In a recent landmark judgment, the Hon'ble Supreme Court of India has clarified the rights of secured creditors under the Insolvency and Bankruptcy Code (IBC). The case revolved around the appellant, a secured creditor, who extended a short-term loan facility of Rs.500 crores to the corporate debtor’s group companies, secured by a pledge over its equity shares. Several security trustee agreements were thus executed between the group companies and the appellant.
An application under Section 7 of the IBC initiated proceedings against the Corporate Debtor, leading to the appointment of a Resolution Professional and the submission of the Resolution Plan to the NCLT. The appellants, claiming to be secured creditors, had their claim rejected by the Resolution Professional and subsequently by the Adjudicating Authority.
On appeal, the NCLAT also dismissed their claim, stating they had not provided any financial debt to the Corporate Debtor and could not be considered secured creditors. Aggrieved by these decisions, the appellants appealed to the Hon'ble Supreme Court.
Subsequently, an application was filed under Section 7 of the IBC to initiate proceedings against the Corporate Debtor, leading to the appointment of a Resolution Professional and the submission of the Resolution Plan to the NCLT. The appellants, claiming to be secured creditors, had their claim rejected by the Resolution Professional and subsequently by the Adjudicating Authority.
On appeal, the NCLAT also dismissed their claim, stating they had not provided any financial debt to the Corporate Debtor and could not be considered secured creditors. Aggrieved by these decisions, the appellants appealed to the Hon'ble Supreme Court. Aggrieved by the NCLAT's decision, the appellants filed an appeal to the Hon’ble Supreme Court.
The Hon’ble Supreme Court stated that the appellant, as a secured creditor, was denied rights under Sections 52 and 53 of the I&B Code concerning the pledged shares. The Court considered the definition of "security interest" provided in Section 3(31) of the IBC, along with the nature of the pledge agreement. It noted that Section 31 of the IBC requires the Adjudicating Authority to protect the interests of creditors not included in the Committee of Creditors.
The SC discussed two potential solutions:
To treat the secured creditor as a financial creditor of the corporate debtor to the extent of the estimated value of the pledged shares on the date of commencement of CIRP; or
To treat the appellant as a secured creditor under Sections 52 and 53 of the I&B Code.
The Supreme Court partially modified the NCLAT’s order, recognizing the appellants' rights and obligations as a secured creditor under Sections 52 and 53 of the IBC. Further, by adopting the second solution, the Hon’ble Court made an equitable interpretation of insolvency laws and allowed the application for liquidation proceedings during the CIRP.
M/S. Vistra ITCL (India) & Ors. v. Mr. Dinkar Venkatasubramanian & Anr.
Civil Appeal No. 3606 of 2020
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