NCLAT Sets Aside Insolvency Proceedings Against Coffee Day Enterprises Ltd (CDEL)

In a significant legal development, the National Company Law Appellate Tribunal (NCLAT) on Thursday quashed the insolvency proceedings against Coffee Day Enterprises Ltd (CDEL), the parent company of Café Coffee Day (CCD). This decision was a major relief for the company, which had been facing an insolvency petition filed by IDBI Trusteeship Limited (ITSL) over an alleged default of ₹228 crore.

The NCLAT ruling followed an appeal by Malavika Hegde, a shareholder and director at CDEL, who contested the National Company Law Tribunal’s (NCLT) August 2024 order admitting ITSL's insolvency petition. The Chennai Bench of NCLAT, consisting of Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain, ruled in favor of CDEL, setting aside the earlier NCLT decision. The NCLAT had earlier stayed the insolvency proceedings in August 2024, providing interim relief to CDEL, but the matter had been temporarily reinstated due to delays in passing the final order. The Supreme Court had set a February 21, 2025 deadline for resolving the appeal, which the NCLAT failed to meet, leading to a temporary reinstatement of the insolvency process. However, the final order issued on Thursday dismissed the insolvency case against CDEL.

Background of the Insolvency Petition

The dispute dates back to September 2023 when ITSL filed an insolvency petition against CDEL. ITSL claimed that the company had defaulted on the payment of dues related to non-convertible debentures (NCDs). These NCDs were issued by CDEL in 2019, with ITSL subscribing to 1,000 debentures worth ₹100 crore. CDEL, however, failed to make coupon payments between September 2019 and June 2020, prompting IDBI Trusteeship to issue a default notice in July 2020.

The insolvency petition was filed in 2023, and the NCLT admitted the case in August 2024, triggering the corporate insolvency resolution process (CIRP). The primary argument from ITSL was that CDEL’s default on the coupon payments amounted to a financial debt, and therefore, they were entitled to initiate the insolvency process under Section 7 of the Insolvency and Bankruptcy Code (IBC).

However, CDEL challenged the petition, arguing that ITSL, as a debenture trustee, was not a “financial creditor” under the provisions of the IBC and thus lacked the legal standing to file an insolvency petition. In its appeal, Malavika Hegde contended that IDBI Trusteeship's role as a trustee for the NCDs did not qualify it to initiate insolvency proceedings against the company.

NCLT’s Ruling and NCLAT’s Intervention

The NCLT, in its August 2024 ruling, rejected CDEL’s argument, stating that the debt arising from the debenture issuance was indeed a “financial debt” under the IBC, as per Section 5(8)(c). The Tribunal held that debenture holders, such as ITSL, were considered financial creditors, and therefore, ITSL had the right to seek the initiation of insolvency proceedings.

However, the NCLAT, after reviewing the case, disagreed with the NCLT’s decision. The appellate tribunal ruled that ITSL did not meet the criteria to be classified as a financial creditor. The bench emphasized that only those entities with a direct financial claim against the corporate debtor are entitled to initiate insolvency proceedings under the IBC. As a result, the NCLAT set aside the NCLT’s order, providing significant relief to CDEL.

Recent Developments and Legal History

The case comes against the backdrop of CDEL’s ongoing financial struggles. Founded in 1996 by V.G. Siddhartha, Café Coffee Day quickly became one of India’s largest coffee chains. However, by 2019, the company was burdened with over ₹7,000 crore in debt, which worsened following Siddhartha’s tragic death in July 2019. His wife, Malavika Hegde, took charge of the company and attempted to stabilize finances through asset sales.

CDEL’s debt woes have been compounded by multiple insolvency petitions. In addition to the proceedings initiated by ITSL, a separate insolvency petition had been filed against CDEL's subsidiary, Coffee Day Global, by IndusInd Bank over an alleged ₹94 crore default. This petition was admitted by the NCLT in July 2024. However, after an amicable settlement between the parties, the insolvency process was called off, and the debt was transferred to an asset reconstruction company, ASREC (India) Ltd.

The Coffee Day Saga

Café Coffee Day, at its peak, had 495 cafes across 158 cities in India by FY2022. However, by September 2024, its footprint had shrunk to 450 cafes in 141 cities. Despite this, CDEL’s vending machine business has seen significant growth, with the number of operational machines increasing from 38,810 to 52,581 during the same period. These machines, placed in corporate offices and hotels, continue to be a crucial revenue source for the company.

Despite the ongoing financial distress, the NCLAT's ruling provides CDEL with temporary relief from the insolvency process, offering the company an opportunity to negotiate with creditors and explore alternative avenues for debt resolution. While the relief is significant, the company still faces the daunting task of restructuring its finances and addressing its liabilities.

The Bigger Picture: Corporate Insolvency in India

This case highlights the complexities surrounding corporate insolvency proceedings in India, particularly concerning the definition of "financial creditors" and the legal standing required to initiate insolvency proceedings under the IBC. The NCLAT’s ruling in this case is a critical reminder that only those with legitimate financial claims against the company have the right to trigger insolvency proceedings.

The legal proceedings involving Coffee Day Enterprises also illustrate the growing scrutiny of insolvency petitions, especially with regard to debt obligations arising from debenture holders and other non-bank financial institutions. As the IBC framework continues to evolve, this case is expected to set important precedents for future corporate insolvency disputes in India.

Conclusion

The NCLAT's ruling in favor of Coffee Day Enterprises Ltd. represents a temporary victory for the company, allowing it to avoid the immediate threat of insolvency proceedings. However, the financial challenges facing CDEL remain significant, and the company must now focus on restructuring its debt and finding sustainable ways to address its liabilities. The ruling underscores the ongoing evolution of India’s corporate insolvency law and highlights the need for clarity and proper legal standing when invoking insolvency processes under the IBC.