Section 7 IBC Cannot Be Defeated by Pending or Informal Restructuring Absent Written Amendment of Debenture Trust Deed
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REEDLAW Legal News Network reports: The Supreme Court clarified the scope of insolvency admission under Section 7 of the Insolvency and Bankruptcy Code, 2016, holding that pending or informal restructuring discussions cannot defeat initiation of the corporate insolvency resolution process when financial debt and default are established. The decision reinforces the primacy of written contractual instruments governing financial obligations and limits the ability of a corporate debtor to rely on informal negotiations to resist insolvency proceedings.
A Bench comprising Justice Sanjay Kumar and Justice K. Vinod Chandran allowed the appeal filed by the debenture trustee and set aside the concurrent orders of the NCLT and NCLAT. The Court held that alleged restructuring discussions between the corporate debtor and a single debenture holder, not culminating in a written amendment approved in accordance with the Debenture Trust Deed, could not create a moratorium or extinguish default. Relying on settled precedent, the Court reiterated that once financial debt and default are shown, admission under Section 7 is mandatory.
The appeal was filed by the Financial Creditor challenging the concurrent rejection of a Section 7 application by the Adjudicating Authority and the Appellate Tribunal. The petition sought initiation of the corporate insolvency resolution process against the Corporate Debtor in respect of default arising from redeemable non-convertible debentures governed by a Debenture Trust Deed.
The core issue before the Court was whether informal restructuring negotiations could override the binding modification mechanism under the Debenture Trust Deed so as to defeat a Section 7 application.
The lower fora proceeded on the premise that a restructuring proposal and an 18-month moratorium had come into effect based on email correspondence between the Corporate Debtor and one debenture holder, thereby negating default. The Supreme Court found this approach legally unsustainable, holding that restructuring or modification of contractual obligations under the Debenture Trust Deed could take effect only through a written amendment approved by the requisite majority of debenture holders in accordance with the deed.
Relying on Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, the Court reiterated that for admission under Section 7, the adjudicating authority is only required to ascertain the existence of financial debt and default, and disputes or negotiations cannot derail the process. Reference was also made to Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) and Others, REEDLAW 2021 SC 03573, to clarify that while a corporate debtor may demonstrate that no debt is due, such a defence cannot masquerade as a pre-existing dispute applicable only to Section 9 proceedings.
The Court further held that novation under Section 62 of the Contract Act requires consensus of all parties, which was absent in the present case, and that no implied waiver or estoppel could override explicit contractual provisions requiring written consent. Finding the conclusions of the NCLT and NCLAT to be perverse and contrary to the record, the Supreme Court set aside the impugned orders and directed admission of the Section 7 application.
Mr. Aryama Sundaram, Sr. Advocate, with Ms. Akanksha Mehra, AOR, Mr. Himanshu Tyagi, Mr. Lakshay Saini and Ms. Rohini Musa, Advocates, represented the Appellant.
Mr. Ashwani Kumar, Sr. Advocate, with Mr. Amit Sharma, AOR, Mr. Virag Gupta, Mr. Dipesh Sinha, Ms. Pallavi Barua and Ms. Aparna Singh, Advocates, appeared for the respondents.
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