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2019 (2) TMI 1965 - HC - Indian LawsPledge of shares to defendant no. 5 - defendant no. 5 sold the shares to defendant nos. 1 to 4 and that was not permissible under the contract - HELD THAT - It is settled law that no pledgor can decide when and how a pledgee should exercise its right to sell. Section 176 makes it clear that it is the discretion of the pledgee to sell the pledged goods (shares in this case) in case the pledgor makes default and if the pledgee exercises that discretion or does not exercise that discretion, no blame can be put on the pledgee. What is required is if pledgee decides to exercise its discretion to sell, it has to give reasonable notice of sale to pledgors. In this case, defendants have given reasonable notice. It has to be noted that the Debenture Trust Deed states the Trustee can, after giving a written notice of one business day to the pledgors (each pledgor acknowledges and agrees to be reasonable notice under applicable law), take any of the action as quoted and dealt with earlier. Plaintiffs while entering into the Debenture Trust Deed found one business day was reasonable notice. Two event of defaults were communicated to plaintiffs, one in August 2018 and other on 9th October 2018 and plaintiffs have taken no steps to rectify those event of defaults. Plaintiffs have not even paid the 2% additional interest which plaintiffs were supposed to pay on RPL shares being downgraded by ICRA. Plaintiffs did not even take any steps to maintain the security cover ratio. Therefore, it does not lie in the mouth of plaintiffs to find any fault with defendants. The defendants have done nothing contrary to the provisions of the contract and applicable law. Events of default happened in August 2018 and October 2018. ICRA has also observed that RPL is non co-operative. Admittedly, the penal interest has not been paid by plaintiffs and they have not restored the security cover ratio. In the light of this, defendants cannot be stopped from exercising their rights under the contract and applicable law - The balance of convenience also lies in favour of defendants, particularly, in view of the fact that the Chairman of RCOM, which is one of the flagship company and who is also Chairman of the Reliance ADAG group of companies has made a statement that RCOM, whose 2% shares are pledged with defendant no. 5 to secure the debentures issued to defendant nos. 1 to 4, is filing for bankruptcy. Shri Dwarkadas said RCOM has already filed for bankruptcy. It is also stated in the plaint, RCOM is facing insolvency proceedings. In such a situation plaintiffs, after giving notice as required under the pledge agreements sold part of the pledged shares. Further, Shri Chinoy had made no submissions as to what plaintiffs proposed to do for the 2% shares of RCOM pledged with defendant no. 5. No case is made out for granting any ad-interim relief as prayed for - Ad-interim relief rejected.
Issues Involved:
1. Issuance and servicing of debentures. 2. Pledge and sale of shares. 3. Alleged breach of fiduciary duties by defendants. 4. Adequacy of notice period for sale under the Contract Act. 5. Plaintiffs’ claim for damages and compensation. Issue-Wise Detailed Analysis: 1. Issuance and Servicing of Debentures: The plaintiffs issued two series of debentures to the defendants for an aggregate amount of ?300 Crores, secured by a pledge of shares in Reliance Power Limited (RPL) and Reliance Communications Limited (RCOM). The debentures had an interest coupon of 10% p.a. and were redeemable after five years. Plaintiffs serviced the debentures by paying interest regularly and pledged additional shares as required. 2. Pledge and Sale of Shares: On 5th February 2019, defendants sold 2,74,08,000 pledged shares of RPL in the F&O segment and 3,22,91,119 shares in the cash segment, totaling approximately 2.12% of the issued shares of RPL, allegedly causing a fall in the share price and resulting in a loss of ?274 Crores. Plaintiffs argued that the sale should have been structured to obtain the best value and that the notice given was inadequate. Defendants contended they acted within their rights due to plaintiffs' defaults, including failure to pay additional interest and provide further security after share value dropped. 3. Alleged Breach of Fiduciary Duties by Defendants: Plaintiffs claimed defendants ignored fiduciary duties by selling a large volume of shares in one day, causing a market crash. Defendants argued they were compelled to act due to plaintiffs' defaults and the need to protect debenture holders. The court found no breach of fiduciary duty, stating that the pledgee has discretion over the sale of pledged securities and that the sale was conducted as per the agreement. 4. Adequacy of Notice Period for Sale under the Contract Act: Plaintiffs argued that the one business day notice was not reasonable under Section 176 of the Contract Act. The court noted that plaintiffs had agreed to the notice period in the contract, and there was no evidence of coercion or fraud. The court held that the notice period was reasonable, given the volatile nature of the stock market. 5. Plaintiffs’ Claim for Damages and Compensation: Plaintiffs sought to restrain defendants from selling remaining pledged shares and claimed damages of ?2734 Crores. The court held that a claim for damages for breach of contract is not a claim for a sum presently due and payable. Plaintiffs must prove damages, and until then, defendants cannot be restrained from exercising their contractual rights. The court rejected the ad-interim relief sought by plaintiffs. Conclusion: The court concluded that defendants acted within their contractual rights and applicable law. Plaintiffs' defaults triggered the sale of pledged shares, and the notice period was deemed reasonable. Plaintiffs' claims for damages need to be proved, and until then, defendants cannot be restrained from further actions on the pledged shares. Ad-interim relief was rejected, and the case was set for further proceedings.
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