2025 (5) TMI 1922 - AT - IBC

Admission of section 7 application - Section 7 Application filed by Respondent No.1 was barred by Section 10A of IBC or not - rights and obligations of CD under the NCDs issued by the CD stood transferred to RTVPL or not - ratification of Acquisition Agreement by conduct - jurisdiction of Adjudicating Authority to look into the issues raised with regard to Acquisition Agreement - correctness in accepting the Financial Statements of Franklin Templeton India for Financial Year 2023-24 during the hearing of Section 7 Application. Whether Section 7 Application filed by Respondent No.1 was barred by Section 10A of IBC in view of notice dated 22.10.2020 issued by the Financial Creditor seeking repayment under the mandatory repayment clause under Debenture Trust-cum-Mortgage Deed dated 16.09.2015? - HELD THAT - The scheme of composite arrangement as was to enter into between Future Group and Reliance Retail Ventures Ltd. subsequently failed. It is also noticed Part-IV of Section 7 Application which was basis of initiation of Section 7 Application. The date of default mentioned in Part-IV of the Application is 30.04.2021 and it also mentions that debentures were to be redeemed as per the DTMD dated 15.10.2018. The DTMD dated 15.10.2018 as noticed contained a schedule regarding payment details. The date 30.04.2021 is one of the dates of Redemption Schedule as per Schedule-IV Payment Dates and amount of Rs. 5 crores were to be paid. The payment dates indicate that default in repayment also prior to 24.03.2021. It is well settled that Section 7 Application can very well be filed by a Financial Creditor on defaults committed by the CD which defaults are committed subsequent to 10A period. The present is a case where Section 7 Application clearly mentions the date of default as 30.04.2021 hence the Adjudicating Authority has rightly not accepted the submission of the CD that Application is barred by Section 10A. The Adjudicating Authority in paragraph 8.7 has observed that Financial Creditor cannot be held to be barred from filing application under Section 7 on the basis of default subsequent to Section 10A period. The Application filed under Section 7 by the Financial Creditor was not barred by Section 10A and Adjudicating Authority has rightly held that Application was not barred by 10A. There is no error in the order of Adjudicating Authority rejecting the application. Whether by virtue of Acquisition Agreement dated 29.08.2020 the rights and obligations of CD under the NCDs issued by the CD stood transferred to RTVPL? - Whether the correspondence between the Debenture Holders and the CD brought on record demonstrate that Debenture Holders have ratified the Acquisition Agreement by their conduct and due to waiver and the acquiescence they cannot question Acquisition Agreement? - HELD THAT - Neither any correspondence from debenture trustee has been referred or relied to claim that debenture trustee at any point of time gave its approval or no objection to the Acquisition Agreement. Thus according to own case of the corporate debtor there was no compliance of Clause 2.2 of the Acquisition Agreement. Reference of certain correspondence by the debenture holders in the above regard cannot be substituted as approval and no objection from the Axis Trustee Service Limited the respondent herein which is specifically required under Acquisition Agreement Clause 2.2 as noted above. Thus Acquisition Agreement itself having not been complied with insofar as obtaining approval or no objection of Axis Trustee Service Limited there is no occasion to accept the case of the corporate debtor that obligation under the NCDs as per debenture trust DTMD stood transferred from corporate debtor to Rivaaz. As noted the financial creditor or debenture holders were never party to the Acquisition Agreement 29.08.2020. It is on the record that the debenture holders voted against the scheme and the outstanding in Rivaaz as on 31.03.2021 as was communicated to the debenture holders was for purposes of scheme voting. The debenture holders were opposed to the scheme arrangement and voted against it which scheme ultimately was not approved. The voting of debenture holders against the scheme with regard to which public statement was given by the Future Group as noted above no waiver or acquiescence can be treated against the debenture holders with respect to Acquisition Agreement. Adjudicating authority in the impugned order has also rightly observed that the Acquisition Agreement was part of the larger and composite scheme of transfer and merger of the Future Group entities into reliance and which composite scheme having failed to obtain the regulatory approval the Acquisition Agreement has to be looked into as an step into the integral process. Thus no approval or consent to the Acquisition Agreement can be imputed to the debenture holders whereas no approval or consent is even pleaded on the part of the debenture trustee. Whether the Adjudicating Authority had jurisdiction to look into the issues raised with regard to Acquisition Agreement and observation of the Adjudicating Authority that DTMD is a statutory contract and any Agreement contrary to the statutory mandate will be void are sustainable? - HELD THAT - When the corporate debtor in its reply has relied on Acquisition Agreement and pleaded that by virtue of Acquisition Agreement the corporate debtor has no longer any obligation towards