BETWEEN DEBT AND EQUITY: LEGAL UNCERTAINTY OF CCDS AND CCPS IN CORPORATE INSOLVENCY

Abstract

This paper examines the uncertain legal character of Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) under the Insolvency and Bankruptcy Code, 2016 (IBC). While these instruments are designed to be hybrid funding mechanisms combining features of debt and equity, their treatment in insolvency proceedings remains unsettled because the IBC applies a strict binary classification between financial debt and share capital. The study analyses how courts have approached this issue through a substance-over-form or form-over-substance lens, with particular emphasis on the “time value of money” test under the IBC. This paper analyses decisions of the Courts in India and the paper shows that CCDs are inconsistently classified depending on contractual terms, repayment structure and the presence of a direct debtor-creditor relationship, while CCPS are generally treated as equity despite certain debt-like features. The paper argues that this fragmented jurisprudence creates uncertainty for investors, weakens predictability in insolvency resolution, and may deter capital formation. This paper also seeks to propose reccomendations recommending legislative clarification, harmonisation across statutes and a differentiated treatment of principal and interest components in hybrid instruments.