Insolvency proceedings begin against Mcleod Russel
Mcleod Russel India, the Kolkata-based tea plantation company, has now gone into insolvency after the Kolkata Bench of the National Company Law Tribunal (NCLT) admitted the insolvency application filed by IL&FS Infrastructure Debt Fund.
Mcleod Russel has defaulted on the payment of Rs 347 crore to IL&FS Infrastructure Debt Fund. The total default amounts include Rs 252 crore as the principal amount and Rs 95 crore as the interest accrued.
The NCLT has appointed Ritesh Prasad Adatiya as the interim resolution professional.
Brief of the case
The financial creditor is a mutual fund scheme established in accordance with the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996, having its office at the IL&FS Financial Centre.
The Financial Creditor had subscribed to debentures of two group companies of the Mcleod Russel – Rs 150 crore debentures of Babcock Borsig Limited and Rs 99.5 crore of Williamson Magor & Company Limited (WMCL).
The Corporate Debtor had executed a shortfall undertaking in favour of the Financial Creditor. One of the clauses of the Shortfall Undertaking provides that on a breach by borrowers of its obligation to maintain the required amounts in the debt service reserve account (DSRA) under the respective debenture trust deeds, the Corporate Debtor would have an irrevocable and unconditional obligation towards the Financial Creditor to meet any shortfall in the said DSRA.
The Financial Creditor would communicate the amount of shortfall in the DSRA through a funding notice, and the Corporate Debtor would be under an obligation to provide the requisite sum to the Financial Creditor within 7 days of receiving such funding notice.
Another clause of the Shortfall Undertaking provides that the shortfall provider – Mcleod Russel — would not be discharged of its liabilities at any time, till such time the debenture holder, being the financial creditor, issues its discharge in writing.
Thus, by entering into the shortfall undertaking, the Corporate Debtor guaranteed to discharge the liability and obligations of the Borrowers in the event of a default, and such obligation was directly owed to the Financial Creditor.
Mcleod Russel failed to comply with its obligations under the debenture trust deeds including its obligation relating to maintenance of DSRA. The Financial Creditor had issued two default notices dated 6 May 2019, and 24 May 2019 to the Mcleod Russel. However, it failed to remedy the default. Consequently, the Facilities were recalled pursuant to the recall letters dated 10 June 2019. Thus, the entire amount payable under the Facilities became due and payable forthwith.
Opposing the plea by IL&FS Infrastructure Debt Fund, Mcleod Russel contended that the NCDs were fully secured in terms of the security documents and enforceable against the properties mortgaged, shares pledged, promissory notes executed etc. Though the interest shortfall undertaking is designated as definitive document, it does not create any guarantee, nor can it be enforced for the recovery of any defaulted amount payable by the borrowers. Furthermore, the obligation of the Corporate Debtor is restricted to provide funds to meet any shortfall in the DSRA. It cannot be construed as a guarantee to repay the debt.
However, the NCLT observed that whether the shortfall undertaking can be construed as guarantees would depend on the intention of the parties, which in the instant case, without drawing technical inferences, clearly reflect the intentions of the parties that they are meant to be acting as securities protecting the interest of the financial creditor.
It further says that Mcleod Russel has been called upon to deposit the amount in DSRA in terms of the shortfall undertaking agreement, which is not controverted by the Corporate Debtor as well on the basis of the evidence in the shape of PDCs and hence we hold that a financial debt exists and which has been defaulted by the Corporate Debtor.
