NCLAT (10.09.2020) In India Power Corporation Ltd. Vs. Meenakshi Energy Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 1220 of 2019] held that;
Thus, we are unable to convince with the arguments of Learned Counsel for the Appellants that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd. liability of the Corporate Debtor stood discharged.
It is true that after invocation of the pledge, Shares were transferred in dematerialised form in the DP Account of SBI CAP Trustee Company Ltd. and it became the beneficial owner of the shares it does not mean that the Financial Creditor became the beneficial owner of the shares and it losses the status of Financial Creditor.
Excerpts of the order;
# 15. The following two issues are crop up in these Appeals.
(a) Whether the Application under Section 7 of I&B Code, filed pursuant to the RBI Circular dated 12.02.2018?
(b) Whether the liability of the Corporate Debtor stood discharged in view of the invocation of the pledged shares by the Financial Creditor.
Issue No. 1
# 16. Learned Counsel for the Appellants have raised an objection that the Application under Section 7 of I&B Code, is filed pursuant to the RBI Circular dated 12.02.2018 and Hon’ble Supreme Court in Dharani Sugar & Chemicals Ltd. (Supra) has struck down the Circular. Therefore, the Application is not maintainable. . . . .
# 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, is required to be filed on or before 15 days from expiry of 180 days’ time period from reference date 01.03.2018, it means, in this case the Application would have filed on or before 12.08.2018 whereas it is filed on 23.01.2019. Therefore, there is no ground to presume that the Application under Section 7 of I&B Code, is filed pursuant to the RBI Circular. Learned Adjudicating Authority in Para 12 of the impugned order has also rejected this objection.
Issue No. 2
# 18. According to the Appellants after invocation of the pledged shares the Financial Creditor became 95.2% shareholder of the Corporate Debtor and the entire dues of Corporate Debtor stood discharged. In support of this submissions Learned Counsel for the Appellants cited two Judgments one of this Appellate Tribunal in the case of PTC India Financial Services Ltd. (Supra) in which it is held that once shares are transferred to the Financial Creditor, the Financial Creditor became the owner of the shares. The another Judgment of Hon’ble High Court of Delhi in the case of Tendril Financial Services Pvt. Ltd. (Supra) in this Judgment it is held that as per the Regulation 58 of Security Exchange Board of India (Depositors and Participants) Regulations, 1996, the moment the shares are transferred to the Demat Account of the beneficiary after invocation of pledge shares, such transfer amounts to sale and transferee became the beneficial owner of the shares.
# 19. Learned Counsel for the Respondent No. 2 (Financial Creditor) submits that Regulation 58(8) of the Debentures Regulations is subject to the terms of Share Pledge Agreement and the pledge is governed by the Indian Contract Act.
# 20 In the present case the whole controversy arises when SBI CAP Trustee Company Ltd. issued a notice of invocation of pledge shares dated 20.12.2017. (Annexure 8 Page 240 of Reply of Respondent No. 2 (Financial Creditor)). In such a situation we are considering the effect of invocation of pledge shares.
# 21. Admittedly the Loan Document for phase I lenders and phase II lenders are different and default has been committed by the Corporate Debtor in respect of both phases. In the present case the share pledge by the Corporate Debtor were invoked by the SBI CAP Trustee Company Ltd. on the instruction of phase I lenders in relation to phase I facility agreement.
# 22. There is Share Pledge Agreement dated 23.09.2016 by the 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, . . . .
# 23. A bare perusal of the notice of invocation shows that the pledge had been invoked only on behalf of the phase I lenders. This notice was issued without prejudice to the rights and remedies against the borrower under the Financing Documents. This notice also specifically mentioned that the lenders and other secured parties expressly reserving the right to declare further default or invoke security from time to time.
# 24. Now, we would like to refer some material events taken place after issuing this notice:-
i) After receiving the notice the Corporate Debtor has not made any payment.
(ii) On 26.12.2017 the Corporate Debtor issued additional shares 10,02,34,109 with differential voting rights of 1,000 votes per share. Which resulted in reduction of voting rights of the SBI CAP Trustee Company Ltd. from 97.58% to 3.75%.
