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TMI Blog2020 (7) TMI 781X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporate Guarantee Notice ('Corporate Guarantee Notice' for short) dated June 12, 2020 issued to the petitioners in OMP (I) COMM. 136/2020 and in OMP (I) COMM. 137/2020. 2. The facts and the issue which falls for consideration in all these three petitions being similar, they are being disposed by this common order. 3. The Prayers made in the petition are the following: OMP (I) (COMM.) 135/2020 "In view of the facts and circumstances as stated above, it is most respectfully prayed that this Hon'ble Court may be pleased to: A. Restrain the Respondent No. 1 from acting on the Pledge Invocation Notice against the Petitioner, including from invoking the pledge and/or selling the pledged shares in open market, during the pendency of the present Petition and/or conclusion of arbitration proceedings. B. Order costs of the present proceedings in favour of the petitioner. C. Pass any such or further orders as may be deemed fit by this Hon'ble Court in the facts and circumstances of the present case." 4. OMP (I) (COMM.) 136/2020 "In view of the facts and circumstances as stated above, it is most respectfully prayed that this Hon'ble Court may be pleased to: A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2019 in OMP (I) COMM. 136/2020. 8. It is the case of the petitioners that post 2018, and the domino default in the financial sector, there were liquidity issues in the market. This caused a decline in the security cover. As such, the respondent No. 2 at the request of respondent No. 1 caused petitioner to pledge shares on February 1, 2019. Thereafter, on June 25, 2019, when the respondent No. 1 sought further comfort for its debentures, the respondent No. 2 caused a personal guarantee to be given for comfort only, for respondent No. 1. 9. Respondent No. 2 arranged to generate liquidity through a stake sale in Zee Entertainment Enterprises Ltd. ('ZEEL', for short) which took place in September 2019 (Stake Sale - I) and in November, 2019 (Stake Sale-II) to various global investors. The debenture holders were requested by the respondent No. 2 and they choose to tender 30,09,000 shares of ZEEL in Stake Sale -1 and received Rs. 1,20,36,00,000/-. The said placement was conducted at Rs. 400/- per share. This caused redemption of debentures having value of Rs. 74,00,00,000 on September 10, 2019, as is admitted. 10. It is the case of the petitioners that during Stake Sale - II, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most Rs. 130.56 Crores and is today looking to cash out share of ZEEL at much lower traded rate which will result in suboptimal recovery. It is also stated that in normal times, the petitioners would have been able to execute a stake sale like Stake Sale-1 or Stake Sale -2 by private treaty. However, on account of pandemic, there is a delay in finding suitable buyers. Reliance has been placed on Reserve Bank of India Circular being RBI/2019-2020/186, whereby moratorium has been declared on all loans becoming due during the COVID-19 lockdown in view of the effect of COVID-19 on the financial system. It is stated that the aforesaid position was reiterated by the RBI on May 23, 2020 vide circular No. RBI/2019-20/244 and the moratoriums have been extended till August 31, 2020. It is stated that in similar manner, the Securities and Exchange Board of India has given relaxation credit rating during the COVID-19 lockdown in its Circular dated March 30, 2020. In fact, it is the case of the petitioners that the debenture holder in a communication dated May 22, 2020 stated that securities pledged by the Cyquator Media Services Pvt. Ltd. as well as Direct Media Distribution Ventures Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the execution of the DTD, in order to secure all the payments and obligations in relation to the said debentures, petitioners herein executed the following documents: (i) The pledge agreements whereby Direct Media and Cyquotar Media created a first ranking exclusive pledge over 6,25,11,000 and 73,56,500 fully paid up equity shares of Dish TV and ZEEL in favour of respondent No. 1. (ii) An irrevocable Power of Attorney appointing respondent No. 2 as attorney to deal with the pledged shares of Dish TV and ZEEL. (iii) Corporate Guarantee irrevocably and unconditionally guaranteeing the obligations of respondent No. 2 under the said DTD in favour of respondent No. 1. 18. Pursuant thereto and relying on the representation and assurances of respondent No. 2, Franklin Templeton Asset Management India Pvt. Ltd. (Debenture Holders) subscribed to the said debentures against the payment of Rs. 425,00,00,000. The respondent No. 2 accordingly allotted on private placement the said debentures in favour of respondent No. 1 on behalf and for the benefit of debentures holders, on May 22, 2015 and June 24, 2015 respectively. 