The insolvency proceedings initiated against Udaan’s Singapore-based holding company, Trustroot Internet, after it defaulted on $170 million of convertible notes, have brought to the fore a larger tussle between secured and unsecured creditors over recovery rights.
People familiar with the matter said the proceedings relate to Trustroot Internet, which sits above the Indian operating entity in Udaan’s corporate structure. According to legal experts tracking the matter, the case is less about the viability of the operating business and more about the order in which different classes of creditors and investors are entitled to recover their dues. “This is essentially a priority-of-claims issue. Where there are multiple classes of lenders and investors with different contractual rights, insolvency proceedings can become a forum for determining the distribution of value,” said a restructuring lawyer.
Cross-Border Precedents
According to legal experts, the case would be watched closely by investors because several Indian startups continue to be housed under overseas holding companies with multiple layers of equity, convertible instruments and debt. Any judicial interpretation on the rights of different classes of creditors in such structures could influence future cross-border restructurings. A Singapore ruling would not bind Indian courts but would carry persuasive weight, and reshape investor expectations across the startup ecosystem, lawyers said. “If Singapore courts establish a clear hierarchy of how compulsorily convertible note holders rank against other creditors in a default, that precedent will immediately influence how term sheets for similar structures are drafted,” said Amitraj Kaushal, advocate at the Supreme Court of India.
The development follows unsecured creditors moving the Singapore court after the holding company defaulted on obligations linked to overseas financing. However, people aware of the discussions said the long-term investors and secured lenders are contesting the move, maintaining that the petition seeks to secure rights and payouts comparable to those contractually available only to secured stakeholders. According to these people, the secured lenders maintain that the contractual waterfall agreed at the time of the investment should be respected and that unsecured creditors cannot seek parity merely by invoking insolvency proceedings. Long-term investors in the holding company include Lightspeed, M&G and Moonstone, people familiar with the matter said.
When contacted a Udaan spokesperson said, “The matters referenced relate to ongoing restructuring negotiations and offshore proceedings among offshore stakeholders at the offshore holding company level. These discussions have no bearing on our operating entities in India, where our teams employ our people and run the day-to-day business. udaan and udaanCapital continue to operate as usual, serving customers across trade commerce and supply chain financing. We will continue to focus on delivering value to our customers, partners, employees and stakeholders”.
Legal experts said such disputes are not uncommon in venture-backed companies that have raised capital through multiple instruments over several funding rounds. As startups increasingly tapped structured debt and convertible instruments during the funding slowdown, capital tables became more layered, often resulting in differing recovery rights among investors. “Whenever there is stress at the holding company level, unsecured creditors may seek judicial intervention to maximise recoveries, while secured lenders typically insist that contractual priorities should prevail. Ultimately, the court determines the respective rights of each class of stakeholders,” another lawyer specialising in cross-border restructuring said.
Domestic Fallout
The impact, however falls on Udaan’s capital-market plans in India. If the parent’s board powers are suspended, the reverse flip and any Sebi filing would freeze until the Singapore proceedings are resolved. Additionally, if the liquidator takes control of the parent’s stake, the India business’s promoter and lock-in position under Sebi rules cannot be settled until the insolvency is resolved, since promoter status depends on control, said Amit Kumar Nag, partner at AQUILAW.
Control of the India business is the deeper question. Its main asset sits at the parent level, and whoever acquires the parent’s stake in a liquidation gains control, though that transfer will itself need Fema, RBI and CCI approvals, said Surbhi Kapoor, partner at King Stubb & Kasiva. A change in ownership at that level would ripple through the India business. “The real-world consequences are indirect but serious, that is, change of control, material adverse change triggers in lending and commercial contracts, heightened RBI attention on the NBFC business, and counterparty and lender nervousness,” said Kanan Chawda, partner of White & Brief, Advocates & Solicitors.