2025 (3) TMI 1190 - AT - IBC

NCLAT dismisses Section 7 insolvency application by debenture holders citing time-bar and procedural defects

The NCLAT Chennai dismissed a Section 7 insolvency application filed by debenture holders against a corporate debtor. The tribunal found multiple fatal ... Effect of Debenture Trust Deed and Non-compliance of its condition, over the proceedings - existence of any validly executed Power of Attorney to initiate Section 7 Proceedings - proceedings would be barred by limitation or not - date of default and its determination - bar of Section 10A of I & B Code could be read in conjunction to the aspect of limitation or not - implications of Section 65 of the I & B Code, 2016 on the proceedings. What would be the effect of Debenture Trust Deed and Non-compliance of its condition, over the proceedings? - HELD THAT:- On reading of Schedule VIII, it stipulates under its Clause 2 (a), that the event described in para (a) that is the details of the default, which would necessitate the issuance of notice, has had to be as per the events of default contemplated under Clause 7 of the deed and that too in pursuance to the security document which is shown to have become enforceable under the eyes of law. In the absence of satisfaction of any of the conditions as given therein, it is opined that, the entire inception of the proceedings, under Section 7 of the I & B Code, 2016, would be bad because there has been a flagrant and intentional disregard to the content and directives contained in the Debenture Trust Deed, which could have otherwise conferred the powers on the Debenture Trustee only to initiate proceedings under Section 7 of the I & B Code, 2016, when there is a proved and established default or an event of default and in the absence of the same and adoption of procedure under Clause 10.1 (iv) of Debenture Trust Deed, the notices issued on 28.07.2020, alleging that there has chanced a default, that cannot be sustained in the eyes of law, in the absence of established authority. Whether there was any validly executed Power of Attorney? - HELD THAT:- When the nature of default as given under the Debenture Trust Deed and the debt too as defined therein are almost akin in its reflection. An intention of the legislature as that given under the statutory definition, the term ‘coupon’ which has been sought to be argued by the Ld. Senior Counsel for the Respondent otherwise cannot be read as to be an alternative to determine a debt or a default, so as to exclude the applicability of Clause 7, which would be the act falling under the domain of exercise of powers by the Debenture Trustee. Once it comes to determining an aspect of a procedure for the purposes of initiation of proceedings under Section 7 of the I & B Code, 2016, we have had to analyze judicially, as the sanctity of the source of power that, should have been normally exercised based on the Debenture Trust Deed, which would be binding inter-se amongst the parties, owing to the binding effect of the Debenture Trustee, as given under the Debenture Trust Deed itself, which provides for, that the Debenture Trustee though its functions has to be regulated upon by majority resolution passed by the Debenture Holder, but the contents of the same would have a binding effect on the parties whose act or actions are likely to be affected by the Debenture Trustee Agreement. The above question is answered against the Respondent/Applicant, that since the Debenture Trust Deed, is binding on the Respondents, and the procedure for its recovery under Clause 7 of the Deed, it ought to have been initiated, by a grant of authorization to the Debenture Trustee by a majority resolution, as contemplated under the Debenture Trust Deed, and more particularly when the Debenture Trustee itself has been authorized by the Government of India under the notification referred to herein above, which happens to derive source of issuance of notification is, vested under Section 7(1) of the I & B Code, 2016. In the absence of the proceedings being drawn by the Debenture Trustee after its valid procedural authorization, the entire proceedings under Section 7 of the I & B Code, 2016, would be vitiated in the eyes of law, which deserves interference by this Appellant Tribunal. Whether the proceedings were barred by limitation? - HELD THAT:- The object of limitation, under the Act, was to safeguard the right, or benefit which might have judicially accrued to, a person who is the beneficiary of adjudication, and maturing of right due to an inaction on the part of the person who seeks to, invoke a remedy for a redressal of his any legal rights