NCLT Mumbai Rules that Financial Creditors Can Initiate CIRP Despite Debenture Trustee’s Presence

The National Company Law Tribunal (“NCLT”) in Mumbai has ruled that even if financial creditors are minority debenture holders, they can commence a Corporate Insolvency Resolution Process (“CIRP”) regardless of the presence of a debenture trustee. The NCLT made this ruling in the case of Clearwater Capital Partners Singapore Fund IV Private Limited and Anr (“Financial Creditor”) vs. Rajesh Estates and Nirman Private Limited[1] (“Corporate Debtor”) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Case Timeline

The corporate debtor issued 129 secured, non-convertible (“NCD”), redeemable debentures of Rs. 10,00,000 to Clearwater Capital Partners Singapore Fund IV Private Limited and Clearwater Capital Partners Singapore Fund V Private Limited. The corporate debtor defaulted on the payment due in May 2021, prompting the financial creditors to issue two acceleration notices. Because 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 fulfill their obligations.

Issues

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 as the debenture trustee can only act on instructions from the majority of the NCD holders, as claimed by the corporate debtor?

Arguments

The financial creditors contended that a separate section in the Debenture Trust Deed allowed both the debenture trustee and the debenture holders’ unqualified rights to act under various policies, plans, and so on under the applicable legislation whenever necessary. The financial creditors contended that the debenture trustee is not the only person with the authority to commence an action, even if they are minority debenture holders.

Judgment

The NCLT observed that, while financial creditors are minority debenture holders, the debenture trustee is not the only person with the authority to bring an action. The tribunal relied on the decisions in Reliance AIF Management Company Limited & Ors. vs. Bharucha & Motivala Infrastructure Private Limited[2] and Mr. T Prabhakar vs. Mr. S Krishnan[3]. The tribunal granted the petition and determined that Section 10A would not apply because only 10% of the sum was due during the suspension period, and 90% was not covered because the default was ongoing.

[1]C.P.(IB) 560 OF 2022.

[2]CP(IB) – 4108 /2019

[3](Company Appeal (AT) (CH)(INS) No. 217 of 2021