Document Fragment View

Matching Fragments

9. On the other hand, Learned Counsel for the Financial Creditor (Respondent No. 2) submitted that the Appellants have wrongly contended that the invocation of pledge amounted to transfer of shares or discharge of debt. The Pawnee's rights are governed by the Section 176 of Indian Contract Act, 1872, when Pawnor makes default the Pawnee does not have a right to appropriate and transfer ownership to itself of the pledged goods. The Pawnee's remedies are limited to sue for debt and retain the pledged goods or sell the pledged goods on giving the Pawnor reasonable notice of the sale and appropriate the proceeds. For this preposition, place reliance on the Judgment of Hon'ble Supreme Court in the case of Balkrishna Gupta Vs. Swadesi Polytex Ltd. (1985) 2 SCC 167. Wherein Hon'ble Supreme Court has held that even after the pledge is enforced, the legal title in the shares pledged would not vest in the pledgee and the pledgee has only a special interest/property to retain the shares as a collateral or sell them in accordance with Section 176 of the Indian Contract Act. Hon'ble Bombay High Court in the case of United Breweries (Holdings) Ltd. & Ors. Vs. State Bank of India & Ors. (order dated COMPANY APPEAL (AT)(INSOLVENCY) No.1220 of 2019 & 1450 of 2019 02.04.2013) in notice of Motion (L) No. 718 of 2013 in Suit (L) NO. 263 of 2013 held that invocation of pledge and transfer of pledged securities to the pledgee's Demat Account did not violate the Section 176 of the Indian Contract Act and did not result in the pledgor being divested of their rights to the pledged shares. The same view has been taken by this Appellate Tribunal in MAIF investments India Pvt. Ltd. Vs. M/s Ind. Bharath Energy (Utkal) Ltd., (Company Appeal (AT) (Ins) No. 597 of 2018). Thus, the invocation of pledge in itself does not amount to transfer of shares or discharge of debt. This Appellate Tribunal in the case of PFS held that invocation of pledged of shares amounts to discharge of debt. However, Hon'ble Supreme Court has stayed the proceedings. Therefore, this Judgment does not help the Appellants.

10. Learned Counsel for the Financial Creditor (Respondent No. 2) further submitted that the Regulation 58(8) of the Securities and Exchange Board of India (Depositories and Participants) Regulations 1996 deals with the invocation of pledge and it states that it is subject to the provisions of the pledge document. In the present case, the Share Pledge Agreement dated 23.09.2016 at Clause 6.1 provides that upon invocation of pledge and after giving 7 days' notice to the pledgor the Security Trustee can "sell or dispose of all or any part of the Collateral and shall apply the net proceeds of any such sale or disposition pro-rata amongst the lenders towards the obligations then due and payable under the Finance documents and Financing documents." Thus, upon invocation of pledge, SBI CAP Trustee cannot become the owner of the Shares. Clause 6.1 does not grant the phase I Lenders right to COMPANY APPEAL (AT)(INSOLVENCY) No.1220 of 2019 & 1450 of 2019 appropriate the shares or become owners of the shares upon invocation. Therefore, in the light of clause 6.1 of Share Pledge Agreement Regulations 58(8) is not applicable. For the sake of argument that the entity which invokes the shares becomes the owner of the shares then in this case since SBI CAP Trustee Company Ltd. has invoked the shares, then it is the owner of the shares not the Financial Creditor.

The distinction drawn in the Letters of Pledge aforequoted between invocation of pledge, whereupon the beneficial ownership in pledged shares, under Regulation 58, was to stand transferred from that of pledgor to that of pledgee, and sale of said shares by pledgee, to realize its dues, is only for the purpose of determining the amount which was to be offset from the debt to secure which the pledge was made. However such agreement cannot be interpreted as the pledgor continuing to have title in the shares. The only title in dematerialized shares, under the Depositories Act, is as beneficial owner in the records of the participant and the depository and which beneficial ownership changes on invocation of pledge in terms of Regulation 58. Even otherwise, a plea of a pledgor, of the pledgee, though after notice under Section 176, having sold the pledged thing for less than optimum price cannot be a ground for invalidating the sale. The mere fact that the parties, in terms of Arbitral Award reversed the earlier invocation also cannot change the said position. Such agreement is also not found to be inconsistent with Regulation 58. The quantum of consideration does not affect the transfer of title as beneficial owner."

26. In the light of the Judgement of Hon'ble High Court of Delhi in Tendril Financial Services Pvt. Ltd. (Supra). We are convinced with the arguments of Learned Counsel for the Appellants that the moment the shares transferred to the Demat Account of the SBI CAP Trustee Company Ltd. it became the beneficial owner of the shares as also held by this Appellate Tribunal in the case of PTC India Financial Services Ltd. COMPANY APPEAL (AT)(INSOLVENCY) No.1220 of 2019 & 1450 of 2019 (Supra). Learned Counsel for the Appellants tried to impress that pursuant to invocation of pledged shares the Financial Creditor became the shareholder of the Corporate Debtor. We are unable to convince with this argument and held that after invocation of pledged shares the SBI CAP Trustee Company Ltd. became the shareholder of the Corporate Debtor, as per the Clause 2.6.2 of the Share Pledge Agreement dated 23.09.2016. The Financial Creditor is not party in the above referred agreement. In the notice dated 20.12.2017 it is mentioned that invocation of pledged shares shall not prejudice the rights and remedies available to the Financial Creditor under the Financing Documents. Therefore, it cannot be said that after invocation of the pledged shares by the SBI CAP Trustee Company Ltd., the Financial Creditor cannot maintain the Application under Section 7 of I&B Code, or the entire dues of the Corporate Debtor stood discharged.