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TMI Blog2019 (11) TMI 1688X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narender Naik and M. Vikram for the financial creditor. S. Ravi , Senior Counsel with Dishit Bhattacharjee for the corporate debtor. ORDER Under consideration is a company petition, filed by State Bank of India (hereinafter referred to as financial creditor ) under section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as IBC) read with rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 against M/s. Meenakshi Energy Ltd. (hereinafter referred to as corporate debtor ). 2. The brief facts of the present case, inter alia, are as under : (a) That the 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 Asso ciate Banks in short) in two different phases to set up a 300 MW coal based power project (phase-I) and a 700 MW coal based thermal power project (phase-II) respectively, in terms of common loan agreements dated July 10, 2009 and October 1, 2010 respectively, at Thamminapatna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,60,712.52 (h) Learned counsel for the petitioner/financial creditor while reiterating the above submitted that the respondent/corporate debtor is unable to pay its debts and therefore it has no other option except approaching this Adjudicating Authority under the I and B Code seeking an order for commencing the corporate insolvency resolution process and prayed for appointment of an IRP to take over the affairs of the respondent/corporate debtor. (i) List of documents filed in support of the petition are enclosed as under : (i) Copies of the Associate Bank Gazette Notifications. (ii) Copy of the Authorization and Gazette Notification. (iii) Authorization Letter to Advocates. (iv) Details of date of disbursements under the facilities. (v) Computation of defaulted amount and date of default relation to each facility. (vi) Copies of Certificates of Registration Modification of Charge. (vii) Copies of the financial contracts. (viii) Copies of CIBIL Report and CRILC Report. (ix) Copies of entries in the bankers book in accordance with the Bankers' Books Evidence Act, 1891. (x) Revival letter dated February 16, 2018 issued by the corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious forums. (vii) That the sole intention of the financial creditor is to arm twist and paralyze the corporate debtor in order to meet certain arbitrary and unjust demands portraying itself as lender when in reality the financial creditor is the majority shareholder and holds the ownership of the corporate debtor. (viii) That in spite of being aware of the restricted and regulated market in the power sector, the financial creditor along with other lenders has in a synchronized manner pushing the corporate debtor to forced sale which will cause big sacrifice of public money without any benefit to the economy. (ix) That instead of adopting sector agnostic approach for stress resolution, the financial creditor being the owner and majority shareholder should look at sector friendly measures as the power sector should be protected since it is going through a transition phase from a low-demand-low- supply situation to a moderately high-demand situation. (x) That the instant application is filed by Mr. Attaluri Srinivas who does not hold a specific authorization to file the application which is not in line with the dictum of the hon'ble National Company Law Appellate Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous to the overdue recall notice dated December 19, 2017 SBICAP Trustee Co. Ltd., vide two of its letters dated December 20, 2017 first one being the letter of invocation of the pledged shares of the corporate debtor with respect to phase-I facility agreement and the second one was a letter of demand under the guarantee deed dated September 23, 2016. (xviii) That upon the request of the IPCL, being the holding company of the corporate debtor, the depository participant made over the trans action statement that showed that the pledged shares stood transferred and the beneficiary position statement reaffirmed showing that the SBI Cap Trustee as the shareholder holding number of shares that were pledged. (xix) That the financial creditor has deliberately and wilfully with a mala fide intention to mislead the Adjudicating Authority has suppressed the fact that the financial creditor through SBI Cap Trustee Co. Ltd., has invoked the pledge of shares and has converted their entire debt into equity by invocation of the pledge on and by subsequently transfer of shares to the demat account of SBI Cap Trustee Co. Ltd., on May 2, 2018. (xx) That with the act of invocation of the ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated time frame before initiating any action against the corporate debtor under the Code. From various communications and correspondences, it is clear and established that the instant proceedings were initiated in consonance with the impugned RBI circular as the financial creditor has failed to obtain any relief due to its coercive actions being challenged in all the forums. The RBI circular dated February 12, 2018 having been struck down, the financial creditor has no cause of action to institute the instant proceeding. (xxiv) Reiterating above, counsel for the corporate debtor prayed to dismiss the petition. 