NCLAT Invalidates CIRP Initiation Due to Non-Compliance with Debenture Trust Deed and Limitation Bar

The NCLAT invalidated the initiation of the Corporate Insolvency Resolution Process (CIRP) due to non-compliance with the Debenture Trust Deed and the expiry of the limitation period.

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member), reviewed an appeal and connected interlocutory applications. The Tribunal held that the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code (IBC) was invalid due to non-compliance with the mandatory provisions of the Debenture Trust Deed, which included the requirement for a majority resolution of debenture holders. Additionally, the power of attorney used to file the application was deemed invalid, and the application was barred by limitation, having been filed beyond the prescribed period.

The National Company Law Appellate Tribunal (NCLAT), in an appeal filed by a shareholder and director of Coffee Day Enterprises Ltd., overturned the admission of a Section 7 application by the National Company Law Tribunal (NCLT), Bengaluru. The appeal arose from the NCLT’s order dated 08.08.2024, which had admitted the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by IDBI Trusteeship Services Ltd., acting as the Debenture Trustee, and thereby commenced the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

The crux of the appeal pertained to the procedural lapses and legal infirmities in initiating CIRP, notably non-compliance with the Debenture Trust Deed (DTD) dated 22.03.2019. The Tribunal found that the DTD contained express conditions under Clause 10.1(b), which mandated that the Debenture Trustee could only initiate legal actions, including insolvency proceedings, after obtaining a majority resolution from Debenture Holders representing not less than 51% of the outstanding debentures. Clause 7 of the DTD defined the scope and instances of "Event of Default", while Clause 7.23 outlined the remedial mechanism post-default, including issuance of notice in a prescribed form. The NCLAT held that none of these procedural requirements had been satisfied prior to filing the Section 7 application, thereby rendering the initiation of CIRP procedurally defective.

Further scrutiny was applied to the authority under which the Section 7 application had been filed. The Tribunal held that Mr. Manohar Maddili, the individual who filed the application, lacked valid authority on the date of filing. His powers derived from a Power of Attorney issued in 2019, which was superseded by a subsequent resolution in 2021, delegating authorisation powers exclusively to the MD/CEO of the Debenture Trustee. Consequently, a new Power of Attorney was executed in 2022 in favour of Mr. Kaustubh Sudame. Since no authority was vested in Mr. Maddili at the time of filing on 07.09.2023, the application was deemed to be filed by an unauthorised person, vitiating the entire process.

The Tribunal also ruled that the application was barred by limitation. The acknowledged date of default was 30.09.2019. Although the Supreme Court had excluded limitation periods from 15.03.2020 to 28.02.2022 due to the COVID-19 pandemic, the extended deadline expired on 30.05.2022. The application was filed on 07.09.2023—464 days after the limitation period expired—without any explanation or acknowledgement of debt sufficient to invoke Section 18 of the Limitation Act. The Tribunal distinguished precedents that allowed for limitation extensions based on acknowledgements in books of account, finding such evidence absent in this case.

Moreover, the Appellant had also raised a plea under Section 65 of the IBC, asserting that the proceedings were malicious and fraudulent. This plea was not considered by the NCLT, despite being part of the written submissions. The NCLAT deemed this a serious procedural lapse, relying on established judicial precedent to hold that such failure to adjudicate on a specifically pleaded issue rendered the impugned order perverse and unsustainable.

The Tribunal conclusively held that the Section 7 application was barred by limitation, was filed without proper authority, and had failed to comply with mandatory procedural prerequisites under the DTD. It emphasised that proceedings under IBC, especially those affecting the corporate debtor’s status and stakeholder interests, must adhere strictly to legal authorisations and contractual frameworks. Accordingly, the NCLAT allowed the appeal, quashed the NCLT’s order dated 08.08.2024, and rejected the application under Section 7 of the IBC as non-maintainable in law.

Mr. P.S. Raman and Mr. P.H. Arvindh Pandian, Senior Advocates for Ms. Lakshana Viravalli, Mr. Adithya Jain, Mr. Arun C Mohan, Ms. S. Madhusmitha and Ms. Vandana Kohli, Advocates, represented the Appellant.

For the Respondent/ Defendant: Mr. R. Parthasarathy, Senior Advocate and Mr. T.K. Bhaskar, Advocate for Mr. Arun Karthik Mohan, Mr. Suhrith Parathasarathy and Ms. Amritha Sathyajith, Advocates, appeared for Respondent No. 1.

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