NCLT Mumbai: Pledged Shares in Subsidiary Are Corporate Debtor’s Assets, Enforcement Barred During CIRP Due to Moratorium
Pranav B Prem
The Mumbai Bench of the National Company Law Tribunal (NCLT), comprising Judicial Member Lakshmi Gurung and Technical Member Hariharan Neelakanta Iyer, has held that pledged shares held by a Corporate Debtor in its subsidiary company are assets of the Corporate Debtor and cannot be invoked by the pledgee during the Corporate Insolvency Resolution Process (CIRP) due to the bar imposed by Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The decision came in an Interlocutory Application filed by Asset Reconstruction Company (India) Limited (ARCIL) under Section 60(5) of the IBC read with Rule 11 of the NCLT Rules, seeking various reliefs related to pledged shares of Vijay Group Realty LLP (the Corporate Debtor) in its subsidiary, Vijay Group Housing Private Limited (the Borrower). ARCIL, which had stepped into the shoes of original lenders through assignment agreements, had taken the Corporate Debtor’s 95% equity stake in the Borrower as pledged security.
ARCIL contended that due to the moratorium under Section 14, it was unable to enforce the pledge, despite the security being meant solely for the benefit of ARCIL. It also argued that the pledged shares should not be considered as part of the asset pool available for transfer under a resolution plan, and sought exemption from the moratorium to invoke the pledge and realize its security interest.
On the other hand, the Resolution Professional (RP) argued that since the pledge was not invoked before the initiation of CIRP, the beneficial ownership remained with the Corporate Debtor. The RP submitted that the pledged shares formed part of the Corporate Debtor’s assets and were rightly included in the Information Memorandum and Resolution Plan. It was also pointed out that the Borrower is undergoing a separate CIRP, and that ARCIL’s remedy lies in filing a claim there, not before the RP of the Corporate Debtor.
The Tribunal examined key precedents including Vistra ITCL (India) Ltd. v. Dinkar Venkatasubramanian [Civil Appeal No. 3606/2020] , Anuj Jain v. Axis Bank [Civil Appeal Nos. 8512-8527 of 2019], China Development Bank v. Doha Bank [Civil Appeal No. 7298/2022], and India Resurgence ARC v. Amit Metaliks [Civil Appeal No. 1700/2021]. The Tribunal observed that although a pledgee is a secured creditor under Sections 52 and 53 of the IBC, such a creditor is not classified as a financial or operational creditor under Section 30. Hence, the argument that ARCIL was not a creditor of the Corporate Debtor was not sustainable.
Referring to Section 3(6) of the IBC, the Tribunal noted that a claim exists if there is a right to payment, regardless of whether it can be enforced due to the moratorium. Citing the Supreme Court’s ruling in China Development Bank v. Doha Bank, it was held that invocation of a pledge is not required for submission of a claim.
The Tribunal further clarified that because the pledge was not invoked before the commencement of CIRP, the Corporate Debtor continues to own the shares, and as such, the RP is obligated under Section 18(1)(f)(v) of the Code to take custody of those shares. Therefore, the shares were rightfully included in the Information Memorandum.
It also rejected ARCIL’s reliance on Clause 16.2 of the Share Pledge Agreement to override the impact of CIRP. The Tribunal stated that under Section 238 of the IBC, any agreement inconsistent with the provisions of the Code is overridden to the extent of the inconsistency. As the pledge enforcement contradicts the moratorium under Section 14, such enforcement is barred.
The Tribunal distinguished the Vistra ITCL case by emphasizing that the Supreme Court’s relief in that case was granted under Article 142 of the Constitution and does not lay down a general principle of law applicable to all cases. It also cited the NCLAT’s ruling in Edelweiss ARC v. Anuj Jain [CA(AT)(Ins) No. 517-518 of 2023], reaffirming that Sections 52 and 53 of the IBC apply only during liquidation, not during the CIRP stage.
Accordingly, the Tribunal rejected ARCIL’s request to exclude the pledged shares from the asset pool of the Corporate Debtor, as well as its plea for exemption from the moratorium. However, ARCIL was permitted to file its claim before the RP in the prescribed form, which the RP must examine without raising the issue of delay. The application was disposed of with no order as to costs.
Appearance
For the Applicant: Adv. Jehangir J. a/w Aparna Wagle i/b Alliance Law
For the Respondent: Adv. Nausher Kohli a/w Adv. Harish Khan i/b Adv. Ajinkya Khurdukar
Cause Title: Asset Reconstruction Company (India) Limited V. Mrs. Bhanu Navin Nisar
Case No: I.A. No. 1161/2022 In CP No. 4359/2019
Coram: Ms. Lakshmi Gurung [Member (Judicial)], Sh. Hariharan Neelakanta Iyer [Member (Technical)]
