2020 (9) TMI 440 - AT - Insolvency and Bankruptcy

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

India Power Corporation Ltd. Versus Meenakshi Energy Ltd., State Bank of India, PTC India Limited. (Formerly known as Power Trading Corporation of India Ltd.) And Debasish Som S/o Shri Narayan Chandra Som, Meenakshi Energy Limited Versus Meenakshi Energy Ltd., State Bank of India, India Power Corporation Limited

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 ... Maintainability of application - initiation of CIRP - Corporate Debtor defaulted in making repayment of its dues - Invocation of pledge shares - Whether the Application under Section 7 of I&B Code, filed pursuant to the RBI Circular dated 12.02.2018? - HELD THAT:- 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. Whether the liability of the Corporate Debtor stood discharged in view of the invocation of the pledged shares by the Financial Creditor? - HELD THAT:- 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. 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. 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. Application admitted - appeal dismissed. 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 CircularLearned 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 SharesThe 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.