NCLAT dismisses Section 7 application filed during valid moratorium period with ulterior motives

NCLAT dismissed the appeal challenging rejection of Section 7 application under IBC. The court found that a valid moratorium was in place until September 2023 following completion of the Sapphire transaction, precluding any default or debt becoming due. The appellant-debenture trustee had agreed to restructuring proposal and acted upon it by releasing charges and funds. NCLAT held the Section 7 application was filed with ulterior motives to coerce the corporate debtor into insolvency despite substantial assets, rather than genuine insolvency resolution. The adjudicating authority correctly dismissed the application as no default existed during moratorium period.

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The core legal questions considered by the Tribunal in this appeal arising under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 ("IBC") are twofold: first, whether there existed a debt due and payable by the Corporate Debtor to the Appellant-Debenture Trustee with an incidence of default justifying initiation of Corporate Insolvency Resolution Process ("CIRP") under Section 7 of the IBC; and second, whether the Section 7 application was filed with the bona fide intent of insolvency resolution or for some other ulterior purpose.

Regarding the first issue, the legal framework involves the provisions of the IBC relating to admission of applications under Section 7, which require proof of existence of debt and default. The Debenture Trust Deed ("DTD-I") executed between the Corporate Debtor and the Appellant as Debenture Trustee governs the terms of the debt, including provisions for modification of the deed and maintenance of an interest reserve account. Clause 33 of DTD-I stipulates that any modification requires approval of at least two-thirds of the Debenture Holders. The Appellant contended that no such modification or moratorium was validly granted as the requisite procedure was not followed, and that the moratorium claimed by the Corporate Debtor was based on negotiations with only one Debenture Holder (ECL Finance Limited - ECLF) who held only 28.17% of the debentures, insufficient to bind the entire Debenture Holder body. The Appellant relied on Supreme Court precedent holding that once default is established, the Adjudicating Authority has limited discretion to refuse admission of a Section 7 application.

The Corporate Debtor, conversely, argued that a restructuring and moratorium were agreed upon by the majority Debenture Holders constituting 84.67%, including ECLF and its sister companies, and that the Appellant was aware and actively participated in implementing this moratorium. The Corporate Debtor pointed to a series of email correspondences and letters exchanged between itself, ECLF, and the Appellant, including a restructuring proposal dated 16.03.2022, ECLF's conditional acceptance on 23.03.2022 subject to completion of the "Sapphire transaction," and the Appellant's letter dated 28.03.2022 confirming no objection to issuance of further debentures and release of charges upon receipt of Rs 152 crore from the Sapphire transaction. The Corporate Debtor further highlighted that the Appellant released the charge on the Bandra property and disbursed Rs 9.33 crore in tranches post-Sapphire transaction, actions consistent with a moratorium arrangement. The Corporate Debtor contended that the moratorium was thus in place until September 2023, precluding any debt being due or default occurring before that date.

In its interpretation, the Tribunal closely examined the documentary evidence, particularly the email exchanges and letters between the parties. It found that the restructuring proposal and moratorium were indeed communicated and agreed upon in principle by the majority Debenture Holders, including ECLF, and that the Appellant was fully aware and actively involved in these arrangements. The Tribunal observed that the Appellant's contention that ECLF's consent could not bind the other Debenture Holders was undermined by the fact that the restructuring proposal was put to the Debenture Holders for approval and rejected by 94.84%, but only after the Sapphire transaction was completed and the moratorium was already acted upon. The Tribunal noted that the Appellant and Debenture Holders' conduct - releasing charges, issuing no objection certificates, and disbursing funds - demonstrated their acceptance of the restructuring and moratorium. The Tribunal rejected the Appellant's reliance on Clause 28.3 of DTD-I to justify the release of the Bandra property as an afterthought, given the contemporaneous communications linking the release to the restructuring proposal.

The Tribunal also analyzed the timing and sequence of events, noting that the Corporate Debtor had fulfilled its part by completing the Sapphire transaction and depositing Rs 152 crore with the Appellant, expecting the moratorium to be honored. The Appellant's subsequent issuance of a demand notice for Rs 65.49 crore and initiation of coercive recovery measures was found to be inconsistent with the prior conduct and understanding. The Tribunal observed that the Appellant and majority Debenture Holders appeared to have engineered a default situation by reneging on the restructuring and moratorium agreement after inducing the Corporate Debtor to complete the Sapphire transaction. This conduct was viewed as manipulative and aimed at pushing a solvent Corporate Debtor into insolvency.

On the question of the intent behind filing the Section 7 application, the Tribunal applied the principle from the Supreme Court's decision in Indus Biotech Private Ltd. v. Kotak India Venture (Offshore) Fund, which requires the Adjudicating Authority to make an objective assessment of the facts to determine if default has occurred and whether the petition is fit for admission. The Tribunal found that the Appellant's conduct and the timing of coercive steps post-Sapphire transaction indicated an ulterior motive rather than a genuine intent for insolvency resolution. The inflated claim amount in the Section 7 application, despite substantial repayments by the Corporate Debtor, further supported the inference of malafide intent. The Tribunal relied on the Supreme Court's ruling in Dena Bank v. C Shivakumar Reddy emphasizing that coercive litigation against a Corporate Debtor contrary to the spirit of IBC is detrimental to all stakeholders.

In conclusion, the Tribunal held that no debt was due and payable at the relevant time due to the moratorium agreed upon by the majority Debenture Holders and acted upon by the Appellant and Corporate Debtor. Consequently, no default had occurred to justify admission of the Section 7 application. Furthermore, the Tribunal found that the Section 7 application was filed with an improper motive, not for genuine insolvency resolution but to coerce the Corporate Debtor into insolvency. Hence, the impugned order dismissing the Section 7 application was upheld.

Significant holdings include the following verbatim excerpt from the judgment:

"We are therefore persuaded to believe that it was always in the notice and knowledge of the Appellant that the Corporate Debtor and the Edelweiss Group were negotiating a restructuring proposal. We also find that these correspondences and reference to various discussions between the parties mentioned in the letters were part of the record before the Adjudicating Authority."

"Given the present facts and circumstances of this case, we find that there is enough substance to believe that ECLF and the Appellant were acting in tandem to act upon and implement the restructuring proposal as agreed upon by them with the Corporate Debtor... Hence, there was no question of any default having been committed by the Corporate Debtor."

"We strongly deprecate such motivated and manipulative endeavours on the part of any Financial Creditor to push a Corporate Debtor into the folds of CIRP as it tantamount to misuse and abuse the provisions of IBC."

Core principles established include the necessity of adherence to procedural requirements under the Debenture Trust Deed for modification of debt terms, the binding nature of restructuring and moratorium agreements when acted upon by the parties, and the requirement that Section 7 applications be filed with bona fide intent for insolvency resolution rather than as a coercive recovery tool. The Tribunal reaffirmed the duty of the Adjudicating Authority to objectively assess the entire factual matrix before admitting an insolvency petition.

On the first issue, the Tribunal concluded that the moratorium was validly in place until September 2023, precluding any default and debt becoming due and payable, thus justifying dismissal of the Section 7 application. On the second issue, the Tribunal held that the Section 7 application was not filed with the intent of insolvency resolution but rather with an ulterior motive to coerce the Corporate Debtor, thereby affirming the impugned order's rejection of the application on this ground as well.

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