Case Note & Summary
The present appeal arises from an order of the National Company Law Appellate Tribunal (NCLAT) dated 24.08.2020, which dismissed the appeal filed by the appellants, M/s Vistra ITCL (India) Ltd & Ors., and confirmed the order of the NCLT in IA No.62/2020 in CP (IB) 42/Chd./Hry.2017. The appellants, who were secured creditors, had extended a short-term loan facility of INR 500 crores to group companies of Amtek Auto Limited (Corporate Debtor) for the ultimate use of the Corporate Debtor. The Corporate Debtor created a security by way of pledge of 16,82,06,100 equity shares of JMT Auto Ltd. held by it in favour of the appellants. Subsequently, the Corporate Debtor went into insolvency, and a moratorium was imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The appellants sought to enforce the pledge, but the NCLT and NCLAT held that the moratorium barred such enforcement. The Supreme Court examined the scope of Section 14 of the IBC and the definition of 'security interest' under Section 3(31) of the IBC. The Court noted that the pledge of shares constituted a security interest and that the moratorium under Section 14 prohibits the initiation or continuation of proceedings against the corporate debtor, but does not bar a secured creditor from enforcing a security interest over assets that are not owned by the corporate debtor. The Court held that the pledged shares were assets of the corporate debtor, but the enforcement of the pledge by the secured creditor did not amount to a proceeding against the corporate debtor. The Court further held that the moratorium under Section 14 is intended to protect the assets of the corporate debtor for the benefit of all creditors, but it does not extinguish the rights of secured creditors to enforce their security interests. The Court allowed the appeal, set aside the orders of the NCLT and NCLAT, and permitted the appellants to enforce the pledge in accordance with law.
Headnote
A) Insolvency and Bankruptcy Code - Moratorium under Section 14 - Enforcement of Security Interest - The issue was whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 bars the enforcement of a security interest created by the corporate debtor by way of pledge of shares of its subsidiary. The Court held that the moratorium under Section 14 does not prohibit a secured creditor from enforcing a security interest created prior to the moratorium, as the assets of the corporate debtor are not being alienated but rather the secured creditor is exercising its rights over the pledged shares. The Court set aside the NCLAT order and allowed the appeal. (Paras 1-43)
Issue of Consideration
Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits the enforcement of a security interest created by the corporate debtor by way of pledge of shares of its subsidiary in favour of a secured creditor, and whether the NCLAT was correct in holding that such enforcement is barred.
Final Decision
The Supreme Court allowed the appeal, set aside the orders of the NCLT and NCLAT, and permitted the appellants to enforce the pledge of shares in accordance with law. The Court held that the moratorium under Section 14 of the IBC does not bar the enforcement of a security interest created by the corporate debtor by way of pledge of shares, as the secured creditor is not initiating a proceeding against the corporate debtor but exercising its rights over the pledged assets.
Law Points
- Security interest
- pledge of shares
- moratorium under Section 14 IBC
- enforcement of security by secured creditor
- corporate debtor as pledgor
- third-party security
- Insolvency and Bankruptcy Code
- 2016
