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TMI Blog2020 (9) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, Advocates for R-3 Mr. P.V. Dinesh and Mr. Ashwini Kumar and Mr. Mukund P. Unni, Advocates for R.P. JUDGMENT Jarat Kumar Jain. J The Appellant, India Power Corporation Ltd. (in short IPCL) and Debasish Som being a Shareholder and Independent Ex-Director of Meenakshi Energy Ltd. (in short MEL) (Corporate Debtor) respectively, filed these Appeals under Section 61 of Insolvency and Bankruptcy Code, (In Short I&B Code) against the order dated 07.11.2019 passed by the Ld. Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad. Whereby, admitted the Application under Section 7 of I&B Code and initiated Corporate Insolvency Resolution Process against the Corporate Debtor. These Appeals were heard together and disposed of by this common Judgment. 2.1 Brief facts of the case is that Meenakshi Energy Ltd. Respondent No. 1 (referred as Corporate Debtor) had availed term loan and working Capital facilities from time to time from a consortium of lenders including State Bank of India, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore (SBI and the Associate Banks) Respondent No. 2 (referred as Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Creditor to the Demat Account of SBI CAP Trustee. Thus, the Financial Creditor became owner of 95.2% shares of the Corporate Debtor and the entire debt of the Corporate Debtor stood discharged. The Financial Creditor being a majority Shareholder of the Corporate Debtor, cannot maintain this Application as a Financial Creditor. The Financial Creditor has also mis-led the Ld. Adjudicating Authority by failing to disclose the pending legal proceedings before various forums. The Financial Creditor has filed this Application as a counter blast to the proceedings initiated by the Corporate Debtor and IPCL against the Financial Creditor in various forums. The Application is barred by Limitation. There does not exist any debt as on date, thus, there is no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecomes the beneficial owner of the shares. 7. Learned Counsel for the Appellants further submitted that the Application under Section 7 of I&B Code was filed under the RBI Circular dated 12.02.2018 (In Brief 'RBI Circular'). Such RBI Circular has been declared ultra vires and struck down by the Hon'ble Supreme Court in the case of Dharani Sugar & Chemicals Ltd. Vs. Union of India & Ors. reported in (2019) 5 SCC 480 Hence, the Application under Section 7 of I&B Code, should have been rejected at the threshold as not maintainable. 8. It is also submitted on behalf of the Appellants that after invocation of pledge and transfer of shares. The Financial Creditor in collusion and connivance with all the erstwhile lenders have been siphoning 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 wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Security Trustee can "sell or dispose of all or any part of the Collateral and shall apply the net proceeds of any such sale or disposition pro-rata amongst the lenders towards the obligations then due and payable under the Finance documents and Financing documents." Thus, upon invocation of pledge, SBI CAP Trustee cannot become the owner of the Shares. Clause 6.1 does not grant the phase I Lenders right to appropriate the shares or become owners of the shares upon invocation. Therefore, in the light of clause 6.1 of Share Pledge Agreement Regulations 58(8) is not applicable. For the sake of argument that the entity which invokes the shares becomes the owner of the shares then in this case since SBI CAP Trustee Company Ltd. has invoked 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 20 billion and above, on or after March 1, 2018 ('reference date'), including accounts where resolution may have been initiated under any of the existing schemes as well as accounts classified as restructured standard assets which are currently in respective specified periods (as per the previous guidelines), RP shall be implemented as per the following timelines: (i) If in default as on the reference date, then 180 days from the reference date. (ii) If in default after the reference date, then 180 days from the date of first such default. 9. If a RP in respect of such large accounts is not implemented as per the timelines specified in paragraph 8, lenders shall file insolvency 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant (IPCL) and MEL in favour of SBI CAP Trustee Company Ltd. When the Corporate Debtor committed default then at the instruction of the Financial Creditor, the SBI CAP Trustee Company Ltd. issued notice of invocation of pledged shares dated 20.12.2017, relevant portion of the notice is reproduced here:- "This constitutes an Event of Default as defined in the Common Loan Agreement and the IPCL Pledge Agreement. In terms of the IPCL Pledge Agreement, you the Pledgor have agreed that in the event of any default on part of the Borrower in payment of the outstanding amount, the Phase I Security Trustee shall be entitled to exercise their rights over the pledged shares 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst their interest repayment, while not providing any funds for the running of the plant which ultimately effects intrinsic value of the Corporate Debtor. In this Petition the Corporate Debtor has filed an Applications I.A No. 1 of 2018. For stay all steps/actions by the Financial Creditor pursuant to Total Recall Notice dated 07.08.2018 till pendency of Writ Petition whereas the Financial Creditor has filed an Application I.A. No. 2 of 2018 for vacating the interim order dated 24.08.2018 passed in I.A. No. 1 of 2018. (ix) On 23.01.2019 Hon'ble High Court of Telangana allowed I.A. No. 2 of 2018 and vacated the interim order passed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participants of the pledgor and the pledgee of the same and mandates the said participants to inform the pledgor and the pledgee. Thus, (a) while Section 176 provides for a notice to pledgor prior to effecting sale, Regulation 58 provides for notice post invocation and on which invocation beneficial ownership of pledged shares changes from that of the pledgor to that of the pledgee and which is equivalent to sale under Section 176. To hold that a prior notice under Section 176 of Contract Act is also required in the case of pledge of dematerialized shares would interfere with transparency and certainty in the securities market, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellants that the moment the shares transferred to the Demat Account of the SBI CAP Trustee Company Ltd. it became the beneficial owner of the shares as also held by this Appellate Tribunal in the case of PTC India Financial Services Ltd. (Supra). Learned Counsel for the Appellants tried to impress that pursuant to invocation of pledged shares the Financial Creditor became the shareholder of the Corporate Debtor. We are unable to convince with this argument and held that after invocation of pledged shares the SBI CAP Trustee Company Ltd. became the shareholder of the Corporate Debtor, as per the Clause 2.6.2 of 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 argu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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