M/s. Vistra ITCL (India) Limited vs Siesta Hospitality Services Limited

The Financial Creditor (hereinafter referred to as “FC”) states that BPEA India Credit Investment Trust II subscribed to unlisted, secured, redeemable, non-convertible debentures issued by the Corporate Debtor (hereinafter referred to as “CD”) on a face value of INR 1,00,000/- totalling to an amount of Ra.50,00,00,000/-. Subsequently, a Demand Promissory Note was created along with a Letter of Continuity (March 01, 2018) by which repayment of the amount was secured under the Debenture Trust Deed to the FC. The said NCD’s were issued to BPEA in the following tranches:-

The FC, was appointed as the Debenture Trustee under the Debenture Trust Deed (“DTD”) and the Debenture Trustee Agreement (“DTA”) both dt.01.03.2018 whereby the FC was allotted 5000 unlisted, secured, redeemable and non-convertible debenture with a face value of 1,00,000 aggregating to 50,00,00,000/-. Both DTD and DTA are collectively referred to as the “Agreements.”

The CD requested the FC to amend the terms of the Agreements and restructure the payment there under. In pursuant to which discussions were held between the CD and FC by which the payment terms were restructured and an In Principle Re-Schedulement Letter dt.05.02.2020 was executed between the CD and the FC as the debenture trustee. Pursuant to discussions, at the request of the CD, the parties agreed to further amend the terms of the Agreements vide an amendment dt.28.03.2021 which restructured the payment terms as below:

As per the amended payment terms, the CD was required to pay instalments amounts but despite providing two restructuring to the CD for payment of outstanding dues under the Agreements the CD has failed to pay the same.

After several notices calling upon the CD to pay the outstanding default amount, a part payment of Rs.15,00,000 was made on 15.07.2021. The CD informed the FC through an email dt.23.06.2021 that it has decided to sell the business and offered to buy back the Debentures held by the CD and pay the FC 56.81% of its principle amount due. The FC did not agree to the proposal of the CD and reminded the CD to make the payment vide email dt.14.07.2021.

Due to the recurring default in the payment of outstanding default amount, the Debenture trustee inter alia initiated proceedings under Section 7 of the Code, 2016 in CP(IB) 71/2021. During the pendency of the said proceedings, due to the continued default of the CD, the entire loan facility was recalled. Therefore, the said petition before the Hon’ble NCLT was withdrawn on the ground of new developments taking place and the loan facility being recalled resulting in substantial change in the default amount under Part IV Form-1. This Tribunal also vested the petitioners in CP (IB) 71/2021 with the liberty to file fresh petition for the entire defaulted amount. The Hon’ble NCLT was pleased to permit the withdrawal of the Petition vide order dt.15.02.2023.

Subsequent to the withdrawal of the Petition, BPEA has transferred part of the NCDs held by them to M/s Mobisoft Telesolutions Private Limited, the Financial Creditor herein, in terms of the Agreements. Accordingly, the rights of BPEA have been assigned in favour of the FC herein to the extent of the NCDs that have been transferred to it.

It is stated that as per Part IV Form 1 of the Petition, the amount in default is Rs.62,98,99,143/- and the date of default is 15.04.2021.

That the petition falls under 10A period and is debarred on account of the same. Given that the Respondent’s business came to a standstill during the pandemic, the CD decided to sell a substantial part of its business on a “Slump Sale” basis under Section 2(42C) of the Income Tax Act, to reduce its debt and pay off the Debenture Holder and settle their liabilities of the Company the Petitioner /BPEA assisted the CD in identifying potential buyers for the slump sale and made introductions to the CD for “selling its debentures.”

The CD received an offer from M/s Altruist Technologies Private Limited and Scholar Alley Private Limited for the Slump Sale of certain identified business, which culminated into signing of two Business Transfer Agreements on 2.08.2021 and 18.08.2021 respectively for a slump sale of identified business as defined in Section 2(42C) of the Income Tax 1961. As per the terms of these BTA read in conjunction with Section 2(42C) of the Income Tax Act 1961, the Buyers will take over both the assets and liabilities of the respondent as on 31.07.2021 without assigning any individual values to the assets and liabilities. While the outstanding amount owed to BPEA was Rs.44,00,00,000, BPEA agreed to settle at Rs.36,00,00,000/- for which BPEA issued an NOC. In view of the above, on 26.10.2021, an Addendum to the Business Transfer Agreements was executed under which it was inter alia agreed that an amount of INR 36 crores would be paid to the Debenture Holder by Altruist.

The Petitioner and Respondent executed a Second Amendment to the Debenture Trust Agreement on 20.10.2021 under which specifically provided that an escrow account will be opened for an amount of Rs.36 crores which will be directly paid to the Debenture Holders. It is also stated by the CD that the debenture holders on 28.12.2021 through the Petitioners effected an issuance of an “in-principal approval” for a proposed slump sale of the identified assets of the Respondent to the Buyers. The letter reinforced the intention of the parties to proceed with a new arrangement arising from the email dt.31.08.2021 and “second amendment” dt.20.10.2021 and provided respondent the necessary approvals to proceed with the transfer to the Buyers.

