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2023 (2) TMI 1379 - HC - Indian Laws
Permission to exercise voting rights on shares pledged as collateral - whether upon restructuring of the debenture trust deed by the respondents the appellant is entitled to exercise the voting rights in respect to the pledged shares? - HELD THAT - In the present case the appellant under the SPA authorised the respondent no. 1 to exercise voting rights in respect of the pledged shares on the Event of Default . Further Power of Attorney was executed under which the appellant appointed respondent no. 1 as its proxy in law including for the purposes of exercising voting rights. Admittedly the Event of Default has set in which led to the invocation of pledged shares. There is nothing on record placed by the appellant to show that it has made any efforts to repay the amount due to the Lender upon the Event of Default . The appellant has resigned as the whole time Director and Chairman of the Board of respondent no. 3 company w.e.f. 13.01.2022. There was non-compliance with the repayment obligation of the respondent no. 3 company. The management and the control of respondent no. 3 company was thereafter assumed by the new management of respondent no. 3 company. The Board of the respondent no. 3 company has been reconstituted and the new management has undertaken various steps for the revival of the business and operations of the Company and the Reference Entity including restructuring of DTD - The learned Single Judge has rightly held that the actions taken by the respondent no. 1 2 are protected under Clause 17.2 and will have no effect on the obligations of the appellant as a pledgor and that the amendment to the DTD executed on 22.04.2023 would not come in the way of exercise of rights which had already accrued in favour of respondent no. 1 upon the occurrence of Event of Default . Conclusion - The appellant being a pledgor who is guilty of default as per clause 16(j) and (h) of the SPA cannot be now permitted to urge that voting rights continue to vest in him. The findings of learned Single Judge does not suffer any illegality consequently the appeal is dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include:
- Whether the appellant, having pledged shares as collateral, retains the right to exercise voting rights in the context of an alleged 'Event of Default'.
- Whether the restructuring of the Debenture Trust Deed (DTD) affects the appellant's rights concerning the pledged shares and the invocation of voting rights by the respondent.
- Whether the invocation of pledged shares by the respondent is justified under the terms of the Share Pledge Agreement (SPA) and the DTD.
- Whether the appellant's resignation as a director and being declared a "wilful defaulter" constitutes a continuing 'Event of Default'.
- Whether the appellant's claims regarding the detrimental impact of the 'Composite Scheme of Arrangement' on his interests justify the restoration of voting rights.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Voting Rights and Event of Default
- Legal Framework and Precedents: The SPA and DTD outline the conditions under which voting rights can be exercised or transferred. Relevant precedents include the Supreme Court's observations on the rights of a pawnee in pledged property.
- Court's Interpretation and Reasoning: The court found that the appellant's right to exercise voting rights ceased upon the 'Event of Default' as per the SPA and DTD. The court emphasized the contractual terms agreed upon by the parties.
- Key Evidence and Findings: The appellant's resignation and declaration as a "wilful defaulter" were considered continuing 'Events of Default'.
- Application of Law to Facts: The court applied the SPA and DTD clauses to determine that the respondent was entitled to exercise voting rights post-default.
- Treatment of Competing Arguments: The appellant's argument that restructuring cured the default was rejected based on the specific terms of the SPA and DTD.
- Conclusions: The court concluded that the appellant's voting rights were rightfully vested in the respondent due to the 'Event of Default'.
Issue 2: Impact of Restructuring on Pledged Shares
- Legal Framework and Precedents: The DTD and its amendments, along with the SPA, govern the rights and obligations related to pledged shares.
- Court's Interpretation and Reasoning: The court held that restructuring did not negate the 'Event of Default' or affect the invocation of pledged shares.
- Key Evidence and Findings: The restructuring was acknowledged but did not change the status of the pledged shares or the rights of the respondent.
- Application of Law to Facts: The court referenced the SPA and DTD clauses that allowed the respondent to exercise rights despite restructuring.
- Treatment of Competing Arguments: The appellant's claim that restructuring cured the default was dismissed as the invocation of pledge remained valid.
- Conclusions: The restructuring did not impact the respondent's rights to exercise voting rights over the pledged shares.
Issue 3: Invocation of Pledged Shares
- Legal Framework and Precedents: The SPA and DTD outline the conditions for invoking pledged shares and the consequences of default.
- Court's Interpretation and Reasoning: The court found that the invocation of pledged shares was justified based on the 'Event of Default'.
- Key Evidence and Findings: The appellant's resignation and default status justified the invocation under the SPA and DTD.
- Application of Law to Facts: The court applied the SPA and DTD provisions to uphold the respondent's actions.
- Treatment of Competing Arguments: The appellant's arguments against invocation were rejected based on contractual terms.
- Conclusions: The invocation of pledged shares was upheld as per the SPA and DTD.
3. SIGNIFICANT HOLDINGS
- The court emphasized that "the rights of the plaintiff have to be governed by these specific terms of the DTD as it is on the terms of this DTD dated 07.08.2017 that the plaintiff had pledged his shares."
- The court held that "an 'Event Default' continues in accordance with the terms and conditions agreed between the parties."
- The court concluded that "the plaintiff having voluntarily agreed that once an 'Event of Default' occurs, it is the defendant no. 1 which will have the voting rights, cannot be now permitted to urge that these rights continue to vest in him."
- The final determination was that the appeal is dismissed, and the respondent's right to exercise voting rights over the pledged shares is upheld.