NCLT Mumbai Orders Restoration of Pledged Shares, Holds Their Invocation During CIRP Moratorium Illegal

The National Company Law Tribunal (NCLT) at Mumbai has recently held that a financial creditor's invocation of pledged shares after the commencement of the Corporate Insolvency Resolution Process (CIRP) violated the moratorium under the Insolvency and Bankruptcy Code (IBC). It ruled that the creditor's contractual right to invoke the pledge could not override the statutory moratorium.

A bench of Judicial Member Lakshmi Gurung and Technical Member Charanjeet Singh Gulati made the observations while directing the transfer of 3,62,000 pledged equity shares of Flexituff Ventures International Ltd back to the corporate debtor's demat account within 15 days.

"The invocation of pledge and transfer of the Pledged Securities to the demat account of Respondent No. 1 on 20.05.2025 after imposition of the moratorium on 24.10.2024 was an act of enforcement of that security interest and falls squarely within the bar imposed by Section 14(1)(c) of the Code as the contractual right of invocation available to Respondent No. 1 under the Loan-cum Pledge Agreement does not override the Statutory Bar under Section 14 of the Code.", the tribunal ruled.

The dispute arose from a loan-cum-pledge agreement under which Sunrise Properties Pvt Ltd borrowed ₹3 crore from Swan Finance Ltd after pledging 3,62,000 equity shares of Flexituff Ventures International Ltd as security.

The company entered CIRP on October 24, 2024. Despite filing its claim in the insolvency process, Swan Finance invoked the pledge on May 20, 2025, and transferred the shares to its demat account. The Resolution Professional then approached the tribunal.

The Resolution Professional argued that invoking the pledge during the moratorium amounted to enforcement of a security interest barred under the IBC. He also contended that Swan Finance was aware of the moratorium because it had already filed its claim in the CIRP. Swan Finance argued that the shares had not been sold or transferred to any third party and offered to reverse the transfer and restore the pledge arrangement.

The tribunal noted that the shares remained in Swan Finance's demat account and had not been sold or otherwise alienated. It also found that the financial creditor was aware of the moratorium when it invoked the pledge.

Referring to the scope of the moratorium, the tribunal observed:

"On a plain reading of Clause (c) of Section 14(i) of the Code, it is clear that even when a security interest has been created by the Corporate debtor in respect of its property, any action to foreclose, recover or enforce such security interest during the subsistence of moratorium is prohibited."

Holding that the invocation amounted to enforcement of a security interest during the moratorium, the tribunal directed Respondents 1 to 3 to transfer the pledged shares back to the corporate debtor's demat account within 15 days. It declined to initiate proceedings under Section 74 of the IBC or impose costs.

The tribunal noted that the shares had not been sold and that Swan Finance had expressed its willingness to reverse the transfer. Accordingly, it partly allowed the Resolution Professional's application.

For Applicant : Advocates Dhrupad Vaghani along with Advocates Gayatri Mohite, Ashwath Reddy Instructed by Anchorstone Legal

For Respondent : Advocates Ashwini Chindarkar instructed by Asahi Legal