Debenture trustee, moratorium and a split bondholder class
Kaveri Auto Components Ltd, a listed manufacturing company that is not a financial service provider, defaulted on ₹500 crore of secured non-convertible debentures. Taurus Trustee Co. holds, for the debenture holders, a registered charge over a demat account holding 1.2 crore shares of Kaveri’s subsidiary and over a plant. CIRP commenced on 10 January 2025. The RP admitted Taurus’s claim for ₹500 crore but excluded it from the CoC, saying the beneficial owners must be admitted separately. The CoC otherwise has two banks with ₹300 crore and ₹150 crore. Taurus receives instructions from holders: 60% by value want to vote for a resolution plan; 40% want to enforce the share pledge immediately. The 40% argue that the shares are securities and can be sold without affecting the plant. The RP asks whether the trustee can be kept out and how the trustee’s vote should be counted if admitted.
1. Was the RP correct to exclude Taurus from the CoC? Explain who should be admitted and how the class should be represented.
Read the worked answer
No. A financial debt owed to a class of creditors is represented through an authorised representative. Section 21(6A) and CIRP Regulation 16A permit the debenture trustee to attend and vote for the class; the RP should admit the class claim at ₹500 crore and recognise Taurus as the authorised representative. Excluding the trustee would understate the CoC’s financial debt and deny the debenture holders their statutory representation. The trustee’s voting share is the aggregate admitted debt of the class, but the trustee does not have a free hand: it must vote in accordance with instructions. If 60% by value instruct ‘yes’, only that 60% is cast as yes; the 40% is cast as no or, if no instruction, abstained. The RP cannot count the entire ₹500 crore as a single yes vote.
2. Can the 40% holders enforce the pledge over the subsidiary shares during CIRP? What if the pledge had been created by the promoter over his personal shares?
Read the worked answer
No, as to the subsidiary shares. Section 14(1)(c) prohibits enforcement of a security interest created by the corporate debtor over its property during the moratorium. The shares are held by Kaveri and are part of its assets; the charge was created by Kaveri. The 40% cannot sell them. The position changes if the pledge is over shares owned by a third-party guarantor: section 14(1)(c) is confined to security created by the corporate debtor, so the moratorium does not bar enforcement against the guarantor’s own shares, though any claim against the corporate debtor remains subject to the CIRP. This distinction matters because the location of ownership, not the identity of the secured creditor, drives the answer.
3. If a plan is approved with the bank votes and 60% of the debenture class voting yes, what protection do the dissenting 40% have?
Read the worked answer
If the plan is approved by at least 66% of the CoC and complies with section 30(2), the dissenting 40% are bound by it. Their protection is section 30(2)(c): a dissenting financial creditor must receive not less than the amount payable to it under the section 53 liquidation waterfall. The trustee must therefore ensure that the 40% is treated as dissenting and that the plan’s payment to them meets that floor. If the plan pays less, the RP should not submit it as compliant, and the Adjudicating Authority can reject it under section 31. A commercial vote cannot override the statutory minimum.