4. The petitioner filed rejoinder, inter alia, stating as under : (a) That in terms of section 7(5) of the Code, the Adjudicating Authority is merely required to be satisfied that a default has occurred and relied on the decision rendered by the hon'ble apex court in Innoventive Industries Ltd. v. ICICI Bank [2017] 205 Comp Cas 57 (SC) ; [2018] 1 SCC 407. (b) That all the issues raised by the corporate debtor in its counter affidavit have already been raised before the hon'ble High Court of Telangana by way of W. P. No. 30048 of 2018 and was considered v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. The corporate debtor passed resolution on December 26, 2017 whereby 10,02,34,046 equity shares each having a nominal value of ₹ 10 were allotted at par to IPCL upon conversion of loan (additional shares) and the voting rights were 1,000 on every one additional share. However, the shares that were earlier issued by the corporate debtor (that were pledged to lenders) were having only one vote for each share resulting in substantial reduction of voting rights of the initially pledged shares from 97.58 per cent. to 3.75 per cent. available now and relied on the finding of the hon'ble High Court of Telangana in its order dated January 23, 2019 in W. P. No. 30048 of 2019. (i) That the corporate debtor failed to disclose the fact that aggrieved by the actions of the corporate debtor allotting additional shares, REC on April 2, 2017 filed a petition under section 213 and section 221 of the Com panies Act, 2013 before the Adjudicating Authority being C. P. No. 277/ 213/HDB/2108 seeking investigation into the affairs of the corporate debtor and for cancellation of additional shares allotted by the corporate debtor. (j) That the applicant/Phase-I lenders cannot utilize the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement dated September 23, 2016 was signed by the SBI Cap Trustee Co. Ltd., as a security trustee for phase I lenders and as an agent of phase II security agent who is acting in trust and for the benefit of the phase-I and phase-II lenders including SBI, the financial creditor. And, thus the financial creditor cannot make any contention that 381,15,06,509 shares (95 per cent. of shares) of the corporate debtor which have been transferred in the name of SBI Cap Trustee Co. Ltd., has been done only for the benefit of phase-I lenders and not the phase-II lenders. (iv) That it is important to note that the valuation of the shares of the debtor company is significantly higher than the purported outstanding debt of INR 2,900 crores and thus the entire debt of the corporate debtor stands discharged and there is no default that can be said to be in existence as on date. Reliance has been placed on the order passed by the Adjudicating Authority in SREI Infrastructure Finance Ltd. v. Amrit Jal Ventures P. Ltd. in C. P. (IB) No. 21/7/HDB/2018 and on the order passed by hon'ble National Company Law Appellate Tribunal in PTC India Financial Ser vices Ltd. v. Venkateswarlu Kari [2020] 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st by the financial creditor under section 7 of the Code under and/or as a result of RBI circular dated February 12, 2018 will be proceeding which being faulted at the very inception are to be declared to be nonest. Reliance was placed on the order passed by the Adjudicating Authority in C. P. (IB) No. 298/7/HDB/2018. 7. The instant application under section 7 of the IB Code, 2016 was filed in the registry on January 23, 2019 and after scrutiny, the same was listed for the first time on March 26, 2019. During the hearing held on March 26, 2019 the petitioner was directed to issue notice to the respondent for appearance and for making submission and the matter was adjourned to May 14, 2019. 8. During the hearing held on May 14, 2019 counsel for the respondent appeared and prayed time for filing counter. Subsequently the matters was adjourned on various dates, viz., April 23, 2019, June 13, 2019, June 24, 2019, July 10, 2019 and August 8, 2019 for filing of counter and rejoinder and the matter was heard at length during the hearings held on August 27, 2019, September 9, 2019 and September 16, 2019. Further, time was enlarged for filing written submissions on September 26, 2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to the contention of the corporate debtor that the instant application is filed in accordance with RBI circular dated February 12, 2018 and, therefore, in view of the judgment rendered by hon'ble Supreme Court in the matter of Dharani Sugars and Chemicals Ltd. v. Union of India [2019] 6 Comp