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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 ..... w, regulation or orders of any authority. It is not the case of the petitioner that such an approval was taken by it when it, bought the shares/at time of allotment. That apart, the shares are being freely traded in the stock market. The prayers as sought for by the petitioners cannot be granted - Petition dismissed. - OMP (I) (COMM) 135/2020, I.A. 4847/2020, OMP (I) (COMM) 136/2020, I.A. 4848/2020, OMP (I) (COMM) 137/2020 and I.A. 4849/2020 - - - Dated:- 3-7-2020 - V. Kameswar Rao, J. For the Appellant : Harish Salve, Parag Tripathi, Sr. Advs., Vijay Aggarwal, Tarun Singla, Naman Joshi and Shailesh Pandey, Advs. For the Respondents : Neeraj Kishan Kaul, Birendra Saraf, Sr. Advs., Vikram Trivedi, Jai Sanklecha, Sunil Tilok Chandani, Sachin Chandarana, Ramchandra Madan, Deepak Joshi and Jagdeep Sharma, Advs. JUDGMENT V. Kameswar Rao, J. I.A. 4847/2020 in OMP (I) (COMM.) 135/2020 I.A. 4848/2020 in OMP (I) (COMM.) 136/2020 I.A. 4849/2020 in OMP (I) (COMM.) 137/2020 Exemptions allowed subject to all just exceptions. Applications stand disposed of. OMP (I) (COMM.) 135/2020 OMP (I) (COMM.) 136/2020 OMP (I) (COMM.) 137/2020 1. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Restrain the Respondent No. 1 from acting on the Corporate Guarantee Notice against the Petitioner during the pendency of the present Petition and/or conclusion of arbitration proceedings; C. Grant ad-interim reliefs in terms of Prayer A and B above; D. Order costs of the present proceedings in favour of the petitioner; E. Pass any such other or further orders as may be deemed fit by this Hon'ble Court in the facts and circumstances of the present case. 6. The facts as noted from the petitions are, the respondent No. 2 ESSEL Infra Projects Ltd. issued non-convertible debentures aggregating to a principal amount 4,25,00,00,000/- which were subscribed by certain identified debenture holders for whom the respondent No. 1 is the debenture trustee in terms of Debenture Trust Deed dated May 22, 2015 ('DTD', for short). The broad structure of the transactions is as follows: 7. According to the petitioners the debentures carried a maturity date of May 22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general market default, insolvency, IL FS collapse, COVID-19 and share market collapse. It is stated that when the DTD was executed, the shares of ZEEL were trading at ₹ 319.45 per share. Today, in the post COVID-19 bear market, the shares of ZEEL are trading at ₹ 168.55 per share which is lowest, it has been in the last 5 years. Similarly, when DTD was executed the shares of Dish TV India Ltd. ('Dish TV, for short) were trading as ₹ 82.95 per share. Today post COVID-19, the shares of Dish TV are trading at ₹ 6.65 per share which is lowest in the last 5 years. 12. According to the petitioner, by not participating in Stake Sale - II respondent No. 1 exposed itself as well as the petitioner not to mention thousands of shareholders of ZEEL as well as mutual funds, NDFCs and banks to the present situation. Any attempt to redeem the debentures right now or invoke the pledge on shares on respondent No. 2 would be egregiously wrong, unfair and prejudicial to all concerned and will culpably defeat the rights and interest of petitioner which deserves adjudication. 13. It is the case of the petitioners that the impugned notices are blind to the present situa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent basis in two series, i.e., Series-1 (200 debentures) and Series-II (225 debentures) to certain identified debenture holders. 15. The said debentures were proposed to be issued on the broad terms and conditions set out in the information memorandums dated May 22, 2015 and June 23, 2015 respectively. One of the terms of the issue of the said debentures was that all payments and obligations pertaining to the said debentures were to be secured by way of inter alia an (i) irrevocable, unconditional corporate guarantee and (ii) an exclusive first ranking pledge over 6,25,11,000 fully paid up equity shares of Dish TV by direct media Distribution Ventures Pvt. Ltd. and ZEEL by Cyquator Media Services Pvt. Ltd. in favour of respondent No. 1. 16. According to respondent No. 1, it was appointed by respondent No. 2 as the debenture trustee for the benefit of the debenture holders and to hold the security created to secure the payments and other obligations of respondent No. 2 in relation to the said debentures on the terms and conditions, more particularly set out in the DTD executed between respondent No. 1 and 2. The petitioners were confirming parties to the said DTD. In terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs stake in ZEEL to inter alia meet certain identified borrowings. As part of this arrangement it was also agreed that Mr. Subhash Chandra would provide personal guarantee for guaranteeing the payment obligations in relation to the said debentures on an irrevocable and unconditional basis. The understandings arrived at in the said meeting was recorded in a letter dated February 3, 2019 signed by the representatives of respondent No. 2 and the debenture holders. 