The National Company Law Tribunal, Mumbai (“NCLT”) on June 29, 2020, in the matter of IDBI Trusteeship Services Limited (“Petitioner”) v. Ornate Spaces Private Limited (“Corporate Debtor”), decided upon the admissibility of an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).  

Background of the case: 

The Petitioner was acting on behalf of the debenture holder, being Piramal Capital and Housing Finance Limited (“Piramal Finance”). The Corporate Debtor had created an English mortgage under a debenture trust deed (“DTD”) in favour of the Petitioner to secure the repayment of the principal amount of non-convertible debentures aggregating to Rs. 245,00,00,000 (Rupees two hundred forty five crores) of the Corporate Debtor, along with all outstanding amounts on the terms and conditions contained therein. Out of the said 24,500 (twenty four thousand five hundred) non-convertible debentures (“NCDs”), the Corporate Debtor only issued 23,923 (twenty three thousand nine hundred twenty three) NCDs, and the same were subscribed by Piramal Enterprises Limited. The Corporate Debtor redeemed 1,990 (one thousand nine hundred ninety) NCDs, and presently, the balance 21,943 (twenty one thousand nine hundred forty three) NCDs are held by Piramal Finance. The Corporate Debtor failed to fulfil its payment obligations towards the debenture holders in accordance with the DTD, and also failed to pay the interest due on December 31, 2018. Since this constituted an event of default under clause 24.6 of the DTD, the Petitioner became entitled to declare all the outstanding NCDs and the accrued interest thereon to be immediately due. Subsequently, numerous correspondences took place between the parties wherein the Petitioner declared the event of default under the DTD and called upon the Corporate Debtor and the guarantors to repay the entire outstanding amount, which they failed to do.  

The Petitioner had also filed a commercial suit no. 968 of 2019 (“Suit”) before the Bombay High Court, inter-alia, seeking a direction against the Corporate Debtor and the guarantors to jointly and severally pay to the Petitioners an aggregate sum of Rs. 214,63,07,617 (Rupees two hundred fourteen crores sixty three lacs seven thousand six hundred seventeen), with further interest and default interest. By an ad-interim order dated September 23, 2019, passed by the Bombay High Court, the Corporate Debtor and the guarantors, their officers, etc. and any person claiming through or under them, were restrained from, in any manner selling, alienating, parting with possession, creating third party rights, license, etc. in respect of the mortgaged property, the hypothecated property and the pledged shares.  

Contentions of the Corporate Debtor:  

The Corporate Debtor, inter-alia, contended that:

1. The Petitioner had also filed a Suit before the Bombay High Court, and a perusal of the same would show that an identical issue has been raised in such Suit;
2. Subsequent to the DTD, the Corporate Debtor entered into a loan agreement-cum-mortgage deed with PNB Housing Finance Limited (“PNB”). A pari passu agreement was also executed between PNB, Piramal Finance Limited, Piramal Housing Finance Limited, Petitioner and Corporate Debtor (“Pari-passu Agreement”), and these agreement have not been disclosed by the Petitioner; and
3. The present application has been filed by the debenture trustee not by itself, but through a purported power of attorney holder. The right to file being a specific right granted by a statute, cannot be delegated and must be filed by the debenture trustee itself.

Issue:

The issues which arose for consideration before the NCLT were:

1. Whether there was a novation of contract?;
2. Whether this petition under Section 7 of IBC was barred by law in view of the Suit?; and
3. Whether technicalities make a material change in summary proceedings under IBC?  

Decision by the tribunal: 

The NCLT observed that the DTD entailed the powers/duties conferred upon the debenture trustee to represent the debenture holder as a security trustee for the events of default due to non-payment of money as contemplated under clause 24.6 of DTD. The Corporate Debtor failed and neglected to repay the monies/interest due under the DTD on December 31, 2018. Since this default constituted a default under clause 24.6 of the DTD, the Petitioner was entitled to declare the outstanding on NCD due and payable along with interest.  

With respect to the first issue, the NCLT observed that the rights of the Petitioner could not be linked to the execution of the Pari-passu Agreement. It was held that the said agreement confirmed the original DTD and stipulated certain events of payment by PNB. Upon strict interpretation of the Pari-passu Agreement, the NCLT held that it was evident that the agreement was a mere arrangement to share security on a pari-passu basis, and did not in any way substitute or novate the original loan agreements. It was held that the statutory rights of enforcement of contract cannot be taken away by any contractual arrangement.  

While dealing with the second issue, NCLT observed that it is a settled position of law that the petitioner can initiate corporate insolvency resolution proceedings (“CIRP”) under the IBC, and also file a suit for recovery of outstanding claim.  

With respect to the third issue, the NCLT observed that upon a conjoint reading of Section 7 of the IBC, and the recent notification of the Central Government dated February 27, 2019, the rights of parties to seek initiation of CIRP by a financial creditor or operational creditor cannot be subjected to technicalities and formalities. The following was held:  

“The notification only clarifies that Debenture Trustee can file a petition under sec.7 and the defect pointed out by the Corporate Debtor and since the default took place in December19/January2019, the petitioner cannot take advantage of the subsequent notification is absolutely untenable. The procedural formality regarding obtaining written consent from the Debenture holders does not take away the statutory rights of seeking initiation of CIRP under the I & B Code 2016.”                                                            (emphasis added) 

The NCLT continued to emphasise that the adjudicating authority in summary proceedings under the IBC is not bound by the Civil Procedure Code, 1908 and technicalities prescribed therein, and thus a petition under Section 7 of the IBC can be admitted only if there is a debt and default. It was observed that the primary agreement of loan, i.e. the DTD was sought to be confirmed by the execution of the Pari-passu Agreement, and therefore the 2 (two) agreements were distinct that ensured benefit of petitioner’s right of receiving payments. Non-payment of monies by the Corporate Debtor or PNB demonstrated a clear liability and default, and thus an action to initiate CIRP can be triggered.  

In light of the same, the petition under Section 7 of the IBC was admitted.  

This update has been contributed by Adity Chaudhury (Partner) and Ishita Malhotra (Associate).