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2021 (6) TMI 790 - Tri - Companies LawSeeking direction for redemption of the debentures issued by the Respondent - Section 71(10) of the Companies Act, 2013 - HELD THAT - It is not in dispute that the R1 by letter dated 27.04.2019 informed the BSE NSE that the repayment of principal to various banks have been delayed due to the ongoing securitization and monetization proposals considered by the financial institutions. It is also not in dispute that by letter dated 29.06.2019, the R1 informed the BSE NSE that due to severe liquidity crisis in the housing sector, the maturity of certain debentures has been extended till 31.10.2019 - The R1 s inability to pay the material debts is independent of other conditions / circumstances specified in clause 7.3 (f), (h) (l) of the DTD. Therefore, the default in servicing the other material debts and the failure of the R1 to pay the interest due on the extant secured NCDs clearly constitutes events of default as agreed to between the parties under the DTD - there are no hesitation in holding that the R1 committed default in respect of the payment of interest on the debentures in terms of Section 71(10) of the Act. Sub-rule 3 indicates that the Tribunal shall pass appropriate order within 60 days from the date of receipt of the Application under Section 71(10) of the Act. However, before making an order reasonable opportunity of being heard has to be given to the Company or any other person interested in the matter. In our considered opinion reasonable opportunity has been granted to the R1 Company and the Company has been heard at length in the matter - their prerogative in timely receipt of interest against their investment (debentures) cannot be sacrificed at the altar of public interest. The submissions regarding consideration of the Resolution bids would have no bearing in the instant Company Petition. The amount of debentures is substantial and the R1 having taken the deposit, there is no reason why any indulgence should be shown to the Respondents on the ground that any Resolution Process is underway. The Petitioner / debenture trustee represents 18,959 debenture holders who are the members of the public. Therefore, under the garb of public interest their interest cannot be foregone nor the mandate under sub-section 10 of Section 71 of the Act can be diluted - application allowed.
Issues Involved
1. Whether the Respondent No. 1 (R1) is liable to redeem the Secured Non-Convertible Debentures (NCDs) and pay the principal and interest as per the Debenture Trust Deed (DTD). 2. Whether the Tribunal's power under Section 71(10) of the Companies Act, 2013 is discretionary or mandatory. 3. Whether the Respondent's default constitutes an 'event of default' under the terms of the DTD. 4. Whether the Tribunal should consider the financial condition of the company and the public interest before passing an order under Section 71(10). Issue-wise Detailed Analysis 1. Liability of R1 to Redeem Secured NCDs and Pay Principal and Interest: The Petitioner, acting as the Debenture Trustee, sought direction under Section 71(10) of the Companies Act, 2013, for the redemption of debentures issued by R1. The Petitioner represented 18,959 debenture holders and argued that R1 defaulted on the payment of principal and interest on the secured NCDs, thus constituting an 'event of default' under the DTD. The Tribunal found that R1 had indeed defaulted on its obligations, as evidenced by letters dated 27.04.2019 and 29.06.2019, where R1 admitted its inability to pay its material debts. The Tribunal held that R1 committed default in respect of the payment of interest on the debentures in terms of Section 71(10) of the Act. 2. Discretionary or Mandatory Nature of Tribunal's Power under Section 71(10): The Respondents argued that the power under Section 71(10) is discretionary, as indicated by the use of the word 'may'. They contended that the Tribunal should exercise its discretion judiciously and consider the financial condition of the company. However, the Tribunal clarified that once the conditions prescribed in sub-section 10 are fulfilled, the word 'may' assumes mandatory characteristics and should be read as 'shall'. The Tribunal cited the case of Akhil R. Kothakota v. M/s Tierra Farm Assets Company Pvt. Ltd., where it was held that the Tribunal must order redemption of the debentures and payment of interest once default is established. 3. Event of Default under DTD: The Tribunal examined the clauses of the DTD that define 'event of default'. Clause 7.3 of the DTD specifies that default in payment of principal or interest on the due date constitutes an event of default. The Tribunal found that R1's inability to pay its material debts and the failure to pay interest due on the secured NCDs clearly constituted events of default under clauses 7.3 (f), (h), and (l) of the DTD. The Tribunal held that the Petitioner was entitled to move the forum under sub-section 10 for the default in payment of interest. 4. Consideration of Financial Condition and Public Interest: The Respondents argued that an order in favor of the Petitioner would not be in the interest of R1, its creditors, or the public, as it would derail the ongoing Resolution Process. They referred to Rule 73 of the National Company Law Tribunal Rules, 2016, which allows the Tribunal to consider the financial condition of the company and public interest before making an order. The Tribunal acknowledged the rule but emphasized that the interest of the debenture holders, who are members of the public, cannot be sacrificed. The Tribunal held that the Rules cannot override the express provisions of the Act and that the conditions prescribed in sub-section 10 of Section 71 were fulfilled, necessitating an order for redemption. Conclusion The Tribunal allowed the Petition and directed R1 to pay the interest on the debentures at the contractual rate within two months and redeem the debentures by paying the principal within three months thereafter. The Tribunal emphasized that the interest of the debenture holders must be protected and that the mandate under sub-section 10 of Section 71 of the Act must be upheld.
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