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2023 (2) TMI 187 - HC - Companies LawRecovery of debt under NCD issued - Maintainability of plaint - rejection of plaint on the ground that the plaint does not disclose a cause of action and on the ground that the suit appears from the statements in the plaint to be barred by law - whether an application seeking interim relief in the form of interim injunction or provision of security is maintainable in the context of a suit for damages? - HELD THAT - Both the CRAs did not provide details of the progressively weakening liquidity of DHFL in their reviews. More importantly, they did not take reasonable notice or give reasonable weight to the same and downgrade the ratings on such basis. Instead, they waited until DHFL's collapse became imminent before downgrading the ratings. By so doing, a strong prima facie inference may be drawn that they failed to fulfil their statutory and common law obligation to monitor and review the ratings so as to provide a true and accurate rating. For such reason, they are prima facie liable. Therefore, the CRAs cannot be absolved from liability. The three firms of auditors (the eight to tenth defendants) endeavoured to absolve themselves of responsibility on the ground that they were not responsible for the financial statements, which were referred to and relied on in the prospectus. While the eighth defendant contended that the financial statements for the financial years 2011-2012 to 2015-2016 were relied upon in the prospectus and that the eighth defendant did not carry out audit during the said period, the ninth defendant contended that the prospectus was issued in the financial year 2016-2017 after the said defendant had resigned. However, the question arises as to whether they owe a duty of care to the plaintiff. 63 Moons became a debenture holder upon subscribing to the debentures floated under the prospectus. In the case of shareholders, whose interest is ordinarily aligned with that of the company, an argument that the company should espouse the cause may be required to be dealt with by a complaining shareholder. As regards debenture holders, the argument that the debenture trustee and not an individual debenture holder should espouse the cause could ordinarily be made. But, here, the plaintiff alleges with prima facie a fair measure of justification that the Debenture Trustee failed to fulfil obligations to debenture holders, including 63 Moons. Therefore, such objection is untenable. The manner in which DHFL collapsed over the period when the eighth defendant played a critical role as statutory auditor leads to the strong prima facie conclusion that they failed to fulfil their statutory obligations, thereby causing immense losses to investors such as the plaintiff. Therefore, they cannot be absolved from responsibility and liability. All the defendants who were represented by counsel contended with great vigour that this is an action for unliquidated damages and, therefore, the interim order in force should be discharged and that the defendants should not be called upon to provide security - liability to provide security for the suit claim cannot be apportioned with any degree of accuracy. Nonetheless, by taking into account the role played by the respective defendant, the obligation to provide security is apportioned for interlocutory purposes. All the applications to reject or return the plaint are dismissed - All the applications to delete a party from the array of parties are dismissed - All the applications for injunction, to vacate the injunction and to provide security are disposed of.
Issues Involved:
1. Rejection of plaint or striking off parties. 2. Applications for interim injunction and provision of security. 3. Liability of various defendants including promoters, key managerial personnel, credit rating agencies (CRAs), auditors, and the debenture trustee. Issue-wise Detailed Analysis: 1. Rejection of plaint or striking off parties: The defendants argued that the present suit is barred under Order II Rule 2 CPC as it arises from the same cause of action as the suit filed in Bombay High Court. They also contended that DHFL, the issuer of the NCDs, was not joined as a party, and that certain defendants should be deleted as they were not involved during the issuance of the prospectus. The plaintiff countered that the present suit is distinct, seeking compensation for misstatements and negligence, unlike the Bombay suit which was for debt recovery. The Division Bench of this Court had previously ruled that the causes of action are distinct and DHFL is not a necessary party. The applications to reject the plaint or delete parties were dismissed as the causes of action were found to be distinct, and all defendants were deemed necessary parties for the relief sought. 2. Applications for interim injunction and provision of security: The plaintiff sought interim relief to prevent the defendants from alienating assets and to secure the suit claim. The defendants argued that no debt was due, and hence, no security should be provided. The Court held that interim relief could be granted in an action for damages if justified. Given the significant loss incurred by the plaintiff due to DHFL's default, the Court found a strong prima facie case for interim relief. The Court ordered that the interim injunction would continue against the first to eighth and eleventh defendants until they provide security for the principal suit claim in specified proportions. The order of interim injunction against the ninth and tenth defendants was vacated. 3. Liability of various defendants: - Promoters (First to Third Defendants): The Court found them responsible for the mismanagement of DHFL and the statements made in the financial statements and prospectus. Given their involvement in criminal proceedings and asset attachment, the interim injunction would continue unless they provide full security for the suit claim. - Key Managerial Personnel (Fourth and Fifth Defendants): These defendants, as CEO and CFO, were responsible for compliance certificates and financial statements. The Court concluded that they were negligent and failed to fulfill their statutory obligations. The interim injunction would continue until they provide security to the extent of 15% of the suit claim each. - Credit Rating Agencies (Sixth and Seventh Defendants): The CRAs were found to have failed in their statutory and common law obligations to monitor and review the ratings accurately. The Court held them prima facie liable, and the interim injunction would continue until they provide security to the extent of 10% of the suit claim each. - Auditors (Eighth to Tenth Defendants): The eighth defendant, being the statutory auditor during the issuance of the prospectus, was found prima facie liable for failing to exercise reasonable care. The interim injunction would continue until they provide security to the extent of 10% of the suit claim. The ninth and tenth defendants were not held liable as they had resigned before the issuance of the prospectus, and the interim injunction against them was vacated. - Debenture Trustee (Eleventh Defendant): The Debenture Trustee was found negligent in protecting the interests of the debenture holders. The interim injunction would continue until they provide security to the extent of 10% of the suit claim. Conclusion: The applications to reject the plaint or delete parties were dismissed. The interim injunction against the first to eighth and eleventh defendants would continue until they provide security for the suit claim in specified proportions. The interim injunction against the ninth and tenth defendants was vacated.
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