(iii) On 16.02.2018 the Corporate Debtor had itself sent a acknowledgement of debt.
(iv) On 02.05.2018 as per Clause 2.6.2 of the Share Pledge Agreement, in furtherance of pledged invocation the Corporate Debtor transferred 3912402331 shares owned by IPCL, in the Demat Account of SBI CAP Trustee Company Ltd.
(v) On 25.05.2018 the Corporate Debtor had sent settlement proposal.
(vi) On 11.06.2018 the Corporate Debtor had sent settlement proposal.
(vii) On 31.07.2018 IPCL filed W.P. No. 26977/2018 before the Hon’ble High Court of Telangana praying for declaration the invocation of transfer of the entire shareholding of IPCL in SBI CAP Trustee Company Ltd. without carrying out valuation of the pledged shares to be arbitrary and illegal.
(viii) On 21.08.2018 the Corporate Debtor filed W.P. No. 30048 of 2018 before the Hon’ble High Court of Telangana that the Financial Creditor were withdrawing the entire amount standing in the Trust Retention Account of the Corporate Debtor against 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 and Regulations made therein. Hon’ble High Court of Delhi in the case of Tendril Financial Services Pvt. Ltd. (Supra) concurred with the view of Hon’ble High Court of Bombay in JRY Investments Pvt. Ltd. and Puspanjali Tie Up Pvt. Ltd. held that the shares in dematerialised form cannot be pledged in accordance with Section 176 of the Contract Act. The Court observed that the Provisions of the Contract Act require delivery of the goods pledged i.e. physical possession of the goods. However, the dematerialised shares are not capable of delivery by handing over de facto possession. Since, the goods in such cases are invisible and intangible, it would be impossible to fix the time and place of delivery. Hence, the requirement for sending a reasonable notice to the Pledgor under Section 176 of the Contract Act, prior to the actual sale is not required in case of sale of dematerialised securities because the provisions of the Contract Act, will not be applicable for enforcing a share pledge. Hence, the Provisions of the Depositories Act, 1996 and Regulations therein shall apply. Hon’ble High Court of Delhi also held that:-
“D. I have no reason to take a view different from that taken by the High Court of Bombay in JRY Investments Private Limited supra and in Pushpanjali Tie Up Pvt. Ltd. (Supra) and respectfully concur with the same and am for the same reasons unable to find the plaintiffs entitled to any interim relief as they have enjoyed for the last 12 years
E. I may however add, that a notice under Section 176 of Contract Act is in derogation of Regulation 58 (Supra). While Section 176 entitles the pledgee/pawnee to, on default by the pledgor/pawnor, sell the thing pledged, ―on giving the pawnor reasonable notice of the sale, Regulation 58(8) entitles the pledgee to, ―subject to the provisions of the pledge document, ―invoke the pledge and mandates the depository to ―on such invocation i.e. by the pledgee, ―register the pledgee as beneficial owner of such securities i.e. the securities pledged and further mandates the depository to ―amend its records accordingly. There is no place for a prior notice under Section 176, in the scheme of Regulation 58(8). On the contrary, Regulation 58(9) requires the depository to, after so amending its records under Regulation 58(8), inform the 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 pledgor, invoke the pledge by intimating to the depository and mandates the depository to in its records record the pledgee in place of the pledgor as the beneficial owner of pledged shares, thereby transferring title as beneficial owner, from the pledgor to pledgee. The only condition imposed on invocation of pledge by the pledgee, under Regulation 58(8) is of the same being required to be ―subject to the provisions of the pledge documents i.e. of creation of pledge in the manner provided in Regulation 58(1) to 58(6) - of which the participant of the pledgee and the depository have been made aware and with which they are thereby required to comply with. It is not the case of plaintiffs that there was any condition of prior notice in the pledge documents. Though it is not the plea that the Letters of Pledge and Arbitral Award were intimated to the participant or the depository but even they do not provide for prior notice. On the contrary, they provide otherwise. The distinction drawn in the Letters of Pledge aforequoted between invocation of pledge, whereupon the beneficial ownership in pledged shares, under Regulation 58, was to stand transferred from that of pledgor to that of pledgee, and sale of said shares by pledgee, to realize its dues, is only for the purpose of determining the amount which was to be offset from the debt to secure which the pledge was made. However such agreement cannot be interpreted as the pledgor continuing to have title in the shares. The only title in dematerialized shares, under the Depositories Act, is as beneficial owner in the records of the participant and the depository and which beneficial ownership changes on invocation of pledge in terms of Regulation 58. Even otherwise, a plea of a pledgor, of the pledgee, though after notice under Section 176, having sold the pledged thing for less than optimum price cannot be a ground for invalidating the sale. The mere fact that the parties, in terms of Arbitral Award reversed the earlier invocation also cannot change the said position. Such agreement is also not found to be inconsistent with Regulation 58. The quantum of consideration does not affect the transfer of title as beneficial owner.”
