Insolvency and Bankruptcy Code, 2016: ss. 30, 52 and 53 – Claim of the appellant as financial creditor of the corporate debtor on basis of the pledged shares – Entitlement to – On facts, corporate debtor approached the appellants to extend a short- term loan facility to its group companies for the ultimate end use of the corporate debtor – It was an understanding that the corporate debtor would create first ranking exclusive security by way of pledging shares held by the corporate debtor – Execution of Security Trustee Agreements between the appellant no. 1 and the group companies – Thereafter, an application u/s.7 admitted against the corporate debtor and the respondent appointed as the resolution professional – Appellant no. 1 filed its claim as a secured creditor of the corporate debtor and submitted Form C claiming a principal amount, however, the same was rejected by the resolution professional – Appellants then filed application u/s. 60(5) claiming the right based on pledged shares, which was rejected by the Adjudicating Authority as well as the NCLAT – NCLAT held that the appellants not having advanced any money to the corporate debtor as a financial debt would not be coming within the purview of a financial creditor of the corporate debtor – On appeal, held:Appellant No. 1 has security interest in the pledged shares – Appellant No. 1 is to be treated as a secured creditor, but would not fall under the category of financial creditors or operational creditors – Appellant No.1 is being denied the rights u/s. 52 as well as s. 53 in respect of the pledged shares whereas, the intent of the amended s. 30(2) rw s. 31 is to protects the interests of other creditors who are outside the purview of the CoC – Viable solution is to treat the appellant no. 1 as secured creditor in terms of s. 52 rw s. 53 – Option is given to the successful resolution applicant to treat the appellant no.1 as a secured creditor, who would be entitled to retain the security interest in the pledged shares, and in terms thereof, retain the security proceeds on the sale of the said pledged shares – This option would meet the mandate of the Code and does not violate the rights given to the secured creditor –Thus, appellant no.1 would be treated as a secured creditor, and entitled to all rights and obligations as applicable to a secured creditor in terms of ss. 52 and 53 and in accordance with the pledge agreement – Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 – r. 21A.
Disposing of the appeal, the Court
HELD: 1.1 The submission that the Amended and Restated Pledge Agreement dated 5.07.2016 between the corporate debtor and the IL&FS Trust Company Limited, the predecessor-ininterest of the appellant no. 1 (Pledge Agreement) inter alia provides that the Corporate Debtor is the guarantor of the entire loan amount for which reliance was placed upon clause 2.12 of the Pledge Agreement, is rejected, for the Pledge Agreement specifically restricts and limits the liability of the Corporate Debtor the extent of the pledged shares vide clause 2.1.1. [Para 6][821-C-D]
1.2 Certain communications issued by the IDBI Bank, the lead bank of the Joint Lenders Forum, which now constitutes the majority of the CoC of the corporate debtor permitting the pledge of shares etc., have to be read and understood in the context in which they were written. It was clear and understood by the financial creditors of the corporate debtor that the corporate debtor is not to bear any additional financial liability by a security or charge of its assets for the STL Facilities, and the loans were being procured and taken by Brassco and WLD from the Appellant Nos. 2 and 3. It was stipulated that the assets of the Corporate Debtor would not be encumbered in anyway, and except for shares given as security, and the burden to repay/ discharge the loan was/ is upon Brassco and WLD. IDBI Bank had only permitted the corporate debtor to pledge the shares in question, and to this extent, they did not have any objection. [Para 6.1][822-A-C]
1.3 Appellant No. 1 is a secured creditor to the extent of the shares pledged to it by the Corporate Debtor. It holds the first right in pledge on 66.77% shareholding in JMT Auto Limited. The expression ‘security interest’ as defined in Section 3(31) of the Insolvency and Bankruptcy Code, 2016 states that it means right, title, interest or a claim to a property created in favour, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes, mortgage, charge, hypothecation, assignment and encumbrance, or any other agreement or arrangement for securing payment or performance of any obligation of any person. The person is whose favour the security interest is created need not be the creditor who avails the credit facility, and can be a third person. Security interest can be created for credit facilities/loan advanced to another person. It is accepted and admitted that the appellant No. 1 has security interest in the pledged shares. [Para 7][822D-G]
1.4 The law of pledge contemplates special rights for the pawnee in the goods pledged, i.e., the right to possession of the security, and in case of default, the right to bring a suit against the pawnor, as well as the right to sell the goods after giving reasonable notice to the pawnor. The general rights or ownership rights in the property remain with the pawnor, and wholly reverts to him on discharge of the debt or performance of the promise. In other words, the right to property vests in the pawnee only as far as it is necessary to secure the debt. [Para 7.2][824-F-G]
1.5 The amendment introduced by Act No. 26 of 2019 ensures that the operational creditors under the resolution plan should be paid the amount equivalent to the amount which they would have been entitled to, in the event of liquidation of the Corporate Debtor under Section 53 of the Code. In other words, the amount payable under the resolution plan to the operational creditors should not be less than the amount payable to them under Section 53 of the Code, in the event of liquidation of the Corporate Debtor. The amended provision also provides that the financial creditors who have not voted in favour of the resolution plan shall be paid not less than the amount which would be paid to them in accordance with sub- section (1) to Section 53 of the Code, in the event of liquidation of the corporate debtor. Explanation to clause (b) of the 30(2) of the Code, for the removal of doubts, states and clarifies that the distribution in accordance with this clause shall be fair and equitable to such creditors. [Para 8.1][826-F-H]
1.6 It is also the mandate of Section 31 of the Code that the adjudicating authority should be satisfied that the resolution plan, as approved by the CoC under sub-section (4) of Section 30 meets with the requirement as referred to in sub-section (2) of Section
