Reliance Capital Insolvency: IDBI Trusteeship Not The 'Owner' Of Pledged Shares, Administrator Says
Whose shares are they anyway? Reliance Capital's successful resolution hinges on the answer to this question.
Reliance Capital Ltd.'s administrator made submissions against IDBI Trusteeship Services Ltd. before the insolvency court on Monday.
At the center of the dispute is Reliance Capital's ownership in Reliance General Insurance Co., which it had pledged with IDBI Trusteeship.
Transfer of possession of security doesn’t amount to extinguishment of pledge, the administrator's counsel Ravi Kadam said before the National Company Law Tribunal.
Kadam was responding to IDBI Trusteeship's argument that giving up the shares of Reliance General Insurance would amount to giving up the sole security in a secured debt.
In the last hearing, IDBI Trusteeship had resisted the handover of Reliance General Insurance's shares to the administrator to be included in the assets available for resolution. Federal Bank Ltd. had also intervened to be heard as the beneficiary of the pledge agreement.
Reliance Home Finance Ltd. had issued non-convertible debentures, which it failed to redeem. As part of the restructuring terms of these NCDs in 2019, RHFL's promoter—Reliance Capital—had pledged its entire shareholding in Reliance General Insurance in favour of IDBI Trusteeship —the debenture trustee. When Reliance Capital failed to redeem the NCDs, IDBI Trusteeship invoked the pledge.
Arguing for the administrator, Senior Counsel Ravi Kadam opposed the stand of IDBI Trusteeship and Federal Bank.
The Insolvency and Bankruptcy Code obligates the administrator to take control and custody of the assets of the company and the shares in dispute are very much the property of the company, he said.
The argument of IDBI Trusteeship that such a handover would lead to extinguishment of debt is misconceived as the object of the Code is not to extinguish the security interest but to make their rights in security interest subservient to the CIRP. What we seek is a mere custody of the security as empowered under the Act.Ravi Kadam, Counsel for Administrator
Second, Kadam said, IDBI Trusteeship is not the owner of the pledged shares. It merely has the right to possession of shares, and until they are sold, there is no accrual of vested right and the ownership remains with the pledgor (Reliance Capital), he said.
A mere recording of ‘pledgee’ as beneficial owner in the depository records doesn’t amount to a sale; the ownership still resides with the company/pledgor.Ravi Kadam, Counsel for Administrator
Third, the argument that the company has waived its right of redemption since it failed to reserve the right is contrary to the settled law, Kadam said. The law doesn’t require the pledgor to reserve the right; therefore, there is no question of waiver.
Moreover, waiver being a question of fact must be pleaded and cannot be orally argued. It must be clear, unequivocal and reflect a conscious decision of party after being appraised of all legal consequences.Ravi Kadam, Counsel for Administrator
Fourth, Kadam questioned Federal Bank's locus to intervene in the matter as it is not a beneficiary in the concerned pledge agreement. Reliance Interactive Advisors Ltd. is the actual beneficiary whose right was hypothecated to Credit Suisse, who in turn had transferred some of the loan interest to several parties, including Federal Bank, Kadam said.
'If Federal Bank is allowed to take part in these proceedings, then every security interest beneficiary would have to be impleaded, he said.
Federal Bank’s argument that the transfer has already taken place is misconceived as the balance sheet of the company still reflects the shares as their property and the Code allows the administrator to take custody of such properties if provided in the balance sheet.Ravi Kadam, Counsel for Administrator
The application should be dismissed in the absence of any right to sue, he said.
Finally, the non-obstante clause in IBC overrides all other statutes, including the contract law from which the pledgee derives its rights, Kadam said.
The object of the Code is the preservation of value of the company, he emphasised. "The argument of the trustees that the moratorium doesn’t allow the administrator to take custody of all the assets can be rebutted with the explicit provisions of the Code that allow an administrator/RP/IRP to take custody of the assets."
The NCLT has reserved its order.