Pledge of shares without undertaking to discharge liability will not make entity financial creditor under IBC

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The Supreme Court in an important ruling held that pledge of shares will not make an entity financial creditor of the corporate debtor for the purpose of the Insolvency and Bankruptcy Code (IBC).  In this case, the L & T Infrastructure Finance Company Limited advanced a financial facility to Doshion Limited which was repayable in 72 structured monthly instalments.  

A pledge agreement was executed under which 40,160 shares of Gondwana Engineers Limited (GEL) were pledged as security by Doshion Limited. Later, by an agreement L&T Infrastructure assigned all rights, title and interest in the financial facility including any security and interest therein in favour of Phoenix ARC, which is the appellant in the present case. 

On failure of Doshion Limited to repay the loans, the applicant-initiated action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.In the meanwhile, the Bank of Baroda initiated corporate insolvency resolution process against the Doshion Limited (corporate debtor) under Section 7 of the IBC and subsequently an Interim Resolution Professional (respondent in the present case) was appointed. 

Pursuant to the commencement of corporate insolvency resolution process in respect of the corporate debtor, the appellant filed its claim for an amount of Rs.83.49 crore with the respondent.The respondent rejected the claim of the appellant stating that as under the Pledge Agreement, the liability of the corporate debtor was limited to the pledge of the shares only. 

The appellant approached the National Company Law Tribunal (NCLT) and thereafter the National Company Law Appellate Tribunal (NCLAT) without any success.The Appellate Tribunal held that pledge of shares does not amount to “disbursement of any amount against the consideration for the time value of money” and hence do not fall within sub-clause (f) of sub-section (8) of Section 5 of the IBC. 

The appellant moved the Supreme Court for relief, The Supreme Court held that a person having only security interest over the assets of corporate debtor, even if the description of "secured creditor" by collateral security extended by the corporate debtor, would not be covered by the definition of financial creditor in subsection (7) and (8) of the IBC. 

The appellant at best will be secured debtor qua above security but shall not be a financial creditor within the meaning of Section 5 subsections (7) and (8), The Supreme Court said, upholding the decision of the NCLT that the caller was not a financial creditor of the corporate debtor.