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TMI Blog2023 (5) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 aforesaid Section. Rule 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. Liquidation Process Regulations deals with the presumption of security interest, which we need not elaborate for the present decision. If the secured creditor relinquishes the security interest, it is then entitled to priority in payment under clause (b) to subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a fair and just solution to the legal conundrum and issue highlighted. The submission is that the Appellant No. 1 Vistra 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 Amtek. Though this argument had appealed and had weighed with the NCLAT, in our opinion 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 Vistra as a secured creditor in respect of the pledged shares. Appellant No. 1 Vistra has elaborately explained that LHG etc. were in negotiations with them so as to redeem the pledge and acquire the shares. The impugned judgment of the NCLAT affirming the view taken by the NCLT is partly modified in terms of our directions holding that appellant no.1 M/s. Vistra ITCL (India) Limited 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co for an amount of Rs.200,00,00,000/. That thereafter the Corporate Debtor, WLD, BRASSCO and Vistra executed an amended and reinstated pledge agreement on 05.07.2016 and the Corporate Debtor pledged 66.77% of its shareholding in JMT Auto Limited to secure the term loan facilities availed by WLD and Brassco from KKR and L T. That thereafter an application under Section 7 of the Insolvency Bankruptcy Code, 2016 (hereinafter referred to as IBC/Code ) was admitted against the Corporate Debtor/AAL on 24.07.2017. The respondent herein Mr. Dinkar T. Venkatasubramanian was appointed as the interim resolution professional which came to be later confirmed as the resolution professional. 2.3 That on 02.11.2017 the appellant no.1 filed its claim as a secured creditor of the Corporate Debtor and submitted Form C claiming a principal amount of INR 500 crores. However, the claim by the appellants secured creditors was rejected by the Resolution Professional in 2017, which order was not challenged by the appellants. Resolution Professional received two resolution plans from only 2 resolution applicants being Liberty House Group Pvt. Ltd. (LHG) and Deccan Value Investors (DVI). DVI withdre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Revenue dismissing I.A.No.62 of 2020, the original applicants M/s Vistra and others have preferred the present appeal. 3. Shri Rakesh Dwivedi, learned Senior Advocate has appeared on behalf of the appellant in C.A. No.3606 of 2020 and Shri Shyam Divan, learned Senior Advocate has appeared on behalf of the appellant in C.A. No.637273 of 2021. Shri Tushar Mehta, learned Solicitor General has appeared on behalf of the respondent no.1 CoC. 3.1 Learned Senior Counsel appearing on behalf of the appellants have vehemently submitted that in the facts and circumstances of the case the NCLT/NCLAT have materially erred in observing that the claim made by the appellant no.1 as a secured financial creditor was belated. It is submitted on behalf of the appellants that both the NCLT as well as NCLAT have not properly appreciated the fact that it was a continuing cause of action. So, it was a case of continuing cause of action. It is submitted under the IBC that there is no limitation prescribed for objecting to the categorization of the creditors in a wrongful category. 3.2 It is submitted that the ratio of the limitation is connected with the principle of cause of action. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that from the aforesaid it is clear that Amtek obtained monies from Appellant Nos.2 3 when it was in financial distress, which fact the banks were aware of since the reason for obtaining these loans was to standardize Amtek s loan account with the banks. 3.7 It is vehemently submitted that the pledge of shares constituted as financial debt under the IBC is defined as Security Interest under Section 3(31) of the IBC. 4. Shri Tushar Mehta, learned Solicitor General appearing on behalf of respondent no.2 has vehemently submitted that the appellant had filed its claim with the Resolution Professional on 02.11.2017 which was rejected and the same was duly reflected in the list of creditors published on the website of the Corporate Debtor. It is submitted that the said rejection has never been challenged by the appellant. It is submitted that even in various communications exchanged, the appellant no.1 raised no challenge to nonacceptance of its claim but rather put forth an absurd request to the Resolution Professional to ensure that the pledged shares are not to be dealt with in any manner without the prior written consent of the appellant no.1. It is submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the resurgence and restructuring of the Corporate Debtor. A secured creditor may only have an interest in realising the value of its security and, therefore, will not have stake or interest in Corporate Debtor s revival or equitable liquidation, while a financial creditor, apart from looking for safeguards of its own interests, will also be simultaneously interested in the revival and growth of the Corporate Debtor. Therefore, a person only having a security interest in the assets of the Corporate Debtor, even if falling in the description of secured creditor by virtue of collateral security extended by the Corporate Debtor, would nevertheless stand outside the sect of the financial creditors , and consequently outside the CoC as well. The aforesaid decision is also based upon the meaning assigned to the term financial debt under Section 5(8) of the Code, which, in the context of the present decision, need not be elaborated. 