Court Holds Redemption Of Preference Shares Cannot Be Treated As Debt Automatically, But Directs Disclosure Of Assets And Financial Records To Protect Arbitration Proceedings
LawDaily.org | Arbitration & Corporate Law
The Bombay High Court (Commercial Division) has partly allowed an interim application filed under Section 9 of the Arbitration and Conciliation Act, 1996, in a dispute between Ramakrishnan Krishnan and Gluhend India Private Limited (GIPL) & Another, arising out of obligations relating to Redeemable Optionally Convertible Preference Shares (ROCPS) issued as part of a corporate acquisition arrangement.
Justice Amit Borkar, while dealing with Commercial Arbitration Petition No. 766 of 2026, held that although the petitioner had raised substantial issues requiring adjudication by the arbitral tribunal, the Court was not inclined to direct immediate payment or deposit of the claimed amount at the interim stage. However, considering the financial circumstances and disputes surrounding redemption of ROCPS, the Court directed the respondents to disclose their assets, liabilities, financial records and details relating to any transfer or encumbrance of material assets.
The petition was disposed of with limited protective directions to preserve the effectiveness of future arbitration proceedings.
Background Of The Dispute
The dispute originated from a Share Purchase Agreement (SPA) dated 10 November 2017 executed between Delos Sage HoldCo Cooperatief UA (DSHC), Sage Metals Limited, the petitioner and other shareholders.
Under the transaction, Sage Metals was acquired at an enterprise value of approximately ₹470 crore. The petitioner was described as the “Continuing Shareholder” and retained 10% shareholding in the company. Unlike other shareholders who received their sale consideration immediately, the petitioner’s consideration was structured differently. A significant portion of his consideration was deferred and was to be paid through Redeemable Optionally Convertible Preference Shares (ROCPS).
Subsequently, Gluhend India Private Limited (GIPL) was incorporated and assumed obligations under the SPA. The parties thereafter entered into a Framework Agreement dated 11 March 2018, which governed the petitioner’s rights regarding equity shares, ROCPS and returns payable on such securities. Under the arrangement, the petitioner was entitled to:
- Equity shares equivalent to 10% of fully diluted share capital;
- ROCPS towards deferred consideration;
- Annual returns on ROCPS;
- Redemption of ROCPS in stages.
The parties agreed that the ROCPS would be redeemed in a manner ensuring payment of at least ₹5 crore annually along with accrued returns. The arbitration clause provided that disputes between parties would be referred to arbitration before the Singapore International Arbitration Centre (SIAC).
Subsequent Agreements And Restructuring
After execution of the initial Framework Agreement, the parties entered into further arrangements modifying the rights and obligations. A Supplemental Share Purchase Agreement dated 18 December 2018 increased the purchase consideration by ₹27.5 crore, resulting in an increase in the petitioner’s deferred consideration. Following approval of the scheme of amalgamation by the National Company Law Tribunal, Mumbai, Sage Metals merged with GIPL.
The petitioner received ROCPS as part of the restructuring.
Later, on 31 January 2020, the parties executed the Amended and Restated Framework Agreement, under which certain securities were reorganised. The petitioner continued holding ROCPS carrying agreed returns at 15% per annum with annual compounding. The agreement further provided yearly payments and redemption obligations.
Third Framework Agreement Of 2022
The dispute before the Bombay High Court primarily concerned the Third Framework Agreement dated 13 July 2022. According to the petitioner, this agreement reaffirmed his contractual rights. The agreement provided that:
- Final ROCPS would carry annual returns at 15% compounded annually;
- Agreed Special Return would be payable;
- ROCPS would be redeemed;
- Payments would be completed by 30 June 2024.
The petitioner argued that the agreement imposed an independent obligation upon the respondents to ensure payment. According to him, if GIPL did not have sufficient funds, the shareholders were required to provide funds or purchase the ROCPS themselves.
Petitioner’s Allegation Of Default
The petitioner alleged that despite repeated demands, the respondents failed to redeem the ROCPS and make payment of accrued returns. The petitioner relied upon various communications exchanged between the parties. According to him, the respondents had repeatedly acknowledged the outstanding amounts. A communication dated 20 August 2024 was relied upon by the petitioner, wherein GIPL allegedly recorded:
- Outstanding principal amount of approximately ₹24.3 crore;
- Accrued returns of approximately ₹38.2 crore.
The petitioner argued that these communications amounted to acknowledgment of liability. He contended that the respondents were delaying payment by relying upon alleged lender restrictions.
Respondents’ Defence
The respondents opposed the petition and argued that the petitioner had incorrectly interpreted the Third Framework Agreement. According to them, the petitioner’s entitlement was not unconditional. The respondents relied heavily upon Clause 3.5 of the Third Framework Agreement, which provided that redemption, payment of returns and other obligations were subject to:
- Approval of the Board;
- Financing documents;
- Prior consent of lenders.