# 26. In the light of the Judgement of Hon’ble High Court of Delhi in Tendril Financial Services Pvt. Ltd. (Supra). We are convinced with the arguments of Learned Counsel for the 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 argued on behalf of the Appellant that after invocation of pledge and subsequent transfer of shares the Financial Creditor held 95.2% shares of the Corporate Debtor. Thus, the entire debt of the Financial Creditor stood discharged. If this is the position, then why the Corporate Debtor after receiving the notice of invocation of pledged shares dated 20.12.2017 sent an acknowledgement of debt on 16.02.2017 (See Annexure 20 of Page 313 Reply of Financial Creditor Vol. II) and after transfer of shares sent letters dated 25.05.2018 and 11.06.2018 for settlement. It shows that even after transfer of shares in the Demat Account of SBI CAP Trustee Company Ltd., there exist a debt of more than Rs. 1 lakh and there is a default on the part of the Corporate Debtor.
# 28. It is pertinent to note that Hon’ble High Court of Telangana while deciding the Application I.A. No. 1&2 of 2018 in W.P. No. 30048 of 2018 observed that after receiving the notice of invocation of shares on 20.12.2017 the Corporate Debtor issued 10,02,34,109 additional shares on 26.12.2017 with a differential voting rights of 1,000 voting per share which resulted in reduction of voting rights of the SBI CAP Trustee Company Ltd. from 97.58% to 3.75%. Hon’ble High Court of Telangana also observed that while issuing additional shares, the Corporate Debtor Prima Facie contravened the Rule 4(1)(e) of the Companies (Share Capital and Debenture) Rule, 2014. Hence, issuance of additional shares does not appear to be bona fide and the Corporate Debtor had defeated the very purpose of the Share Pledge Agreement dated 23.09.2016. These findings of Hon’ble High Court of Telangana is maintained by the Division Bench of Hon’ble High Court of Telangana in Writ Appeal No. 203 of 2019. Thus, these findings attained finality. Learned Counsel for the Appellants has not made any submission as to how the Appellants would over come with these findings.
# 29. Thus, we are unable to convince with the arguments of Learned Counsel for the Appellants that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd. liability of the Corporate Debtor stood discharged.
# 30. It is true that after invocation of the pledge, Shares were transferred in dematerialised form in the DP Account of SBI CAP Trustee Company Ltd. and it became the beneficial owner of the shares it does not mean that the Financial Creditor became the beneficial owner of the shares and it losses the status of Financial Creditor.
# 31. With the aforesaid, we hold that the Financial Creditor has not filed the Application under Section 7 of I&B Code, in pursuant to the RBI Circular dated 12.02.2018 and even after invocation of the pledged shares by SBI CAP Trustee Company Ltd., the financial Creditor can maintain the Application. Learned Adjudicating Authority has rightly admitted the Application under Section 7 of I&B Code. It is undisputed fact that the Corporate Debtor has committed default in repayment of debt and the amount of debt is more than 1 Lakh. Thus, we found no ground to interfere in these Appeals. Thus, the Appeals are hereby dismissed. No order as to costs.
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