Redemption of Debentures using Section 71(10), Companies Act read with Rule 73, NCLT Rules: An underutilized provision

Most of us know that a debenture holder is a “financial creditor” under the Insolvency and Bankruptcy Code, 2016 (“IBC”) regime. Most of us also know that if the default of redeeming these debentures exceed ₹1 crore, only then can they approach National Company Law Tribunal (“NCLT”) under the IBC regime.

However, most of us may not know about Section 71(10) of the Companies Act, 2013 read with Rule 73 of the NCLT Rules, 2016. This article attempts to highlight the remedy available for a failure to redeem debentures below the threshold limit of ₹1 crore.  

Debenture holders are increasingly leveraging the IBC regime to address defaults done by a corporate debtor above ₹1 crore through the NCLT mechanism. This trend is driven by several factors, including the classification of debentures as financial debts under the IBC, and the structured recovery process offered by the IBC's Corporate Insolvency Resolution Process (“CIRP”).

This provision is quite straightforward and seeks to codify a remedy for debenture holder if a company fails to redeem its debentures, without having any threshold limit like the one stipulated under the IBC. While IBC has emerged as a significant tool for resolving insolvency, it primarily caters to defaults exceeding ₹1 crore.

However, for debenture holders facing defaults below this threshold, Section 71(10) of the Companies Act, 2013, read with Rule 73 of the National Company Law Tribunal (NCLT) Rules, 2016, offers a less explored yet effective avenue for redressal.

By leveraging this provision, debenture holders can expedite debt recovery, reduce costs, and ensure timely redressal. It is imperative for legal practitioners and debenture holders to be aware of this often-overlooked remedy. By utilizing these provisions, they can not only protect their financial interests but also contribute to a more efficient and balanced debt recovery ecosystem.

About the author: Harshvardhan Abburi is a Partner at JSA.

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