The respondents argued that lender approval was mandatory and had not been granted. Therefore, according to them, payment could not legally be made.
Reliance On Section 55 Of Companies Act, 2013
A major issue before the Court was the effect of Section 55 of the Companies Act, 2013. The respondents argued that ROCPS are preference shares and cannot be redeemed unless statutory requirements under Section 55 are satisfied. Section 55 provides that redeemable preference shares can be redeemed only:
- Out of profits available for dividend; or
- Through proceeds of a fresh issue of shares.
The respondents submitted that GIPL did not have sufficient distributable profits and therefore redemption was legally prohibited. They relied upon the Supreme Court judgment in EPC Constructions India Limited v. Matix Fertilizers and Chemicals Limited, arguing that preference shareholders do not automatically become creditors merely because the redemption date has expired.
Bombay High Court’s Analysis On ROCPS And Debt
Justice Amit Borkar observed that the dispute involved important questions regarding the nature of ROCPS. The Court held that merely because the redemption date has expired, the holder of preference shares does not automatically become a creditor. The Court observed that redemption of preference shares continues to remain governed by statutory requirements under the Companies Act.
The Court also held that accounting treatment showing ROCPS as “borrowings” or “financial liabilities” cannot by itself change their legal character. However, the Court clarified that accounting entries may have limited evidentiary value.
The Court observed:
Accounting treatment cannot override statutory provisions or contractual terms, but it may be considered as relevant material depending upon the facts.
Court Examines Contractual Liability Under Framework Agreement
The Court considered whether the respondents’ obligation under the Third Framework Agreement disappeared because lender approval was not obtained. The Court held that Clause 3.5 could not be ignored. The requirement of lender approval and compliance with financing documents formed part of the contractual arrangement. However, the Court rejected the respondents’ broader argument that no liability existed until lender consent was obtained.
The Court observed that:
- Clause 3.3 created substantive contractual rights;
- Clause 3.5 regulated the manner of performance.
Thus, according to the Court, failure to obtain lender approval did not completely extinguish the petitioner’s contractual rights.
Section 9 Arbitration Petition: Court’s Approach
The petitioner sought interim protection under Section 9 of the Arbitration Act, including protection of the claimed amount. The petitioner argued that there was a serious risk that the arbitral award may become ineffective because of the respondents’ financial condition. The respondents argued that the petitioner was effectively seeking enforcement of a money claim before the arbitral tribunal decided the dispute. The Court agreed that Section 9 cannot become a substitute for execution proceedings.
The Court held that interim protection requires consideration of:
- Prima facie case;
- Balance of convenience;
- Possibility of irreparable prejudice;
- Need to preserve arbitration proceedings.
Court Refuses Immediate Payment Direction
The Bombay High Court refused to direct immediate deposit or payment of the claimed amount. The Court held that the dispute involved complex contractual and statutory questions which required adjudication by the arbitral tribunal. The Court observed that neither party’s interpretation could be accepted conclusively at the interim stage.
Directions Issued By Bombay High Court
While partly allowing the petition, the Court directed Respondent Nos. 1 and 2 to file affidavits disclosing:
- Assets and liabilities;
- Existing charges and encumbrances;
- Status of any proposed third-party sale or transfer process;
- Steps taken for obtaining lender approvals;
- Financial statements and audited records.
The Court further directed that:
- Respondents shall maintain complete accounts of transactions involving material assets;
- No transaction outside ordinary business causing material reduction of assets shall be undertaken without prior notice;
- Directions shall continue until the arbitral tribunal considers an application under Section 17 of the Arbitration Act.
Legal Significance Of The Judgment
The Bombay High Court’s decision provides important guidance on disputes involving preference shares and arbitration proceedings. The judgment highlights that:
First, preference shares cannot automatically be treated as debt merely because redemption has become due.
Second, contractual obligations relating to preference shares must be examined alongside statutory restrictions under the Companies Act.
Third, Section 9 of the Arbitration Act cannot be used to grant final relief before adjudication of disputes.
Fourth, courts can grant protective directions to preserve the effectiveness of arbitration even when immediate monetary relief is refused.
Conclusion
The Bombay High Court balanced the competing interests of both parties by refusing to order immediate payment while ensuring that the petitioner’s potential arbitration claim remained protected. The Court recognised that the petitioner had raised substantial contractual issues but also acknowledged that redemption of ROCPS involves statutory considerations under the Companies Act. The matter will now proceed before the arbitral tribunal, which will finally decide the rights and liabilities of the parties.