Supreme Court: In an appeal arising from the judgment of the National Company Law Appellate Tribunal (NCLAT) affirming the order of the NCLT whereby the application under Section 7, Insolvency and Bankruptcy Code, 2016 (IBC) filed by the debenture trustee was rejected and initiation of the Corporate Insolvency Resolution Process (CIRP) was refused. A Division Bench of Sanjay Kumar* and K. Vinod Chandran, JJ., set aside the NCLT and NCLAT’s orders and held that application under Section 7 IBC cannot be refused on the basis of an unapproved restructuring loan facility proposal when the Debenture Trust Deed was never modified in the manner contractually prescribed and default in repayment of financial debt stands established. Consequently, the Court held that the financial debt and default had occurred, financial creditor’s Section 7 IBC application liable to be admitted and restored the company petition before the NCLT.
Factual Matrix
The respondent company proposed to develop a residential-cum-retail project in Mumbai and, for this purpose, resolved to raise funds through the issuance of 850 redeemable non-convertible debentures aggregating to ₹850 crore in two series. On the same day the Board approved the issuance, the appellant was appointed as the debenture trustee-appellant and a Debenture Trust Deed dated 27 March 2018 came to be executed. Series A debentures worth ₹600 crore were fully subscribed and the entire amount stood disbursed to the respondent, whereas Series B debentures were never issued.
In March 2022, when defaults had already occurred, the respondent initiated correspondence with one of the debenture holders, ECL Finance Limited, seeking restructuring of the loan facility repayment schedule, including an 18-month moratorium on principal and interest. However, these communications were not marked to the debenture trustee. Around the same time, the respondent sought a No Objection Certificate (NOC) from the trustee for raising additional funding by creating a charge over certain unsold flats. The trustee issued a conditional NOC for this limited purpose, stating that the charge would be released upon receipt of the specified amount in escrow.
Soon thereafter, the trustee issued a demand letter recording that more than ₹65 crore was overdue. When the restructuring proposal was eventually placed before the debenture holders, it was rejected by 94.84% of them. The trustee then issued a recall notice demanding the entire outstanding amount of over ₹1203 crore and subsequently filed an application under Section 7 IBC.
The NCLT dismissed the application on the premise that a moratorium had come into effect pursuant to restructuring negotiations, and the NCLAT affirmed NCLT’s view. Aggrieved the appellant preferred the present appeal.
Parties’ Contentions
The appellant contended that the NCLT and NCLAT proceeded on an erroneous assumption that the Debenture Trust Deed stood modified. Under the terms of the Debenture Trust Deed, any variation required prior written consent of the debenture holders through “approved instructions” and execution of necessary documents. No such procedure was followed.
It was further argued that the correspondence relied upon by the respondent was only with one debenture holder and could not bind the others in the absence of express authorization. Therefore, the so moratorium never came into existence in law.
The respondent, on the other hand, asserted that the restructuring proposal had been accepted in principle and acted upon, as evidenced by the trustee’s conduct, release of certain amounts, and release of secured property. It claimed that, in view of the moratorium, no default existed and the insolvency proceedings were in the nature of recovery. The respondent also invoked doctrines such as estoppel and legitimate expectation and relied upon its repayment of a substantial portion of the disbursed amount.
Moot Point
Whether the alleged restructuring and moratorium had the effect of altering the terms of the Debenture Trust Deed so as to negate the existence of a default, thereby justifying the dismissal of the Section 7 application?
Court’s Analysis
At the outset, the Court reiterated the settled position that, for admission of an application under Section 7, the adjudicating authority is required examine and satisfy itself that a financial debt exists and a default has occurred. Referring to Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, the Court stated that a pre-existing dispute, relevant under Section 9, has no bearing on a financial creditor’s application under Section 7 IBC.
On facts, the Court found that the restructuring proposal was addressed only to one debenture holder and that there was no material to show that the person with whom the respondent corresponded had authority to bind the remaining debenture holders. It refused to accept the respondent’s bald statement that “the subsidiaries had no independent volition of their own.” Thus, it was held that they can neither be alleged to have committed a volte face nor can they be said to have approbated and reprobated by their conduct.
The Court examined Clause 33, Debenture Trust Deed, which mandated prior written consent of the debenture holders through approved instructions passed by a “Special Resolution.” Clause 33.4 explicitly stated that no amendment “shall be effective unless the same is in writing and signed by or on behalf of each of the parties.” Clause 37.1 posits that there can be no implied waiver or impairment while clause 37.2 stated that “a waiver or consent granted by the debenture trustee under the DTD would be effective only if given in writing.” The Court also referred to Section 62, Contract Act and held that novation requires consensus of all parties, which was wholly absent.
The Court noted that no such procedure was followed. The debenture trustee and other debenture holders were not even privy to the initial discussions and the restructuring proposal addressed only to ECLF could not bind other debenture holders.
The Court noted that even the Bombay High Court, in the respondent’s own commercial suit, had refused interim relief on the ground that there was no compliance with the contractual mechanism for amendment. It was asserted that unfortunately, the NCLT and NCLAT had “casually brushed aside” this order by the competent civil Court, which has attained finality.
The Court rejected the NCLAT’s conclusion with regards to debenture trustee colluding with the debenture holders because the debenture trustee was enjoined by the Debenture Trust Deed to protect the interest of the debenture holders. The Court found the “finding that the debenture trustee acted in unison with the debenture holders in catalysing their dubious designs to drag the respondent company towards insolvency” as incorrect. Accordingly, It set aside the adverse remarks made against the debenture trustee.
The Court further held that the doctrine of legitimate expectation had no application where the contract itself prescribed a specific mode for modification and where even the alleged promise did not crystallise into a commitment.
Finally, the Court stated that although it would ordinarily not choose to reappreciate a matter on facts when the NCLT and, in appeal, the NCLAT have recorded concurrent findings, but, this was a case of “glaring and manifest” perversity, as the tribunals had effectively rewritten the contract on the basis of surmises and conjectures.
Court’s Decision
The Court set aside the orders of the NCLT and NCLAT, directed to admit the Section 7 application, and restored the matter to the NCLT for initiation of the CIRP.
[Catalyst Trusteeship Ltd. v. Ecstasy Realty (P) Ltd., Civil Appeal No. 7424 of 2025, decided on 24-2-2026]
*Judgment by Justice Sanjay Kumar