2021 (3) TMI 1180 - SC - Companies Law

Concession Agreement - Operation of rapid metro link - debt due as per the financing documents in terms of their respective Concession Agreements - whether the consequences envisaged in the consent order of the High Court dated 20 September 2019 can stand obviated? - HELD THAT - At the very outset it is important to note that the FIR in respect of IL FS group of companies was lodged on 6 December 2018. The termination notices of June and August 2019 and the institution of the writ proceedings took place thereafter. Evidently the appellants on the one hand as well as HSVP/HMRTC on the other were conscious of the developments which were taking place in respect of the IL FS group of companies in the proceedings before Justice D K Jain on 19 August 2019. When the consent order was passed before the High Court HSVP was represented by counsel as well as the Chief Administrator of HSVP and Managing Director of HMRTC who were also present. The financial institutions including Andhra Bank were also in appearance. The consent order before the High Court on 20 September 2019 was also preceded by mutual discussions between the parties and the exchange of written proposals. which have been referred to expressly by the High Court. Clause (ii) of the order dated 20 September 2019 makes it abundantly clear that the basic purpose underlying the entrustment of the reference to the CAG was the determination of the debt due as defined under the Concession Contract . The High Court it must be emphasized was seized of a proceeding under Article 226 of the Constitution and its writ jurisdiction had been invoked to challenge the notices of termination issued by RMGL and RMGSL and for ensuring that the consequence which would emanate on the expiry of the notice period of 90 days by the cessation of the metro operations could be prevented by the judicial intervention in the course of the public law jurisdiction - there was an evident interface between this element of public interest on the one hand and the contractual rights of the parties to the Concession Agreements on the other. However when HMRTC and HSVP moved the High Court under Article 226 they did so in view of the impending threat which was looming large on the horizon of the rapid metro operations being brought to a standstill as a result of the proximate expiry of the notice of 90 days preceding termination. In the present case the High Court was evidently concerned over a fundamental issue of public interest which was the hardship that would be caused to commuters who use the rapid metro as a vehicle for mass transport in Gurgaon. As such the High Court s exercise of its writ jurisdiction under Article 226 in the present case was justified since non-interference which would have inevitably led to the disruption of rapid metro lines for Gurgaon would have had disastrous consequences for the general public. However as a measure of abundant caution we clarify that ordinarily the High Court in its jurisdiction under Article 226 would decline to entertain a dispute which is arbitrable - It is also important to note that the termination of the Concession Agreements had consequences in terms of the provisions contained in the Agreement requiring a deposit of 80 per cent of the debt due under Article 24.4. The contesting parties agreed to an independent third-party determination of this amount by a neutral entity namely the CAG. The primary function of CAG was to appoint a team of auditors for conducting a financial audit of the debt due and in that process of also examine the scope of the audit. HMRTC and HSVP are themselves to blame if they did not submit their responses. CAG has specifically rebutted the objections to the audit report submitted by HMRTC on the ground that as a constitutional authority CAG decided upon the scope of the audit of the debt in terms of the Concession Agreements which it submitted to the High Court. Moreover it has clarified that this was a financial audit of the debt due and the auditors reported their findings in terms of the Concession Agreements - The Escrow Account Agreement has been entered into in pursuance of the Concession Agreement and to effectuate the funding of the Project No 2. As on 31 July 2019 the lenders of RMGSL have an outstanding of Rs. 1651 crores approx. Hence the Projects which have been executed by RMGL and RMGSL involved an outlay of funds from Andhra Bank and Canara Bank who have a vital stake in the financials of the Projects. The intervention of this Court under Article 136 of the Constitution was sought having regard to the manner in which the proceedings before the High Court were being derailed. On 12 October 2020 after HMRTC filed its affidavit the High Court noted the appellant s submission that the matter does not brook any delay and yet adjourned the matter to 16 October 2020. Thereafter when the proceedings came up on 16 December 2020 and the response filed by CAG was taken on the record the hearing of the writ petitions was again deferred to 8 April 2021. This course of events indicates that the whole object and purpose behind setting down the timelines in the order dated 20 September 2019 stood the risk of being defeated. This Court has been constrained to intervene in the process in order to ensure that the sanctity of the understanding that was arrived at before the High Court on 20 September 2019 is duly maintained. The invocation of the writ jurisdiction of the High Court under Article 226 of the Constitution by HMRTC and HSVP was to challenge the termination notices dated 17 June 2019 and to obviate the consequence of the cessation of the rapid metro operations which would have ensued on the expiry of the notice period. The arbitration clause of the Concession Agreements provides sufficient recourse to remedies which can be availed of. That apart the order of the High Court dated 4 October 2019 has also clarified that the rest of the dispute that remains after the deposit of 80 per cent of the debt due either arising out of the CAG report the validity of the termination notices issued by both the parties and any past or future inter se claims and liabilities shall be agitated and decided in the arbitration proceedings. Appeal disposed off.