19. In and around 2019, the ESSEL Group faced severe liquidity cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A mechanism was formulated whereby the promoters' shares and pledged shares of ZEEL shall be tendered by the lenders at their discretion and sold to the investors in exchange of the consideration which shall be utilized by the lenders to reduce the outstanding obligations. In the event respondent No. 2/petitioner failed to comply with its obligations, under the deed or any of the other financing documents, the respondent No. 1 was entitled to commence the enforcement of the security interest, notwithstanding anything contrary in the financing documents. 23. It is the case of the respondent No. 1 that the said documents did not contain any arbitration clause. 24. In or around September, 2019, in furtherance to the said deed respondent No. 2 requested respondent No. 1 for release of 30,09,000 ZEEL shares pledged as security in favour of respondent No. 1 for the benefit of debenture holders for strategic sales. The share price of ZEEL continued its down trend from January, 2019. The respondent No. 2 in the month of September, 2019 redeemed 74 of the 425 said debentures against the payments of amounts towards the principal redemption premium etc. on September 10, 2019 to respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another letter to the debenture holders recording that they are in active discussions with prospective investors to generate additional liquidity in a manner that the said debentures issued to debenture holders or the pledged securities would be bought by investors upon payment of mutually acceptable consideration. In the meantime, respondent No. 2 requested the debenture holders not to precipitate any action with respect to pledged securities. However, no concrete proposal was put forth by the respondent No. 2 and further time of 10 days was sought from the debenture holders to enable respondent No. 2 to procure a concrete proposal. 27. On May 19, 2020, respondent No. 2 addressed another letter to the debenture holders citing excuse of nation-wide lockdown as delaying the process of sale of the pledged shares. Once again, a request was made to avoid precipitating any action towards sale of pledged securities. In spite of being aware of date of maturity of the said debentures approaching, respondent No. 2 without providing neither any definitive time lines for sale or any concrete proposal of how it plans to raise additional liquidity to redeem the said debentures sought time till ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nication dated May 22, 2020. Today the share prices of ZEEL and Dish TV have recovered and the recovery figure is higher. This was after the stock market tanked 12,000 points approximately between February 28, 2020 and March 23, 2020 on account of the COVID-19 pandemic induced fire sale, which caused the price of ZEEL shares to crash to Rs. 122/- on March 23, 2020 and Dish TV shares to crash to Rs. 4.90/- on March 23, 2020. This reflected steep declines from Rs. 239.30/- and Rs. 8.30/- on February 28, 2020 respectively. If the Petitioner is granted some time and permitted to arrange a stake sale by private placement, it can generate even higher returns than those that would be received by sale of shares in open market which will have the effect of beating down the share price and will lead to sub-optimal recovery and public loss which will cause detriment to the mutual fund unit holders at the end of the tunnel. According to him, the respondent No. 1 in its reply admits that the respondent No. 1 is obligated to cause the shares pledged with it in a fair and reasonable manner. The fairness and reasonableness of any sale in recovery matters is ultimately a function of maximizing reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioners seek a time period of 4 to 6 weeks for finding a buyer and selling the shares through private placement. 36. Meanwhile, the interests of the respondent No. 1 are also safeguarded insofar as the pledged shares are already lying with Respondent No. 1, so there is no possibility of creation of third-party rights without its scrutiny and approval. 37. According to Mr. Tripathi, commercial contracts giving way to the practical difficulties faced in the present unprecedented scenario on account of COVID-19 is no longer res integra as the High Court of Bombay in Rural Fairprice Wholesale Ltd. and Anr. v. IDBI Trusteeship Services Ltd. and Ors., Commercial Suit (L) 307/2020 vide order dated March 30, 2020 has granted reliefs qua the Respondent No. 1 itself when pledge qua shares of Future Retail Ltd. was being invoked. Relevant portion from the order dated March 30, 2020 is extracted hereinbelow: "3. .....The learned Senior counsel for the plaintiffs ........ submits that as per Debenture Trust Deed, the defendants are fully secured. He relies on clause No. 6 i.e. Security and Security Providers of the said Trust Deed. ..... 