30. Only then, the adjudicating authority shall approve the resolution plan, which shall then be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. Section 30(2)(e) also requires the resolution professional to examine each resolution plan received by him/her and confirm that it does not contravene any provisions of law for the time being in force. Thus, the amended Section 30(2) read with Section 31 of the Code, enunciates the manner in which the interests of the creditors who are not included in the CoC i.e., the operational creditors and the financial creditors who have not voted in favour of the resolution plan, must be protected in the resolution plan by the resolution professional and the adjudicating authority. [Para 8.28.3][827-A-D]
1.7 It is in this context that the appellant No. 1 submits that the resolution plan in question does not meet the requirements of the Code, as it extinguishes and vaporises the pledge created in favour of the appellant no. 1 and thereby, appellant no. 1, a secured creditor, viz, the pledged shares, is left remediless and worse off than the dissenting financial creditors, or even the operational creditors. [Para 8.4][827-D-E]
1.8 The difficulty which arises in the instant case is that, in terms of the decision of this Court in Anuj Jain’s case and Phoenix ARC’s case, appellant no. 1 is to be treated as a secured creditor, but would not fall under the category of financial creditors or operational creditors. Therefore, they would be denied the benefit of the amendments to Section 30(2) of the Code made vide Act No. 26 of 2019, or for that matter Act No. 26 of 2018. Consequently, a very odd and a peculiar situation is created where a secured creditor is denied the benefit of the secured interest i.e., the right to exercise the sale of the secured interest, yet not be treated as either a financial creditor or an operational creditor. In terms of Section 52 of the Code, a secured creditor in liquidation proceedings has the right to relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified under Section 53 of the Code. The second option given to the secured creditor is to realise the security interest in the manner specified in said Section. Rule 21 A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 deals with the presumption of security interest. If the secured creditor relinquishes the security interest, it is then entitled to priority in payment under clause (b) to sub-section (1) to Section 53 of the Code. The debts owed to the secured creditor in such event, rank pari passu with the workmen’s dues for the period 24 months preceding the liquidation commencement date. As per Section 52(9) of the Code, where the proceeds on realisation of secured assets are not adequate to repay the debts due to the secured creditors who have exercised the option to realise the security interest, the unpaid dues of such secured creditors are to be paid by the liquidator in terms of clause (e) of sub-section (1) of Section 53 of the Code. [Para 8.5][828-A-E]
1.9 The answer to the situation wherein the appellant no.1, a secured creditor, is being denied the rights under Section 52 as well as Section 53 of the Code in respect of the pledged shares, whereas, the intent of the amended Section 30(2) read with Section
31 of the Code is too contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC, is two-fold. First is to treat the secured creditor as a financial creditor of the Corporate Debtor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP. This would make it a member of the CoC and give it voting rights, equivalent to the estimated value of the pledged shares. However, this may require re-consideration of the dictum and ratio of Anuj Jain’s case and Phoenix ARC’s case, which would entail reference to a larger bench. In the context of the instant case, the said solution may not be viable as the resolution plan has already been approved by the CoC without appellant no. 1 being a member of the CoC. Therefore, the second option would be opted. The second option is to treat the appellant no. 1 as a secured creditor in terms of Section 52 read with Section 53 of the Code. In other words, the option is given to the successful resolution applicant-DVI to treat the appellant no.1 as a secured creditor, who would be entitled to retain the security interest in the pledged shares, and in terms thereof, would be entitled to retain the security proceeds on the sale of the said pledged shares under Section 52 of the Code read with Rule 21 A of the Liquidation Process Regulations. The second recourse available, would be almost equivalent in monetary terms for the appellant no. 1, who is treated it as a secured creditor and is held entitled to all rights and obligations as applicable to a secured creditor under Section
52 and 53 of the Code. This would be a fair and just solution to the legal conundrum and issue highlighted. [Para 9][828-F-H; 829-A-C]
1.10 It is clarified that the directions given would not be a ground for the successful resolution applicant-DVI to withdraw the resolution plan which has already been approved by the NCLAT and this Court. The reason is simple. Any resolution plan must meet with the requirements/provisions of the Code and any provisions of law for the time being in force. What is directed and the option given by, ensures that the resolution plan meets the mandate of the Code and does not violate the rights given to the secured creditor, who cannot be treated as worse off/inferior in its claim and rights, viz, an operational creditor or a dissenting financial creditor. [Para 9.1][828-D-E]
1.11 The submission raised by the respondent No. 1, resolution professional for the Corporate Debtor and the respondent no. 2-CoC of the Corporate Debtor that the plea of the appellant no.1 to be treated as a financial creditor of the Corporate Debtor should be dismissed on the grounds of delay, laches and acquiescence is accepted. The submission is that the appellant no. 1 had not objected to the resolution plan submitted by the erstwhile resolution applicant-LHG and, as a sequitur, its non-classification as a financial creditor in the CoC of the Corporate Debtor. Though this argument had appealed and had weighed with the NCLAT, is untenable since the resolution plan submitted by erstwhile resolution applicant LHG did not in any way affect the rights or interests of the appellant No. 1 as a secured creditor in respect of the pledged shares. appellant no.
1 has elaborately explained that LHG etc. were in negotiations with them so as to redeem the pledge and acquire the shares. [Para 10][829-F-H;]
1.12 The impugned judgment of the NCLAT affirming the view taken by the NCLT is partly modified in terms of the directions holding that appellant no.1 would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Code, and in accordance with the pledge agreement dated 05.07.2016. [Para 11][830-B-C]
Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited etc. etc. (2020)
8 SCC 401 : [2020] 8 SCR 291; Phoenix ARC Private Limited vs. Ketulbhai Ramubhai Patel (2021) 2 SCC 799; PTC India Financial Services Limited v.
Venkateswarlu Kari and Another (2022) 9 SCC 704 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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