India’s largest tea producer McLeod Russel India has been admitted for a corporate insolvency resolution process under the Insolvency and Bankruptcy Code by the Calcutta branch of the National Company Law Tribunal.

This is the second instance in less than two years when the tea planter is being admitted for CIRP.

The company had averted the previous crisis by entering into an out-of-court settlement with the lender.

On Friday, McLeod was admitted again following an appeal filed by IL&FS Infrastructure Debt Fund.

Sources in the tea company confirmed it would appeal against the order in NCLAT, Delhi, even as it would simultaneously explore a mediation.

The court development will be a setback for the Khaitan family-promoted company, which signed an exclusive agreement last month with Carbon Resources to jointly explore a one-time settlement payment to the lenders of McLeod to resolve outstanding debt, which stands at around Rs 1,600 crore.

The case

McLeod Russel was admitted to CIRP even though it was not the borrower in this instant case as IL&FS Infrastructure Debt Fund had lent Rs 252.66 crore to two of the holding companies of the Khaitan family viz. Babcock Borsig Ltd and Williamson Magor & Co Ltd in 2017.

However, McLeod had executed a ‘shortfall undertaking’ in favour of IL&FS Infra Debt Fund.

Senior counsel Ratnanko Banerji, who appeared for IL&FS, argued that by entering into the shortfall undertaking, McLeod guaranteed to discharge the liability and obligations of the borrowers in the event of a default, and such an obligation was directly owed to the financial creditor.

Senior counsel Pranav Kohli, who appeared for McLeod, argued that McLeod was not the borrower and there are no obligations under the letters of comfort or interest shortfall undertaking which would require payment to the applicant by the company.

However, the bench comprising Justice Rohit Kapoor and Balraj Joshi (technical member) held that a financial debt exists and which has been defaulted by the corporate debtor (McLeod).

The court noted that McLeod had issued 24 post dated cheques worth Rs 33.77 crore to IL&FS.

“On the basis of the PDCs issued by the corporate debtor herein to the financial creditor herein, the debt is established and the fact that the borrower failed to respond to the notices sent by the financial creditor… the facilities were recalled pursuant to the recall letters… Therefore, this adjudicating authority is satisfied that a default has occurred and therefore this petition deserves to be admitted,” the order read.

Ramya Hariharan, founder of Citadel Law Chambers, who represented IL&FS, said: “The order is very significant as it sets a precedent for the issue of whether a default under a shortfall undertaking constitutes a financial debt under the IBC, 2016.”

IL&FS, which itself had gone through financial turmoil, had filed the case against McLeod in 2019. NCLT appointed Ritesh Prasad Adatiya as the interim resolution professional in this case on Friday.