Restructuring Conduct Binds Debenture Trustee: NCLAT Rejects Section 7 Plea Amid Affirmed Moratorium
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NCLAT held that the conduct of the Debenture Trustee in acting upon the restructuring proposal, including releasing securities and issuing a NOC, bound it to the agreed moratorium, leading to the rejection of the Section 7 application.
On 16-04-2025, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), reviewed an appeal and held that a Section 7 IBC application cannot be admitted where the Debenture Trustee has actively participated in and acted upon a restructuring proposal—including releasing securities and issuing No Objection Certificates (NOCs)—thereby affirming the existence of a binding moratorium, even in the absence of a formal modification of the Debenture Trust Deed. The Tribunal further held that such conduct estops the Trustee from subsequently alleging default to trigger insolvency proceedings.
The National Company Law Appellate Tribunal, Chennai Bench, comprising Justice Rakesh Kumar Jain and Mr. Jatindranath Swain, adjudicated an appeal filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, by Catalyst Trusteeship Ltd., acting as Debenture Trustee. The appeal arose from the dismissal of a Section 7 application by the NCLT, Mumbai, which was filed to initiate CIRP proceedings against Ecstasy Realty Pvt. Ltd. (Corporate Debtor). The underlying dispute concerned a complex debt arrangement involving ₹850 crore worth of non-convertible debentures (NCDs), of which ₹600 crore was disbursed, and allegations of default by the Corporate Debtor.
The primary ground of appeal was that the Corporate Debtor had defaulted in maintaining interest reserves and repaying dues, resulting in a recall notice and a subsequent Section 7 petition, claiming an outstanding of ₹1203.55 crore. The Adjudicating Authority, however, found that the parties had entered into a restructuring arrangement, backed by ECL Finance (ECLF), a major debenture holder from the Edelweiss Group, which granted a moratorium until September 2023. This finding was based on various communications and steps taken by the Appellant that suggested acquiescence to the restructuring. The Appellant challenged this conclusion, asserting that no binding modification of the Debenture Trust Deed (DTD-I) had occurred, as required under Clause 33, which necessitated the approval of at least two-thirds of the debenture holders. Since ECLF only held 28.17%, the Appellant argued that unilateral commitments could not be deemed binding on the entire group of stakeholders.
In rebuttal, the Corporate Debtor relied on documentary evidence and the conduct of the Appellant, including the issuance of a No Objection Certificate, the release of mortgage over properties, and the transfer of ₹9.33 crore, to assert that the Appellant had knowingly acted in furtherance of the agreed restructuring. The Tribunal examined the contemporaneous correspondence and concluded that the Appellant had participated in the process, especially when it agreed on 28.03.2022 to release securities upon receipt of ₹152 crore, a condition that was fulfilled by the Corporate Debtor under the Sapphire transaction. This action was consistent with the understanding of a moratorium being in place and contradicted the Appellant’s later assertion that its conduct was independent of any such restructuring.
The Tribunal also found that the Appellant’s claim that the release of security was in accordance with Clause 28.3 of the DTD lacked substance, as there was no reference to this clause in the contemporaneous communications. Rather, the conduct of the Appellant and the directions received from ECLF indicated a unified approach towards implementing the moratorium. It was also noted that the Appellant did not raise objections to ECLF’s authority or instructions at the relevant time, which further weakened its case.
In a broader context, the Tribunal scrutinised whether the Section 7 application was a genuine attempt at insolvency resolution or a coercive mechanism to recover dues. It noted the suspicious timing of the Appellant’s demand notices and legal action, coming soon after the Sapphire transaction was completed and the restructuring steps had been acted upon. The Tribunal found that the Corporate Debtor had complied with its obligations under the restructuring agreement and that the Appellant’s abrupt reversal and initiation of recovery proceedings appeared to be engineered to induce default. This conduct, particularly against a solvent company with significant assets, was found to be contrary to the spirit of the IBC.
The Tribunal concluded that the Section 7 application lacked bona fide intent and was, instead, a misuse of the insolvency framework for recovery purposes. It upheld the Adjudicating Authority’s decision and dismissed the appeal, finding no merit in the arguments advanced by the Appellant.
Mr. Abhijeet Sinha, Sr. Counsel, along with Mr. Ritesh Kumar, Mr. Ankit Banati, Mr. Aditya Shukla, Ms. Heena Kochar and Mr. Naman Gowda, Advocates, represented the Appellant.
Dr. Ashwani Kumar, Sr. Advocate with Mr. Virag Gupta, Mr. Aman Kacheria, Ms. Shefali Sangwan, Ms. Sakshi Dube, Mr. Rishabh Dhanuka, Mr. Shaurya Tiwari, Mr. Vishal Mishra, Mr. Zeeshan Hashmi and Mr. Ankit Prashar, Advocates, appeared for the Respondent.
Mr. Sunil Trilokchandani and Ms. Drishti Bhindra, Advocates, appeared for the Proposed Respondent.
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