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2022 (9) TMI 110 - SC - SEBIProcedure to be followed by debenture trustees - suit before the Bombay High Court - Evolution of the law surrounding the resolution of debts - Whether the debenture holders and other parties in the present case were required to follow the procedure under the SEBI Circular? - scope of Debenture Trust Deeds - Bombay High Court exercised jurisdiction over the subject matter of the suit - RCFL s case that the SEBI Circular is applicable only if the debenture holders choose to enter into an ICA under the RBI Circular - bar to the civil court s jurisdiction - HELD THAT - Section 15Y of the SEBI Act stipulates that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which an adjudicating officer appointed under the SEBI Act is empowered to determine. Section 15-I of the SEBI Act provides that an adjudicating officer may be appointed to adjudge cases under Sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA, 15HB. None of the sections mentioned in Section 15-I of the SEBI Act would confer jurisdiction on the adjudicating officer to grant the relief sought by the plaintiffs in the first instance. Hence, the bar in Section 15Y would not operate as against the suit in the present case. Similarly, Section 430 of the Companies Act provides that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine. Nothing in the Companies Act 2013 or any other law for the time being in force vests either the National Company Law Tribunal or the National Company Law Appellate Tribunal with the jurisdiction to adjudicate upon a challenge to the RBI Circular. Hence, the bar in Section 430 is not attracted. Single Judge of the Bombay High Court (in the first instance) as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. SEBI Circular is applicable if debenture holders wish to implement a Resolution Plan to which the lenders are a party - By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan. Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. When the SEBI Circular came into force, it specified the conditions under which the debenture holders (through the Debenture Trustees) could access this Resolution Plan and participate in its formulation via the ICA. By arguing that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, RCFL is suggesting that the ICA and the Resolution Plan are distinct and severable. The implication is that debenture holders may opt in to the Resolution Plan after it has been formulated, without concerning themselves with the ICA. This is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former, and flows from it. We agree that the language in Regulation 15(7) of the 1993 Regulations and the SEBI Circular is facilitative and not mandatory. This is in recognition of the fact that debenture holders may opt to exercise their rights through mechanisms other than the execution of a Resolution Plan. The language cannot be construed to be facilitative in the sense of providing debenture holders with the option of by-passing the modalities prescribed by the SEBI Circular while accepting a Resolution Plan. The ICA continues to be the foundation or mother document for the Resolution Plan. Dissenting ISIN level debenture holders are bound by the ICA / Resolution Plan - Dissenting creditors do not have the option of exiting the compromise or arrangement arrived at in terms of Section 230 Companies Act. The NCLT will look into the overall fairness of the compromise or arrangement under Section 230 Companies Act Similarly, dissenting lenders do not have the option of exiting the ICA / Resolution Plan under the RBI Circular. The RBI Circular states that the ICA may provide for the protection of dissenting lenders The respective majorities provided for in each of these laws bind dissenting creditors. It is along these lines that the SEBI Circular binds dissenting debenture holders. Indeed, the SEBI Circular could bind dissenting debenture holders even in the absence of similar provisions in other laws. The argument that the SEBI Circular is not applicable because a single debenture holder will be able to frustrate the Resolution Plan is a consequential one. The applicability of a circular cannot be determined on the basis of such a concern. We need not comment upon this aspect in the absence of a challenge to the SEBI Circular. We also note that it is open to the relevant stakeholders to approach SEBI with any concerns, commercial or otherwise, and request an amendment to the SEBI Circular. SEBI as a statutory regulator can always look at such concerns and has the power to factor them in if it deems fit to do so in public interest and for the orderly functioning of the securities market. SEBI Circular has retroactive application - In the present case, RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular. However, as of 13 October 2020 (the date on which the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect to the resolution of RCFL s debt. The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020. Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein. Even assuming that debenture holders were vested with the right to sanction a compromise or arrangement in terms of the special majority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed, they were divested of such a right upon the issuance of the SEBI Circular. Clause 59 of the Debenture Trust Deed stipulates that any provision in the Debenture Trust Deed which is in conflict with the 1993 Regulations is null and void. In so doing, it lays down a trigger for the divestment of rights under the Debenture Trust Deed. A contractually vested right may be taken away by the operation of a statutory instrument. A fortiori, in the present case, the SEBI Circular owes its existence to statutory powers conferred by a special legislation enacted with a view to protect the interests of investors and to ensure the stable and orderly growth and development of the market for securities. SEBI Circular was issued partly in exercise of the powers under the 1993 Regulations.28 Further, Regulation 15(7) of the 1993 Regulations lays the foundation for the conditions specified in the SEBI Circular. As such, the phrase provisions of the 1993 Regulations in Clause 59 must be read to include the SEBI Circular. Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed are evidently in conflict with the SEBI Circular as they each provide for different voting mechanisms. Therefore, Clauses 22 and 23 must give way to the SEBI Circular, which will take precedence Exercise of this Court s power under Article 142 of the Constitution - The different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court. Depending upon the facts and circumstances of a case, this Court can, having regard to Article 142 of the Constitution of India, stipulate suitable directions to mitigate the potential denial of rights. Pertinently, the SEBI Circular only contemplates two situations where ISIN-wise voting is mandated (i) non-enforcement of security; and (ii) entering into an ICA. Although it applies retroactively, it admittedly does not contemplate a scenario where the debenture holders could give ex post facto consent to ICAs agreed prior to the commencement of the SEBI Circular, that is 13 October 2020. In the present case, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled. For this reason, we consider it necessary to extend the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. We would like to reiterate that this Court is issuing the directions to mould the relief under Article 142 in view of the peculiar facts and circumstances of the present case noted above. Dissenting debenture holders in the present case - It is clear that a compromise arrived under the SEBI Circular or Section 230 of the Companies Act effectively assimilates the rights of the dissenting creditors. The SEBI Circular adopts a higher voting threshold of 60% by number and 75% to bind dissenting/ abstaining debenture holders. SEBI submits that debenture holders are entitled to full outstanding amounts due (principal plus interest) if their debt cannot be resolved under the compromise/ resolution mechanism. However, it has been argued that the compromised arrived at in terms of the direction of the Division Bench will also bind all the other debenture holders, who were not a party to the original suit before the High Court. This will prejudice the dissenting debenture holders as they have to settle for a lesser amount 24.96% of the principal among with a further 5% of the principal outstanding. We agree with SEBI s submission that the compromise arrived at the Debenture Trust Deed level among the consenting debenture holders should not bind the dissenting debenture holders. The dissenting debenture holders would have been bound by the Resolution Plan if it had been approved in accordance with the Insolvency and Bankruptcy Code, 2016 or under an ICA as acceded to under the SEBI Circular. We accordingly deem it appropriate that dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan. Alternatively, the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender s ICA and pursue other legal means to recover their entitled dues. For the reasons indicated in the text of the judgment, we accept the submissions which have been urged by SEBI and disapprove of the interpretation placed by the Division Bench of the Bombay High Court on the SEBI Circular. The appeal is allowed in part, subject to the directions issued above under Article 142 of the Constitution.
Issues Involved:
1. Applicability of the SEBI Circular to the debenture holders. 2. Jurisdiction of the civil court to entertain the lis. 3. Retroactive application of the SEBI Circular. 4. Binding nature of the ICA/Resolution Plan on dissenting ISIN level debenture holders. 5. Exercise of the Supreme Court's power under Article 142 of the Constitution. Detailed Analysis: 1. Applicability of the SEBI Circular to the Debenture Holders: The SEBI Circular dated 13 October 2020 standardizes the procedure to be followed by debenture trustees in case of default by issuers of listed debt securities. It prescribes the process for seeking investor consent for refraining from enforcing security and/or entering into an Inter-Creditor Agreement (ICA). The SEBI Circular is applicable if debenture holders choose to implement a Resolution Plan to which the lenders are a party. The Circular mandates that the consent of the majority of investors shall mean the approval of not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level. The SEBI Circular recognizes that investors in debt securities who are financial creditors falling outside the purview of the RBI Circular may be approached by other lenders to sign an ICA under specific terms detailed in the RBI framework. 2. Jurisdiction of the Civil Court to Entertain the Lis: The court held that the civil court had jurisdiction to entertain the suit challenging the RBI Circular. Section 15Y of the SEBI Act and Section 430 of the Companies Act do not bar the jurisdiction of the civil court in this case. The Single Judge and the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. 3. Retroactive Application of the SEBI Circular: The SEBI Circular has retroactive application as it does not take away or impair any vested rights but operates in the future based on events that arose prior to its issuance. The SEBI Circular applied to the manner of resolution of debt, as specified therein, even though the default by RCFL occurred before the Circular came into force. The SEBI Circular, issued partly under the 1993 Regulations, takes precedence over conflicting provisions in the Debenture Trust Deed, such as Clauses 22 and 23 of the Fifth Schedule, which must give way to the SEBI Circular. 4. Binding Nature of the ICA/Resolution Plan on Dissenting ISIN Level Debenture Holders: The SEBI Circular binds dissenting debenture holders if the decision to enter into an ICA is backed by the stipulated majority. The Circular mandates ISIN-wise voting, ensuring that the interests of small investors are protected. The SEBI Circular facilitates the process of seeking consent for enforcement of security and/or entering into an ICA, and dissenting debenture holders are bound by the ICA/Resolution Plan if approved by the requisite majority. The SEBI Circular provides protections for dissenting debenture holders, ensuring they are not bound by decisions taken by a simple majority. 5. Exercise of the Supreme Court's Power under Article 142 of the Constitution: The court exercised its power under Article 142 to allow the Resolution Plan to pass muster, considering the peculiar facts and circumstances of the case. The compromise arrived at, which benefits small investors, especially those with exposure up to INR 10 lakhs, should not be disturbed. The SEBI Circular, though right in law, may lead to unjust outcomes for retail debenture holders if the entire process is reversed. The court extended the benefit under Article 142 to retail debenture holders by allowing the Resolution Plan to be implemented, ensuring complete justice. Conclusion: The Supreme Court accepted SEBI's submissions, disapproving the interpretation of the SEBI Circular by the Bombay High Court. The appeal was allowed in part, subject to directions issued under Article 142 to protect the interests of retail debenture holders and ensure the Resolution Plan's implementation.
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