The CD contends that since Altruist and Scholar Alley agreed to bear the obligations and liability to redeem the debentures issued to BPEA, in terms of Section 62 of the Indian Contract Act, 1872 which inter alia deals with the effect of novation, as Altruist and Scholar Alley substituted the Respondents, the CD’s liability stands extinguished.

That the petitioners have also filed a suit before the Hon’ble High Court of Bombay which came to be withdrawn due to lack of jurisdiction by virtue of which a subsequent suit came to be filed before the Hon’ble Delhi High Court in C.S (COMM) No.850 of 2022 wherein the petitioner sought to challenge the BTA between Siesta, Altruist and Scholar Alley by arraying them as parties, and had sought for reliefs of declaration and permanent injunction as well as for recovery and damages of certain amount along with an interest which came to be withdrawn due to the debt being satisfied by the buyers. Since the debt was satisfied, the parties including the Petitioner agreed that the lis had been settled, by virtue of which the above suit came to be withdrawn by the Petitioner which came to be recorded vide order dt.24.08.2023 which stated that “the suit stood withdrawn as the parties have been in inter-se settlement discussions pursuant to which a settlement has been arrived at between the parties. The conduct of the plaintiff/applicant in not even informing the Court about the inter-se settlement discussions, while consuming considerable judicial time in pressing I.A. No.110/2023 deserves to be deprecated. In the circumstances, while allowing the present application, the Court imposes costs Rs.5lakhs on the plaintiff (herein the Petitioner in the present case. At request of the learned senior counsel appearing for the applicant in I.A No.9437/2023, it is clarified that in view of the unconditional withdrawal of this suit by the plaintiff, this court has not gone into the merits of the contentions raised in the said I.A.” That the petitioners after the adverse order have not come up with a compromise petition for substantiating the terms of the settlement which clearly goes on to show the pattern of the petitioners in wasting court’s judicial time by engaging in multiple rounds of litigation.

That to initiate the CIRP under section 7 of the Code, the petitioners have failed to show the occurrence of debt and default as the settlement was reached by the parties in October 2021 and the petitioner confirmed the same by December 2021. Pursuant to the execution of the BTA with the buyers and receipt of monies thereon, the Respondent has repaid almost all of its creditors till date including:

It is submitted that the CD has paid off their creditors, aggregating to an amount of about INR 33 crores. In fact, upon completion of certain minor procedural and administrative formalities the settlement amount as agreed to be received by the Petitioner and as agreed by the parties vide the second amendment dt.20.10.2021 and subsequent correspondences and discussions would be paid.

It is submitted that on 24.07.2021, a similar Application under Section 7 of the Code, 2016 was filed by the Petitioner, against the CD before the NCLT Bangalore which was withdrawn on 15.02.2023.

It is submitted that the Petitioner has produced before this Hon’ble Tribunal a Debenture Purchase Agreement dt.19.07.2023 which it is alleged to have been culmination of the settlement in CS (COMM) No.850/2022 wherein as per clause 1.1(B) it clearly states that an amount of INR 13,25,00,000 would be the consideration for transferring the Debentures to one Mobisoft Telesolutions Pvt. Ltd. It is pertinent to note that Mobisoft is a subsidiary of Altruist and Altruist, Scholar Alley and Mobisoft are parties to this Debenture Purchase Agreement along with BPEA.

The Petitioners argue that as per the Debenture Trust Deed they are entitled to file the instant petition being a debenture trustee and the averment of the CD that the transfer of NCDs by BPEA to Mobisoft was not intimated to the CD is prima facie erroneous as the NCDs are freely transferable and transmissible instruments of debt. The same can is crystalized by the terms of the Debenture Trust Deed dt.01.03.2018 in Clause 7 of Schedule II.

The objection of the CD that the terms of the Debenture Trust Deed was amended in October 21 during the pendency of CP(IB) 71/2021 (the first CIRP petition which was subsequently withdrawn) amounted to novation of the original debenture trust deed is denied as factually incorrect and frivolous as the same was never executed between the parties and the second amendment deed was merely a draft. The Petitioners argue that there existed only an In Principle Re-schedulement Letter dt.05.02.2020 and First Deed of Amendment to the Debenture Trust Deed dt.28.03.2021 vide which the instalment amount of Rs.1,30,83,303/- (which consisted of Redemption Instalment of Rs.61,11,111/-; Deferred Payment Instalment of Rs.30,48,356/-and Regular Interest of Rs.39,23,836) was due on 15.04.2021.