5.2 In Phoenix ARC (supra), the Corporate Debtor, namely Doshion Veolia Water Solutions Private Limited (Doshion Veolia), had pledged 40,160 shares of Gondwana Engineers Limited as a security to L T Infrastructure Finance Company Limited (L T). A deed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. The words guarantee and indemnity as occurring in Section 5(8) (i) has not been defined in the Code. Section 3 clause (37) of the Code provides that words and expressions used but not defined in the Code but defined in the Contract Act, 1872 shall have the meanings respectively assigned to them. 5.5 The decision in Phoenix ARC (supra) has also relied upon and reproduced paragraphs 4650.2 of the decision in Anuj Jain (supra) (referred to as Jaypee Infratech Interim Resolution Professional v. Axis Bank in the aforesaid judgment), and thereupon observes: 36. This Court held that a person having only security interest over the assets of corporate debtor, even if falling within the description of secured creditor by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in clauses (7) and (8) of Section 5. What has been held by this Court as noted above is fully attracted in the present case where corporate debtor has only extended a security by pledging 40,160 shares of GEL. The appellant at best will be secured debtor qua above security but shall not be a financial creditor withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Limited, the predecessor-in-interest of the Appellant No. 1 Vistra (Pledge Agreement) inter alia provides that the Corporate Debtor Amtek is the guarantor of the entire loan amount, for which reliance was placed upon clause 2.1.2 of the Pledge Agreement. This contention is liable to be rejected, for the Pledge Agreement specifically restricts and limits the liability of the Corporate Debtor to the extent of the pledged shares vide clause 2.1.1, which reads as under: 2.1.1.Pursuant to the Financing Documents and in consideration of the Identified Lenders having entered into and/or agreed to enter into the Financing Documents in respect of each of the Facilities, the Pledgor covenants and agrees with the Identified Lenders that it shall comply with the provisions of the Financing Documents in relation to each of the Facilities and shall repay, pay and/or discharge the Outstanding Amounts in relation to the Identified Debt in accordance with the terms set out herein and therein. Provided that the Pledgor shall not be required to pay to any Finance Party any amount in excess of the aggregate amount realized by the Trustee pursuant to an enforcement of the Security Interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itutes pledge in law. 7.1 The concept of pledge has been elucidated by this Bench in PTC India Financial Services Limited v. Venkateswarlu Kari and Another, (2022) 9 SCC 704 with reference to the provisions of contract of bailment and specific provisions concerning the pledge, a subset of bailments, in the following manner: 18. As per Section 151, a bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his goods of the same bulk, quality and value as the goods bailed. Section 152 states that a bailee, in the absence of a special contract, will not be liable for any loss, destruction, or deterioration of the bailed goods if he acts in conformity with Section 151. As per Section 153, a contract for bailment is voidable at the option of the bailor if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment. Section 154 lays down that the bailee shall be liable for damage arising from unauthorised use of the bailed goods. The bailee, with the consent of the bailor, can mix the goods bailed with his own goods, in which event, the bailor and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the debt or promise, the pawnor is still liable to pay the balance amount to the pawnee. If the proceeds of such sale exceed the amount due, the pawnee will be liable to pay the surplus to the pawnor. 23. Section 177 gives statutory right to the pawnor, who is at default in payment of the debt or performance of the promise, to redeem the pledged goods at any time before actual sale by the pawnee. However, in such cases, the pawnor must pay in addition the expenses that have arisen from his default. Section 179 states that the limited interest that a pawnor has in the goods can be validly pledged. 7.2 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. We need not refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he corporate insolvency resolution process of a corporate debtor (i) where a resolution plan has not been approved or rejected by the Adjudicating Authority; (ii) where an appeal has been preferred under Section 61 or Section 62 or such an appeal is not time barred under any provision of law for the time being in force; or (iii) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan; (c) provides for the management of the affairs of the corporate debtor after approval of the resolution plan; (d) the implementation and supervision of the resolution plan; (e) does not contravene any of the provisions of the law for the time being in force; (f) conforms to such other requirements as may be specified by the Board. Explanation. For the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013 (18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in the resolution plan. 8.3 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. 8.4 It is in this context that the Appellant No. 1 Vistra 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 Vistra, and thereby, Appellant No. 1 Vistra, a secured creditor, viz, the pledged shares, is left remediless and worse off than the dissenting financial creditors, or even the operational creditors. 8.5 The difficulty which arises in the present case is that, in terms of the decision of this Court in Anuj Jain (supra) and Phoenix ARC (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. 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 reconsideration of the dictum and ratio of Anuj Jain (supra) and Phoenix ARC (supra), which would entail reference to a larger bench. In the context of the present case, the said solution may not be viable as the resolution plan has already been approved by the CoC without Appellant No. 1 - Vistra being a member of the CoC. Therefore, we would opt for the second option. The second option is to treat the Appellant No. 1 Vistra as a secured creditor in terms of Section 52 read with Section 53 of the Code. In other words, we give the option to the successful resolution applicant DVI (Deccan Value Investors) to treat the Appellant No.1 Vistra as a secured creditor, who will 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 share ..... X X X X Extracts X X X X X X X X Extracts X X X X
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