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TMI Blog2016 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... he NDA. It is well settled that recitals alone do not spell out the intention of the parties but terms and conditions of the contract and intention of the parties have to be taken into consideration for arriving at any conclusion. The interest component could be converted into equity shares and the loan component would be reduced to 403.72 crores with interest. However, both these components have been fully secured; the loan component by the pledged shares and the top-up shares and equity component by the Fixed Deposit of margosa and 20,14,000 shares of United Breweries Limited which could be sold in the event of default. The questions are answered as follows:- (1) Whether 20,14,000 shares of UBL furnished as security (NDA shares) under Non-Disposal Agreement dated 12/11/2011 was available as security in favour of the Appellants for the payment of their recompense claim arising under Clause 10.1 of the Loan Purchase Agreement dated 21/12/2010? - Held Yes. (2) Whether the Appellants' recompense claim was capable of being collateralised or secured? - Held Yes (3) Whether the NDA shares were given in lieu of top-up obligation under clause 4.1.3 of the Loan Purchase Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices Limited is a Trusteeship Company incorporated under the provisions of the Companies Act and which provides wide range of trusteeship services in India. Defendant No.1, in the present suit, is claiming to be the Lenders Agent appointed by Defendant No.2 and also a Power of Attorney holder purported to be appointed by UBHL. Defendant No.2 ICICI Bank Limited is a Banking Company incorporated under the Companies Act and is a Lender of money to the Plaintiffs. Defendant No.3. - Kingfisher Airlines Limited is a proforma Defendant and no reliefs are claimed against it. 6. Defendant No.3 - Kingfisher Airlines Limited started its airline business in the year 2003 and in the course of its business availed loan from Defendant No.2 - ICICI Bank Limited and also from number of other Banks. 7. Sometime after the year 2008 onwards Kingfisher Airlines Limited suffered financial set back and therefore it availed additional financial assistance from time to time. 8. Defendant No.2 - ICICI Bank Limited entered into Rupee Facility Agreements dated 30/06/2008, 08/09/2010 and 04/08/2009 and advanced Rupee Term Loans to the tune of ₹ 527.22 crores and a Working Capital Facility to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ICICI Bank Limited were to suffer a loss upon sale of the shares held by it of Kingfisher Airlines Limited - Defendant No.3 (after conversion of debt into equity) to recompense such loss to the ICICI Bank Limited and if there was a default in payment of the recompense amount, it would constitute an event of default. The Clause 4.1.1 of LPA also provided that Respondents/Plaintiffs would ensure that the loan purchase secured obligation was secured by first exclusive pledge over such number of fully paid up equity shares of USL which provided a cover of 1.25 times the ICICI Bank Facilities and such number of fully paidup equity shares of the Kingfisher Airlines which provided a cover of 0.75 times the ICICI Bank Facilities. 10. On 31/03/2011 the CCPS (Preference Shares) were converted into 2,63,64,764 equity shares of Defendant No.3 - Kingfisher Airlines Limited at an allotment price of ₹ 68.48 per share. On 28/06/2011, a sister concern of Plaintiff No.1 viz. Margosa Consultancy Services ( Margosa ) issued a Letter of Comfort to the ICICI Bank Limited - Defendant No.2 to the effect that Margosa would provide security to the extent of ₹ 45 crores for meeting the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Equity Recompense claims of ₹ 146 crores under clause 10.1 of the LPA. On 23/12/2013, Plaintiff No.1 - United Breweries (Holdings) Limited gave reply to the said letter claiming that the NDA shares were not offered as security for recompense claim and again demanded release of the NDA shares (equity shares of Kingfisher Airlines Limited) which were with ICICI Bank Limited - Defendant No.2. On 02/02/2014, ICICI Bank Limited - Defendant No.2 issued a notice to Plaintiff No.1 - United Breweries (Holdings) Limited and Defendant No.3 - Kingfisher Airlines Limited, stating therein the event of default under LPA and called upon Plaintiff No.1 - United Breweries (Holdings) Limited to cure the event of default, failing which Defendant No.1 - 3i Infotech Trusteeship Services Limited would proceed against the sale of the NDA shares. On 11/02/2015, Plaintiff No.1 gave reply to the said notice reiterating its earlier stand. 