Insolvency and Bankruptcy Code, 2016 — Section 7 — Scope of adjudication — Financial debt and default — Pre-existing dispute irrelevant. (Paras 12, 18, 22–23) For admission of an application under Section 7, the Adjudicating Authority is required only to satisfy itself that a financial debt exists and that default has occurred. The concept of “pre-existing dispute”, relevant under Section 9 in proceedings by an operational creditor, has no application to proceedings under Section 7. The NCLT and NCLAT erred in proceeding on considerations extraneous to the limited jurisdiction under Section 7, including alleged restructuring discussions and equitable considerations. Ratio Decidendi: In proceedings under Section 7 of the Code, once existence of financial debt and default is established, admission must follow; pre-existing disputes or restructuring negotiations do not defeat a financial creditor’s statutory right unless the debt is not due in law.

advocatemmmohan

Insolvency and Bankruptcy Code, 2016 — Section 7 — Scope of adjudication — Financial debt and default — Pre-existing dispute irrelevant. (Paras 12, 18, 22–23)

For admission of an application under Section 7, the Adjudicating Authority is required only to satisfy itself that a financial debt exists and that default has occurred. The concept of “pre-existing dispute”, relevant under Section 9 in proceedings by an operational creditor, has no application to proceedings under Section 7.

The NCLT and NCLAT erred in proceeding on considerations extraneous to the limited jurisdiction under Section 7, including alleged restructuring discussions and equitable considerations.

Ratio Decidendi: In proceedings under Section 7 of the Code, once existence of financial debt and default is established, admission must follow; pre-existing disputes or restructuring negotiations do not defeat a financial creditor’s statutory right unless the debt is not due in law.

---

Debenture Trust Deed — Modification and novation — Mandatory compliance with contractual procedure — No implied waiver or oral restructuring. (Paras 14–18)

Clause 33 of the Debenture Trust Deed required prior written consent of debenture holders through “approved instructions” passed by Special Resolution in a duly convened meeting. Clause 33.4 mandated that amendments must be in writing and signed by all parties. Clause 37 barred implied waiver and required written waiver.

Admittedly, no such procedure was followed. Correspondence between the corporate debtor and a single debenture holder (ECLF) did not amount to modification or novation under Section 62 of the Contract Act, 1872.

Ratio Decidendi: Where a debenture trust deed prescribes a specific written procedure for amendment or waiver, no restructuring or moratorium can be inferred in absence of compliance; unilateral exchanges or informal negotiations cannot effect novation.

---

Authority of a single debenture holder — Absence of express authorization — No binding effect on other holders. (Para 13)

Restructuring discussions were held only with one debenture holder. No express authorization was shown empowering it to bind other debenture holders. Separate legal entities holding debentures independently cannot be presumed to have acted through one entity absent written authorization.

Ratio Decidendi: In absence of express authorization, negotiations by one debenture holder cannot bind other holders; collective consent must conform strictly to contractual governance mechanism.

---

Release of secured assets — Contractual entitlement distinct from restructuring. (Para 17)

Release of the Bandra property was referable to Clause 28.3 of the Debenture Trust Deed, permitting release upon specified payment. It could not be construed as evidence of acceptance of restructuring proposal.

Ratio Decidendi: Exercise of contractual rights for release of security in terms of the deed cannot be equated with acceptance of a restructuring proposal unless expressly linked thereto in accordance with contractual procedure.

---

Legitimate expectation — Inapplicability against clear contractual stipulations. (Para 19)

The inference drawn by the NCLAT that the corporate debtor had a legitimate expectation of moratorium was unsustainable. The Debenture Trust Deed contained a detailed modification mechanism; unilateral expectations cannot override express contractual terms.

Ratio Decidendi: Doctrine of legitimate expectation cannot override express contractual stipulations governing amendment or waiver; commercial contracts must be enforced as written.

---

Role and duty of Debenture Trustee — Protection of debenture holders — No obligation to protect corporate debtor. (Para 20)

The debenture trustee’s duty under the Debenture Trust Deed was to safeguard the interests of debenture holders. The NCLAT erred in holding that the trustee was obliged to act in fairness towards the corporate debtor or that it colluded to engineer default.

Ratio Decidendi: A debenture trustee’s fiduciary duty is owed to debenture holders in accordance with the trust deed; it cannot be faulted for enforcing contractual rights upon occurrence of default.

---

Perversity of concurrent findings — Scope of interference under Section 62 of the Code. (Para 22)

Though ordinarily this Court does not interfere with concurrent findings of NCLT and NCLAT, interference is warranted where such findings are perverse and contrary to record.

Ratio Decidendi: The Supreme Court may interfere under Section 62 where concurrent findings of NCLT and NCLAT are manifestly perverse or ignore binding contractual terms.