The National Company Law Appellate Tribunal (NCLAT) has said insolvency proceedings cannot be triggered on the basis of debt that has been converted into capital such as equity of a company.

The appellate tribunal also said any investment cannot be “financial debt” and the provisions of Section 7 of the Insolvency & Bankruptcy Code provides for the initiation of CIRP by a financial creditor only and that too, if there is “debt” and “default”.

CIRP is corporate insolvency resolution process.

The observations from a two-member NCLAT bench came as it upheld an order of the National Company Law Tribunal (NCLT), which on November 26, 2019, had dismissed the plea by an individual Rita Kapur seeking initiation of insolvency proceedings against Invest Care Real Estate LLP. Kapur had claimed that she was a financial creditor of the company on the basis of the investment in the firm, which had allegedly defaulted her repayment and converted loans into equity.

Citing Section 7 of the Code, the appellate tribunal said it is clear that once the debt is converted into capital, it cannot be termed as financial debt and the appellant cannot be described as financial creditor.