6. It is to be noted that when Debenture Trust Dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 13, 2020. Similarly, High Court of Bombay has granted reliefs in Transcon Iconia Pvt. Ltd. & Ors. v. ICICI Bank & Ors., W.P. LD-VC No. 30/2020 on April 11, 2020. 42. It is also stated that the respondent No. 1 argued at length of its rights in law and under the agreement on account of pledge and guarantee and relied on judgments in Bank of Bihar Ltd. v. Damodar Prasad and Ors., AIR 1969 SC 297; Bank of Maharashtra v. Racmann Auto (P) Ltd., AIR 1991 Del 278; National Securities Clearing Corporation Ltd. v. Prime Broking Company (India) Ltd., (2016) 4 CompLJ 219 (Bom); Reliance Project Ventures and Management Pvt. Ltd. and Ors. v. ECL Finance Ltd. and Ors., Commercial Suit (L) No. 191/2019 (High Court of Bombay); and Infrastructure Leasing and Financial Services Ltd. v. BPL Ltd., (2015) 3 SCC 363; without pointing out how any of these precedents apply to an emergency pandemic situation like the present where market forces have been upended on fear and panic selling on account of COVID- 19. The only relevant law cited has been the one cited by the Petitioners in Rural Fairprice Wholesale Ltd. (supra) on which the respondent No. 1 had no answer except to suggest that the law can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to garner a higher than market price. 47. As regards the petitioners objection to the invocation of the pledge during the COVID-19 pandemic it is submitted by Mr. Kaul (i) that under law it is respondent No. 1's sole discretion, once default is committed/continuing, to invoke and thereafter sell the pledged shares; and the petitioner has no right to restrain respondent No. 1 from doing so; and (ii) Notwithstanding anything in the instant case, the admitted defaults bear no co-relation to the pandemic, given that the financial precariousness of the borrower group, pre-dates the onset of the pandemic, and that the bogey of the pandemic has been raised by the petitioner only to deny respondent No. 1 the exercise of its legitimate rights. Respondent No. 1 submits that it is in the interest of the debenture holder and more importantly retail investors holding units in the debenture holder that it be permitted to exercise its valid and legitimate rights. 48. According to him, under law it is a settled position that no pledgor can decide when and how the pledgee should exercise its rights to sell. Section 176 of the Indian Contract Act, 1872 ('Indian Contract Act', for short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pledge. According to him, where the relevant regulatory authorities, in their subjective opinion, felt that the COVID-19 situation required certain relaxations, etc., appropriate circulars were issued. The omission of any relevant regulatory authority to restrict the rights of pledgee of shares to invoke and sell pledged shares is deliberate and instructive. 52. He stated, across the pleadings as well as the oral submissions, the petitioners have made out no case for restraining respondent No. 1 from invoking the Corporate Guarantee, which in any case is a relief barred by Section 41(b) of the Specific Relief Act 1963. 53. An order injuncting respondent No. 1 from invoking the Corporate Guarantee would tantamount to an order of restraint from accessing legal remedy which respondent No. 1 is entitled to, in terms of the Transaction Documents as well as the law of the land. 54. He stated unlike a Bank Guarantee where the Guarantee amount is capable of being immediately withdrawn, a Corporate Guarantee must be enforced in Court. Thus, there is no demonstrable urgency in the present matter to call for an injunction if at all, as all the objections of the petitioner can be made at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the pledged shares of Dish TV, without prior approval of the Ministry of Information & Broadcasting, would be illegal and void in as much as they are contrary to the terms of license issued to Dish TV for providing direct to home broadcasting services in India; and (iii) it be permitted to have the pledged shares sold through private treaty which would allow more value to be derived rather than having respondent No. 1 sell the same in the open market. 62. He stated, while on one hand the petitioner accepts that respondent No. 1 as pledgee has the unfettered right to sell the shares, in effect the petitioner by seeking the restraint is in fact seeking to govern when the pledged shares should be sold and at what price. The petitioners' case is contrary to the contract and based on incorrect legal premises and mere surmises and conjectures. 