21. Around the same time the DTD was amended by virtue of Supplemental and Amended Debenture Trust Deed executed on February 1, 2019. Under the terms of the Supplemental and Amended Debenture Trust Deed, 60,28,000 shares of respondent No. 2 were agreed to be pledged by the petitioner to secure the said debentures issued by respondent No. 2 in favour of respondent No. 1 for the benefit of the debenture holders. Accordingly, petitioner executed a Share Pledge Agreement dated February 1, 2019 in favour of respondent No. 1. 22. In the meanwhile, to set out in detail the precise terms and conditions of the understanding recorded in the letter dated February 3, 2019 inter alia respondent No. 2 and the petitioner executed a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were under no legal obligation to participate in the proposed stake sale and it was ultimately a commercial decision keeping in mind the interest of the stake holders which includes retail investors. 26. It is stated by respondent No. 1 that in the meantime, the price of pledged shares further dropped compromising the security interest of the debenture holders. Seeing no immediate resolution and the date of maturity of the said debentures approaching the debenture holders were constrained to address a letter to respondent No. 2 on April 15, 2020 and requested for (i) a confirmation from the personal guarantor to comply with Clause 7.1. of the Personal Guarantee which records that the personal guarantor shall not dispose of any of its material assets including shareholding in the promoter company directly or indirectly without obtaining prior written consent of respondent No. 1 and (ii) provide a list of unencumbered assets evidencing ability to discharge obligations of the Personal Guarantor under the Personal Guarantee. In response, respondent No. 2 vide letter dated May 4, 2020 addressed to the debenture holders, admitted the decline in security cover due to fall in share pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The stock markets are not immune and those have not only been operating at historically lower points but they are extremely volatile in current times. In these circumstances, the respondent No. 1 has been insisting to dump 43,47,500/- and 6,25,11,000/- shares of ZEEL and Dish TV respectively, being oblivious to the extraordinary volatility in the stock market. 29. He stated that the entire thrust of the respondent No. 1 during the course of arguments has been regarding absolute right of the respondent No. 1 to sell the pledged shares and invoke corporate guarantee issued by the petitioners in its favour. 30. He stated, the petitioners are not joining issues with the respondent No. 1 in so far as the latter's rights as a pawnee or its entitlements under the subject-matter contracts are concerned. However, it is settled law that financial institutions, such as respondent No. 1 and the debenture holders herein, owe a duty to act fairly and in good faith. 31. Mr. Salve stated that RBI and SEBI vide their Circulars have made relaxations qua defaults during the lockdown on account of the unprecedented situation and RBI has even infused ₹ 50,000 Crores of liquidity for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsede the arbitration clauses. I may state here that during the hearing, Dr. Saraf has given up the said contention at this stage. 34. He stated that any act qua shares of Dish TV which result in change of equity structure requires prior approval of the Ministry of Information Broadcasting. Respondent No. 1 contends by analogy in its further reply dated June 24, 2020 that Yes Bank has invoked a pledge as well. However, Yes Bank, invoked the pledge itself illegally and upon being put to notice has not acted qua the shares of Dish TV. The equity structure of Dish TV will change if the pledge is allowed to be invoked by the respondent No. 1 without prior approval of the Ministry of Information Broadcasting inasmuch as the pledged shares constitute approximately 3.39% of the equity of Dish TV, i.e. more than 1%, and a matter of disclosure unlike any small on-market transactions as sought to be projected by the Respondent No. 1. 35. Mr. Parag Tripathi, also for one petitioner stated that the petitioner only seeks the indulgence of this Court to the extent that the pledged shares are sold by the respondent No. 1 in consultation with the petitioner through private placement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that case had not matured unlike the present case, which with respect, is not the relevant factor to distinguish the purpose and portion relied upon by the petitioners. 40. The debenture holders themselves on April 23, 2020 issued a public communication stating: In light of the severe market dislocation and illiquidity caused by the COVID-19 pandemic, this decision has been taken in order to protect value for investors via a managed sale of the portfolio. This is also the Petitioner's case. What is good for the goose is good for the gander - by letting the prices normalize further and selling shares by private treaty to an identified buyer, all concerned, including the mutual fund holders, would recovery optimally. 