Tribunal upholds Financial Creditor's Application under Section 7 despite share transfer

The tribunal held that the Application under Section 7 of I&B Code was not filed pursuant to the RBI Circular and rejected the argument that the liability of the Corporate Debtor was discharged post the invocation of pledged shares. It was determined that the debt was not considered discharged despite the transfer of shares to the Financial Creditor, and the Financial Creditor could maintain the Application under Section 7. The Adjudicating Authority's decision to admit the Application was upheld, and the Appeals were dismissed.

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Issues Involved:
1. Whether the Application under Section 7 of I&B Code was filed pursuant to the RBI Circular dated 12.02.2018.
2. Whether the liability of the Corporate Debtor stood discharged in view of the invocation of the pledged shares by the Financial Creditor.

Issue-wise Detailed Analysis:

Issue No. 1: Application under Section 7 of I&B Code and RBI Circular

Learned Counsel for the Appellants argued that the Application under Section 7 of I&B Code was filed pursuant to the RBI Circular dated 12.02.2018, which was struck down by the Hon'ble Supreme Court in the Dharani Sugar & Chemicals Ltd. case. However, the tribunal noted that the NPA was declared on 28.10.2017, internal approval for filing the Application was sought on 04.08.2018, and the Application was filed on 23.01.2019. The Application did not reference the RBI Circular, and as per the Circular, the Application should have been filed on or before 12.08.2018. Therefore, the tribunal concluded there was no ground to presume that the Application was filed pursuant to the RBI Circular. The Adjudicating Authority also rejected this objection.

Issue No. 2: Discharge of Liability Post Invocation of Pledged Shares

The Appellants contended that after the invocation of the pledged shares, the Financial Creditor became the 95.2% shareholder of the Corporate Debtor, discharging the entire debt. They cited judgments from the Appellate Tribunal and the Delhi High Court, which held that the transfer of shares to the Financial Creditor amounts to the discharge of debt. However, the Financial Creditor argued that the invocation of pledge did not amount to the transfer of ownership or discharge of debt, citing the Indian Contract Act and relevant case law.

The tribunal noted that the Share Pledge Agreement and the invocation notice indicated that the pledge was invoked only on behalf of phase I lenders and did not prejudice the rights and remedies against the borrower. The Corporate Debtor's subsequent actions, including issuing additional shares and acknowledging the debt, indicated that the debt was not considered discharged. The tribunal also referred to the Delhi High Court's judgment, which held that the provisions of the Contract Act do not apply to dematerialized shares, and the Depositories Act and Regulations shall apply.

The tribunal concluded that the moment the shares were transferred to the Demat Account of SBI CAP Trustee Company Ltd., it became the beneficial owner of the shares. However, this did not mean that the Financial Creditor lost its status as a Financial Creditor or that the debt was discharged. The tribunal also noted that the Corporate Debtor's issuance of additional shares with differential voting rights was not bona fide and was intended to reduce the voting rights of the SBI CAP Trustee Company Ltd.

Therefore, the tribunal held that the Financial Creditor could maintain the Application under Section 7 of I&B Code and that the debt was not discharged by the invocation of the pledged shares. The Adjudicating Authority's decision to admit the Application was upheld, and the Appeals were dismissed.

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