The Supreme Court on Tuesday (February 24) held that ongoing or pending restructuring discussions for a debt-laden corporate debtor do not, by themselves, stop the initiation of a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).
A Bench of Justices Sanjay Kumar and K. Vinod Chandran set aside the NCLAT’s decision, which had rejected a Section 7 IBC application because a restructuring arrangement was said to be in place. The Court reiterated that, at the admission stage under Section 7, the adjudicating authority must examine only two issues: whether a financial debt exists and whether a default has occurred. Further, the Court observed that internal restructuring communications cannot defeat CIRP once debt and default stand established.
Background of the dispute
The case arose from a debenture-backed financing transaction for a residential-cum-retail real estate project in Mumbai. Under a Debenture Trust Deed executed in March 2018, the corporate debtor issued Series A redeemable non-convertible debentures aggregating ₹600 crore. Catalyst Trusteeship Ltd., the appellant, acted as the debenture trustee.
Importantly, the Debenture Trust Deed laid down a strict contractual process for any amendment, waiver, or restructuring. It required prior written consent of the debenture trustee. It also required approval by debenture holders through “approved instructions”. In addition, it required a special resolution passed by a 3/4th majority.
After defaults occurred, the respondent-corporate debtor claimed that it had agreed on restructuring through email correspondence with ECL Finance Ltd. (ECLF). ECLF is one of the debenture holders and belongs to the Edelweiss group. Relying on this exchange, the corporate debtor argued that no default continued and that the Section 7 application was not maintainable.
Findings of the Supreme Court
The corporate debtor’s position persuaded the fora below. As a result, the NCLT and the NCLAT rejected the Section 7 CIRP application. The appellant then approached the Supreme Court.
The Supreme Court allowed the appeal and set aside the impugned findings. In a judgment authored by Justice Sanjay Kumar, the Court held that a corporate debtor may show that a debt is not “due” in law. However, it cannot do so indirectly by relying on informal and non-binding negotiations. Such discussions, the Court noted, do not meet contractual or statutory requirements.
Further, the Court held that mere restructuring talks between the respondent-corporate debtor and ECLF could not bind other debenture holders. This remained true even if those holders belonged to the same corporate group. To bind them, the respondent needed express authorisation.
The Court also addressed the NCLAT’s reasoning. It observed that the respondent-company could not assume that ECLF had accepted the restructuring proposal. It also could not assume that such acceptance would bind all stakeholders. In addition, the Court held that the NCLAT’s adverse remarks against ECLF were unfounded. ECLF’s communication, the Court noted, showed no promise. Instead, it showed that the proposal was only “subject to consideration” through the due procedure.
Accordingly, the Supreme Court allowed the appeal and directed admission of the appellant’s CIRP application.
Cause Title: CATALYST TRUSTEESHIP LTD. versus ECSTASY REALTY PVT. LTD.
Appearance
For Appellant(s): Mr. Aryama Sundaram, Sr. Adv.; Ms. Akanksha Mehra, AOR; Mr. Himanshu Tyagi, Adv.; Mr. Lakshay Saini, Adv.; Ms. Rohini Musa, Adv.
For Respondent(s): Mr. Ashwani Kumar, Sr. Adv.; Mr. Amit Sharma, AOR; Mr. Virag Gupta, Adv.; Mr. Dipesh Sinha, Adv.; Ms. Pallavi Barua, Adv.; Ms. Aparna Singh, Adv.