created under an Act or law, which has been adversely effected by an adjudication made by the courts, which remains unchallenged, is matured for the winning party due to non-initiation of proceedings before a superior forum, within limitation - A rational interpretation has to be given, and the said extension should not be preposterously extended without rationality to deprive the very object of limitation. The limitation should not be extended at the cost of deprivation of a right which had accrued to the beneficiary. The question of acknowledgment of default, being 30.09.2019 in the instant case, is not in controversy, as Section 18 only deals with the aspect of effect of acknowledgment, which had never been the disputed case of the Respondent, at any stage of the proceedings, because they had persistently argued, that the default stood acknowledged as back as on 30.09.2019 - Once the date of default is not in dispute, the implication of Section 18 of the Limitation Act will have no relevance for the purposes of determining the debt and the date of default and its conjoint reading with Section 238A of I & B Code, 2016. The proceedings drawn under Section 7 of the I & B Code, 2016, by Respondent/Applicant was barred by limitation, this question too is answered against the Respondent and in favour of the Appellant. Date of Default and its determination - HELD THAT:- It is a rampant case and not in aspect of debate, that the date of default is on 30.09.2019, and it is not in debate rather admitted by Respondent/Applicant, that the limitation has to be determined as per Article 137 of the Limitation Act from the date of admission of default i.e., 30.09.2019 in the instant appeal. If the limitation is construed under Article 137 of Limitation Act, as per the admitted date of default, it will be ending on 30.09.2022, but if it is determined from the date of the imposition of the restrictions because of COVID-19 and even if the same is permitted to be extended, to the period of 90 days as per Hon’ble Apex Court Suo motu case [2022 (1) TMI 385 - SC ORDER] irrespective of which that would be falling on 29.09.2022. After the extended date of 90 days of limitation as granted by the judgment of the order of the Hon’ble Apex Court, with effect from 01.03.2022, if that be so, there was no legal or factual obstruction for the Applicant/Respondent nor there is any express pleadings for inability to file proceedings between 01.03.2022 till 29.09.2022 and thereafter till 08.09.2023. In that eventuality, they would not be entitled to any benefit of limitations determined on the basis of admitted date of default, even based upon the Suo motu judgment particularly, that has contained under Para 5.3 of the said judgment. The en block exclusion, of the period from 15.03.2020 to 28.02.2022, would not be available to the Appellant, when the Section 7 application was filed after 464 days even after the extended period of 90 days. Hence at the most, the appeal ought to have been filed, prior to 29.09.2022, and since there happens to be no valid explanation, by the Respondent for the inability to file, the application between 29.09.2022 and 07.09.2023. The limitation, could not be extended as argued by the Ld.Senior Counsel for the Respondent; which would be reckoned from the date of admitted default i.e., 30.09.2019, which was prior the restrictions of COVID-19 situation i.e., prior to 15.03.2020. Limitation and effect of Section 10A of the I & B Code, 2016 - HELD THAT:- On a simpliciter reading, of the provisions contained under Section 10A it provides for, that the bar which was created for initiation for proceeding, was in relation to the default which was committed on or after 25.03.2020, it not apply to admitted defaults prior subsequent to the insertion of Section 10A. Since there being a specific incorporation of a cut-off date of 25.03.2020 and here in the instant case admittedly the default has been committed on 30.09.2019, Section 10A will have no applicability for the purposes of extension of the period of limitation for initiation of CIRP proceedings owing to COVID-19 situation and more particularly, when the Respondent/Applicant, himself has issued notices for initiation of proceedings on 28.07.2020 after the insertion made by the Act No. 17/2020 with effect from 05.06.2020, that is one month after the insertion. The explanation of Section 10A, has abundantly made quite clear, that the provision under Section 10A would only be applicable when the default is expressly shown to have been committed after 25.03.2020 and it will not be inclusive of any defaults which are committed prior to it. Under