Default sparks insolvency proceedings – The Hindu BusinessLine

Yet again, the Supreme Court of India has said that if the National Company Law Tribunal (NCLT) is satisfied that a default has occurred, then it has no option but to admit an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016. The tribunal has no discretion in such matters, it said this while dealing with M Suresh Kumar Reddy vs Canara Bank & Ors.

Canara Bank, a financial creditor, filed an application against Kranthi Edifice Pvt Ltd before NCLT, Hyderabad, under Section 7 of the IBC for defaults in repayment of an overdraft facility and bank guarantees. NCLT, Hyderabad, admitted the application on June 27, 2022. M Suresh Kumar Reddy, a suspended director of the corporate debtor, filed an appeal against the order of admission before the National Company Law Appellate Tribunal (NCLAT).

The appeal was dismissed on August 5, 2022, and it was this judgement that was challenged at the Supreme Court. Among the many precedents cited by the apex court, were Innoventive Industries Limited vs ICICI Bank, in which the Supreme Court had, inter alia, held that once the NCLT is satisfied that a default of a financial debt has occurred, an application under Section 7 of the IBC must be admitted, unless it is incomplete.

CIRP and debenture trustee

Financial creditors are minority debenture holders, and the debenture trustee is not the only person with authority to bring an action, the National Company Law Tribunal (NCLT), Mumbai, has pointed out.

In its verdict in Clearwater Capital Partners Singapore Fund IV Pvt Ltd vs Rajesh Estates and Nirman Pvt Ltd, the tribunal said that even if financial creditors are minority debenture holders, they can commence a corporate insolvency resolution process, even if there is a debenture trustee.

The corporate debtor issued 129 secured and redeemable non-convertible debentures (NCD) of ₹10 lakh to Clearwater Capital Partners Singapore Fund IV Pvt Ltd and Clearwater Capital Partners Singapore Fund V Pvt Ltd. As the corporate debtor defaulted on the payment due in May 2021, the financial creditors issued two acceleration notices. The corporate debtor did not acknowledge the acceleration notices. Personal and corporate guarantees were invoked. Despite repeated reminders, the corporate debtor and corporate guarantors failed to fulfil their obligations.

The legal issue was whether the petition is barred by Section 10A and whether the acceleration notice issued by the financial creditors is against the provisions of the Debenture Trust Deed. Can the debenture trustee only act on the instructions of the majority of the NCD holders, as claimed by the corporate debtor?

NCLT, Mumbai, agreed with the financial creditors’ contention that the debenture trustee is not the only person with the authority to commence an action, even if they are minority debenture holders.