63. According to Dr. Saraf, contractually, in terms of the Pledge Agreements, it is evident, that (i) the petitioners have covenanted to repay the outstanding amounts under the transaction documents, and until such payment, secure the same through the share pledge (ii) on the occurrence of default, which is admitted, respondent No. 1 is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the tranches in which the shares would be sold is something that respondent No. 1, as legally and contractually entitled would decide considering all factors. He stated, respondent No. 1 is most interested in getting a good price for the shares which would reduce their debt. Respondent No. 1 is an entity operating in the securities market and is equally interested in maximizing the recovery. The petitioners' entire case is built on a mere conjecture that respondent No. 1 would proceed to dump the pledged shares at once in the open market causing the share price to tank. There is no basis for such apprehension. In any case and strictly without prejudice, even assuming without admitting that such prospective sale is 'improperly' conducted, the only remedy available to the pledgor under law is damages. 66. In any case, it is not as though even at the price at which the petitioner was suggesting to sell the ZEEL shares in November 2019, the entire debt would have been written off. Even if the sale was done at that price, respondent No. 1 would still have had a substantial outstanding due. When sued for the balance, at the highest, if proved that there was an improper sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company as well as amendment to the shareholders' agreement wherever applicable,....shall be carried out only in consultation and with prior approval of the Licensor". It is submitted that the reliance on this condition is entirely misplaced. The terms 'equity structure' in this condition is a reference to the 'authorized and paid up share capital' of the licensee company. This is apparent from the use of the term 'structure of equity capital' to refer to the 'authorized share capital and paid up share capital' in the guidelines. Furthermore, in the license conditions the term 'equity structure' is used in contradistinction to the term 'equity holding pattern'. The equity holding pattern in the case of a listed traded company such as Dish TV would change daily. Accordingly, interpreting alteration of 'equity structure' to mean changes in equity holding pattern would lead to an absurdity and would be opposed to the nature of traded public securities which are 'freely transferable'. The contention of the petitioner stands defeated by the very fact that being listed on the stock exchange the shares are being traded fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Mr. Kaul in the case of Bank of Bihar Ltd. (Supra); Bank of Maharashtra (Supra); National Securities Clearing Corporation Ltd. (Supra); Reliance Project Ventures and Management Pvt. Ltd. and Ors. (Supra) and Infrastructure Leasing and Financial Services Ltd. (Supra) in support of his contention that (i) as per Section 176 of the Indian Contract Act, the discretion is with the pawnee to either sell the pledged goods after issuing notice to the pawner or prefer a suit for recovery by retaining the goods as co-lateral (ii) the pledger cannot decide when and how and pledgee should exercise its right to sell (iii) if the pledgee exercises its discretion or does not exercise the discretion, no blame can be put on the pledgee, are not contested. 75. According to Mr. Salve and Mr. Tripathi, the precedence as have been referred to by Mr. Kaul may not be applicable to an emergency pandemic situation like the present one, where the market forces have been upended on fear and panic selling on account of COVID-19, more so by relying upon the order of the Bombay High Court in the case of Ruler Fairprice Wholesale Ltd. (Supra) which has been upheld by the Supreme Court. This submission looks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t similar to this petition. 80. In so far as the submissions of Mr. Salve by referring to the circulars issued by the RBI and SEBI that moratorium has been declared on all loans becoming due during COVID-19 and granted relaxation credit rating during COVID-19 are concerned, the same are not appealing. I agree with the submission of Mr. Kaul that RBI/SEBI being regulatory authorities, they in their subjective satisfaction felt that COVID-19 situation required certain relaxations etc., appropriate circulars have been issued and there is no circular by SEBI to restrict the rights of pledgee of shares to invoke and sell pledged shares is deliberate and instructive. Further, when the debentures have reached maturity on May 22, 2020, on respondent No. 2's failure to redeem the debentures, surely the petitioners as pledgors/guarantors become liable to pay in terms of debenture trust deed, the share pledged agreements and corporate guarantee and any default by petitioners/guarantor, the respondent No. 1 is within its right to enforce the pledge which cannot be postponed, otherwise, it will set a precedent contrary to what has been agreed between the parties. 81. Even the plea of Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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