Appeal dismissed: Share pledge not financial transaction under Insolvency Code.

Phoenix ARC Pvt. Ltd.   Versus Ketulbhai Ramubhai Patel

Phoenix ARC Pvt. Ltd.   Versus Ketulbhai Ramubhai Patel - [2021] 13 Comp Cas - OL 523 (NCLAT–Del) Issues:
1. Determination of 'Financial Creditor' status under the Insolvency and Bankruptcy Code, 2016.
2. Interpretation of the 'Facility Agreement' and 'Pledge Agreement' in relation to the financial facility provided.
3. Analysis of the Assignment Agreement and its impact on the 'Financial Creditor' status.
4. Examination of the rights of creditors under Section 176 of the Contract Act in the context of the Insolvency and Bankruptcy Code.

Issue 1: Determination of 'Financial Creditor' status:
The Appellate Tribunal addressed the challenge to the decision of the Resolution Professional regarding the Appellant's claim as a 'Financial Creditor.' The Tribunal noted that the National Company Law Tribunal held that the Appellant did not qualify as a 'Financial Creditor' under the Insolvency and Bankruptcy Code, 2016. The Appellant argued that shares had been pledged and assigned, constituting a financial transaction. The Tribunal examined the Assignment Agreement between 'L&T Infrastructure Finance Company Limited' and the Appellant, 'Phoenix ARC Private Limited,' emphasizing the commercial effect of the transaction.

Issue 2: Interpretation of Agreements:
The Tribunal delved into the 'Facility Agreement' between 'L&T Infrastructure Finance Company Limited' and the 'Corporate Debtor,' outlining the terms of the financial facility provided. The agreement required the 'Corporate Debtor' to pledge shares of 'Gondwana Engineers Ltd.' as security, with specific conditions regarding equity stakes. Subsequently, a 'Pledge Agreement' was executed, securing the shares for repayment of the financial facility. The Assignment Agreement dated 30th December, 2013, transferred rights and interests in the financial facility to the Appellant, 'Phoenix ARC Private Limited.'

Issue 3: Impact of Assignment Agreement:
The Tribunal analyzed the implications of the Assignment Agreement on the Appellant's claim as a 'Financial Creditor.' It highlighted that the shares were assigned, ensuring the assignor's benefit and successor's interest. However, the Tribunal concluded that the pledge of shares did not amount to a disbursement against the time value of money, as per the definition under Section 5(8) of the Insolvency and Bankruptcy Code, 2016.

Issue 4: Rights of Creditors under Section 176 of the Contract Act:
Regarding the rights of creditors under Section 176 of the Contract Act, the Tribunal clarified that while creditors have the right to file a suit, not all creditors, apart from 'Financial Creditors' or 'Operational Creditors,' can file applications under Sections 7 or 9 of the Insolvency and Bankruptcy Code. The Tribunal dismissed the appeal, emphasizing that not all creditors have the right to initiate insolvency proceedings under the Code.

In conclusion, the Appellate Tribunal dismissed the appeal, stating that the Appellant did not qualify as a 'Financial Creditor' based on the pledged shares, as it did not meet the criteria outlined in the Insolvency and Bankruptcy Code, 2016. The Tribunal's detailed analysis of the agreements and legal provisions provided clarity on the determination of creditor status and the rights of creditors under the relevant laws.