TMI Blog2020 (9) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... ication would have filed on or before 12.08.2018 whereas it is filed on 23.01.2019. Therefore, there is no ground to presume that the Application under Section 7 of I B Code, is filed pursuant to the RBI Circular. Learned Adjudicating Authority in Para 12 of the impugned order has also rejected this objection. Whether the liability of the Corporate Debtor stood discharged in view of the invocation of the pledged shares by the Financial Creditor? - HELD THAT:- A bare perusal of the notice of invocation shows that the pledge had been invoked only on behalf of the phase I lenders. This notice was issued without prejudice to the rights and remedies against the borrower under the Financing Documents. This notice also specifically mentioned that the lenders and other secured parties expressly reserving the right to declare further default or invoke security from time to time. We are unable to convince with the arguments of Learned Counsel for the Appellants that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd. liability of the Corporate Debtor stood discharged - It is true that after invocation of the pledge, Shares were transferred in dematerialised for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipur, State Bank of Mysore and State Bank of Travancore (SBI and the Associate Banks) Respondent No. 2 (referred as Financial Creditor) in two different phases to set up a 300 MW coal based power project (phase I) and 700 MW coal based thermal power project (phase II) respectively, in terms of Common Loan Agreement dated 10.07.2009 and 01.10.2010 respectively, at Thamminapatnam village, Nellore District (Andhra Pradesh). 2.2 The Corporate Debtor has also availed working capital facilities in accordance with the terms of Working Capital Consortium Agreement dated 18.09.2012 and the latest Working Capital facility sanctioned by Financial Creditor is captured under the Renewal cum Enhancement Sanction Letter dated 17.11.2015 issued by SBI. For Security of Loan the Corporate Debtor pledged shares of the Corporate Debtor held by IPCL. 2.3 The Corporate Debtor has defaulted in timely servicing of the principal repayments and interest payments for the facilities in relation to phase I project from 31.07.2017. Therefore, the Account of Corporate Debtor was classified Non-Performing Asset since, 28.10.2017. The SBI (Financial Creditor) vide its notice dated 07.08.2018 demanded the rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o question of default in respect of the Financial Creditor. The Application under Section 7 of I B Code is filed in consonance with the RBI Circular dated 12.02.2018 and such circular has been struck down by the Hon ble Supreme Court. Therefore, the Financial Creditor has no cause of action to institute the proceeding. 4. After hearing Learned Counsel for the parties, Learned Adjudicating Authority having satisfied with the submission put forth by the Financial Creditor held that there exist default on the part of Corporate Debtor, for which the Corporate Debtor liable to pay. Hence, admitted the Application and ordered for initiation of CIRP and also declared moratorium from the date of order till completion of CIRP under Section 14 of I B Code. Being aggrieved with this order, the Appellants being Shareholder and independent Director of the Corporate Debtor have filed these Appeals. 5. Learned Senior Counsel for the Appellants submitted that the debt owed by Corporate Debtor was secured by pledge of shares of the Corporate Debtor held by the IPCL. The Financial Creditor after invocation of pledge and subsequent transfer of shares in the name of SBI CAP Trustee Company Ltd, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the funds from the Corporate Debtor. Therefore, the Appellant (IPCL) had filed an Application under Section 241 242 of the Companies Act, against the Financial Creditor. However, Learned Adjudicating Authority has erroneously admitted the Application under Section 7 of I B Code. Hence, the order deserves to be set aside. 9. On the other hand, Learned Counsel for the Financial Creditor (Respondent No. 2) submitted that the Appellants have wrongly contended that the invocation of pledge amounted to transfer of shares or discharge of debt. The Pawnee s rights are governed by the Section 176 of Indian Contract Act, 1872, when Pawnor makes default the Pawnee does not have a right to appropriate and transfer ownership to itself of the pledged goods. The Pawnee s remedies are limited to sue for debt and retain the pledged goods or sell the pledged goods on giving the Pawnor reasonable notice of the sale and appropriate the proceeds. For this preposition, place reliance on the Judgment of Hon ble Supreme Court in the case of Balkrishna Gupta Vs. Swadesi Polytex Ltd. (1985) 2 SCC 167. Wherein Hon ble Supreme Court has held that even after the pledge is enforced, the legal title in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the shares, then it is the owner of the shares not the Financial Creditor. 11. Learned Counsel for the Financial Creditor (Respondent No. 2) submitted that the Application under Section 7 of I B Code, has been filed independently and not pursuant to the directions given under the RBI Circular dated 12.02.2018 which directed that Insolvency Proceedings must be commenced under the I B Code, if the amount specified therein continues to be in default for a period of 180 days from the date specified therein. In the Present case, internal approvals for filing the Application under Section 7 of I B Code, was sought on 04.08.2018 which was prior to the ending of the period specified in RBI Circular. 12. Learned Counsel for the Financial Creditor (Respondent No. 2) further submitted that the Corporate Debtor has suppressed issuance of Additional shares as a result the substantial reduction in the voting rights of the initially pledged shares i.e. from 97.58% available earlier to 3.75% available now, after issuance of Additional shares. The Corporate Debtor (MEL) issued Additional shares with a malafide intention to reduce the voting rights of the Respondent No. 2 (Financial Credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y application, singly or jointly, under the insolvency and Bankruptcy Code (IBC) within 15 days from the expiry of the said timeline. 