ASK Trusteeship Services Private Limited vs M/s Nobility Estates Pvt. Ltd.

M/s ASK Trusteeship Services Pvt. Ltd (for brevity, the ‘Applicant’/ ‘Financial Creditor’) has filed the present application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity, the ‘IBC 2016’) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, on 25.05.2023 with a prayer to initiate the Corporate Insolvency Resolution Process, declaring moratorium and for appointment of Interim Resolution Professional (IRP), against M/s Nobility Estates Pvt. Ltd (from now on referred to as ‘Respondent’/ ‘Corporate Debtor’).

The Corporate Debtor (CD) was incorporated on 02.01.2014, having CIN: U70100DL2014PTC262971, under the Companies Act 2013, and is involved in Real estate activities. The registered address of the CD is at 711 /92, Deepali, Nehru Place, New Delhi-110019, hence the jurisdiction to deal with the application lies with this Tribunal.

In order to prove the existence of Financial Debt and the occurrence of default, the Respondent has submitted the following:

The Respondent is a Special Purpose Vehicle (SPV) promoted by Mr. Getamber Anand and ATS Infrastructure Limited (together referred to as ‘Promoters’) incorporated to develop certain parcels of land for the purposes of construction, development, and sale of a residential real estate project by the name of ‘ATS Le Grandiose’ in Noida, Uttar Pradesh (hereinafter referred to as ‘Project’).

Mr. Getamber Anand had requested the Applicant to invest in the Respondent Company. Accordingly, the Respondent, its Promoters, and the Applicant executed a Debenture Subscription Agreement dated 10.07.2015 pursuant to which the Applicant subscribed to certain debentures issued by the Respondent.

It is stated by the Applicant in Part-IV of the application that it had made disbursal of the amount as per the following schedule:

It is further stated by the Applicant that in terms of the Debenture Subscription Agreement (‘DSA’) dated October 7, 2015 executed between the Applicant, the Respondent, and the Promoters of the CD, the Applicant had subscribed to and has been allotted 1,250 (One thousand two hundred fifty) only unlisted optionally convertible cumulatively secured debentures (‘OCD’) of a face value of Rs. 10,00,000/-(Rupees Ten Lakh only) each, aggregating to Rs. 125,00,00,000/- (Rupees One Hundred and Twenty-Five Crores only) OCDs on the terms and conditions specified therein. Accordingly, various security documents were executed in favour of the Debenture Trustee to perfect the security in respect of the OCDs.

As per Clause 9 of the DSA, the Respondent was required to make annual interest/coupon payments to the Applicant till the redemption of the OCDs. Respondent was required to redeem the OCDs within 5 years (i.e., by October 6, 2020) by repaying the entire principal sums of the OCDs and subject to the terms contained in the DSA. Any delay in payment of any sums on their respective due dates would entitle the Applicant to receive a “default interest” as specified in the DSA.

As the Respondent was unable to meet its redemption obligation of the OCDs on the redemption date i.e., October 6, 2020, vide letter dated October 3, 2020 (page No. 343 of the application), the Respondent requested an extension for a period of 298 days i.e., until July 31, 2021 (“the revised redemption date”). In response, the Applicant consented to the extension till July 31, 2021, vide its letter dated October 5, 2020, and accordingly, the documents were amended/modified by way of an agreement of modification to the Debentures Subscription Agreement and Debenture Trust Deed (‘DTD’) dated June 16, 2021.

However, despite the extension, the Respondent failed to redeem the OCDs even by the revised redemption date and hence, led to a commission of default. 3.8 On occurrence of an event of default under the DTD or DSA, as per Clause 11.2 of the DTD and Clause 13.2 of the DSA, the Applicant has the right to be paid, the entire aggregate amount with an aggregate compound IRR of 27% calculated from the date of investment till the date of returns in full along with other conditions laid thereunder subject to a cure period of 90 days. However, the defect was not cured despite the passing of a year. On commission of default, the Applicant issued an EOD (“Event of Default”) notice dated 05.02.2022 (Annexure P/29) to the CD to cure the EODs within 90 days, failing which it was entitled to the repayment of the entire redemption amount of OCDs along with the annual compounded IRR of 27% from the date of subscription.

