Section 7 IBC Admission Valid When Remaining Liability is Unpaid After Sale of Pledged Shares
- REEDLAW
- Jan 21
- 3 min read
NCLAT held that the admission of the Section 7 IBC application was valid as the remaining liability remained unpaid after the sale of pledged shares.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed an appeal and held that the Corporate Debtor's debt and default were clearly established, with the remaining liability after the sale of pledged shares amounting to Rs. 2.05 crores, which remained unpaid.
The Appeal filed by the Suspended Director of the Corporate Debtor challenged the order dated 02.08.2024 passed by the National Company Law Tribunal, Mumbai Bench-VI, admitting the Section 7 Application filed by the Financial Creditor. The Respondent sanctioned a Working Capital Facility of Rs.5 crores on 15.10.2020, and a Master Facility Agreement was executed on 24.10.2020. A loan recall notice was issued on 02.06.2022, claiming an amount of Rs.4,61,51,597/-. Subsequently, the Section 7 Application was filed on 20.06.2022, seeking recovery of Rs.3.80 crores along with interest amounting to Rs.60,36,961/-. During the pendency of the Application, an MoU was entered into on 17.09.2022, followed by a Share Pledge Agreement on 19.09.2022. The pledged shares were invoked on 29.11.2022. An interlocutory application seeking dismissal of the petition was filed by the Corporate Debtor on 07.08.2023, but the Adjudicating Authority proceeded to admit the Section 7 Application.
The Appellant informed the Tribunal that negotiations for a settlement with the Financial Creditor were ongoing and that a partial payment had been made. Consequently, the Tribunal, by its order dated 12.08.2024, granted time for settlement and restrained further action under the impugned order. Despite multiple opportunities, the parties failed to reach a settlement, and the matter proceeded to a hearing. The Appellant contended that the pledged shares' value was sufficient to cover the liability if transferred immediately; however, the Financial Creditor argued that the realized amount was insufficient to satisfy the debt. The Adjudicating Authority, in its findings, observed that the debt existed default had occurred, and the outstanding amount was still due even after the sale of pledged shares.
The Tribunal, after examining the submissions and records, found no merit in the Appellant's argument that immediate transfer of shares would have discharged the debt. The Tribunal held that the discretion to invoke the pledged shares rested with the Financial Creditor, and the proceeds from their sale did not fully satisfy the outstanding debt. It was noted that despite opportunities, the Appellant failed to present a viable settlement. Consequently, the Tribunal concluded that the Corporate Insolvency Resolution Process (CIRP) was rightly initiated against the Corporate Debtor.
The Appeal was dismissed, affirming the NCLT's decision. However, the Tribunal clarified that if a settlement was reached, the parties could seek withdrawal of CIRP under Section 12-A of the Insolvency and Bankruptcy Code, 2016, as per the ruling of the Hon'ble Supreme Court in the case of GLAS Trust Company LLC v. BYJU Raveendran and Others, REEDLAW 2024 SC 10545. No costs were imposed.
Mr. Abhijeet Sinha, Sr. Advocate with Ms. Pallavi Pratap, Mr. Pushkraj, Mr. Rohan Marathe, Ms. Yashvi Aswani and Mr. Amjid Maqbool, Advocates represented the Appellant.
Ms. Smriti Churiwal and Mr. Jaiveer Kant, Advocates appeared for the Respondent.
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