41. Mr. Tripathi stated that in the past, the petitioners as well as the respondent No. 2 organized stake sales to retire debt, including prematurely. Respondent No. 1 participated in Stake Sale - I and received ₹ 120.36 Crores (share price of ZEEL @ ₹ 400 when market price was ₹ 360). Despite requests, they refused to participate in Stake Sale - II. Had they participated they would have received a further ₹ 130.56 Crores (share p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as sale proceeds, i.e. the exact value ascribed by the Debenture Holders in its communication dated May 22, 2020. 44. On the other hand, the respondent No. 1 through Dr. Birendra Saraf, learned Sr. Counsel has during the course of arguments stated without prejudice to the contention that there is no binding arbitration agreements, the issue be kept open and it should not be construed that they have waived this contention. 45. According to Mr. Kaul (for respondent No. 1 in one petition) the petitioner has admittedly not contested the factum of default under the financing documents or the entitlement of respondent No. 1 to enforce its security in terms of the security documents. 46. According to Mr. Kaul, the submission of Mr. Salve and Mr. Tripathi are based on incorrect legal premises and mere surmises and conjectures. He submitted that there is no legal obligation upon the pledgee to sell the pledged shares at the instance of the pledgor. The pledgee is entitled, in its unfettered discretion to retain the pledged shares as collateral security and bring a suit for recovery. Respondent No. 1 was not legally compelled to participate in the stake sale of the pledged shares or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured lender does not agree to partake in expected or unexpected market risks and in fact secures itself against any potential market risk. Accordingly, financing documents typically do not contain any force majeure type provisions. By seeking to restrain respondent No. 1 from exercising its lawful rights under the Pledge Agreements, the petitioner is seeking to overturn this fundamental premise which forms the bedrock of secured lending transactions in the country. 50. According to Mr. Kaul, the reliance placed on the judgment of the Hon'ble Supreme Court of India in Mardia Chemicals (supra) to argue that the lender has a 'duty to act fairly and in good faith' while enforcing its rights under the Share Pledge agreement is misplaced. The decision in Mardia Chemicals (supra) was rendered in context of a challenge to the SARFAESI Act, 2002 and was relevant to the issue of lenders liability. Furthermore, the ad-interim order passed by the Bombay High Court in Rural Fair Price Wholesale Ltd. (supra) is readily distinguishable. In the said order, it was recorded that the defendant therein was otherwise fully secured. Furthermore, the said order was passed in the aftermath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impact the subscribers of these Mutual Funds, which includes public funds. 58. In these times of crisis when access to funds is already scarce, the common man will be forced to dip into his investments such as mutual funds. If a relief as is sought is granted it will directly impact the unit holders who will face a devaluation of their investments. 59. He stated, the petitioners as Pledgers/Guarantors became liable to pay in terms of the DTD, the Share Pledge Agreements and the Corporate Guarantees, immediately on respondent No. 2's failure to redeem the debentures. 60. The sole ground the petitioner relies upon is the possibility of the shares being sold at a lower value. However, mere economic hardship cannot be a ground for relief, for the only obligation upon the pledgee is to ensure that shares are sold at a fair price. In view of the aforesaid arguments, the present petition deserves to be dismissed with cost. 61. Dr. Birendra Saraf, Sr. Counsel (for respondent 1 in one petition) stated that the Petitioner has not contested the factum of default under the financing documents. The petitioner has also not contested that under the contract and in law, respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interpretation placed on them. According to him, in the opening part of Clause 6.1 of the Pledge Agreements the petitioner has clearly accepted that the rights including to enforce the pledge is 'reasonable'. 64. He stated even legally, it is settled law that no pledgor can decide when and how the pledgee should exercise its rights to sell. Section 176 of the Indian Contract Act makes it clear that it is the discretion of the pledgee to sell the pledged shares in case the pledgor makes default. He relied on the Judgment of the Bombay High Court in Prime Broking (supra), wherein it was held that the pledgors rights are only (i) in case pledgee exercises the power of sale, to insist that it should be honestly and properly done and the sale proceeds applied to the debt; (ii) in case the pledgee did not exercise the power of sale then the pledgor can redeem the pledge on the payment of the debt or such part of it that has remained unpaid; and (iii) in case the same was improperly exercised, to get the damages caused thereby. It is therefore submitted that petitioner has no right under law or contract to restrain respondent No. 1 from invoking the pledge on the specious g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shares ₹ 56.8 Crores). Thus, the entire basis of the present petitions i.e. enforcing the pledge during COVID-19 would result in sub-optimal recovery from Dish TV shares (less than 50% of market value, as alleged) does not stand. He stated, if any restraint is placed on respondent No. 1's right to sell and the share prices fall, irretrievable prejudice would be caused to the respondent No. 1. 