The Supreme Court bench comprising Justices M. R. Shah and Sanjiv Khanna was hearing an interesting appeal involving a lot of issues on Thursday and held that the Appellant would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Code, and in accordance with the pledge agreement.
In the present case, the order passed by the Adjudicating Authority dated 09.07.2020 in I.A. No. 62 of 2020 was the subject matter of appeal before the NCLAT. By the impugned judgment and order the NCLAT has dismissed the said appeal by observing that appellant No.1’s claim in the purported capacity of ‘Secured Financial Creditor’ has been rejected way back in the year 2017 and the decision in this regard has not been called in question and therefore it is not open for the appellants to raise the same issue in 2020 by filing I.A. No. 62 of 2020. The NCLAT has also observed that the appellants have not lent any money to the Corporate Debtor and the Corporate Debtor did not owe any financial debt to the appellants except the pledge of shares was to be executed. Therefore, the NCLT 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 financial creditor of the Corporate Debtor. Making the above observations, the NCLAT has dismissed the appeal. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the NCLAT dismissing the appeal and confirming the appeal passed by the Revenue dismissing I.A. No. 62 of 2020, the original applicants – M/s. Vistra and others have preferred the present appeal.
Appellant’s Submission:
Senior Counsel appearing on behalf of the appellants has vehemently submitted that in the facts and circumstances of the case, the NCLT/NCLAT have materially erred in observing that the claim made by the appellant No. 1 as a secured financial creditor was belated. It is submitted on behalf of the appellants that both the NCLT and NCLAT have not properly appreciated the fact that it was a continuing cause of action. So, it was a case of continuing cause of action. It is submitted under the IBC that there is no limitation prescribed for objecting to the categorization of the creditors in a wrongful category. The Appellant submitted that the ratio of the limitation relates to the principle of cause of action. It was submitted that it is a case of the continuous cause of action as the resolution professional, CoC, Resolution Applicant and the Adjudicating Authority are all required to consider the correct categorization of the claimants.
It is submitted that in the present case, the corporate insolvency resolution process (“CIRP”) commenced on 24.07.2017 and the present resolution plan (which as per the Adjudicating Authority’s order dated 09.07.2020) was submitted for voting by the CoC from 07.02.2020 to 11.02.2020; which was only approved by the Adjudicating Authority on 09.07.2020 i.e., almost 3 years since the start of the CIRP. The Appellants had already challenged the non-inclusion of the Appellants as a financial secured creditor in the CoC on 11.02.2020, which was 5 months before the resolution plan was approved by the Adjudicating Authority. Therefore, the question of delay on the part of the Appellants does not arise and neither can delay be agitated by the Respondents since the CIRP process under the supervision of the Resolution Professional and CoC itself carried on for 3 years, which 3 years is well beyond the timeline of 330 days as set out under the IBC. Therefore, the CoC and Resolution Professional cannot justify their delay on one hand and then seek to erode the rights of the Appellants by relying on delay. It is vehemently submitted that the pledge of shares constituted as financial debt under the IBC is defined as Security Interest under Section 3(31) of the IBC.
Respondent’s Submission:
The learned Solicitor General appearing on behalf of respondent no. 2 has vehemently submitted that the appellant had filed its claim with the Resolution Professional on 02.11.2017 which was rejected and the same was duly reflected in the list of creditors published on the website of the Corporate Debtor. It is submitted that the said rejection has never been challenged by the appellant. It is submitted that even in various communications exchanged, the appellant no. 1 raised no challenge to non-acceptance of its claim but rather put forth an absurd request to the Resolution Professional to ensure that the pledged shares are not to be dealt with in any manner without the prior written consent of the appellant no. 1. It is submitted that therefore the appellant on 11.02.2020 filed an application before the NCLT that too not in challenge to its claim rejection but for seeking admission into the CoC. It is submitted that since the said application was filed belatedly the same is rightly rejected by the NCLT and is rightly confirmed by the NCLAT.
The learned Solicitor General has further submitted that the issue involved in the present appeal is squarely covered by this Court in the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc., REED 2020 SC 02502 and Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel, REED 2021 SC 02502. It is submitted that the appellants could not qualify to be financial creditors of the Corporate Debtor. It is submitted that there is only third-party security given in the form of pledged shares with respect to the amounts advanced by the appellants to affiliates of the Corporate Debtor. Thus, the appellants cannot be considered financial creditors of the Corporate Debtor.
Court’s View:
The Supreme Court noted that the concept of ‘pledge’ has been elucidated by the same Bench in PTC India Financial Services Limited v. Venkateswarlu Kari and Another, REED 2022 SC 05502 with reference to the provisions of the contract of bailment and specific provisions concerning the pledge, a subset of bailments. The law of pledge contemplates special rights for the pawnee in the goods pledged, i.e., the right to possession of the security, and in case of default, the right to bring a suit against the pawnor, as well as the right to sell the goods after giving reasonable notice to the pawnor. The general rights or ownership rights in the property remain with the pawnor and wholly revert to him on the discharge of the debt or performance of the promise. In other words, the right to property vests in the pawnee only as far as it is necessary to secure the debt.
The Supreme Court bench observed that the second issue which arises for consideration is whether the resolution plan can dilute, negate, or override the pledge agreement because a resolution plan to this effect has been approved by the CoC. Revisiting this issue is important, as Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc., REED 2020 SC 02502 had interpreted the provisions as they existed prior to substitutions of several provisions of the Code by Act No. 26 of 2018 with retrospective effect from 6.06.2018 and Act No. 26 of 2019 with effect from 16.08.2019.