the NCD the adjudicating authority for determining the question of default on the part of the corporate debtor has to go into the question related to the Acquisition Agreement and the submission of the appellant that adjudicating authority has no jurisdiction and it exceeded the jurisdiction by making observation that Acquisition Agreement is void cannot be accepted - Acquisition Agreement is thus clearly not in conformity with the DTMD and thus is clearly void being in contravention of the DTMD. The finding of the adjudicating authority that Acquisition Agreement is void sustained. The present is a case where Section 7 application was filed by financial creditor claiming debt and default on the part of the corporate debtor. Corporate debtor in its defence have come up with Acquisition Agreement pleading that by Acquisition Agreement obligation of the corporate debtor has been transferred to the Rivaaz. The adjudicating authority was thus fully entitled to look into the Acquisition Agreement and considered the same in light of the principal document i.e. DTMD dated 15.10.2018. The adjudicating authority did not exceed its jurisdiction in entering into consideration of the Acquisition Agreement dated 29.08.2020 - Acquisition Agreement can be held to be void and contrary to DTMD - the adjudicating authority travelled beyond its jurisdiction to enter into Acquisition Agreement cannot be accepted. Whether the Adjudicating Authority committed error in accepting the Financial Statements of Franklin Templeton India for Financial Year 2023-24 during the hearing of Section 7 Application? - HELD THAT - Replying on the judgment of the Hon ble Supreme Court in Dena Bank (Now Bank of Baroda) Vs. C. Shivakumar Reddy Anr. 2021 (8) TMI 315 - SUPREME COURT the adjudicating authority has rightly observed that additional document amended the pleading can be accepted and permitted by the Tribunal. With regard to balance sheets of debenture holders adjudicating authority has held that corporate debtor has failed to show any grave prejudice or any unfair advantage was derived by the financial creditor due to non-production of the balance sheets of the debenture holders. It was held that balance sheets of the debenture holder which is a mutual fund being public documents are available on the website. Adjudicating Authority held that the balance sheets of the debenture holders need to be accepted on the record. When the corporate debtor was relying on the conduct and correspondence by the debenture holders for relying on the consent of the debenture holders to the Acquisition Agreement opposition to the receiving of the financial statements of the debenture holders is unexplainable. The adjudicating authority has rightly accepted the financial statements of the debenture holders and held that the objections raised by the corporate debtor were without any substance. Whether the order of Adjudicating Authority dated 09.04.2025 is not sustainable? - HELD THAT - The order of the adjudicating authority dated 09.04.2025 admitting Section 7 application adjudicating authority has come to finding that there exist a financial debt within the meaning of Section 5(8) of the Code exceeding for the monetary default of Rs.1 crore which is due and payable to the financial creditor. It was held that existence of financial debt and occurrence of default has been established by the financial creditor. Adjudicating Authority having returned the aforesaid finding there are no error in the order of the adjudicating authority in admitting Section 7 application. The order of the adjudicating authority dated 09.04.2025 indicate that adjudicating authority has elaborately considered all submissions raised by the parties and after due consideration of all aspect to the matter has returned its finding and admitted Section 7 application. Order of the adjudicating authority dated 09.04.2025 is a well-considered order which needs no interference by this Court in exercise of the Appellate Jurisdiction. Conclusion - i) Section 10A will have no bearing on defaults occurring after the expiry of the prohibited period. ii) The Acquisition Agreement dated 29.08.2020 which purported to transfer the rights and obligations under the NCDs from the Corporate Debtor to RTVPL was entered into without obtaining the prior written consent or no objection of the Debenture Trustee as mandated under Clause 2.2 of the Acquisition Agreement and Clause 10.2 of the Debenture Trust-cum-Mortgage Deed. Such non-compliance renders the Acquisition Agreement void and unenforceable. iii) The correspondence and conduct of the Debenture Holders including requests for financial statements and voting against the composite scheme do not amount to ratification waiver or acquiescence of the Acquisition Agreement. iv) The Adjudicating Authority has jurisdiction to examine the validity and effect of the Acquisition Agreement in the context of the Section 7 application especially when the Corporate Debtor relies on it as a defense. v) The audited financial statements of the Debenture Holders being public documents are admissible evidence in Section 7 proceedings. vi) The existence of financial debt and occurrence of default having been established on record the Adjudicating Authority s order admitting the Section 7 application is a well-considered order and does not warrant interference. There are no substance in any of the submission of the appellant. The appeal is dismissed.