The Respondent replied to the notice dated February 5, 2022 and acknowledged that the redemption of the OCDs was extended to the Revised Redemption Date (i.e., July 31, 2021) and it also admitted that the OCDs were not redeemed by the Revised Redemption Date.

The “date of default” relied on by the Applicant is 06.05.2022 i.e., 90 days from the EOD notice dated 05.02.2022 and the Applicant has claimed that Respondent is obligated to redeem the OCDs by paying Rs.504,50,00,000/- only, as per the details given in the table below:

The Applicant has relied on the following documents to prove the existence of Financial Debt and commission of default by the Respondent:

Record of Default of the CD as registered with NeSL.

On perusal of Part IV of the Application, it is observed that the Applicant has claimed a debt of Rs.687,50,00,000/- as the defaulted amount as of 24.05.2023 and relied upon 06.05.2022 as the date of the Default.

Based on the aforesaid facts and documents, the Applicant has prayed for initiation of CIRP in respect of the Respondent.

On issuance of the notice, the Respondent filed its reply. The Respondent raised the following objections in its reply and during the course of the final hearing:

The present Application is not filed by an Authorized Person.

Neither the debt of the Applicant is a financial debt nor any default is committed by the Respondent. The Applicant is only an “investor” which is evident from the use of the word “investor” in the following Clauses of the DSA dated 07.10.2015:

It is further stated by the Respondent that the debt of the Applicant does not fall within the ambit of Section 5(8) of IBC, 2016.

The Applicant is a speculative investor and not a Financial Creditor. The Debentures have trappings of Equity and hence, cannot be claimed.

The present Application is barred by Section 10A of IBC, 2016 as the redemption of the outstanding debentures (OCDs) was to be made on 06.10.2020, which was later revised to 31.07.2021. It is contended by the Respondent that the alleged default occurred during the Section 10A period.

There is a force majeure clause incorporated in the Debenture Subscription Agreement dated 07.10.2015 and the Debenture Trust Deed dated 07.10.2015 and in view of the Covid-19 pandemic, the repayment of the debt had to be suspended/extended i.e., from March 2020 to till date. Since the COVID-19 pandemic is a force majeure event, the time for performance under the DSA stands extended during the said event.

The Applicant has also filed its Rejoinder and Written Submissions and contended the following therein and during the course of arguments:

The ‘debentures’ are expressly mentioned as ‘financial debt’ under Section 5(8)(c) of the Code and hence, a Section 7 proceeding in case of default in the redemption of debentures is maintainable. The mere fact that the Applicant is a ‘debenture holder’ implies that it is also a Financial Creditor, as the definition of ‘financial debt’ includes debentures. Further, a ‘debenture’ as per Section 2(30) of the Companies Act, 2013, is essentially defined as an instrument ‘evidencing a debt’. Hence, the nature of debentures as a security, holding debt is established in law.

The suspension period under Section 10A of the Code is from 25.03.2020 to 24.03.2021. The date of default i.e., 06.05.2022 does not fall within the Section 10A suspension period. Even the Revised Redemption Date of OCDs i.e., 31.07.2021 also falls outside the Section 10A suspension period.

The Applicant was already granted the benefit of an extension of the redemption date owing to financial hardship caused to the Respondent on account of the COVID-19 pandemic. The initial date of redemption of the OCDs was 06.10.2020 which, upon the request of the Respondent was extended by the Applicant up till 31.07.2021.

The Respondent has admitted the commission of default in its Reply.

The present Section 7 petition is signed by Mr. Bhavesh Pandya, who is the authorized signatory of ASK Property Investment Advisors Private Limited and was duly authorized to institute the petition. The chain of Authority in favour of the AR is duly explained in Part I, Para 5 of the Petition on page no. 13. All documents supporting the chain of authority have been annexed with the petition as Annexure nos. P/2 to P/4 in Volume I.