17. In the case in hand NPA was declared on 28.10.2017 internal approval for filing the Application under Section 7 of I B Code, sought on 04.08.2018 and the Application was filed on 23.01.2019. In the Application there is no reference that the Application is filed in pursuant to the RBI Circular. As per RBI Circular the Application under Section 7 of I B Code, is required to be filed on or before 15 days from expiry of 180 days time period from reference date 01.03.2018, it means, in this case the Application would have filed on or before 12.08.2018 whereas it is filed on 23.01.2019. Therefore, there is no ground to presume that the Application under Section 7 of I B Code, is filed pursuant to the RBI Circular. Learned Adjudicating Authority in Para 12 of the impugned order has also rejected this objection. Issue No. 2 18. According to the Appellants after invocation of the pledged shares the Financial Creditor became 95.2% shareholder of the Corporate Debtor and the entire dues of Corporate Debtor stood discharged. In support of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as specifically provided for in the said Agreement. In view of the above, we hereby call upon you to pay the sums as per the details mentioned in the Annexure within 7 days from the date of this notice. In case, you fail to make the payments as mentioned in the Annexure, the Phase I Security Trustee shall exercise its available rights as the Pledgee by way of invocation of the pledge over the Pledged Shares and shall be entitled to inter alia transfer and/or sell the pledged shares on the expiry of 7 days from the date of this letter for realizing the dues as per the details mentioned in the Annexure at your own risks as to the costs and consequences thereof. This notice is being issued to you without prejudice to our rights and remedies against the Borrower. Nothing contained in this letter will be construed as a waiver (in full or part) of any or rights or remedies under the Financing Documents or defaults thereunder. The Lenders and other Secured Parties expressly reserve the right to declare further defaults or invoke security from time to time. 23. A bare perusal of the notice of invocation shows that the pledge had been invoked only on behalf of the phase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in I.A No. 1 of 2018. (x) On 23.01.2019 the Financial Creditor filed an Application under Section 7 of I B Code before the Tribunal. (xi) On 17.04.2019 the Division Bench of the Hon ble High Court of Telangana at Hyderabad dismissed the Writ Appeal No. 203 of 2019 in which the order dated 23.01.2019 of the Single Bench of Hon ble High Court of Telangana, was challenged. 25. Now, we have considered whether the pledge of dematerialised shares being governed under the Provisions of Section 176 of the Contract Act, or/and Depositories Act, 1996 and Regulations made therein. Hon ble High Court of Delhi in the case of Tendril Financial Services Pvt. Ltd. (Supra) concurred with the view of Hon ble High Court of Bombay in JRY Investments Pvt. Ltd. and Puspanjali Tie Up Pvt. Ltd. held that the shares in dematerialised form cannot be pledged in accordance with Section 176 of the Contract Act. The Court observed that the Provisions of the Contract Act require delivery of the goods pledged i.e. physical possession of the goods. However, the dematerialised shares are not capable of delivery by handing over de facto possession. Since, the goods in such cases are invisible and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket, rendering fatal blow to the Depositories Act and Regulations and the object of enactment thereof. F. The distinction sought to be drawn by the senior counsel for the plaintiffs between ―invocation‖ and ―sale‖ is also not in consonance with Regulation 58. I may notice that there is no such distinction in Contract Act either. While Section 176 of Contract Act entitles pledgee to, on default of pledgor, sell the pledged thing i.e. transfer title and possession thereof to purchaser, Regulation 58 entitles the pledgee to, on default on pledgor, invoke the pledge by intimating to the depository and mandates the depository to in its records record the pledgee in place of the pledgor as the beneficial owner of pledged shares, thereby transferring title as beneficial owner, from the pledgor to pledgee. The only condition imposed on invocation of pledge by the pledgee, under Regulation 58 (8) is of the same being required to be ―subject to the provisions of the pledge documents‖ i.e. of creation of pledge in the manner provided in Regulation 58(1) to 58(6) - of which the participant of the pledgee and the depository have been made aware and wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Share Pledge Agreement dated 23.09.2016. The Financial Creditor is not party in the above referred agreement. In the notice dated 20.12.2017 it is mentioned that invocation of pledged shares shall not prejudice the rights and remedies available to the Financial Creditor under the Financing Documents. Therefore, it cannot be said that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd., the Financial Creditor cannot maintain the Application under Section 7 of I B Code, or the entire dues of the Corporate Debtor stood discharged. 27. It is argued on behalf of the Appellant that after invocation of pledge and subsequent transfer of shares the Financial Creditor held 95.2% shares of the Corporate Debtor. Thus, the entire debt of the Financial Creditor stood discharged. If this is the position, then why the Corporate Debtor after receiving the notice of invocation of pledged shares dated 20.12.2017 sent an acknowledgement of debt on 16.02.2017 (See Annexure 20 of Page 313 Reply of Financial Creditor Vol. II) and after transfer of shares sent letters dated 25.05.2018 and 11.06.2018 for settlement. It shows that even after transfer of shares in the Demat Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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