Debenture Holders Retain Right To Initiate Insolvency Despite Trustee Appointment: NCLT Bengaluru

The National Company Law Tribunal (NCLT), Bengaluru has held that the appointment of a Debenture Trustee to represent debenture holders does not take away their independent statutory right as Financial Creditors to initiate insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench comprising Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada was considering an insolvency petition filed by India Housing Fund and India Housing Fund Series 2 seeking initiation of the corporate insolvency resolution process (CIRP) against Gulam Mustafa Enterprises Private Limited. It held:

“The Respondent has not disputed the execution of the transaction documents or the receipt of the subscription amounts. Thus, the existence of the financial debt and the occurrence of default stand established from the material placed on record.”

The petition arose from the Corporate Debtor's failure to repay secured, redeemable, non-convertible debentures subscribed by the Financial Creditors. They had subscribed to Senior Debentures worth Rs. 225 crore and Series VI Debentures worth Rs. 160 crore, aggregating to Rs. 385 crore, which was disbursed to the Corporate Debtor for its real estate project.

Following the alleged defaults, the Debenture Trustee issued default notices followed by recall notices. The Corporate Debtor failed to repay the dues, which were stated to have amounted to Rs. 627.61 crore as on 28 February 2025.

The Corporate Debtor opposed the petition, contending that the debenture holders could not independently invoke insolvency proceedings as the Debenture Trustee was authorised to act on their behalf. It also disputed the computation of dues and contended that the contractual grievance redressal mechanism had not been exhausted.

The Tribunal noted that under Section 7 of the IBC, it was required to ascertain the existence of financial debt and the occurrence of default. It observed that the Corporate Debtor had not disputed the execution of the transaction documents or receipt of the subscription amount. It further noted that the Financial Creditors had produced statements of account, bank statements, Default Notices and Recall Notices establishing the default.

On the objection regarding computation of dues, the Bench said that at the stage of a Section 7 application, it was not required to undertake detailed adjudication of the exact quantification of the claim once the financial debt and default were established. It observed that even the principal amount of Rs. 385 crore was substantially above the statutory threshold under the IBC.

On maintainability, the Tribunal held that the appointment of a Debenture Trustee merely authorises the Trustee to act in a representative capacity for the benefit of the debenture holders. It observed:

“Such appointment merely enables the Debenture Trustee to act on behalf of the Debenture Holders. It cannot be construed as divesting, extinguishing or excluding the independent statutory right of the actual Financial Creditors to invoke Section 7 of the Insolvency and Bankruptcy Code, 2016,”

It further added that “the Debenture Trustee does not become the creditor in substitution of the Debenture Holders; it merely acts as their representative for the purposes contemplated under the Debenture Trust Deed.”

The Bench also held that although the Debenture Trust Deed authorised the Trustee to institute proceedings and enforce the rights of debenture holders, such a contractual stipulation could not be interpreted as curtailing the statutory right of the actual Financial Creditors. It stated that the Debenture Trust Deed, being a contractual arrangement, could regulate the manner in which the Trustee acts but could not override the statutory remedy under the IBC.

Lastly, it rejected the remaining objections concerning interpretation of the transaction documents and contractual enforcement mechanisms, holding that they did not displace the existence of financial debt and default.

Accordingly, the NCLT allowed the petition, directed the Corporate Debtor to undergo CIRP and declared a moratorium under Section 14 of the IBC.

For Petitioner: Advocates Pinaz Mehta and Deepthi C.R