IMPACT OF COVID-19 ON SALE OF PLEDGED SHARES

The recent judgment passed by the Bombay High Court concerning the sale of pledged shares by the IDBI Trusteeship and UBS AG’s London branch highlights the effect that COVID-19 has imposed on the economic markets as well as the rights and privileges that it leaves for the lender and investor communities. 

Share pledging is an option available to the promoters of a company to pledge their shares to the lenders/investors/shareholders in order to secure loans to either meet their working capital requirements or fund any projects or acquisitions etc,. In case where the borrowing organisation is unable to fulfil the repayment obligation, the lending company/companies have full rights to sell such such pledged shares in order to recover the loaned amount. 

In light of the same, the respondents, i.e. the IDBI Trusteeship and UBS AG, decided to sell the pledged shares of the Future Retail Group, which in the normal market conditions would have allowed them to recover an amount of almost Rs.670 crores, however due to the highly volatile conditions of the share market hit by the COVID-19 pandemic, the share prices of the Future Group reduced considerably and the respondents would be able to recover only about half the amount. As a result, to avoid the immense losses that would be incurred by the borrowing company, they filed a suit within the Court. 

Accordingly, the Bombay High Court, keeping in view this pandemic, through its decision provided protection to the promoters of the Future Group and restricted the respondents from selling the pledged shares of the company till the next date of the hearing which is 4th May, 2020.

Given that such a judgment may be set as a precedent in all the future cases that may arise relating to the sale of pledged shares by the lenders or the investors, the issue that develops is whether such decision deprives such lending communities of their right to sell the pledged shares, and whether such decision is contrary to the principles of common law, provided that such contracts should be enforceable in the court of law in their absolute terms. 

Thus it becomes important to identify as to whether such a pandemic can fall within the category of a force majeure category, if they are not expressly stated.