That the contention of the CD that the petitioners reneged on the terms of the Debenture Trust Deed by only making Rs.50crores available instead of Rs.75 crores is denied as false. The money was disbursed in 3 tranches in accordance with Clause 5.3 of the Debenture Trust Deed, Conditions Precedent to the Issuance of each trance of Series A Debentures and Series B Debentures in case of an occurrence of an Event of Default prior to the payment of Series A allotment Amounts or Series B Allotment Amounts, then the Debenture Holders “shall not be required to make any payment of the remaining subscription amount towards the one or more tranches of the Series A Debenture or Series B Debentures, as applicable and the Issuer shall be required to redeem the Series A Debentures and the Series B Debentures along with the Secured Obligations, in the manner set out.”

The Petitioners aver that despite sufficient time availed by the CD, the payment of debt was still outstanding which led to the initiation of CIRP by the petitioner in CP (IB) 71/2021. The petition was later withdrawn with the liberty to file it fresh as during the pendency of the proceedings the CD continued to default on subsequent payments which led to loan facility being recalled. The CD was given last and final opportunity to pay the entire amount vide demand notice dt.11.08.2023 for payment of Rs.62,26,84,384/- within period 10 days. The CD has failed to make the payment.

With regards to the averment of the CD that the liability to repay the debt has been shifted with the execution of the Business Transfer Agreements dt.2.08.2021 and 18.08.2021 entered with Altruist and Scholar Alley (Buyers), the petitioners herein state that the BTA was executed only in relation to the Identified Business of the CD which is provided in Schedule 1 of the BTA read with Clause 5.5.2 and Schedule 5 of the BTA. That the scope of the Identified Business does not include the liability of the CD which it has towards the petitioners as they were not made party to the agreements entered by the CD with the buyers.

That when the CD sought NOC from the petitioners for execution of the BTA by assuring that the sale proceeds from the BTA to the effect of Rs.36 crores will be directly credited to the Debenture Holders, the petitioners provided the In-Principle Approval dt.28.12.2021 which was conditional and subject to the receipt of Rs.36 crores towards partial redemption of debentures.

Additionally, the draft settlement agreement/second deed of amendment circulated vide email dt.21.08.2021 of the CD was only a Working draft which was never signed. Thus, the same has no legal standing in the eyes of law. In fact the document in the title states that it is “for discussions purposes only.”

Moreover, in the Contract Addendum of the BTA dt.26.10.2021, executed between the CD and the buyers, as per Clause 1.1(b) it was stated that,

This was on the basis of the in-principle consent letter issued by the Petitioner. However, the CD instead of opening an Escrow Account for receipt of monies as per Clause 1.1(b), received the entire amount of Rs.36crores paid by the third parties in its personal account and utilized it for payment to the other creditors; and not the Debenture Holder/Trustee which is in contravention of the Contract Addendum. As per the Petitioners, the receipt of the above amount is established by the admission of the CD in its objections wherein it has stated that:

Since, the CD has transferred the assets to the buyers in contravention with the Contract Addendum by not making a payment of Rs.36crores to the petitioners subject to which the assets of the CD could be sold, the sale of assets by the CD before payment to the petitioners is void ab initio. Further, the Assets proposed to be sold was charged to secure the debentures.

That the petitioners moved to the Bombay High Court in suit bearing No.317/2022 and subsequently to the Delhi High Court in C.S.(COMM) 850/2022 challenging the BTA both of which were later withdrawn due to lack of jurisdiction and settlement respectively. During the pendency of proceedings before the Hon’ble High Court of Delhi, a settlement was arrived at between the Debenture Holder/BPEA and the third-party purchasers Altruist, Scholar Alley and Mobisoft Telesolutions Pvt. Ltd. (Mobisoft), and accordingly, a Debenture Purchase Agreement (DPA) dated 19.07.2023 was executed between these parties. In Clause 5 of the DPA, it was agreed that instruction would be issued to the Debenture Trustee for withdrawal of the proceedings before the Hon’ble Delhi High Court and to initiate insolvency proceedings against the Corporate Debtor before this NCLT. Therefore, the proceedings before the Hon’ble Delhi High Court was withdrawn in accordance with Clause 5 of the DPA, and this Petition was filed. There was no settlement of the outstanding amounts owed by the Corporate Debtor in the above Agreement. Moreover, the Corporate Debtor has not paid any amount to the Debenture Holders and thus the liability of the Corporate Debtor is not discharged; and it was merely an assignment of debt. Therefore, the defense of the Corporate Debtor that due to the settlement the entire liability pertaining to these Debentures have been extinguished is not acceptable, and there was no settlement with the Corporate Debtor at all. Therefore, the debt and default was still in existence. Further, the record of default in Form-D issued by NeSL also shows that the default is “deemed to be authenticated”.

the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2022);

the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor

It is further directed that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.

The provisions of sub-section (1) shall however, not apply to such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority, and to a surety in a contract of guarantee to a Corporate Debtor.

The order of moratorium shall have effect from the date of this order till the completion of the Corporate Insolvency Resolution Process or until this Adjudicating Authority approves the Resolution Plan under sub-section (1) of Section 31 of the Code or passes an order for liquidation of Corporate Debtor under Section 33 of the Code, as the case may be