Giving up the shares of Reliance General Insurance Co. would amount to giving up the sole security in a secured debt, the counsel for IDBI Trusteeship Services Ltd. argued before the National Company Law Tribunal on Monday.
IDBI Trusteeship and the administrator for Reliance Capital Ltd. are locked in a dispute over pledged shares of Reliance General Insurance.
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.
Since then, Reliance Capital has been admitted to insolvency. And the Reserve Bank of India-appointed administrator Nageshwara Rao has approached the NCLT to direct IDBI Trusteeship to free up the shares of Reliance General Insurance so that it can be included in the assets available for resolution.
IDBI Trusteeship has refused to do so on grounds that it's merely the custodian of the shares, and has no authority to hand them over. Its counsel Janak Dwarkadas argued that any such direction would violate the pledgee's rights to hold on to the possession of the property and would put an end to the pledge.
The intention of moratorium is not to destroy the pledge. IDBI as a trustee can’t be called upon to hand over the pledged shares to the administrator.Janak Dwarkadas, Counsel for IDBI Trusteeship
A creditor is not expected to give up shares during insolvency and such a question would only arise during liquidation of the company, Dwarkadas said. "Such a surrender is within the discretion of the creditor and hence, he must be allowed to exercise the same."
Further, Dwarkadas said, the administrator is in the same position as that of the insolvent company and is therefore in a position to exercise similar powers. Reliance Capital has never challenged the existence and invocation of the pledge and has in turn accepted the same before the Securities Appellate Tribunal, he pointed out.
In 2020, the appellate tribunal had recognised IDBI Trusteeship's right to hold securities for the purpose of sale.
The argument raised by the administrator that the right to reclaim the pledged property subsists until sale is made was lost on the day the appellate tribunal recognised the right of the trustee to sell the pledged shares. On recognition of the rights of the trustee, it becomes vested rights and cannot be taken away from the parties even on commencement of CIRP (Corporate Insolvency Resolution Process).Janak Dwarkadas, Counsel for IDBI Trusteeship
The matter will next be heard on Aug. 26.
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