16. Plaintiff No.1 - United Breweries (Holdings) Limited and Plaintiff No.2 - Kingfisher Finvest (India) Limited filed a suit inter alia seeking relief of injunction and also filed Notice of Motion. The Notice of Motion was finally disposed of by an order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, is patently erroneous. It was submitted that conjoint reading of the three agreements viz PSSA and LPA both dated 21/12/2010 and the NDA Agreement dated 12/11/2011 clearly established that 20,14,000 shares of United Breweries Limited were furnished as security under the Non-Disposal Agreement dated 12/11/2011 in favour of Defendant Nos 1 and 2 - the Appellants herein, for payment of its recompense claim arising under clause 10.1 of the Loan Purchase Agreement dated 21/12/2010. It was submitted that the balance of convenience was entirely in favour of the Defendant Nos.1 and 2 i.e. the Appellants herein since the value of the NDA shares was admittedly reducing day by day and when the impugned order was passed the value was ₹ 235.26 crores and when the Appeals were filed it was ₹ 193.14 crores and on the date when the Appeals were reserved for judgment, the value was ₹ 171.65 crores. Secondly, it was submitted that these shares being shares of a public listed company, even assuming that the same were not a part of the security available for the recompense claim of Defendant No.2 - ICICI Bank Ltd, the same could always be restored to Respondent Nos.1 and 2/or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities and to secure this obligation, clause 4.1.3 granted a right to the ICICI Bank Limited to call up the Respondent Nos. 1 and 2/original Plaintiff Nos.1 and 2 to pledge additional/top-up shares, if the value of the pledged shares fell below this threshold level. He then submitted that clause 10 of the LPA provided for repayment of the recompense amount. He submitted that this was secured by Margosa Consultancy Services Fixed Deposit. It was submitted that the ICICI Bank was not entitled to sell the additional top-up shares to satisfy the demand for this recompense amount. It was submitted that the LPA contemplated two primary obligations viz (i) the Loan Purchase Obligation which was secured by the pledged shares and (ii) the recompense obligation which was not secured by the pledged shares and therefore not to be secured by top-up shares which were only a top-up to maintain the value of the pledged shares. It was therefore submitted that the shares under the Non-Disposal Arrangement were given only as a further top-up of the pledged shares and it covered the amount of the loan advanced by ICICI Bank Limited and not the equity shares which were transferred in the name of ICIC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance of convenience was entirely in favour of the Respondent Nos.1 and 2/original Plaintiff Nos. 1 and 2. It was submitted that if the Appellants/original Defendant Nos. 1 and 2 sell the shares, the Respondent Nos.1 and 2 /original Plaintiff Nos.1 and 2 will lose multiple rights that accrue to them by virtue of holding the said shares including the voting rights in United Breweries Limited and the sale of these shares would render the suit infructuous. FINDINGS AND CONCLUSION: 20. We have heard the learned Senior Counsels Mr. Iqbal Chagla and Mr. Janak Dwarkadas appearing on behalf of the Appellants/original Defendant Nos. 1 and 2 and Mr. N.H. Seervai appearing on behalf of Respondent Nos. 1 and 2/original Plaintiff Nos. 1 and 2 respectively. 21. Appellants are aggrieved by the order of injunction granted by the learned Single Judge, restraining the Appellants from selling 20,14000 shares of United Breweries Limited (hereinafter referred to as the NDA shares ) which were furnished as security under the Non-Disposal Agreement dated 12/11/2011. 22. After the Appellants/Defendant Nos. 1 and 2 informed the Respondent Nos. 1 and 2/Plaintiff Nos. 1 and 2 that they we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o by Plaintiff No.2 - Kingfisher Finvest (India) Limited in United Spirits Limited. It was therefore agreed to enter into restructuring/recasting agreement and divide original loan in two parts. Out of ₹ 573.72 crores, the monetary loan would be reduced to ₹ 403.72 crores which was secured by the pledged shares which pledge was created on 08/09/2006 and 30/06/2008. The amount of ₹ 170 crores was to be converted into Compulsory Cumulative Preference Shares/Equity Shares of Kingfisher Airlines Limited under the Master Debt Recast Agreement. This was secured by margosa Fixed Deposit of ₹ 45 crores. Under the LPA, there were clauses viz clauses 4.1.1 to 4.1.3 which mentioned that the value of the pledged shares would be