Shares supplied by the promoter in an official capacity as security for a loan makes the lender a secured creditor ruled the bankruptcy court in a petition filed by two-wheeler maker TVS Motor Company Ltd against the liquidator of Mumbai-based Kalisma Steel Ltd.
The Chennai-based two-wheeler maker had approached the Mumbai bench of the National Company Law Tribunal (NCLT) after the liquidator of Kalisma Steel rejected its claim as a financial creditor. At the time of rejection, the liquidator also argued that the claim was belated.
“The shares were supplied by the promoter in his official capacity to provide security for the loan” said the division bench of Justice PN Deshmukh and a technical member Shyam Babu Gautam in its 15-page order. “The submission of the respondent (liquidator) that the promoter pledged the shares in its personal capacity is not justified.”
TVS Motors argued that the bankrupt company’s promoter had informed it about financial difficulties and would be able to continue its supply as a vendor only if the auto major can support it by giving an advance of Rs 2 crore.
The automaker had extended the said financial assistance at the agreed rate of annual 12% interest. Kalisma Steel agreed to repay the money in five trenches. Also, the promoters of Kalisma Steel had provided shares of Rs 2 crore as the security deposit.
“This judgement will definitely come to aid in matters where security other than the normal banking system is not considered by the RP or liquidator,” said Ashish Pyasi, Associate Partner at Dhir & Dhir Associates. “Generally, in cases where the security is provided to a creditor who is neither an NBFC nor a bank, it becomes difficult to prove the transaction that it was a loan secured by the borrower.”
TVS Motors argued in the tribunal that at no time had the vendor denied its liability to pay back the debt amount received from the company. Also, the corporate debtor in its email had acknowledged the loan liability to pay back the debt in instalments proving the automaker had advanced a loan amount to be paid back with interest.
Countering this, the liquidator argued that the company’s claim as a secured creditor is incorrect since the underlying security is shares of the promoters which are not an asset of the company and those shares are pledged by the promoter of the Mumbai-based company in a personal capacity.
However, the tribunal rejected the liquidator’s arguments and clarified that TVS Motors stands in the position of a secured creditor in the liquidation of the company and directed the liquidator to consider the claim.
Mamta Binani, a resolution professional and former president at the Institute of Company Secretaries of India (ISCI), said advances given are being considered an operational debt, which is now settled law, but this ruling further clarifies the issue.
