Debenture holders as financial creditors: direct guarantee and default supported admission of insolvency proceedings.

Debenture holders were treated as financial creditors where the debenture issue was for raising debt, the trust deed and guarantee recognized payment obligations, and the corporate debtor signed as co-obligor and executed an unconditional guarantee. The transaction structure made the guarantors jointly and severally liable on demand, so enforcement was not confined to the trustee. On default, the demand certificate triggered the payment obligation under the transaction documents, establishing debt and default for insolvency purposes. The amount payable was therefore financial debt, and the section 7 application satisfied the threshold for admission. The admission of insolvency proceedings against the corporate debtor was upheld.

---

---

Issues: (i) Whether the debenture holders were financial creditors of the corporate debtor in view of the debenture trust deed and the deed of guarantee; (ii) Whether the debenture holders were entitled to claim repayment as financial debt on occurrence of default and whether the section 7 application was liable to be admitted.

Issue (i): Whether the debenture holders were financial creditors of the corporate debtor in view of the debenture trust deed and the deed of guarantee.

Analysis: The debentures were issued for raising debt, the debenture holders subscribed to the instruments, and the transaction documents expressly recognized their entitlement to payment. The corporate debtor signed the debenture trust deed as co-obligor and executed an irrevocable and unconditional guarantee in favour of the debenture trustee for the benefit of the debenture holders. The deed of guarantee made the guarantors jointly and severally liable to pay the amounts due on demand, and the contractual scheme did not confine enforcement only to the trustee. In that setting, the debenture holders fell within the definition of persons to whom financial debt was owed.

Conclusion: The debenture holders were financial creditors of the corporate debtor.

Issue (ii): Whether the debenture holders were entitled to claim repayment as financial debt on occurrence of default and whether the section 7 application was liable to be admitted.

Analysis: The debenture trust deed and guarantee provided that upon event of default and issuance of a demand certificate, the guarantors had to make payment to the debenture holders. The demand certificate was issued after the event of default notices, and the amount claimed was payable under the transaction documents. The Tribunal held that the existence of debt and default stood established and that the corporate debtor, as guarantor and co-obligor, was liable for the financial debt within the meaning of the insolvency law. The application under section 7 therefore satisfied the statutory threshold for admission.

Conclusion: The debenture holders were entitled to claim repayment, and the section 7 application was rightly admitted.

Final Conclusion: The appeal was found to be without merit and the admission of insolvency proceedings against the corporate debtor was upheld.

Ratio Decidendi: Where debenture holders are the intended beneficiaries under the transaction documents and the corporate debtor has undertaken direct liability as guarantor and co-obligor, the amount payable on default constitutes financial debt and the debenture holders may invoke section 7 of the insolvency law upon default.

---