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NCLT Guwahati Admits Insolvency Plea Against Adhunik Meghalaya Steels, Holds Pledged Shares Dispute No Defence
Insolvency petition under Section 7 of the IBC admitted despite objections over timing and manner of pledge enforcement; court holds that contractual discretion over security does not extinguish the underlying debt or .
The has admitted a petition filed by against , ruling that a dispute over the invocation and appropriation of pledged shares cannot defeat a Section 7 application once the and is established.
The bench, comprising Judicial Member Rammurti Kushawaha and Technical Member Yogendra Kumar Singh, rejected the corporate debtor’s contention that the financial creditor had failed to properly realise pledged securities, holding that the creditor’s in enforcing the pledge is irrelevant to the limited inquiry under .
Dispute Over Pledged Shares Cannot Derail Insolvency Proceedings
The core legal question before the tribunal was whether the manner in which a financial creditor invokes and appropriates proceeds from pledged shares can constitute a valid defence to an application under Section 7 of the IBC. The corporate debtor argued that the petition was an because the creditor had not realised the full value of the security and had deliberately appropriated sale proceeds towards interest rather than principal.
The NCLT, however, emphasised that its jurisdiction at the admission stage is confined to verifying two things: the existence of a and the occurrence of a . “Questions relating to the adequacy of the security, the timing of enforcement of the pledge, the quantum realised from sale of pledged shares, or the manner of appropriation of the sale proceeds are matters which may give rise to contractual disputes between the parties but do not constitute a valid defence to an application under Section 7 once the and stands established,” the bench observed.
The Background: A Loan Gone Sour
IL&FS Financial Services had extended a term loan facility of up to ₹30 crore to Adhunik Meghalaya Steels, of which ₹24.44 crore was disbursed on . The loan was to be repaid in eight equal quarterly instalments beginning 27 months from disbursement. The corporate debtor defaulted on its repayment obligations, leading the creditor to classify the account as a on .
After issuing event of and recall notices, the financial creditor filed a Section 7 petition on , claiming an outstanding amount of ₹55.45 crore as of . The petition was initially dismissed by the NCLT on limitation grounds, but the , in a judgment dated , set aside that dismissal, holding that the application was within limitation when account was taken of the corporate debtor’s in its financial statements and the exclusion of the COVID-19 period.
Corporate Debtor’s Defence: Pledge Enforced Improperly
Adhunik Meghalaya Steels opposed the petition primarily on two grounds. First, it argued that the debt was time-barred—a point that was already conclusively decided by the . Second, it contended that the loan was secured by a pledge of 2.52 crore equity shares of , valued at approximately ₹50 crore at the time of creation. The corporate debtor alleged that the financial creditor invoked the pledged shares in a piecemeal manner, recovering only ₹8.30 crore, and appropriated the proceeds towards interest, leaving the principal largely untouched. It further argued that the creditor continued to hold 78.87 lakh shares and failed to liquidate them at the appropriate time, thereby causing the security to diminish in value.
The corporate debtor submitted that had the financial creditor acted prudently and realised the full value of the pledged securities, the outstanding debt would have been substantially reduced or extinguished. It characterised the Section 7 petition as an , contending that the creditor could not be permitted to invoke the insolvency code after failing to mitigate its losses.
NCLT’s Analysis: vs. Insolvency
The tribunal examined the pledge agreement and found that Clause 6.2(b) expressly conferred on the financial creditor the right—but not the obligation—to sell or otherwise dispose of the pledged securities upon an event of . The clause stated: “IFIN shall be entitled (but not bound) to sell or otherwise dispose of, in any manner all or any of the Pledged Securities…”.
“The expression ‘shall be entitled (but not bound)’ makes it abundantly clear that enforcement of the pledged securities was permissive and not mandatory. Accordingly, the Financial Creditor had not faulted in invoking or realising the pledged securities at any particular point of time, as the decision regarding such enforcement falls within its ,” the bench observed.
The tribunal further noted that, even assuming the entire amount realised from the pledged shares had been adjusted towards the principal, the outstanding debt would still have remained well above the statutory threshold of ₹1 crore required for admission under . The corporate debtor did not dispute that the loan was disbursed or that it had defaulted; its objections pertained only to the timing and manner of security enforcement.
Relying on the ’s judgment in , the NCLT reiterated that the adjudicating authority’s mandate under Section 7 is strictly limited to verifying the existence of a debt and . “The determination of the exact quantum of claims is therefore a post-admission exercise and does not form part of the of the Adjudicating Authority at the admission stage,” the bench said, citing .
Key Observations: Limited Scope of Section 7
The tribunal made several key observations that underscore the narrow scope of inquiry at the admission stage:
“We are, therefore, of the considered opinion that the objections raised by the Corporate Debtor regarding the invocation of 2,52,17,391 pledged shares, the recoveries of Rs. 8,30,61,278/-, the alleged retention of 78,86,958 shares, and the manner of appropriation of the sale proceeds do not affect the maintainability of the present proceedings under Section 7 of the Code. These objections do not extinguish the '' or dislodge the occurrence of '' established from the material placed on record.”
“Such discretion does not affect the existence of the '' or the occurrence of '' and therefore, does not constitute a valid defence to the present application under Section 7 of the Code.”
“The transaction clearly satisfies the ingredients of a '' under , being money disbursed against consideration for the .”
Order: Petition Admitted, CIRP Begins
The NCLT admitted the petition and directed the commencement of the CIRP effective from . It imposed a under , prohibiting the institution or continuation of suits or proceedings against the corporate debtor, the transfer of assets, and the enforcement of security interests.
The tribunal appointed Mr. Sanjay Kumar Poddar as the and directed him to make a public announcement of the initiation of CIRP within three days. The management of the corporate debtor now vests in the IRP, who is to take charge of all assets and documents. The IRP is also required to submit periodical reports to the tribunal.
The financial creditor was directed to deposit ₹3 lakh with the IRP to meet initial expenses, subject to approval by the . The registry was instructed to send copies of the order to the and to various government departments, including , , and .
The order has significant implications for future Section 7 applications, as it clarifies that contractual disputes over the enforcement of security—including the timing, manner, and appropriation of proceeds—cannot be used as a shield to avoid the insolvency process once a clear is established. The decision reinforces the principle that the IBC is a code for resolution and not a forum for adjudicating contractual claims between creditors and debtors.
