Coffee Day Enterprises Ltd. vs. IDBI Trusteeship Services Ltd.: NCLAT Quashes CIRP Proceedings Due to Limitation & Lack of Authorization

Introduction:

The NCLAT has set aside the NCLT order admitting IDBI’s Section 7 application against Coffee Day Enterprises Ltd., ruling that the proceedings were time-barred, unauthorized, and maliciously filed. The tribunal held that IBC proceedings must be initiated within the statutory limitation period, by a duly authorized representative, and in good faith. The decision underscores the need for strict adherence to procedural requirements in insolvency matters, ensuring that the IBC is not misused for purposes other than legitimate debt resolution.

Background:

The dispute arose when Coffee Day Enterprises Ltd. (CDEL), a company engaged in multiple businesses including hospitality and coffee retail, issued 2,000 unlisted, unrated, secured, redeemable NCDs in March 2019, each valued at ?10 lakh, aggregating ?200 crore. These debentures were subscribed to by various investors, with IDBI Trusteeship Services Ltd. acting as a debenture trustee on their behalf. As per the agreement, CDEL was obligated to make periodic interest payments on these NCDs. However, on September 30, 2019, the company allegedly defaulted on an interest payment, prompting IDBI to initiate recovery actions. The Section 7 application under IBC was filed on September 7, 2023, citing ?228 crore as the outstanding debt. On August 8, 2024, the NCLT Bengaluru Bench admitted the application, thereby imposing a moratorium under Section 14 of IBC, restricting any further financial or legal action against CDEL. Aggrieved by this decision, CDEL appealed before the NCLAT, arguing that the insolvency proceedings were time-barred, unauthorized, and initiated with malicious intent.

Questions of Law:

1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by IDBI Trusteeship Services Ltd., was barred by limitation?
2. Whether the application was validly filed despite the absence of a proper authorization?
3. Whether the application complied with the terms of the Debenture Trust Deed?
4. Whether the proceedings were initiated with a malicious intent in violation of Section 65 of the IBC?
5. Whether the COVID-19 extension of limitation periods applied to the present case?

Findings and Rationale:

1. Application Barred by Limitation: The NCLAT held that IDBI’s Section 7 application was barred by limitation under Article 137 of the Limitation Act, 1963, which prescribes a three-year period for initiating insolvency proceedings from the date of default. In this case, the default occurred on September 30, 2019, but IDBI filed the application only on September 7, 2023, making it time-barred. The tribunal rejected IDBI’s reliance on the Supreme Court’s ruling in B.K. Educational Services v. Parag Gupta & Associates (2018), which allows extension of limitation under Section 18 of the Limitation Act based on acknowledgment of debt. The NCLAT ruled that there was no valid acknowledgment of liability that could extend the limitation period. Additionally, the tribunal noted that the COVID-19-related extension of limitation did not apply, as the default occurred before the pandemic. The NCLAT by stating that "IBC is not a tool for reviving time-barred claims. The limitation period must be strictly followed unless a legally valid acknowledgment is made within the prescribed time."emphasized that IBC is not meant to revive time-barred claims and that limitation laws must be strictly followed.
2. Lack of Proper Authorization: The tribunal found that the individual who filed the Section 7 application, Manohar Maddili, lacked a valid power of attorney at the time of filing, as his authority had been superseded by a subsequent resolution. The NCLAT by stating that "Since the proceedings under Section 7 of I & B Code, 2016, itself was instituted on 07.09.2023, at that point of time Mr. Manohar Maddili, who had filed the supporting affidavit was not holding the valid authority to file an affidavit, which will itself vitiate the entire proceedings, since having been instituted by a person who was not competent to initiate the same." emphasized that since insolvency proceedings must be initiated by an authorized representative, the application was procedurally defective. The tribunal cited Palogix Infrastructure Pvt. Ltd. v. ICICI Bank (2017), where the Supreme Court held that the absence of valid authorization to initiate insolvency proceedings is a fatal defect. Since the insolvency application was filed without proper authority, the tribunal concluded that the entire CIRP process stood vitiated.
3. Non-Compliance with Debenture Trust Deed: The NCLAT observed that IDBI failed to comply with the Debenture Trust Deed, which required a majority resolution from debenture holders before initiating insolvency proceedings. Since IDBI was acting as a debenture trustee, it was obligated to secure approval from the debenture holders before filing the Section 7 application. The tribunal relied on Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021), where the Supreme Court held that contractual obligations must be adhered to before invoking IBC provisions. In the absence of such a resolution, the tribunal ruled that IDBI unilaterally initiating insolvency proceedings was legally untenable.
4. Malicious Proceedings Under Section 65 of IBC: The NCLAT found that IDBI initiated the insolvency proceedings with malicious intent, violating Section 65 of the IBC, which prohibits fraudulent or coercive insolvency applications, in this refernce the NCLAT noted that:"It would be a malicious proceeding and would be barred by Section 65 of the I & B Code, 2016. The plea of Section 65 of the I & B Code, 2016, since having been taken by the Appellant after the leave of the Tribunal and has not been considered, it would vitiate the proceedings." Further, the NCLAT observed that CDEL had explicitly argued that the proceedings were initiated to exert undue pressure, which NCLT failed to consider, making its judgment perverse. The tribunal cited Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017), where the Supreme Court held that insolvency proceedings should not be used as a recovery tool or to harass debtors. The NCLAT ruled that IDBI’s motive was not debt resolution but to coerce Coffee Day, thereby invalidating the entire proceedings.

Conclusion:

The NCLAT allowed Coffee Day Enterprises Ltd.’s appeal, set aside the NCLT order, and dismissed IDBI’s Section 7 application, holding that the insolvency proceedings were time-barred, unauthorized, and initiated with malicious intent. The judgment underscores that IBC is a tool for legitimate debt resolution and must not be misused for coercion. By upholding strict adherence to limitation laws, procedural requirements, and good faith principles, the ruling reinforces the integrity of insolvency proceedings and protects corporate debtors from baseless insolvency actions.

Disclaimer

This post is for educational and informational purposes only. It is not intended to defame, discredit, or tarnish the reputation of any individual, entity, or organization. The opinions expressed are based on publicly available judicial decisions and are aimed at fostering a better understanding of legal principles. For specific legal advice, readers are encouraged to consult a professional.