OCDs Not Converted Into Equity By Notice Alone: NCLT Admits CIRP Against Arcturus Developers

The National Company Law Tribunal (NCLT) at Delhi has admitted insolvency proceedings against Arcturus Developers Private Limited for a default of Rs 1,258.73 crore, holding that a mere conversion notice does not legally convert debt into equity unless mandatory statutory steps are completed.

A bench of Judicial Member Ashok Kumar Bhardwaj and Technical Member Reena Sinha Puri held that Optionally Convertible Debentures (OCDs) continue to retain the character of “financial debt” in the absence of actual allotment of equity shares.

The tribunal observed that “in the absence of actual allotment of the converted securities (equity shares), completion of corporate actions including activation of ISIN, credit of securities to the account of debenture holders, updating of register of members and filing of Form PAS-3 (return of allotment) with the RoC, it cannot be said that the beneficiary ceased to be debenture holder/creditor.”

The proceedings arose from a CIRP plea filed by Beacon Trusteeship Limited, acting as debenture trustee for Samman Capital Limited. Arcturus Developers, a real estate company promoted by the Vatika Group, had issued 50 lakh OCDs of Rs 1,000 each in 2019, aggregating to Rs 500 crore.

As per the Debenture Trust Deed, the debenture holder had a contractual put option to seek redemption of the OCDs.

The debenture trustee exercised the option on January 7, 2025, calling upon Arcturus to repay Rs 1,258.73 crore within seven days.

Arcturus did not redeem the debentures. It instead claimed that the debt had ceased to exist as the OCDs had converted into equity upon receipt of a conversion notice dated January 6, 2021. This effectively, accoridng to Arctus, rendered the put option invalid and consequently the present petition not maintainable

Arctus also relied on board resolutions passed in December 2024 to contend that the OCDs had been converted into compulsorily convertible debentures and no longer constituted “financial debt” under Section 5(8) of the Insolvency and Bankruptcy Code.

The tribunal rejected this defence, holding that contractual intent or internal resolutions cannot override statutory requirements. It emphasised that an active International Securities Identification Number (ISIN) is a prerequisite for effecting any corporate action involving securities.

The NCLT noted that the ISIN allotted to the OCDs had expired on July 11, 2024 and was never reactivated. It held that the responsibility for reactivation lay with the issuer and that, in the absence of a valid ISIN, no lawful conversion could have taken place.

Holding that the failure to redeem the debentures after issuance of the put notice amounted to a default, the tribunal observed: “When on issuance of put notice, the debentures are not redeemed, the default is established.”

The tribunal concluded that the amount continued to qualify as “financial debt” under Section 5(8) of the Code and admitted the Corporate Insolvency Resolution Process against Arcturus Developers.A moratorium under Section 14 of the Code was also declared.

Megha Agrawal was appointed as the Resolution Professional, and the tribunal directed that the management of the corporate debtor would vest in the RP during the CIRP period.

The NCLT also dismissed Arcturus Developers' application seeking reference of the dispute to arbitration. It held that proceedings under the Insolvency and Bankruptcy Code have overriding effect and cannot be stayed on the basis of an arbitration clause.

The tribunal also dismissed the Corporate Debtor's application seeking reference to arbitration.

For Petitioner: Advocates Gaurav Mitra, Nikhil Ratti Kapoor, and Yashodhara Gupta

For Respondent: Senior Advocate Virendra Ganda with Advocates Vishal Ganda, Mitra, Ishita Singh, and Riya.