Mumbai, Feb 17: The National Company Law Tribunal (NCLT) has accepted the application filed by the Punjab National Bank (PNB) to retain its status as a secured financial creditor in the ongoing Corporate Insolvency Resolution Process (CIRP) of Arshiya Limited. This order has thus set aside the Resolution Professional’s decision to reclassify the bank as an unsecured financial creditor.
Dispute over reclassification
As per the application filed, initially, in the first CoC meeting, PNB’s claim of over Rs 374 crore had been recorded as that of a secured financial creditor.
However, based on a legal opinion, the RP later shifted the bank to the category of “unsecured financial creditor”, stating that a pledge of shares amounted only to a security interest and that no direct disbursement had been made to Arshiya Limited.
PNB challenged the decision, arguing that it held both a corporate guarantee and a pledge of shares securing the debt advanced to Arshiya Northern FTWZ Limited (ANFL), a subsidiary of Arshiya Limited. The bank contended that the unilateral reclassification was beyond the RP’s authority and violated settled legal principles.
Tribunal’s observations on RP’s powers
After hearing both sides, the Tribunal held that once a claim has been admitted and categorised by the Interim Resolution Professional, the Resolution Professional cannot alter the status of the creditor.
The bench relied on precedents of the appellate tribunal to observe that while claims can be updated, their classification cannot be changed without proper adjudication.
Examination of security and guarantee
On merits, the NCLT examined the nature of the security held by PNB. It noted that the bank had extended credit facilities to ANFL under a consortium arrangement and that the debt was secured by a corporate guarantee and a pledge of 51 percent equity shares of ANFL.
The Tribunal observed that obligations arising from a corporate guarantee fall within the definition of “financial debt” under the IBC. At the same time, the pledge created a security interest in favour of the bank.
The bench held that PNB stood in a dual capacity in respect of the same debt — as a financial creditor by virtue of the corporate guarantee and as a secured creditor due to the pledge of shares.
It observed that denying the bank the status of a secured financial creditor would either deprive it of its voting rights in the Committee of Creditors (CoC) or negate the benefit of the security interest it held.
The Tribunal further noted that both the pledge agreement and the corporate guarantee were extended to the restructured credit facilities, and the initial facility granted by the bank in its individual capacity was subsumed into the consortium arrangement, as reflected in the distinct allocation of credit facilities among consortium members.
It clarified that this was not a case where the bank had filed two separate claims — one for the Rs 100 crore facility and another for the Rs 90 crore and Rs 25 crore facilities under the consortium arrangement.
Although Arshiya Limited was not a party to the Master Restructuring Agreement (MRA) of 2013, its predecessor, Arshiya International Limited, had executed a corporate guarantee on September 28, 2013, to secure the restructured debt.
Upon its merger into Arshiya Limited, the latter became bound by the guarantee obligations. In these circumstances, the bench held that the bank’s position must be reconciled holistically so as not to deprive it of the benefit of its security interest while also recognising its entitlement to participate in collective decision-making.
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Final ruling
Accordingly, the Tribunal concluded that the applicant was entitled to be classified as a secured financial creditor on account of its concurrent holding of a security interest and guarantee obligations in respect of the same debt.
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