Section 10A of the I & B Code, 2016, will not be attracted in the instant case and in those cases where the default has chanced prior to cut-off as ascribed under Section 10A of the I & B Code, 2016. This Appellate Tribunal too, had an occasion to deal with almost a similar issue in the matter of Company Appeal (AT) (CH) (Ins) No. 95/2024, Mr. Sudhir Bobba versus M/s. TVN Enterprises & Another [2025 (3) TMI 1142 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL AT CHENNAI], the Judgment rendered by this Tribunal is based upon the ratio of Raghavendra Joshi [2023 (8) TMI 1376 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI] as well as that of, Narayan Mangal [2023 (8) TMI 1378 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] had to propound to the same principles that Section10A will not apply in those cases where the default has occurred, prior to the insertion of Section 10A in I & B Code, 2016, and period prescribed therein. Section 10A will have no applicability for the purposes of extension of the period of limitation in the instant case, as it has been argued by the Ld. Counsel for the Respondent/Applicant to the proceedings. Because of the fact, that the Respondent/Appellant themselves have chosen to issue notice on 28.07.2020, i.e., one month after the exemption contemplated under Section 10A, as made effective by the amending act with effect from 05.06.2020. The Respondent/Applicant will not be entitled to any benefit under Section 10A of the I & B Code, 2016, which would not be applicable - from the conduct of Respondent/Applicant, they have attempted to blow hot and cold simultaneously and take the benefit of the extended period of limitation under Section 10A of the I & B Code, 2016, by knowing the fact that they had issued the notice under Section 8, after almost one month from the date of the insertion of Section 10A of the I & B Code, 2016, and then sitting over the issue and instituting the proceedings, even after the taking off the period of limitation by the Hon’ble Apex Court, with effect from 28.02.2022 to 30.05.2022 and waiting till 07.09.2023, the proceedings drawn by the Respondent would be barred by limitation and Article 137 of the Limitation Act will come into play. Thus, this question is answered, against the Respondent thereby the Section 7 proceedings were barred by limitation. What implications would Section 65 of the I & B Code, 2016, would have on the proceedings? - HELD THAT:- The plea of malicious prosecution was raised in written submissions, but the Adjudicating Authority did not address it. The Court found this omission significant, rendering the judgment perverse for not considering all relevant pleas. Conclusion - i) Because of the fact that the default is an aspect not disputed, and its limitation for the purpose of initiation of proceedings, under Section 7 of the I & B Code, 2016, will be expiring on 30.09.2022, after the gracious period granted by the Hon’ble Apex Court, since the Respondent having filed the same on 07.09.2023 would be barred by limitation. Since being in violation to Article 137 of the Limitation Act. ii) Because of the fact that, the Debenture Trust Deed dated 22.03.2019, it was a self-contained provision, which provided for conferring of a right for initiation of proceedings for insolvency, after a majority decision of the Debenture Holders, which was to be exercised by the Debenture Trustee and since the same was not done in accordance with the covenants of the inter-se binding implications of the Debenture Trust Deed. The entire proceedings would be vitiated, since there being a contravention to the agreed terms of the deed, which is not in dispute. iii) Because of the fact that, as per the affidavit which was filed in support of the application preferred under Section 7 for initiation of I & B proceedings was by an individual, who on the relevant date was not even holding a valid authority, owing to the cessation of his authority which was vested to him by the Boards Resolution of 05.03.2019. On the date of filing of the proceeding, since the said Boards Resolution stood superseded by the subsequent Boards Resolution of 02.02.2021, where the right set in subsequently conferred an authority to initiate proceedings to Mr. Kaustubh Sudame, by an attorney executed in his favour on 22.02.2022, thus on the date of filing of the proceedings, Mr. Manohar Maddili as he was not holding a valid authority. The proceedings would be vitiated since, having not been instituted under the valid authority. iv) Since, the entire proceeding was maliciously oriented, as having been instituted on the basis of the notice