency and Bankruptcy Code (IBC), 2016, which defines amounts raised through the issuance of bonds, notes, or debentures as "Financial Debt"

¶ 2(vii)

It interpreted the contractual provisions of the Debenture Trust Deed (DTD, specifically Clause 6 (Manner of Conversion), Clause 10 (Put Option), and Clause 11 (Events of Default)

¶ 8, 13, 14, 15

The court also relied on the principle that "deeming" provisions in a contract regarding the effective date of conversion (Clause 6b) cannot override the necessity of mandatory statutory procedures for the allotment of shares under the Companies Act, such as filing Form PAS-3 and updating registers

¶ 14, 18

04Reasoning

The Court rejected the Appellant’s "deemed conversion" argument by reading Clause 6(b) in conjunction with Clause 6(c) and 6(d) of the DTD.

It reasoned that Clause 6(b) merely "pegs" the effective date for rights purposes once the conversion is finalized

¶ 14

However, actual conversion requires the CD to perform "ministerial acts" and "statutory compliances," including increasing authorized capital and activating the ISIN

¶ 14

The CD admittedly failed to do this, meaning the instruments remained debentures

¶ 11, 19

Consequently, the failure to convert constituted an "Event of Default" under Clause 11.1(xxviii), which triggered the Financial Creditor's right to exercise the put option under Clause 11.2(ix)

¶ 15-16

The Court found that because the CD did not remit the outstanding amount after the put option notice, a clear "default" in repayment of financial debt occurred

¶ 18-20