twice the value of the loan i.e. 1.25 times to be maintained by the fully paid-up equity shares of USL which would cover the ICICI Bank Facilities and fully paid-up shares of Kingfisher Airlines Limited which provided cover of 0.75 times ICICI Bank Facilities. There was, however, a clause 4.1.3 by which the ICICI Bank Limited could call upon Respondent Nos.1 and 2/original Plaintiff Nos.1 and 2 to pledge additional/top-up shares if the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the Appellants for the payment of their recompense claim arising under Clause 10.1 of the Loan Purchase Agreement dated 21/12/2010? (2) Whether the Appellants recompense claim was capable of being collateralised or secured? (3) Whether the NDA shares were given in lieu of top-up obligation under clause 4.1.3 of the Loan Purchase Agreement only? 28 It would be fruitful to prepare a chart showing the division of loan under the Master Debt Recast Agreement. Image No. 1 29. The learned single Judge has relied on Recitals (A), (B) (C ) of the Non-Disposal Agreement and has come to the conclusion that these shares were given only as as a top-up / additional pledge as per clause 4.1.3 and not for the purpose of collateral security towards the recompense amount. The learned Single Judge held that the term event of default and recompense amount mentioned in LPA dated 21/12/2010 could not be interpolated or incorporated in the Non-Disposal Agreement dated 12/11/2011. In our view, the view taken by the learned Single Judge is erroneous and has been arrived at on the misconstruction of Recitals (A), (B) and (C ) of the Non-Disposal Agreement and also by wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, there were two-fold obligations on United Breweries (Holdings) Limited viz (1) to purchase the loan granted by ICICI Bank Limited to the Kingfisher Airlines Limited as and when called upon to do so which is ₹ 403.72 crores with interest; (1-A) to ensure that value of the shares pledged always would be 1.25 and 0.75 times Facilities provided by the ICICI Bank Limited and UBHL thus had agreed to give additional pledged shares/top-up shares to ensure that the said level of 1.25 and 0.75 was maintained and (2) if ICICI Bank Limited were to suffer loss upon sale of shares held by it of Kingfisher Airlines Limited (after conversion of debt into equity) to recompense such loss to the ICICI Bank Limited. If the said loss was not recompensed, it would constitute an event of default. These two conditions clearly revealed that both, the reduced loan of ₹ 403.72 crores with interest was secured by the pledged shares and additional pledged shares/top-up shares which were to be given in the event the value of the pledged shares went below 1.25 and 0.75 and, secondly, an amount of ₹ 170 crores in the form of equity shares also was secured and it was provided that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Recompense Amount ) within 7 (seven) Business Days of being called upon to do so by ICICI Bank in writing. Upon payment of such Redemption Amount, part /whole of the Equity Shares/ CCPS shall stand transferred to the Purchasing Party, as the case may be; 4.1.3. The Corporate Obligors shall ensure that during the currency of this Agreement: i. the Value of the USL equity shares pledged in favour of ICICI Bank shall always be at least 1.25 times the ICICI Bank Facilities and shall pledge additional shares of USL to ensure that the Value of the USL shares pledged / to be pledged in favour of ICICI Bank does not fall below a 1.25 times cover of the ICICI Bank Facilities, within 15 days of being called upon to do so by ICICI Bank, in a form and manner acceptable to ICICI Bank; and iii. Notwithstanding anything contained in this Agreement, the obligation of the Purchasing party to pay the Recompense amount or the Redemption Amount to ICICI Bank shall subsist even after the Loan Purchase Option has been exercised by ICICI Bank and shall survive till such time ICICI Bank recovers the Share Sale Proceeds which shall not be an am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A and an amount of ₹ 170 crores of equity shares was secured by clause No.10.1 of LPA in the event the sale proceeds recovered by ICICI Bank is of a Value lesser than such Converted ICICI Bank Facilities and the Yield Amount. Clause 3.1(h) of NDA secures the ICICI Bank in the event of default by Plaintiff No.1 - UBHL to make good the short-fall after sale of ₹ 170 crores equity shares and in that event ICICI Bank could sell 20,14,000 shares of UBL kept in DP Account through Defendant No.1 - 3i Infotech Trusteeship Services Limited. The contention of the learned Senior counsel appearing on behalf of the Respondent Nos. 1 and 2/original Plaintiff Nos. 1 and 2 that these shares are not secured by this agreement (LPA) is incorrect. 