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2019 (11) TMI 1688 - Tri - Insolvency and BankruptcyMaintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Financial Creditors - existence of debt and dispute or not - RBI Circular dated February 12, 2018 - Whether the liability of the corporate debtor is deemed to have been discharged in view of the invocation of the pledge of shares by the financial creditor? - HELD THAT - From perusal of the record it is observed that the financial creditor issued overdue recall notice on December 19, 2017 and having had no response from the corporate debtor regarding the payment of outstanding debt which became due over such recall, the share pledge agreement was invoked on May 2, 2018 and 391,24,02,331 demat shares of the corporate debtor were transferred in the name of SBI Cap Trustee Co. Ltd., as Security trustee of phase-I lenders. However, it is observed that subsequent to the issue of overdue recall notice dated December 19, 2017 but before invocation of the pledged shares, i. e., on December 26, 2017 additional shares of 10,02,34,109 were issued by the corporate debtor to IPCL with differential voting rights of 1,000 votes per share, which resulted in reduction of voting rights of the financial creditors/lenders in the corporate debtor company from above 95 per cent. to 3.75 per cent. Such drastic reduction in voting right from above 95 per cent. to 3.75 per cent. actually nullified the terms of the share pledge agreement itself. The question whether invocation of the pledge of shares automatically converts debt into equity and results in repayment of the debt was dealt with by the hon'ble Supreme Court, hon'ble Bombay High Court and hon'ble National Company Law Appellate Tribunal - The hon'ble Supreme Court in the matter of BALKRISHAN GUPTA VERSUS SWADESHI POLYTEX LTD. 1985 (2) TMI 214 - SUPREME COURT has held that The pawnor has only a special property. A pawnee has no right of foreclosure since he never had the absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. In this sense a pledge differs from a mortgage. In view of the foregoing the pawnee in the instant case, i. e., the Government of Uttar Pradesh could not be treated as the holder of the shares pledged in its favour. The Cotton Mills Company continued to be the member of the Polytex Company in respect of the said shares and could exercise its rights under section 169 of the Act. Admittedly, in the instant case the pledge has been invoked by SBI Cap Trustee, the security trustee of financial creditor as a pledgee of the pledged shares and those shares have still not been sold by the financial creditor - Further, even after invocation of the pledged shares, the financial creditor/lenders have no controlling voting rights in the corporate debtor, their voting rights having been reduced by issuance of additional shares to its holding company, IPCL, with differential voting rights of 1,000 per share by the corporate debtor. Since in the light of guidance available in the judgments of the hon'ble Supreme Court, hon'ble Bombay High Court and hon'ble National Company Law Appellate Tribunal, this Adjudicating Authority has arrived at the conclusion that mere invocation of pledge of shares will not result in automatic conversion of debt into equity and repayment of debt, we hold that the petitioner, i. e., State Bank of India is a financial creditor of the corporate debtor. On perusal of the pleadings, it is seen from the correspondence between the corporate debtor and financial creditor as enclosed with the counter affidavit, that the corporate debtor has been making proposals for resolving the outstanding debt to the financial creditor even during the year 2018, which is clear indication of both existence of debt as well as default committed by the corporate debtor - this Adjudicating Authority having satisfied with the submissions put forth by the financial creditor that there exist a default on the part of the corporate debtor for which the corporate debtor was liable to pay, is inclined to admit the instant application. Further, the financial creditor has fulfilled all the requirements as contemplated under section 7 of the IB Code, in the present company application and has also proposed the name of IRP after obtaining the written consent in form 2. Petition admitted - moratorium declared.
Issues Involved:
1. Authorization of the person filing the application. 2. Impact of the RBI Circular dated February 12, 2018. 3. Effect of invocation of pledged shares on the discharge of debt. 4. Existence of debt and default. 5. Limitation period for filing the application. Issue-wise Detailed Analysis: 1. Authorization of the Person Filing the Application: The corporate debtor contended that the application was filed by an unauthorized person. However, the tribunal found that Mr. Attaluri Srinivas, Assistant General Manager, State Bank of India, was duly authorized to file the application. The authorization was supported by a letter of authority and Gazette Notifications, which conferred signing powers on behalf of SBI. Therefore, this ground for rejection was dismissed. 2. Impact of the RBI Circular Dated February 12, 2018: The corporate debtor argued that the application was based on the RBI Circular dated February 12, 2018, which had been struck down by the Supreme Court. The tribunal noted that if the financial creditor had intended to follow the RBI Circular, it would have implemented a resolution plan within 180 days from the reference date. Since the petition was filed on January 23, 2019, much later than the cut-off date of September 12, 2018, the tribunal concluded that the application was not filed in accordance with the RBI Circular and thus, this ground for rejection was also dismissed. 3. Effect of Invocation of Pledged Shares on the Discharge of Debt: The corporate debtor claimed that the invocation of pledged shares resulted in the discharge of the entire debt. The tribunal examined this issue and referred to several judicial pronouncements, including the Supreme Court's decision in *Balkrishan Gupta v. Swadeshi Polytex Ltd.* and the Bombay High Court's decision in *United Breweries (Holdings) Ltd. v. State Bank of India*. It was concluded that mere invocation of pledge does not result in the discharge of debt. The tribunal also noted that the financial creditor did not have controlling voting rights after the invocation due to the issuance of additional shares with differential voting rights by the corporate debtor. Therefore, this contention was rejected. 4. Existence of Debt and Default: The tribunal observed that the corporate debtor had acknowledged the debt and default in various correspondences and proposals for resolving the outstanding debt. The corporate debtor's loan account was classified as a non-performing asset (NPA) on October 28, 2017, and they admitted to being unable to make any payments to the lenders. The tribunal concluded that there was a debt of more than ?1 lakh and a default on the part of the corporate debtor. 5. Limitation Period for Filing the Application: The corporate debtor argued that the application was barred by limitation. However, the tribunal found that the corporate debtor had acknowledged the debt in 2018, which extended the limitation period under Section 18 of the Limitation Act, 1963. Therefore, the issue of limitation did not arise in this case. Conclusion: The tribunal found that all conditions for invoking Section 7 of the Insolvency and Bankruptcy Code, 2016, were fulfilled. The application was admitted, and the corporate insolvency resolution process was ordered to commence. Mr. Ravi Sankar Devarakonda was appointed as the Interim Resolution Professional (IRP), and a moratorium was declared as per Section 14 of the Code. The tribunal directed the IRP to take charge of the corporate debtor's management and comply with the necessary provisions of the Code.
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