We heard the submissions of both parties and perused the documents placed on record. The Respondent has objected to the application, mainly on the ground that the Applicant is not a Financial Creditor since it invested the money (in the form of Debentures) in the Respondent Company. It is also the contention of the Respondent that the Applicant is only an Investor, where the money invested through the debentures has trapping of equities. Per Contra, the Applicant has stated that the Debenture is a form of ‘debt’ and cannot be considered as ‘equity’. Further, the ‘debentures’ are expressly included in the term ‘Financial Debt’ as defined under Section 5(8)(c) of IBC, 2016.

Against this backdrop, we would like to examine Whether an investment made in the Debentures/OCD of a Company is a Financial Debt.

It is in this context; that we refer to the definition of “Financial Debt” as defined under Section 5(8) of IBC 2016 which reads thus:

 ^{Evidently, the term “Financial Debt” as defined under Section 5(8)} of IBC 2016 read with sub-clause (c) means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes, inter alia, any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stocks or any similar instruments.

In the instant case, the Applicant has given the details, in Part IV of the Application, of the disbursement of money through its investment in Debentures of the CD, which has not been disputed by the Respondent. Moreover, as per Clause 9 of the Debenture Subscription Agreement (DSA), the Respondent was required to make payments of “interest in the form of Annual Coupon” to the Applicant till the redemption of the OCDs, which brings in the component of the time value of money in the debt. The clause 9 of the Debenture Subscription Agreement (DSA) reads thus:

Even otherwise, Section 5(8)(c) of IBC, 2016, as already noted in Para 11 above, explicitly includes any amounts raised pursuant to the issue of “Debentures”. At this stage, we refer to the Judgement of Hon’ble NCLAT dated 23.04.2019 in the matter of “MAIF Investments India Pte. Ltd Vs M/s. Ind-Barath Energy (Utkal) Limited” Company Appeal (AT) (Insolvency) No. 597 of 2018 [Case Citation: (2019) ibclaw.in 307 NCLAT], which held that the “Optionally Convertible Debentures (OCDs)” are Financial Debt. The relevant paragraph 23 of the Judgement reads thus:

Certainly, the amount could not have been raised by the Respondent unless an investment was made by the Applicant. The terming of the Applicant by the Respondent as an ‘Investor’ and money invested by it as an ‘Investment’, is nothing but a form of “disbursement of money” through an instrument of ‘debenture’, which is a form of financial debt within the ambit of Section 5(8)(c) of IBC 2016. Hence, we find no merit in the contention of the Respondent that (a) the debt in terms of debentures is not a Financial Debt; and (b) the Applicant, being an investor in debentures issued by the Respondent is not a Financial Creditor. Further, as the Debentures under reference at no stage were converted into Equity, we have no hesitation in concluding that the Debentures had no trapping of equity in the instant case.

The next plea raised by the Respondent is that the present Application is barred by Section 10A of IBC 2016 since the Respondent committed the alleged default during the COVID-19 Period that falls within the Section 10A period. Per Contra, the Applicant stated that the suspension period under Section 10A of the Code was from 25.03.2020 to 24.03.2021 and the date of default in the present case is 06.05.2022, which does not fall within the Section 10A period. Even the Revised Redemption Date of debentures was 31.07.2021, which too falls outside the suspension period.

On perusal of the pleadings, it is observed that the original Date of Redemption of Debentures was 06.10.2020, which, upon the request of the Respondent only, was extended by the Applicant up till 31.07.2021. Thus, we find that the date of 31.07.2021 became the “Revised Redemption Date”. Accordingly, the parties including the Respondent executed an Agreement of Modification to the Debenture Subscription Agreement and Debenture Trust Deed, dated June 16, 2021, which is available on record and not disputed by the Respondent. Thus, the debt was not due and payable as of 06.10.2020, rather the parties themselves decided that debentures were to be redeemed until the “Revised Redemption Date” of 31.07.2021. Thus, in our considered view, the debt can only be considered due and payable on and after the “Revised Redemption Date” of 31.07.2021. Since the aforesaid date neither falls within the suspension period stipulated under Section 10A of IBC 2016 nor does it make the Application time-barred, we find no force in the contention of the Respondent that the alleged default falls within the suspension period of IBC and the present Application is barred by Section 10A of IBC 2016. Hence, the objection on this account is rejected.

