Supreme Court Affirms Rights of Secured Creditors Over Pledged Shares Under I&B Code In a landmark decision in May 2023, the Supreme Court of India reiterated the entitlements of secured creditors within the framework of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The ruling in **M/S. Vistra ITCL (India) & Ors. v. Mr. Dinkar Venkatasubramanian & Anr.** established that secured creditors are entitled to retain the sale proceeds from shares pledged by a corporate debtor. This decision further cements the protections afforded to secured creditors under the I&B Code, providing crucial clarity in insolvency proceedings.

Case Background The case involves Amtek Auto Limited, which approached M/S. Vistra ITCL (India) & Ors. (the appellants) for a short-term loan facility of Rs. 500 crores. This facility was extended to the corporate debtor’s group companies, including M/s. Brassco Engineers Ltd. (Brassco) and M/s. WLD Investments Pvt. Ltd. (WLD). As part of this arrangement, Amtek Auto Limited pledged its equity shares in M/s. JMT Auto Ltd. (JMT) to secure the loan. When insolvency proceedings under Section 7 of the I&B Code were initiated against Amtek Auto Limited, a Resolution Professional was appointed, and the approval of a Resolution Plan was sought. The appellants, as secured creditors, moved to claim their rights over the pledged shares. However, the Resolution Professional rejected their claim, and this decision was upheld by the Adjudicating Authority and the National Company Law Appellate Tribunal (NCLAT). The appellants, aggrieved by these decisions, escalated the matter to the Supreme Court.

Supreme Court’s Analysis and Decision The Supreme Court meticulously examined the definition of ‘security interest’ as provided under Section 3(31) of the I&B Code and the nature of the pledge agreement. Relying on precedents such as **Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd.** and **Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel**, the Court concluded that the corporate debtor was not liable to repay the loans advanced, as separate agreements had been executed with Brassco and WLD. The Supreme Court addressed the appellant’s status as a secured creditor, emphasizing their rights under Sections 52 and 53 of the I&B Code. It underscored that the secured creditor’s claims could not be dismissed merely because they did not pay financial debt directly to the corporate debtor.

The Court proposed two possible solutions:

1. Treating 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 the Corporate Insolvency Resolution Process (CIRP).

2. Recognizing the appellant as a secured creditor** under Sections 52 and 53 of the I&B Code. Ultimately, the Supreme Court chose the second solution, providing an equitable interpretation of the insolvency laws. It modified the NCLAT’s order, thereby acknowledging the rights and obligations of the appellants as secured creditors. This included allowing the application for liquidation proceedings during the CIRP.

Implications of the Ruling

1. Reaffirmation of Secured Creditors’ Rights: The Supreme Court’s decision reaffirms the rights of secured creditors to retain sale proceeds from pledged shares, bolstering their position in insolvency proceedings.

2. Clarification on Security Interests: By interpreting Section 3(31) of the I&B Code, the Court has provided much-needed clarity on what constitutes a security interest, enhancing the legal framework governing secured transactions.

3. Equitable Interpretation of Insolvency Laws: The ruling underscores the Court’s commitment to an equitable application of insolvency laws, ensuring that secured creditors are adequately protected. This judgment is a significant development in insolvency jurisprudence, reinforcing the legal protections for secured creditors and providing a clear precedent for future cases involving pledged shares. For practitioners and stakeholders in insolvency proceedings, this decision is a critical reference point for understanding the extent of secured creditors’ rights under the I&B Code.