33. Clause 11 of the LPA clearly stipulates that the LPA shall be subsisting till such time all amounts due and payable to the ICICI Bank thereunder are paid to the full and final satisfaction of ICICI Bank and shall be subsisting notwithstanding independently of the loan purchase option. Clause 10.1(iii) (page 601 of the Appeal (L) No.409/15) and clause 11.1 (page 602 of the Appeal (L) No.409/15) of the LPA read as under:- 10.1(iii) Notw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd things as may be required under the terms of this Agreement and the Power of Attorney. ii. shall not revoke the authority or terminate the agency granted to the Attorney, pursuant to the irrevocable Power of Attorney nor amend or alter any provision of the Power of Attorney executed pursuant to sub clause (i) above; and iiiI. revocation of the authority so granted under the Power of Attorney shall constitute an Event of Default under the LP Agreement. (h) occurrence of any Event of Default or Potential Event of Default under the MDRA and/or LP Agreement and /or failure of the NDU Provider to do all such acts, deeds and things as may be required under this Agreement shall constitute an Event of Default under this Agreement. The NDU Provider shall rectify / cure such Event of Default within a period of three (3) Business Days ( Cure Period ) from the occurrence of such Event of Default, failing which the NDU Provider shall promptly sell, transfer, assign and / or otherwise dispose-off for cash consideration on an arms length basis and with prior written consent of the Lender s Agent, the Cover Assets and deposit the Share Sale Proceeds in the Designated Account as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have accrued to ICICI Bank on such Converted ICICI bank Facilities, then the differential amount (the Recompense Amount ) shall be paid by the Purchasing Party within 7 Business Days of being called upon to do so by ICICI Bank in writing; The finding of the learned Single Judge has therefore been based on incorrect interpretation of the clauses in the LPA and NDA. 36. ICICI Bank in December, 2013 sold equity shares held by it in Kingfisher Airlines Limited and suffered a total shortfall of ₹ 146 crores approximately from the said sale and, therefore, claimed recompense amount from the United Breweries Ltd. The contention of the Plaintiffs that the ICICI Bank, upon assigning its debt to IGCF alongwith the pledged shares, had no right to claim recompense amount for the short-fall for sale of equity shares is contrary to the provisions of these agreements. 37. Much reliance has been placed by the learned Counsel appearing on behalf of the Respondent Nos.1 and 2/original Plaintiff Nos.1 and 2 on the Recitals at (A), (B) and (C ) of the Non-Disposal Agreement. It will be necessary to produce the the said Recitals (A), (B) and (C ) which read as under:- (A) Pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securing the existing loan (Rs 403.72 crores). Clauses 4.1 and 4.2 provided for top-up of pledged shares. At the same time, equity shares CCPS (Rs 170 crores) also is secured by clauses 9.1 and 10.1 and the Plaintiff No.1 UBHL was under an obligation to cover the short-fall, if any, on sale of equity shares. The Non-Disposal Agreement therefore covers both, the pledged shares as as well as the short-fall on sale of equity shares CPPS since Recital (C ) speaks about fulfillment of all obligations of Plaintiff No.1 UBHL under the Loan Purchase Agreement. The intention of parties, therefore, become very clear from the Recitals as well as the contents of the clauses of the Non-Disposal Agreement. The contention of Mr. Seervai, the learned Senior Counsel appearing on behalf of Respondent Nos.1 and 2/original Plaintiff Nos. 1 and 2 that there was novation of contract in respect of Clause No.4.1 is not correct. 38. The law on construction of commercial document is quite well settled. The House of Lords in Reardon Smith Line Ltd. vs. Yngvar Hansen Tangen 1 W.L.R. (1976) 989 has observed as under:- It is less easy to define what evidence may be used in order to enable a term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on has been discarded. The principles may be summarised as follows. (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the matrix of fact , but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declaration of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it the background of facts which plays an indispensable part in the way we interpret what anyone is saying. No one, for example, has any difficulty in understanding Mrs. Malaprop. When