2021 (9) TMI 794 - Tri - Insolvency and Bankruptcy

Tribunal: Corporate Debtor's Financial Default Triggers Insolvency Proceedings

Beacon Trusteeship Limited and Ors. Versus Seya Industries Limited

The tribunal found that there was a clear existence of financial debt and default by the Corporate Debtor, meeting the requirements under Section 7 of the ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - existence of financial debt in terms of Debenture Trust Deed (DTD) and default committed by the Corporate Debtor as envisaged in the events of default - HELD THAT:- The execution of DTD dated 08.03.2019 and Supplementary Trust Deed dated 22.03.2019 demonstrate existence of Financial Debt in pursuance of Section 5(c) of the Code and the essential ingredients of debt which is disbursed against consideration of time value and money is thus satisfied. It is undisputed fact that an amount of ₹ 72 crores was disbursed by the Petitioner No. 3 to the Corporate Debtor as on 11.03.2019. The Petitioner No. 3 further was not able to disburse the second tranche and sought amendment of the DTD vide email dated 26.07.2019. The first coupon was payable by the Corporate Debtor as on 11.09.2019, however, despite extension of grace period till 15.10.2019, the Corporate Debtor failed to make the payment of ₹ 2,18,95,890.41/- as on 15.10.2019 - The events of default as contemplated under the DTD stipulate that on occurrence of default and nonpayment of coupon, the entire amount of outstanding loan became due and payable. Thus, the rights of the Debenture Holder/Debenture Trustee crystallized immediately upon default and the rights of the Petitioners are well defined under the DTD. The essential ingredients of Section 7 Application, i.e., financial debt under Section 5(8) of the Code and the default under Section 3(2) of the Code are met. The Petition was filed on 28.11.2019. Thereafter, the Corporate Debtor has invoked the Arbitration Clause under Section 9 of the Code and the Arbitrator was appointed by the Bombay High Court. The Interim Award was passed by the Arbitrator wherein he has directed the Corporate Debtor to pay an amount of ₹ 72,06,99,224/- with further interest - this petition is not maintainable under section 7 and has to be treated as an application of section 9 of the code, the petition was filed prior in time before the commencement of arbitration proceedings and the Petitioners have exercised their rights of initiation of CIRP against the Corporate Debtor under the Code. There has been a debt and non-payment of coupon interest as on 15.10.2019 which triggered the event of default and the rights of claiming redemption of entire amount is guaranteed under DTD. Therefore, this Bench notes that the passing of Interim Award only confirms the debt by the Arbitrator and thus, all the allegations regarding wrong invocation of pledge etc. are misconceived and the Petitioners has the right to affect the sale of pledge share in any manner it deems fit. This Bench is of the opinion that there is a clear debt and default on the part of the Corporate Debtor and the Petition deserves admission - Petition admitted - moratorium declared. Issues Involved:1. Existence of financial debt and default.2. Maintainability of the petition.3. Impact of arbitration proceedings on the petition.4. Invocation and handling of pledged shares.5. Rights and obligations under the Debenture Trust Deed (DTD).Detailed Analysis:1. Existence of Financial Debt and Default:The petitioners filed for initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, alleging a default of Rs. 77,94,92,513 under Section 7 of the Insolvency & Bankruptcy Code. The Corporate Debtor had issued secured, unrated, redeemable, non-convertible debentures amounting to Rs. 72 Crores to Petitioner No. 3. The Debenture Trust Deed (DTD) specified payment terms, including the first coupon payment due on 11.09.2019, which the Corporate Debtor failed to pay even after an extended grace period till 15.10.2019. This non-payment triggered an event of default, leading the petitioners to issue a notice demanding the entire redemption amount, which the Corporate Debtor failed to pay.2. Maintainability of the Petition:The Corporate Debtor argued that the petition was not maintainable as Petitioner No. 1 and Petitioner No. 2 did not disburse any amounts to the Corporate Debtor and Petitioner No. 3, being a trust, could not sue in its own name. The Corporate Debtor also contended that the petitioners claimed different amounts in the petition and the arbitration proceedings, indicating a lack of clarity regarding the total debt. However, the tribunal found that the essential ingredients of financial debt under Section 5(8) of the Code and default under Section 3(2) were met, and the petition was maintainable.3. Impact of Arbitration Proceedings on the Petition:The Corporate Debtor had invoked arbitration against the petitioners, alleging breach of the DTD and claiming damages. The petitioners filed a counter-claim, and the Arbitral Tribunal awarded Rs. 72,06,99,224 in favor of the petitioners. The Corporate Debtor argued that the petitioners had elected to have their claim adjudicated by the Arbitrator and could not pursue the present action. However, the tribunal noted that the petition was filed before the commencement of arbitration proceedings and that the passing of the Interim Award confirmed the existence of debt and default.4. Invocation and Handling of Pledged Shares:The Corporate Debtor claimed that the petitioners invoked the pledge of 26,60,000 shares and transferred them to themselves without following the Share Pledge Agreement mechanism. The Corporate Debtor argued that the petitioners became owners of these shares and acquired voting rights, thus extinguishing the debt. The tribunal, however, found that the petitioners had the right to affect the sale of pledged shares in any manner deemed fit, and the invocation of the pledge did not negate the default.5. Rights and Obligations under the Debenture Trust Deed (DTD):The tribunal examined the DTD and found that the Corporate Debtor's failure to pay the coupon interest triggered an event of default, entitling the petitioners to recall the entire redemption amount. The tribunal noted that the rights of the Debenture Holder/Debenture Trustee crystallized immediately upon default, and the petitioners' actions were within their rights under the DTD.Conclusion:The tribunal concluded that there was a clear existence of financial debt and default on the part of the Corporate Debtor. The petition met the requirements under Section 7 of the Insolvency & Bankruptcy Code and was thus admitted. The tribunal ordered the commencement of the Corporate Insolvency Resolution Process, effective from the date of the order, and appointed an Interim Resolution Professional to carry out the functions as per the Code.