The amendment introduced by Act No. 26 of 2019 ensures that the operational creditors under the resolution plan should be paid the amount equivalent to the amount to which they would have been entitled, in the event of liquidation of the Corporate Debtor under Section 53 of the Code. In other words, the amount payable under the resolution plan to the operational creditors should not be less than the amount payable to them under Section 53 of the Code, in the event of liquidation of the Corporate Debtor. The amended provision also provides that the financial creditors who have not voted in favour of the resolution plan shall be paid not less than the amount which would be paid to them in accordance with sub-section (1) to Section 53 of the Code, in the event of liquidation of the corporate debtor. Explanation (1) to clause (b) of the 30(2) of the Code, for the removal of doubts, states and clarifies that the distribution in accordance with this clause shall be fair and equitable to such creditors.
It is also the mandate of Section 31 of the Code 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, the adjudicating authority shall 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.
Section 30(2)(e) also requires the resolution professional to examine each resolution plan received by him/her and confirm that it does not contravene any provisions of law for the time being in force. Thus, the amended Section 30(2) read with Section 31 of the Code, enunciates the manner in which the interests of the creditors who are not included in the CoC i.e., the operational creditors and the financial creditors who have not voted in favour of the resolution plan, must be protected in the resolution plan by the resolution professional and the adjudicating authority.
The difficulty which arises in the present case is that, in terms of the decision of this Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc., REED 2020 SC 02502 and Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel, REED 2021 SC 02502, Appellant No. 1 Vistra is to be treated as a secured creditor but would not fall under the category of financial creditors or operational creditors. Therefore, they would be denied the benefit of the amendments to Section 30(2) of the Code made vide Act No. 26 of 2019, or for that matter Act No. 26 of 2018. Consequently, a very odd and peculiar situation is created where a secured creditor is denied the benefit of the secured interest i.e., the right to exercise the sale of the secured interest, yet not be treated as either a financial creditor or an operational creditor. In terms of Section 52 of the Code, a secured creditor in liquidation proceedings has the right to relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified under Section 53 of the Code. The second option given to the secured creditor is to realise the security interest in the manner specified in the aforesaid Section. Rule 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 deals with the presumption of security interest. If the secured creditor relinquishes the security interest, it is then entitled to priority in payment under clause (b) to subsection (1) to Section 53 of the Code. The debts owed to the secured creditor in such an event rank pari passu with the workmen’s dues for the period 24 months preceding the liquidation commencement date. As per Section 52(9) of the Code, where the proceeds on the realisation of secured assets are not adequate to repay the debts due to the secured creditors who have exercised the option to realise the security interest, the unpaid dues of such secured creditors are to be paid by the liquidator in terms of clause (e) of subsection (1) of Section 53 of the Code.
Thus, in a situation, wherein, Appellant No. 1 – Vistra, a secured creditor, is being denied the rights under Section 52 as well as Section 53 of the Code in respect of the pledged shares, whereas the intent of the amended Section 30(2) read with Section 31 of the Code is too contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC. The Supreme Court bench's answer to this tricky problem is two-fold. The first is to treat the secured creditor as a financial creditor of the Corporate Debtor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP. This would make it a member of the CoC and give it voting rights, equivalent to the estimated value of the pledged shares. However, this may require re-consideration of the dictum and ratio of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc., REED 2020 SC 02502 and Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel, REED 2021 SC 02502, which would entail reference to a larger bench. In the context of the present case, the said solution may not be viable as the resolution plan has already been approved by the CoC without Appellant No. 1 Vistra being a member of the CoC. Therefore, the bench opted for the second option. The second option is to treat Appellant No. 1 – Vistra as a secured creditor in terms of Section 52 read with Section 53 of the Code. In other words, the successful resolution applicant – DVI (Deccan Value Investors) would be given the option to treat Appellant No. 1 – Vistra as a secured creditor, who will be entitled to retain the security interest in the pledged shares, and in terms thereof, would be entitled to retain the security proceeds on the sale of the said pledged shares under Section 52 of the Code read with Rule 21-A of the Liquidation Process Regulations. The second recourse available would be almost equivalent in monetary terms for Appellant No. 1 Vistra, who is treated it as a secured creditor and is held entitled to all rights and obligations as applicable to a secured creditor under Sections 52 and 53 of the Code.
The Supreme Court bench clarified that the directions given by the bench would not be grounds for the successful resolution applicant – DVI to withdraw the resolution plan which has already been approved by the NCLAT and by the Supreme Court bench. The reason is simple. Any resolution plan must meet the requirements/provisions of the Code and any provisions of law for the time being in force. The Bench reiterated that the resolution plan meets the mandate of the Code and does not violate the rights given to the secured creditor, who cannot be treated as worse off/inferior in its claim and rights, viz, an operational creditor or a dissenting financial creditor.
The Supreme Court bench did not convince with the plea that Appellant No. 1 – Vistra to be treated as a financial creditor of the Corporate Debtor Amtek should be dismissed on the grounds of delay, laches and acquiescence. The fact is that Appellant No. 1 Vistra had not objected to the resolution plan submitted by the erstwhile resolution applicant LHG and, as a sequitur, its non-classification as a financial creditor in the CoC of the Corporate Debtor Amtek. Though this argument had appealed and had weighed with the NCLAT is untenable since the resolution plan submitted by erstwhile resolution applicant LHG did not in any way affect the rights or interests of Appellant No. 1 – Vistra as a secured creditor in respect of the pledged shares. Appellant No. 1 – Vistra has elaborately explained that LHG etc. were in negotiations with them so as to redeem the pledge and acquire the shares.
The Supreme Court bench partly modified the impugned judgment of the NCLAT affirming the view taken by the NCLT and directed that the appellant no. 1 – M/s. Vistra ITCL (India) Limited would be treated as a secured creditor, who would be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of the Code, and in accordance with the pledge agreement dated 05.07.2016.
The appeal was disposed of in the above terms.
Commentaires