issued on 28.07.2020, which was falling during the COVID-19 period. v) Operation of Section 10A will not in any way impact the limitation period in this case since the limitation would start running from the date of the default being 30.09.2019, which was prior to the COVID-19 period and the limitation thereto of three years will be expiring on 30.09.2022 even after taking into account the implication of Suo motu judgment of Hon’ble Apex Court due to COVID-19 situation. vi) It would be a malicious proceeding and would be barred by Section 65 of the I & B Code, 2016. The plea of Section 65 of the I & B Code, 2016, since having been taken by the Appellant after the leave of the Tribunal and has not been considered, it would vitiate the proceedings. The application under Section 7 of the I & B Code, 2016 is rejected - appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the Debenture Trust Deed and its conditions were complied with in initiating proceedings under Section 7 of the I & B Code, 2016.Whether there was a validly executed Power of Attorney to initiate Section 7 proceedings.Whether the proceedings were barred by limitation.Determination of the date of default and its implications.The applicability of Section 10A of the I & B Code in relation to the limitation period.Implications of Section 65 of the I & B Code regarding fraudulent or malicious initiation of proceedings.2. ISSUE-WISE DETAILED ANALYSISA. Effect of Debenture Trust Deed and Non-complianceThe Debenture Trust Deed dated 22.03.2019 was central to determining the authority to initiate proceedings under Section 7 of the I & B Code, 2016. The deed required a majority decision by Debenture Holders to authorize the Debenture Trustee to act. The Court found that the conditions of the Debenture Trust Deed were not complied with, as there was no majority resolution authorizing the initiation of proceedings. This non-compliance vitiated the proceedings under Section 7 of the I & B Code.B. Validity of Power of AttorneyThe Power of Attorney executed on 06.03.2019 did not confer the authority to litigate on behalf of the Applicant. The Court found that the affidavit supporting the Section 7 application was executed by Mr. Manohar Maddili, who did not hold valid authority on the date of filing. The Board's Resolution of 05.03.2019, which was the basis for the Power of Attorney, did not authorize litigation. Additionally, a subsequent resolution on 02.02.2021 and a new Power of Attorney on 22.02.2022 superseded the earlier authority, rendering the proceedings initiated by Mr. Maddili unauthorized.C. LimitationThe proceedings were found to be barred by limitation. The default date was admitted as 30.09.2019, and the limitation period under Article 137 of the Limitation Act would expire on 30.09.2022. The Court held that the COVID-19-related extensions provided by the Supreme Court did not apply to extend the limitation period beyond this date. The Section 7 application filed on 07.09.2023 was thus time-barred.D. Date of Default and Its DeterminationThe default date was consistently recognized as 30.09.2019. The Court emphasized that acknowledgment of default and debt did not alter this date. The proceedings were initiated long after the limitation period had expired, with no valid explanation for the delay.E. Applicability of Section 10ASection 10A of the I & B Code, which suspends certain proceedings for defaults occurring after 25.03.2020, was deemed inapplicable. The default in question occurred before this date, and the issuance of notices during the COVID-19 period did not alter the limitation calculation.F. Section 65 of the I & B CodeThe Court considered whether the proceedings were maliciously initiated under Section 65 of the I & B Code. The plea of malicious prosecution was raised in written submissions, but the Adjudicating Authority did not address it. The Court found this omission significant, rendering the judgment perverse for not considering all relevant pleas.3. SIGNIFICANT HOLDINGSThe Debenture Trust Deed's conditions were not met, invalidating the proceedings under Section 7 of the I & B Code.The Power of Attorney did not authorize the initiation of litigation, and the proceedings were unauthorized.The application was barred by limitation as it was filed after the expiration of the statutory period.Section 10A did not apply as the default occurred before the specified date.The omission to consider the plea under Section 65 rendered the judgment incomplete and perverse.The appeal was allowed, the Impugned Order dated 08.08.2024 was quashed, and the application under Section 7 of the I & B Code, 2016, was rejected.