Tribunal Admits CIRP Application for Defaulted Debentures: Key Insolvency Decision

The Tribunal admitted the application under section 7 of the Insolvency and Bankruptcy Code, 2016, and initiated the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. An Interim Resolution Professional (IRP) was appointed, and a moratorium was imposed as per the provisions of the Code. The Tribunal found that the Fully Convertible Debentures (FCDs) constituted financial debt, and the Corporate Debtor defaulted on its obligations under the agreements, leading to the commencement of the insolvency proceedings.

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Issues Involved:
1. Application under section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Financial Creditor's claim of default by Corporate Debtor.
3. Nature and classification of Fully Convertible Debentures.
4. Corporate Debtor's defense and counterclaims.
5. Memorandum of Agreement and its implications.
6. Appointment of Interim Resolution Professional (IRP) and initiation of Corporate Insolvency Resolution Process (CIRP).
7. Moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Application under section 7 of the Insolvency and Bankruptcy Code, 2016:
The application was filed by the Financial Creditor under section 7 of the Insolvency and Bankruptcy Code, 2016, in the prescribed format under Rule 4 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The Financial Creditor, a private limited company, sought to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

2. Financial Creditor's claim of default by Corporate Debtor:
The Financial Creditor claimed that the Corporate Debtor defaulted on payments of interest and failed to convert the debentures into equity shares as stipulated in the agreements. The total amount claimed as due was Rs. 49,13,76,941, consisting of a principal sum of Rs. 15 Crores and accrued interest of Rs. 34,13,76,941.

3. Nature and classification of Fully Convertible Debentures:
The Tribunal examined the nature of Fully Convertible Debentures (FCDs) and determined that they are a financial instrument within the meaning of section 5(8) of the Insolvency and Bankruptcy Code, 2016. The Tribunal clarified that FCDs are considered financial debt until they are converted into equity shares.

4. Corporate Debtor's defense and counterclaims:
The Corporate Debtor argued that the FCDs were intended to be converted into equity and not repaid as a loan. They also claimed that the downturn in their business operations was due to unforeseen international market conditions. The Corporate Debtor contended that the Memorandum of Agreement (MOA) constituted a separate contract and superseded the Master Facility Agreement.

5. Memorandum of Agreement and its implications:
The MOA was executed on 18th April 2017, and confirmed by the Madras High Court on 14th July 2017. The Corporate Debtor claimed that the MOA was entered into in a spirit of goodwill and compromise, not to admit or determine the quantum of liability. The MOA provided for resolving disputes amicably and sharing 50% of the net assets after certain adjustments.

6. Appointment of Interim Resolution Professional (IRP) and initiation of Corporate Insolvency Resolution Process (CIRP):
The Tribunal appointed Mr. A.R. Ramasubramania Raja as the Interim Resolution Professional (IRP) to take forward the process of CIRP. The IRP was directed to take necessary steps as required under the statute and file his report within 20 days.

7. Moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016:
The Tribunal ordered a moratorium as envisaged under section 14(1) of the Code, which includes:
- Suspension of all suits or proceedings against the Corporate Debtor.
- Prohibition on transferring, encumbering, or disposing of any assets of the Corporate Debtor.
- Prohibition on foreclosing or recovering any security interest created by the Corporate Debtor.
- Prohibition on recovering any property occupied by the Corporate Debtor.

The moratorium shall remain in effect until the completion of the CIRP or until an order for liquidation is passed.

Conclusion:
The Tribunal admitted the application under section 7 of the Insolvency and Bankruptcy Code, 2016, and initiated the CIRP against the Corporate Debtor. The IRP was appointed, and a moratorium was imposed as per the provisions of the Code. The Tribunal emphasized that the FCDs constitute financial debt and the Corporate Debtor defaulted on its obligations under the agreements.

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