Treatment of pledged shares as security under IBC

Pledging of shares is a common practice among creditors to secure a loan. In case of pledged shares, the pledgor (the borrower) transfers possession of shares to the pledgee (the lender) as collateral for the loan. In the event of default by the pledgor, the pledgee can sell the shares to recover the outstanding debt.

The Insolvency and Bankruptcy Code (IBC) has introduced certain changes in the way pledgees are treated in insolvency proceedings. Under the IBC, a pledgee is not a financial creditor of the corporate debtor (the company that is undergoing insolvency proceedings). This means that the pledgee does not have the same rights as a financial creditor, such as the right to vote in the committee of creditors (CoC) or to receive a priority payment in the liquidation process.

The Supreme Court has recently recognized that the IBC does not adequately protect the rights of pledgees in case of pledged shares. In the case of Vistra ITCL (India) and Others vs. Mr. Dinkar Venkatasubramanian and Another, the Supreme Court held that pledgees should be treated as financial creditors in certain circumstances.

The Supreme Court identified two situations where pledgees should be treated as financial creditors:

• When the pledgee has advanced funds directly to the corporate debtor.
• When the pledgee is a member of the CoC.

In the first situation, the pledgee is effectively a financial creditor because it has provided credit to the corporate debtor. In the second situation, the pledgee is a member of the CoC and therefore has a say in the decision-making process of the insolvency proceedings.

The Supreme Court’s decision in the Vistra ITCL case is a positive development for pledgees. It provides much-needed clarity on the rights of pledgees in insolvency proceedings. However, there are some concerns with the Supreme Court’s decision.

One concern is that it could create a hierarchy of creditors, with pledgees being treated more favorably than other creditors. This could lead to unfairness for other creditors, who may not be able to recover their full debts.

Another concern is that the Supreme Court’s decision could make it more difficult for companies to restructure their debts. If pledgees are treated as financial creditors, they will have a greater say in the insolvency proceedings and may be able to block a restructuring that is in the best interests of all creditors.

Overall, the Supreme Court’s decision in the Vistra ITCL case is a step in the right direction. However, it is important to be aware of the potential consequences of the decision, such as the creation of a hierarchy of creditors and the potential for delays in the insolvency process.

Conclusion

The IBC has introduced some changes in the way pledgees are treated in insolvency proceedings. However, there are still some concerns about the rights of pledgees in insolvency proceedings. It is important to be aware of these concerns before pledging shares as security for a loan.

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