Pledger-In-Default, Can’t Claim Voting Rights on Pledged Shares; HC Upholds Pledgee’s Right to Exercise Voting | HC

Case Details: Rahul Dilip Shah v. Catalyst Trusteeship Ltd. - [2024] 159 taxmann.com 476 (HC - Delhi)

Judiciary and Counsel Details

• Suresh Kumar Kait & Shalinder Kaur, JJ.
• Ms Poojam Saigal, Varun Garg, Prashant Jain, Ms Kriti Bhardwaj & Ms Nitya Prabhakar, Advs. for the Appellant
• Amit Agrawal, Rahul Kukreja, Ms Sana Jain, Kotla Harshavardhan, Ms R. Arora, Ms Gayatri Gupta, Munawwar Naseem & Ms Namrata Lahgade, Advs. for the Respondent

Facts of the Case

In the instant case, the Respondent company i.e. debenture trustee advanced a loan to company ‘K’ and both entered into a debenture trust deed, by means of which ‘K’ issued redeemable non-convertible debentures in favour of the respondent. The appellant/managing director of ‘K’, pledged its equity shares in K in favour of the respondent as collateral for the said loan and the appellant entered into an Unattested Share Pledge Agreement (SPA) with the respondent.

The Respondent addressed a notice of event of default to ‘K’ for default committed by ‘K’ in making timely payments. Meanwhile, the appellant tendered his resignation from the directorial position of ‘K’. The Respondent thereafter, issued an invocation notice to invoke shares pledged by the appellant over pledged shares under SPA.

The appellant in his capacity as a shareholder of ‘K’, received a notice for convening a meeting of equity shareholders of ‘K’ to approve a composite scheme of arrangement between ‘K’ and a company. The appellant filed an application seeking ex-parte ad-interim orders/ directions before, to permit him to exercise voting rights in relation to his equity shares in the said meeting.

The Single Judge vide the impugned order dismissed the said application and it was held that once an event of default had taken place, the respondent, being a debenture trustee became entitled to exercise voting rights in respect of the share pledged by the appellant.

Thereafter, an appeal was made to the High Court. The appellant submitted that due to the restructuring of the deed by the respondent, default under the deed had ceased to exist and stood cured, hence, the respondent was debarred from exercising voting rights regarding shares.

It was noted that the appellant under SPA, authorized the respondent to exercise its voting rights in respect of pledged shares in the event of default and the appellant had not made an effort to redeem the pledged property by tendering the amount advanced to the respondent, whereas, the appellant had the right to redeem pledged property till such time pledged property was not sold and exercise his voting rights.

High Court Held

The High Court held that since, the appellant being a pledger was guilty of default as per SPA, could not be permitted to urge that voting rights continued to vest in him, the findings of Single Judge doesn’t suffer any illegality, and, therefore, the instant appeal was to be dismissed.

List of Cases Reviewed

• Order passed by the High Court (New Delhi) in CS (COMM) No. 108 of 2022, dated 20-10-2023, (para 50), affirmed