2018 (7) TMI 2271 - Tri - Insolvency and Bankruptcy

Tribunal orders independent valuation of pledged shares to determine financial creditor status and reconstitute Committee of Creditors.

In Re: NSL Nagapatnam Power & Infratech Ltd., PTC India Financial Services Ltd., Mandava Holdings Private Limited

The Tribunal directed the Resolution Professional to appoint an independent valuer to assess the fair market value of the pledged shares as of 16.01.2018. ... Invocation of the pledged shares by PFS - compliance of Section 176 of the Contract Act or not - whether invocation of the shares pledged gives legal title to the goods pledged to the pawnee i.e. PPS or the title to the pledged shares still with the pawnor i.e. MHPL? - validity of action of the RP in not including PFS and MHPL in the CoCs by recognising them as financial creditors - HELD THAT:- It is clear that there is no sale of pledged shares but PFS (pawnee) has invoked the pledged shares and the name of PFS is recorded in the register members of NEVPL in the place of MHPL. In fact, there is no controversy regarding invocation of the pledged shares. Such right is given to the Pledgee under the Deed of Pledge - In view of Clause 2.3(B) of the Pledge Deed, PPS is entitled to vote in all the meetings and entitled for dividends etc., paid by NEVPL. Manner of creating pledge or hypothecation - HELD THAT:- Regulation 58(8) of the Regulation gives right to the Pledgee to invoke the pledge subject to the provisions of the pledge document - In the case on hand, in view of the provisions of the pledged document and in view of the regulation 58(8) Pledgee is entitled to invoke the pledge. Regulation 58(8) further says that on invocation of the pledge, the depository shall register the Pledgee as beneficial owner of shares and amend its records accordingly. No doubt, Section 176 of the Contract Act gives pawnee, right to sell the pledged shares after giving reasonable notice to the pawnor. Section 176 of the Contract Act gives only two rights to the pawnee, namely, to file a suit upon the debt and retain the goods pledged as collateral security or pawnee may sell the goods pledged. A reading of Regulation 58(11) says that no transfer of security in respect of which a notice or entry of a pledge or hypothecation is in force shall be effected by a participant without the concurrence of the Pledgee - the argument of the learned senior counsel for PFS that the invocation of the pledged shares is only with a view to prevent the Pledgor from dealing with the shares as superfluous in view of Regulation 58(11). No doubt, Sec. 176 of the Contract Act recognises the right of the pawnor to redeem the pledged shares before sale to third party but here, in the case on hand, the pledged shares were got transferred to the pawnee himself and he became the beneficial owner of the pledged shares - It is not known to the MHPL/pawnor when the Pledgee (PPS) is going to sell the shares after giving notice to the pawnor i.e. MHPL. Coming to MHPL, when the PFS has got a right to sell the shares and realise certain amount to that extent MHPL being guarantor to corporate debtor is entitled to recover the same from the corporate debtor and therefore to that extent MHPL would become financial creditor. Further in case of MHPL intends to redeem the pledged shares, MHPL has to clear the amount payable to PPS by the corporate debtor or pay atleast the fair value of the pledged shares as on the date of the invocation i.e. 16.01.2018 to the PPS. In that view of the matter also MHPL can be treated as financial creditor of the corporate debtor to the extent of the fair value of the shares pledged as on the date of invocation i.e. 16.01.2018 - the concept of related party is only necessary for the purpose of deciding the voting rights of the MHPL in accordance with the provisions of the IB Code. The Resolution Professional is directed to appoint an independent valuer to assess the fair market value of the pledged shares as on 16.01.2018 and depending upon the said valuation report and keeping the findings of this Authority in mind decide to what extent PPS and MHPL are the financial creditors in respect of the corporate debtor - application disposed. Issues Involved:1. Reconstitution of the Committee of Creditors (CoC).2. Admission of financial claims by PTC India Financial Services Ltd. (PFS) and Mandava Holdings Private Ltd. (MHPL).3. Validity of the Resolution Professional’s (RP) actions.4. Determination of financial creditor status.Detailed Analysis:1. Reconstitution of the Committee of Creditors (CoC):- IA 48/2018 and IA 71/2018 both sought reconstitution of the CoC to include the applicants (PFS and MHPL respectively) as financial creditors.- The Tribunal directed the Resolution Professional to appoint an independent valuer to assess the fair market value of the pledged shares as of 16.01.2018. Based on this valuation, the RP was to determine the extent to which PFS and MHPL are financial creditors and reconstitute the CoC accordingly.2. Admission of Financial Claims:- PFS claimed an amount of INR 169,19,17,637 and requested inclusion in the CoC by setting aside the RP’s rejection of their Form-C submission.- MHPL claimed INR 319 crores based on the value of pledged shares and sought inclusion in the CoC.- The Tribunal acknowledged that PFS had invoked the pledged shares but had not realized any value from them. Therefore, PFS’s claim remained valid until the shares were sold.- MHPL’s claim was based on the valuation report by Axis Capital, which PFS disputed, providing a lower valuation from Raj Har Gopal & Co.3. Validity of the Resolution Professional’s Actions:- The RP rejected PFS’s claim on the grounds that the debt was satisfied by the value of the pledged shares upon invocation.- The Tribunal found the RP’s rejection invalid and arbitrary, emphasizing that PFS had not realized any value from the pledged shares as they had not been sold.- The RP formed the CoC without including PFS and MHPL, which the Tribunal directed to be rectified based on the independent valuation of the pledged shares.4. Determination of Financial Creditor Status:- The Tribunal analyzed whether the invocation of pledged shares transferred legal title to PFS or if the title remained with MHPL until a sale occurred.- It was determined that while PFS became the beneficial owner of the shares upon invocation, they retained only a collateral security interest until the shares were sold.- PFS and MHPL’s status as financial creditors depended on the fair market value of the pledged shares as of the invocation date.- If the value of the shares was less than the debt owed to PFS, PFS would be a financial creditor to the extent of the shortfall. Conversely, if the value exceeded the debt, MHPL would be a financial creditor for the excess amount.Conclusion:The Tribunal directed the RP to appoint an independent valuer to assess the fair market value of the pledged shares as of 16.01.2018. Based on this valuation, the RP was to determine the extent to which PFS and MHPL are financial creditors and reconstitute the CoC accordingly. The RP was instructed to complete this exercise within two weeks and proceed as per the Tribunal’s findings.