Pledged Shares Already With Creditor Need Not Be Returned During CIRP: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has held that, in the facts of the case, pledged shares that were already lying in the custody of a secured creditor before the start of the corporate insolvency resolution process did not need to be transferred back to the corporate debtor's demat account during insolvency.

A bench of Judicial Member Nilesh Sharma and Technical Member Charanjeet Singh Gulati held that, in this case, the Insolvency and Bankruptcy Code allows only preservation of the existing asset position during CIRP and does not permit enhancement of the corporate debtor's assets by taking away a secured creditor's security.

“The transfer of the pledged shares from the pledgee's demat account to the pledgor's demat account is not necessary, as the shares could remain in their existing state during the CIRP. Since the pledged shares were already in the pledgee's custody prior to commencement of CIRP, that status could have simply continued throughout the CIRP,” the tribunal observed.

The application was filed by Maitreya Doshi, former director of Doshi Holdings Pvt. Ltd., against the resolution professional and Anand Rathi Global Finance Ltd., the secured financial creditor. Doshi sought directions for the return of unsold pledged shares of Premier Ltd. from Anand Rathi's demat account to the corporate debtor during the insolvency process.

The dispute arose from the CIRP initiated against Doshi Holdings on February 19, 2021, on a Section 7 petition filed by Anand Rathi Global Finance, which later became the sole member of the committee of creditors.

The pledged shares had been created as security under loan-cum-pledge agreements executed between 2015 and 2016 in connection with loans disbursed to Premier Ltd., where Doshi Holdings was a co-borrower.

Doshi argued that although the pledge had been invoked before insolvency, ownership of the shares continued to vest with the corporate debtor. He contended that the resolution professional was duty-bound to take custody of all assets of the corporate debtor and prevent any dealing with them during the moratorium. He also sought restoration of unsold shares and adjustment of amounts realised from shares sold during CIRP.

While the tribunal agreed that the sale of pledged shares during the moratorium violated Section 14 of the Insolvency and Bankruptcy Code. However, it declined to direct restoration of the unsold pledged shares to the corporate debtor's demat account.

It observed that returning the shares would have the effect of removing the pledge and enhancing the asset position of the corporate debtor, which the Code does not permit during the corporate insolvency resolution process.

The bench observed that where pledged shares were already in the custody of the pledgee prior to commencement of CIRP, the shares could remain in that existing state during the insolvency process and did not need to be transferred back to the corporate debtor. It also noted that shares already sold in the open market could not be traced or restored.

The tribunal therefore refused to order the transfer of the unsold pledged shares back to the corporate debtor. It limited the relief to adjustment of the amounts realised from the sale of pledged shares against the financial creditor's claim and disposed of the application without costs.