Supreme Court: In a civil appeal challenging the order of National Company Law Appellate Tribunal (‘NCLAT'), wherein the Vistra Itcl (India) Ltd (‘appellant') plea to be deemed as ‘secured financial creditor' in the case was rejected, the division Bench of M.R. Shah* and Sanjiv Khanna, JJ., accepted the appellants plea and modified the NCLAT's judgment. The Court held that appellant would be treated as a secured creditor, who would be entitled to all rights and obligations applicable to the secured creditor under Section 52 and 53 of the IBC.
Factual Matrix
The Amtek Auto Limited (‘Corporate Debtor') approached the appellants to extend a short-term loan facility of Rs. 500 crores to its group companies i.e., Brassco Engineers Ltd. and WLD Investments Pvt. Ltd. for ultimate end use of the Corporate Debtor. According to the appellants it was an understanding that the Corporate Debtor will create a first ranking exclusive security by way of pledge over 16,82,06,100 equity shares of face value of Rs.2/- each of JMT Auto Ltd. held by the Corporate Debtor. Two security trustee agreements were between the appellant and WLD and Brassco, respectively for Rs. Rs.150,00,00,000/. Thereafter, another security trustee agreement was executed between the appellant and Brassco for Rs. 200,00,00,000.
Later, an application under Section 7 of the Insolvency Bankruptcy Code 2016 (‘IBC') against the Corporate Debtor on 24-07-2017 and respondent was appointed as the resolution professional. On 02-11-2017, the appellant filed its claim as secured creditor of the Corporate Debtor and submitted Form C claiming a principal amount of Rs. 500 Crores. However, the appellant's claim was rejected by the resolution professional. Thereafter, the appellants filed another application under Section 60 (5) of the IBC claiming the right on the basis of the pledged shares. The Resolution Professional filed an application before the Adjudicating Authority seeking approval of the resolution plan. However, the application filed by the appellants before the Adjudicating Authority was dismissed. An appeal was filed before the NCLAT and the said appeal was dismissed by observing that the appellant's claim in purported capacity of ‘secured financial creditor' was rejected way back in 2017. The NCLAT observed that the appellants not having advanced any money to the Corporate Debtor as a financial debt would not be coming within the purview of the Corporate Debtor.
Aggrieved with the NCLAT's order, the appellants appealed before the Court.
Court's Decision
Placing its reliance on Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited, 2019 SCC OnLine SC 1775 and Phoenix ARC (P) Ltd. v. Ketulbhai Ramubhai Patel, (2021) 2 SCC 799, the Court said that the Corporate Debtor- Amtek was not liable to repay the loans advanced by the predecessor-in-interest of the appellant in respect of which there were detailed, and separate agreements executed by the lenders with Brassco and WLD. The Court also said that the Pledge Agreement specifically restricted and limited the liability of the Corporate Debtor to the extent of the pledged shares. Further, the Court said that it was clear and understood by the financial creditors of the corporate debtor- Amtek that it is not to bear any additional financial liability by a security or change of its assets for the STL facilities and the loans were being procured and taken by the Brassco and WLD.
Thus, the assets of the Corporate Debtor- Amtek would not be encumbered in any way, except for shares given as security. The burden to repay the loan was upon Brassco and WLD.
The Court said that the appellant was a secured creditor to the extent of the shares pledged to it by the Corporate Debtor- Amtek, it holds the first right in pledge on 66.77% shareholding in JMT Auto Limited. The Court referred to Section 3(31) of the IBC which defined the expression ‘security interest'. To examine the nature of the said interest, the Court had also examined what constitutes ‘pledge' in law. The Court also considered it necessary to examine the issue that whether the resolution plan can dilute, negate or override the pledge agreement because a resolution plan was approved by the Committee of Creditors (‘CoC').
The Court noted that the amendment introduced by in 2019 ensured that the operational creditors under the resolution plan should be paid the amount equivalent which they have been entitled to, in the event of liquidation of the Corporate Debtor under Section 53 of the IBC. The Court said that thus, the amount payable under the resolution plan to the operational creditors should not be less than the amount payable to them under Section 53, in the event of liquidation of the Corporate Debtor.
The Court also said that it is the mandate of Section 31 of the IBC that the adjudicating authority should be satisfied that the resolution plan, as approved by the CoC under sub-section (4) of Section 30 meets with the requirement as referred to in sub-section (2) of Section 30. Only then shall the adjudicating authority approve the resolution plan, which shall then be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.
Thus, the amended Section 30(2) read with Section 31 of the IBC, enunciates the manner in which the interest of the creditors who are not included in the CoC i.e., the operational creditors and the financial creditors who have not been not been in favour of the resolution plan, must be protected in the resolution plan by the resolution professional and the adjudicating authority.
The Court said that the appellant would be treated as a secured creditor in terms of Section 52 and 53 of the IBC, who would be entitled to retain the security interest in the pledged shares, and would be entitled to retain the security proceeds on the sale of the said pledged shares under Section 52 of the IBC read with rule 21-A of the Liquidation Process Regulations. The Court said that it was best to opt for this recourse as the Court was presented with a difficult issue, wherein the appellant, a secured creditor, was denied the rights under Section 52 and 53 of the IBC in respect of the pledged shares.
Thus, the impugned judgment and order of the NCLAT was partly modified in terms of directions that the appellant would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to the secured creditor under Section 52 and 53 of the IBC.
[Vistra Itcl (India) Ltd v. Dinkar Venkatasubramanian, 2023 SCC OnLine SC 570, Decided on 04-05-2023]
*Judgment Authored by: Justice M.R. Shah