Cas-OL 681 (SC), the present application is to be dis- missed as non-est ; it appears from the perusal of the documents placed on record that if the financial creditor herein had intended to follow the RBI Circular dated February 12, 2018 it ought to have attempted to implement a resolution plan within 180 days from the reference date, i. e., March 1, 2018 since the account of the corporate debtor was already classified as non-performing asset on October 28, 2017. The corporate debtor has noth- ing on record to show that any such exercise was ever attempted by the financial creditors/lenders. Even if it is assumed that any such exercise was adopted by the financial creditors/lenders in consonance with the RBI circular dated February 12, 2018 then upon failure to implement a resolution plan, the financial creditors would have filed a petition for initiation of 12. CIRP on or befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,109 additional shares on December 26, 2017 after the first respondent invoked pledge of 3,91,24,02,331 shares on December 20, 2017 with differential voting rights of 1,000 votes per share which resulted in reduction of voting rights of the respondents lenders in petitioner No. 1-company from 97.58 per cent. to 3.75 per cent. does not appear to be bona fide particularly when the board meeting of the board of directors of petitioner No. 1 of December 26, 2017 was admittedly held on the same day at 12 noon by giving a notice of such board meeting at 11.38 a.m. on the same day, i. e., a mere 22 minutes notice. Thus the petitioners and IPCL had sought to defeat the very purpose of the share pledge agreement dated September 23, 2016 to protect the interests of the lenders in the event of default in payment of dues by prima facie contravening rule 4(1)(e) of the Companies (Share Capital and Debenture) Rules, 2014 which states : 'No company limited by shares shall issue equity shares with dif ferential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely : (g) The company has not defaulted in payment of the dividend on preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic will) ultimately prove detrimental to the economy of the nation. Therefore, the High Court should be extremely careful and circumspect in exercising its discretion to grant stay in such matters.' 66. In Authorized Officer, State Bank of Travancore v. K. C. Mathew [2018] 2 Comp Cas-OL 131, 139 (SC), the Supreme Court reiterated the above principle and also cautioned : 'In financial matters grant of exparte interim orders can have a deleterious effect and it is not sufficient to say that the aggrieved has the remedy to move for vacating the interim order. Loans by financial institutions are granted from public money generated at the tax payer's expense. Such loan does not become the property of the per son taking the loan but retains its character of public money given in a fiduciary capacity as entrustment by the public. Timely repayment also ensures liquidity to facilitate loan to another in need, by circu lation of the money and cannot be permitted to be blocked by fri volous litigation by those who can afford the luxury of the same.' 67. It is pointed by learned counsel for respondents that the interim order obtained by the petitioners from this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to property vests in the pledgee only so far as is necessary to secure the debt . . . The pawnor however has a right to redeem the property pledged until the sale.' In Bank of Bihar (now State Bank of India) v. State of Bihar [1971] 41 Comp Cas 591 (SC) also this court has reiterated the above legal position and held that the pawnee had a special property which was not of ordinary nature on the goods pledged and so long as his claim was not satisfied no other creditor of the pawnor had any right to take away the goods or its price. Beyond this no other right was recognized in a pawnee in the above decision. Under section 176 of the Indian Contract Act, 1872 if the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security, or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. In the case of a pledge, however, the legal title to the goods pledged would not vest in the pawnee. The pawnor has only a special property. A pawnee has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pository Ltd. ('NSDL') have framed bye-laws with the approval of the SEBI. These bye-laws are part of the delegated legislation and have statutory force. Bye-law 14.6 of the CDSL, bye-laws provides as under : 'Subject to the provisions of the pledge/hypothecation docu ments, the pledgee/hypothecate may invoke the pledge or hypothe cation, as the case may be through his participant and on such invocation, CDSL shall register the pledgee/hypothecate as beneficial owner of such securities and shall amend its records accordingly. Thereafter, CDSL shall immediately inform the participants of the pledger and the pledgee of the change and who in turn