The Supreme Court has clarified that for an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) to be admitted, the adjudicating authority (NCLT) is only required to ascertain the existence of a financial debt and a default in its payment. The concept of a pre-existing dispute, which is a defence against an application by an operational creditor under Section 9, is not applicable to an application by a financial creditor under Section 7 of the IBC.
The Apex Court held that a contract, such as a Debenture Trust Deed (DTD), cannot be considered novated or modified through informal communications with only one of several parties, especially when the contract itself prescribes a strict and formal procedure for amendment that has not been followed. For a novation under Section 62 of the Contract Act, 1872, consensus among all original parties is essential.
Further, the Court emphasised that a waiver of rights under a contract cannot be implied when the agreement explicitly requires such waiver to be in writing. The duty of a debenture trustee is to the debenture holders, and acting to protect their interests as per the governing deed does not amount to collusion or unfairness.
A Two-Judge Bench comprising Justice Sanjay Kumar and Justice K. Vinod Chandran observed that the NCLT and NCLAT erred by proceeding on the assumption that a moratorium was in place. The Bench noted that the restructuring discussions were held with only one debenture holder, ECLF, and there was no evidence that ECLF was authorized to act on behalf of all other debenture holders, who were separate legal entities.
The Bench emphasized that the DTD contained specific provisions for its modification (Clause 33), which required the prior written consent of the debenture trustee and a ‘Special Resolution’ passed by a three-fourths majority of the debenture holders, which procedure was admittedly not followed. Thus, any waiver of the DTD’s terms had to be express and in writing, as stipulated in Clause 37, and no such written waiver existed.
The NCLT and NCLAT had also casually brushed aside an order from the Bombay High Court, which had refused to grant an interim injunction in a commercial suit filed by the respondent because the DTD modification procedure had not been complied with, added the Bench.
Further, the Bench also found that the NCLAT’s conclusion that the debenture trustee colluded with debenture holders to be baseless, clarifying that the trustee’s primary duty under the DTD is to protect the interests of the debenture holders, not the respondent company. Thus, the Bench concluded that the concurrent findings of the NCLT and NCLAT were perverse, based on surmises and conjectures, and warranted interference.
Briefly, the respondent proposed to issue 850 redeemable non-convertible debentures valued at Rs. 850 Crore to fund a residential-cum-retail project in Mumbai. The appellant was appointed as the debenture trustee, and a Debenture Trust Deed (DTD) was executed. Series A debentures worth Rs. 600 Crore were subscribed, primarily by ECL Finance Limited (ECLF) and other entities of the Edelweiss group. Later, the respondent emailed ECLF, one of the majority debenture holders, proposing a restructuring of the loan repayment, including an 18-month moratorium on principal and interest. In response, the ECLF agreed in principle, but final approval would be provided later after an internal process. However, the debenture trustee was not included in these communications.
Subsequently, the debenture trustee issued a demand notice for overdue payments. The restructuring proposal was eventually put to the debenture holders and was rejected by a 94.84% majority. Following this, the debenture trustee issued a loan recall notice and filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT and NCLAT dismissed the application, holding that a moratorium was in place based on the email exchanges.
Appearances:
Senior Advocate Aryama Sundaram, AOR Akanksha Mehra, along with Advocates Himanshu Tyagi, Lakshay Saini, Rohini Mussa, and Mohit Yadav, for the Appellant
Senior Advocate Ashwani Kumar, AOR Amit Sharma, along with Advocates Virag Gupta, Dipesh Sinha, Pallavi Barua, and Aparna Singh, for the Respondent