The other plea raised by the Respondent is that the Force Majeure Clause in the Debenture Subscription Agreement (DSA) is applicable to the present case. Per contra, the Applicant has contended that the Respondent was already granted the benefit of an extension in the redemption date owing to financial hardship caused to the Respondent on account of the COVID-19 pandemic. The initial date of redemption of the debentures was 06.10.2020 which, upon the request of the Respondent was extended by the Applicant up till 31.07.2021. Thus, we find that the hardship, if any, caused due to COVID-19, was already taken care of by the Applicant in terms of agreeing to the request of the Respondent for an extension to the debenture redemption date from 06.10.2020 to 31.07.2021 to clear its dues. Therefore, we find no merit in this objection of the Respondent and hence, rejected.

Regarding the contention of the respondent that the present Application is not filed by an Authorized Person, the Applicant referred to the chain of documents placed in Annexure A-2 to A-4 of the Applications, more specifically Copy of the Indenture of Trust dated July 14, 2010 establishing ASK Real Estate Special Opportunities Fund (Page 51-85), Copy of Investment Management Agreement dated 03.08.2010 executed between ASK Trusteeship Services Private Limited and ASK Property Investment Advisors Private Limited (Page 86 to 114) and Copy of Board resolution dated 21.01.2022 issued by ASK Property Investment Advisors Private Limited authorizing Mr. Bhavesh Pandya (Pages 115-116). Thus, the Authority along with the relevant Board resolution being on record, the contention of the respondent that the present Application is not filed by an Authorized Person, is devoid of merits and therefore rejected.

As far as the Applicant is concerned, it has brought on record the admissions of default made by the Respondent. Both in the pleadings and during the arguments, it was pointed out that in Para 6 of Reply dated 28.08.2023 on Page 39, the Respondent clearly admitted in para ‘x’ that it failed to redeem the OCDs on the Redemption Date. The relevant extracts of the admission read thus:

Further, the Applicant has also placed on record the Certificate (Form C) issued by NeSL on Pages 411 and 412 of the Application, and the “Record of Default” in Form D vide additional document dated 5.7.2023. The Form D, as placed by the Applicant, is reproduced overleaf for the immediate reference:

The NeSL “Record of Default” (ibid) also indicates ‘debt’ and ‘default’ on the part of the Corporate Debtor. The objection of the Respondent that the claim of the Applicant is exaggerated is immaterial as long as the quantum of the unpaid Financial Debt is above the minimum threshold of Rs 1 Crore.

In sequel to the above, we conclude that there is sufficient material on record that proves the existence of Financial Debt and commission of Default by the Corporate Debtor.

In the given facts and circumstances, the Applicant/Financial Creditor having established the default in payment of the Financial Debt for the default amount being committed above the threshold limit and the Application being complete, the present Application is admitted in terms of Section 7(5) of the IBC and accordingly, the moratorium is declared in terms of Section 14 of the Code. As a necessary consequence of the moratorium in terms of Section 14(1) (a), (b), (c) & (d), the following prohibitions are imposed:

As proposed by the Applicant, this Bench appoints Mr. Hitesh Goel as IRP having Registration IBBI/IPA-001/IPPO1405/2018-2019/12224 (Email: iphiteshgoel@gmail.com) subject to the condition that no disciplinary proceeding is pending against the IRP so named and disclosures as required under IBBI Regulations, 2016 are made by him within a period of one week from this Order. This Adjudicating Authority orders that:

The Applicant is directed to deposit Rs. 10,00,000/- (Ten Lakh) only with the IRP to meet the immediate expenses. The amount, however, will be subject to adjustment by the Committee of Creditors as accounted for by the Interim Resolution Professional and shall be paid back to the Applicant.

A copy of this Order shall immediately be communicated by the Registry/Court Officer of this Tribunal to the Applicant, the Respondent, and the IRP mentioned above. In addition, a copy of the Order shall also be forwarded by the Registry/Court Officer to the IBBI for their records.