The NCLAT recently dismissed the appeal filed by erstwhile MCX Promoter Jignesh Shah (and others) challenging the NCLT order initiating insolvency proceedings against La-Fin Financial Services (Corporate Debtor).

The Appellate Tribunal ruled that a put-option, or  buy-back arrangement, will constitute a ‘financial debt’. The NCLT had initiated Corporate Insolvency Resolution Process (CIRP) against La-Fin in August, 2018, based on a Section 7 application filed by IL&FS Financial Services.

IL&FS held approximately 5% equity in MCX, which upon mutual negotiations, was decided to be sold. It was further agreed that a part of the proceeds obtained by IL&FS from the sale of these shares would be used to purchase 2.46% equity in MCX-SX. This arrangement was recorded in a Share Purchase Agreement (SPA) between the three parties. There was a simultaneous agreement, in the form of a Letter of Undertaking (LoU) between IL&FS as well as La-Fin Financial Services according to which, La-Fin would purchase IL&FS’s equity in MCX-SX within 3 years of the investment date. The LoU stipulated the price at which the transaction would be carried out.

A Scheme of Reduction for MCX-SX was proposed in order to comply with the SEBI (MIMPS) Regulations, which was prejudicial to the interest of IL&FS. However, negotiations between IL&FS and MCX-SX reaffirmed that the commitments under SPA and LoU would be honoured. Once the Scheme of Reduction was sanctioned by the Bombay High Court, Financial Technologies India Limited (FTIL) informed IL&FS that La-Fin’s obligation under the LoU had become infructuous (for want of compliance with MIMPS Regulations). This is where the dispute stems from.

At the appeal stage, however, in addition to challenging the debt altogether, the Appellants also challenged the order on many technical grounds. Firstly, the order was heard by two members of the Mumbai Bench, however was signed by only member and subsequently, by an addendum-cum-corrigendum the other member agreed and consented to the admission order. The NCLAT found that Section 420(2) of the Companies Act, 2013 read along with the NCLT Rules allows the NCLT to make such modifications.

The court rejected all challenges, except to clarify that the related entities should have been connected with the business of the promoter to be barred from bidding. Defaulters who repay the debt within a year of them being classified as non-performing assets (NPAs) can submit resolution plans for assets as can promoters if they clear debt with interest.

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