68. He stated, Mr. Tripathi has placed reliance on the judgment of the Supreme Court of India in Mardia Chemicals (supra) to argue that the lender has a duty to act fairly and in good faith while enforcing its rights under the Share Pledge. The reliance is misplaced. The decision in Mardia Chemicals (supra) was rendered in context of a challenge to the SARFAESI Act, 2002 and was relevant to the issue of lenders liability. Furthermore, the ad-interim order passed by the Bombay High Court in Rural Fair Price (supra) is readily distinguishable. It is an ad-interim order decided in the facts of that case which is neither a precedent nor even of persuasive value. 69. He stated Mr. Salve's contention that the invocation of the pledge of Dish TV shares, without prior approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the arguments that the said contention be kept open to be decided at the appropriate stage. Their statements are taken on record and the issue is left open. 73. On merits, the submission of Mr. Salve and Mr. Tripathi can be summed up as under: i. The petitioners are not joining issue with respondent No. 1 in so far as rights of pawnee or its entitlement under the subject contracts. ii. In the unprecedented times because of COVID-19, the stock markets are not only operating at historically lower points but they are extremely volatile. iii. The financial institutions like the respondent No. 1 and debenture holders owe a duty to act fairly and in good faith. iv. RBI and SEBI vide their Circulars have made relaxations qua defaults during lockdown and RBI has infused ₹ 50,000 Crores of liquidity for exclusive use of mutual funds. v. The petitioners be granted some time for the market conditions to recover to achieve optimal recovery for the debenture holders/petitioners. vi. The previous stake sales conducted by the petitioners through private placements during 2019 shows that it was able to sell the shares of ZEEL for around ₹ 400 whereas the mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the respondent No. 1 is obliged to debenture holders, the principal amount, redemption premium and default interest (if any) on the maturity, is appealing. 76. Further, the reliance placed on the Bombay High Court order in Ruler Fairprice Wholesale Ltd. (Supra) is totally misplaced, as the said order was passed immediately after lockdown on March 30, 2020 and it was the conclusion of the Court that the defendant therein was fully secured. That apart, it is not the case therein that the debentures have attained maturity as in the case in hand. 77. The submission of Mr. Salve that respondent No. 1 and debenture holders owe a duty to act fairly and in good faith cannot be disputed. In other words, they are required to act in good faith which can only be seen on the following parameters: i. The sale of pledged shares is honestly and properly done. ii. The sale proceeds are applied to debt iii. As held by the Bombay High Court in National Security Clearing Corporation Ltd. (Supra) that pledger right is only in case the sale is not properly exercised, to get damages. 78. That apart, when absolute discretion lies in law and under the subject contracts with pawnee to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith prior approval of Licensor. 82. On the other hand, Dr. Saraf has stated that the permission to be sought is primarily for foreign equity participation. That apart, it was his submission that Clause 3 at Page 195 of the petitioner's documents in OMP (I) (COMM.) 136/2020 defines structure of equity capital to mean (i) authorized share capital, and (ii) paid up share capital of the licensed company. He stated that the term 'equity structure' is used to contradistinction to the term 'equity holding pattern'. According to Dr. Saraf, the equity holding pattern in the case of a listed company would change daily. That apart, if the plea of Mr. Salve is accepted, the same shall be against the nature of traded public securities which are freely transferrable. He stated that shares are listed on the stock exchange and are being traded freely every day. 83. I am in agreement with the submissions of Dr. Saraf. Firstly, no such stipulation exists in the pledged agreements. The plea is clearly an afterthought only to wriggle out from the liability. Rather it is represented in the agreement that the Dish TV shares are freely transferrable without any restriction unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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