Summary

The principal issues considered by the Tribunal in this appeal arising from the admission of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 ("IBC") are as follows:

(1) Whether the Section 7 application filed by the Financial Creditor (Debenture Trustee) was barred by the moratorium period under Section 10A of the IBC, in light of an earlier notice dated 22.10.2020 seeking repayment under a prior Debenture Trust-cum-Mortgage Deed dated 16.09.2015;

(2) Whether the rights and obligations of the Corporate Debtor ("CD") under the Non-Convertible Debentures ("NCDs") stood validly transferred to Rivaaz Trade Ventures Pvt. Ltd. ("RTVPL") pursuant to an Acquisition Agreement dated 29.08.2020;

(3) Whether the correspondence and conduct of the Debenture Holders evidenced ratification, waiver, or acquiescence to the Acquisition Agreement, thereby precluding them from disputing the transfer of debt to RTVPL;

(4) Whether the Adjudicating Authority ("AA") had jurisdiction to examine the validity of the Acquisition Agreement and whether its observation that the Acquisition Agreement was void as contrary to statutory provisions and the Debenture Trust-cum-Mortgage Deed ("DTMD") was sustainable;

(5) Whether the AA erred in admitting the audited financial statements of the Debenture Holders (Franklin Templeton Mutual Fund) for the financial year 2023-24 during the Section 7 proceedings;

(6) Whether the impugned order dated 09.04.2025 admitting the Section 7 application was sustainable.

Issue 1: Bar under Section 10A of the IBC

The CD contended that the Section 7 application was barred by Section 10A of the IBC due to a prior notice dated 22.10.2020 issued by the Financial Creditor invoking the mandatory prepayment clause under an earlier DTMD dated 16.09.2015. This notice was premised on the downgrading of debenture ratings, triggering a right to accelerate redemption.

The AA examined the date of default as per the Section 7 application, which was 30.04.2021, a date subsequent to the moratorium period under Section 10A. The AA held that defaults occurring after the expiry of the Section 10A moratorium period are not barred from initiating insolvency proceedings. The Tribunal concurred, observing that multiple defaults occurred both during and after the moratorium period, and that the Financial Creditor was entitled to file the Section 7 application based on defaults post the Section 10A period.

The AA's reasoning was supported by precedents establishing that Section 10A does not bar applications based on defaults occurring after the moratorium period. The Tribunal affirmed the AA's conclusion that the Section 7 application was not barred by Section 10A.

Issues 2 & 3: Validity of the Acquisition Agreement and Ratification by Debenture Holders

The CD relied heavily on the Acquisition Agreement dated 29.08.2020, under which it purported to transfer its rights and obligations under the NCDs to RTVPL. The CD argued that the Debenture Holders were informed of this transfer, had requested and received copies of the Acquisition Agreement, and had acted in a manner consistent with ratification-such as consolidating the NCDs under RTVPL in financial statements and exercising voting rights in a composite scheme of arrangement based on the transferred units.

However, the DTMD expressly prohibited the CD from assigning its rights or obligations without prior written consent of the Debenture Trustee. Clause 2.2 of the Acquisition Agreement itself required approval or no-objection letters from the Debenture Trustee, which were neither pleaded nor proved to have been obtained. The Debenture Holders were not parties to the Acquisition Agreement.

The AA found that the correspondence between the parties, including emails requesting audited financials and confirmations of consolidation, did not amount to consent, approval, or ratification of the Acquisition Agreement. The Debenture Holders' voting against the composite scheme further negated any suggestion of acquiescence or waiver. The Tribunal agreed that no waiver or acquiescence could be imputed to the Debenture Holders, and that the Acquisition Agreement had not been validly approved or ratified.