Summary

Issues Involved:
1. Termination of Concession Agreements
2. Determination and Payment of Debt Due
3. Continuation of Metro Services
4. Validity of Notices of Termination
5. Dispute Resolution and Arbitration

Detailed Analysis:

A. Factual Background
1. In 2008, HSVP issued an RFQ/RFP for developing a metro rail link from Delhi Metro Sikanderpur Station to NH-8. A consortium led by IL&FS Rail Limited (IRL) won the bid and formed RMGL to undertake the project.
2. In 2012, HSVP issued another RFQ/RFP for a metro rail link from Sikanderpur Station to Sector 56, Gurugram. The consortium again led by IRL formed RMGSL for this project.
3. RMGL completed Project No 1 in 2013, and RMGSL completed Project No 2 in 2017. Both projects were subsequently handed over to HMRTC for operation.
4. In 2018, RMGL and RMGSL issued notices to HSVP alleging material breaches under the Concession Agreements.
5. In 2018, the NCLT superseded the IL&FS Board due to prejudicial conduct, categorizing RMGL and RMGSL as "red" entities.
6. In 2019, RMGL and RMGSL issued termination notices to HSVP. HSVP responded by issuing its own termination notices and directed the handover of the projects to HMRTC.
7. Justice D K Jain permitted the handover of the projects to HSVP, and the High Court directed the continuation of metro operations until a resolution was reached.

B. Submissions of Counsel
1. For RMGL/RMGSL: Argued that the High Court’s order to deposit 80% of the debt due in an Escrow Account was based on a consensus between the parties. They emphasized the need to protect the interests of banks and financial institutions that funded the projects.
2. For HMRTC/HSVP: Contended that ongoing investigations into IL&FS group companies and allegations of fake invoices and inflated project costs impacted the determination of the debt due, making the CAG audit report incomplete.
3. For Financial Institutions: Supported the deposit of 80% of the debt due in Escrow Accounts to secure the interests of the lenders who financed the projects.

C. Analysis of the Concession Agreements
1. Debt Due Definition: Includes the principal amount of debt, accrued interest, financing fees, and subordinated debt.
2. Escrow Account: All funds for the project were to be deposited in the Escrow Account, with specific disbursement orders including debt service payments.
3. Termination Provisions:
- By HSVP: Requires payment of 80% of the debt due to lenders.
- By Concessionaire: Entitles the concessionaire to receive the debt due and 110% of the adjusted equity.

D. Terms of the Consent Order Dated 20 September 2019
1. Continuation of Operations: RMGL and RMGSL agreed to continue metro operations for 30 days while the transfer process commenced.
2. Audit by CAG: CAG was to determine the debt due, with 80% of the debt due to be deposited in an Escrow Account within 30 days of the audit report.
3. Dispute Resolution: Any disputes arising from the audit report were to be resolved through arbitration.

E. Obligations of HMRTC and HSVP to Pay the Debt Due
1. Compliance with Audit: CAG followed a fair process, including providing draft reports to the parties and allowing for responses.
2. Objections by HMRTC: HMRTC’s objections to the audit report were found to be without substance, as CAG limited its audit to the financial aspects as per the Concession Agreements.
3. Public Interest: Emphasized the importance of securing the interests of financial institutions and maintaining the integrity of financing arrangements for infrastructure projects.

F. Conclusion
1. Directions: HSVP to deposit 80% of the debt due into the Escrow Account within three months, maintain it subject to orders from NCLAT or statutory authorities, and pursue any disputes through arbitration.
2. Transfer of Operations: RMGL and RMGSL to execute necessary documents for the transfer of operations and assets to HSVP.
3. Disposal of Writ Petitions: The writ petitions filed by HMRTC and HSVP were disposed of, with the parties directed to pursue arbitration for any remaining disputes.

This judgment ensures the protection of financial institutions' interests, enforces contractual obligations, and maintains the continuity of public metro services while allowing for ongoing investigations into alleged wrongdoing by the IL&FS group.