shall make necessary changes in their records and inform the pledger and pledgee respectively.' Under section 176 of the Contract Act, 1872 the pledgee is entitled to sell the pledged shares. Enforcement of the pledge involves the transfer of the pledged shares from the DP account of the pledgor to the DP account of the pledgee for sale in accordance with the pre scribed procedure under the relevant bye-laws of CDSL. It is true that in the case of Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Cas 563 (SC) ; [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;Arkay Energy Rameswaram Ltd.', inter alia, calling upon them to redeem the 'OCDs' in terms of clause 3.3 read with clause 9.4 of the subscription agreement of 2016. However, no payments were made by the 'corporate debtor' despite the amounts becoming due and payable. According to the promoters, on failure to redeem, on August 31, 2017 the appellant and 'MAIF-2' invoked pledge of 49 per cent. equity shares of the 'corporate debtor' and 51 per cent. equity of holding company. However, it has not been made clear as to why such plea was not taken when the appellant and 'MAIF-2' addressed a letter on April 15, 2018 to the 'corporate debtor', 'IBPIL', 'IBTPL', the promoters and 'Arkay Energy Rameswaram Ltd.', wherein they, inter alia, called upon them to redeem the 'OCDs' in terms of clause 3.3 read with clause 9.4 of the subscription agreement of 2016. The redemption of the 'NCD' and the 'CCD' are different than the conversion within the 'OCD'. What has been stated to have been redeemed is relating to 'NCD' and the 'CCD' and not the 'OCD'. On Septe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor' which are unrelated to the agreement dated December 23, 2016. The Adjudicating Authority failed to consider the same and thereby, wrongly held that the debt has been paid and there was no default on conversion of the 'CCD'. It also failed to consider that the interest to which the appellant was entitled for different debt for which notice was given and, as discussed above, had not been paid by the 'corporate debtor' and there was a default of more than ₹ 1 lakh on the part of the 'corporate debtor'. For the reasons aforesaid, we hold that the appellant-'MAIF Investments India Pte. Ltd.' is a 'financial creditor' of 'M/s. Ind-Barath Energy (Utkal) Ltd.'-('corporate debtor'). Further, we hold that by the invocation of the pledge of shares pursuant to the subscription agreement, no presumption can be drawn that the disbursement of ₹ 102 crores so made was towards the 'OCD' and stands paid. 21. When the facts of the instant case are seen in the light of the guidance available in the aforesaid judicial pronouncements, it is clear that the question framed by us in paragraph 11 above has to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Law Appellate Tribunal in the case of PTC India Financial Services Ltd. v. Venkateswarlu Kari [2020] 10 Comp Cas-OL 456 (NCLAT) in Company Appeal (AT) (Insolvency) No. 450 of 2018, as relied upon by the corporate debtor has been stayed by the hon'ble Supreme Court. 22. Since in the light of guidance available in the afore discussed 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. Further in view of our conclusion in paragraph 21(a) to (f) above, we do not deem it fit to discuss the issue regarding the valuation of pledged shares as it would have no relevance to our decision. 23. Having dealt with the contentions of the corporate debtor as above, it is necessary to see whether all the conditions for invoking the provisions of section 7 of the Code have been fulfilled by the petitioner/financial creditor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application and has also proposed the name of IRP after obtaining the written consent in form 2. 27. The instant petition bearing C. P. (IB) No. 184/7/HDB/2019 is hereby admitted and this Adjudicating Authority orders the commencement of the corporate insolvency resolution process which shall ordinarily get completed as per the timeline stipulated in section 12 of the IB Code, 2016, reckoning from the day this order is passed. 28. This Adjudicating Authority hereby appoint Mr. Ravi Sankar Devara- konda as IRP since his name is proposed by the financial creditor and his name is reflected in IBBI website. He has also filed his written consent in form 2. The IRP is directed to take charge of the respondent/corporate debtor's management immediately. He is also directed to cause public announcement as prescribed under section 15 of the I and B Code, 2016 within three days from the date of this order, and call for submissions of claim in the manner as prescribed. 29. This Adjudicating Authority hereby declares the moratorium which shall have effect from the date of this order till the completion of corporate insolvency resolution process for the purposes referred to in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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