The Tribunal rejected the appellant's reliance on principles of waiver and estoppel, distinguishing the facts from cited precedents where clear consent or conduct amounting to waiver was established. The correspondence in this case was found to be mere information exchange or requests for clarification, insufficient to constitute acceptance or waiver of rights.

Issue 4: Jurisdiction of Adjudicating Authority and Validity of Acquisition Agreement

The appellant contended that the AA exceeded its jurisdiction by examining the Acquisition Agreement and declaring it void, arguing that such contractual disputes fall within the exclusive domain of civil courts.

The AA, however, was confronted with the CD's own reliance on the Acquisition Agreement as a defense in the Section 7 proceedings. The AA was thus entitled to examine the validity and effect of the Acquisition Agreement to determine whether the CD remained liable for the debt. The Tribunal held that the AA had jurisdiction to consider such issues in the context of insolvency proceedings.

Further, the AA observed that the Acquisition Agreement was contrary to the DTMD and statutory provisions governing debentures under the Companies Act, 2013. The Companies Act mandates that the issuer of debentures remains liable to redeem the debentures, and a private agreement purporting to transfer such liability without requisite approvals is void. The Tribunal agreed that the Acquisition Agreement was void for non-compliance with DTMD provisions and statutory mandates.

The appellant's reliance on judgments limiting the jurisdiction of the AA was distinguished on facts, as those cases involved matters outside the scope of insolvency proceedings or against government authorities. The Tribunal noted that contractual issues relevant to the determination of default and liability are within the AA's jurisdiction in Section 7 applications.

Issue 5: Admission of Audited Financial Statements of Debenture Holders

The CD objected to the admission of the audited financial statements of the Debenture Holders (Franklin Templeton Mutual Fund) for FY 2023-24, contending that the Debenture Trustee's authority was extinguished due to liquidation of certain schemes, and that the statements were not admissible.

The AA, relying on Supreme Court precedent, held that the audited financial statements were public documents and their admission did not prejudice the CD. The AA found no merit in the CD's objections regarding the authority of the Debenture Trustee or suppression of facts. The Tribunal concurred, holding that the AA rightly admitted the financial statements as relevant evidence for adjudicating the Section 7 application.

Issue 6: Sustainability of the Impugned Order

The AA, after considering all submissions and evidence, concluded that a financial debt existed within the meaning of Section 5(8) of the IBC, and that a default exceeding the prescribed monetary threshold had occurred. The AA admitted the Section 7 application and appointed an Interim Resolution Professional.

The Tribunal found no error in the AA's detailed and reasoned order. It held that the AA's findings on the existence of debt and default were supported by evidence and legal principles, and that the order admitting the Section 7 application was sustainable. The appeal was accordingly dismissed.

Significant Holdings and Core Principles Established:

"Section 10A will have no bearing on defaults occurring after the expiry of the prohibited period... Merely because the Applicant/Corporate Debtor committed default during the Section 10A period, it cannot be said that the Respondent/Financial Creditor is now barred from filing application under Section 7 on the basis of default subsequent to Section 10A period."

"The Acquisition Agreement dated 29.08.2020, which purported to transfer the rights and obligations under the NCDs from the Corporate Debtor to RTVPL, was entered into without obtaining the prior written consent or no objection of the Debenture Trustee as mandated under Clause 2.2 of the Acquisition Agreement and Clause 10.2 of the Debenture Trust-cum-Mortgage Deed. Such non-compliance renders the Acquisition Agreement void and unenforceable."

"The correspondence and conduct of the Debenture Holders, including requests for financial statements and voting against the composite scheme, do not amount to ratification, waiver, or acquiescence of the Acquisition Agreement. No estoppel or waiver can be imputed to the Debenture Holders in the absence of clear consent or approval."

"The Adjudicating Authority has jurisdiction to examine the validity and effect of the Acquisition Agreement in the context of the Section 7 application, especially when the Corporate Debtor relies on it as a defense. Contractual disputes relevant to the determination of default and liability fall within the scope of insolvency proceedings."

"The audited financial statements of the Debenture Holders, being public documents, are admissible evidence in Section 7 proceedings. Objections regarding the authority of the Debenture Trustee or suppression of facts were found to be without merit."

"The existence of financial debt and occurrence of default having been established on record, the Adjudicating Authority's order admitting the Section 7 application is a well-considered order and does not warrant interference."