she says She is an obstinate as an allegory on the banks of the Nile , we reject the conventional or literal meaning of allegory as making nonsense of the sentence and substitute alligator by using our background knowledge of the things likely to be found on the banks of the Nile and choosing one which sounds rather like allegory . Mrs. Malaprop s problem was an imperfect understanding of the conventional meanings of English words. But the reason for the mistake does not really matter. We use the same process of adjustments when people have made mistake about names or description or days or times because they have forgotten or become mixed up. If one meets an acquaintance and he says And how is Mary? it may be obvious that he is referring to one s wife, even if she is in fact called Jane. One may even, to avoid embarrassment, answer Very well, thank you without drawing attention to his mistake. The message has been unambiguously received and understood. If one applies that kind of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealings between persons who are well versed in the transaction of business are regulated by contracts which parties ought to govern themselves. The law regulates those contracts and provides an ordered framework in which business dealings can be implemented. The duty of the Court when called upon to assess where the balance lies in a contractual dispute, is to read the contract as a whole in order to understand the business meaning which the parties attributed to their obligations. Interpretation in law must ensure in commercial matters that the view which the Court takes records the sense which the parties to an arms length transaction attribute to the terms which they incorporate. The law is not divorced from business realities nor can the vision of the judge who interprets the law be disjointed from the modern necessities to make business sense to business dealings. 25. A business like interpretation of contractual provisions must be adopted in construing contracts entered into by persons of business to govern business dealings. The Court must ensure that interpretation of law in commercial cases must not be disjointed from the intent and object which those having business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Fixed Deposit of margosa and 20,14,000 shares of United Breweries Limited which could be sold in the event of default. The event of default occurred when there was a short-fall of ₹ 146 crores in December, 2013 after the Appellant - ICICI Bank sold the pledged shares and called upon the Plaintiff No.1 - United Breweries (Holdings) Limited to pay the recompense amount. The submissions made by Mr. Seervai, the learned Senior Counsel appearing on behalf of the Plaintiffs therefore cannot be accepted. In fact, in the present case, the balance of convenience lies in favour of the Defendant No.1 - 3i Infotech Trusteeship Services Limited and Defendant No.2 - ICICI Bank Limited. The price of the shares of Kingfisher Airlines Limited has been continuously falling. When the impugned order was passed the value was ₹ 235.26 crores and when the Appeals were filed it was ₹ 193.14 crores and on the date when the Appeals were reserved for judgment the value was ₹ 171.65 crores which are the figures given in the written submissions tendered on behalf of the Appellant - ICICI Bank Limited and these figures have not been disputed by the Plaintiffs. In our view, no preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due only to the application of well settled principles in an individual case. The appellate judgment does not seem to defer to this principle. In the present case, the learned Single Judge, in our humble view, has clearly misinterpreted the Non-Disposal Agreement and the Loan Purchase Agreement and has held that LPA has worked itself out without taking into consideration the relevant clauses which clearly mentioned that the LPA would subsist till all the dues of ICICI Bank are paid in full. The other findings also, in our view, are perverse since they do not take into consideration the relevant clauses in LPA and NDA. We are, therefore, of the view that, in fact, the observations made by the Apex Court in the case of Wander Ltd (supra) would squarely apply to the facts of the present case and we have therefore no hesitation in setting aside the impugned order. 41. Accordingly we answer the three questions framed in para 27 above as under:- Questions Findings (1) Whether 20,14,000 shares of UBL furnished as security (NDA shares) under Non-Disposal Agreement dated 12/11/2011 was available as security in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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