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TMI Blog2022 (3) TMI 1113X X X X Extracts X X X X X X X X Extracts X X X X ..... Kumar, Ms. Disha Shah, Mr. Karan Rukhana, Mr. Nishant Chotani and Mr. Yash Chheda instructed by SDS Advocates for Respondent No.11. Mr. Ravi Kadam, Senior Advocate alongwith Mr. Yohaann Limathwalla and Mr. Shahbaz Malbari instructed by J. Sagar Associates for Respondent No.12. Dr. Birendra Saraf, Senior Advocate alongwith Ms. Tine Abraham, Mr. Siddharth Ranade, Ms. Varuna Bhanrale, Ms. Samrudhi Chothani and Mr. Raghav Bhargava instructed by Trilegal for Respondent No.13 Vistra ITCL (India) Ltd. Mr. Janak Dwarkadas, Senior Advocate alongwith Mr. Tushad Kakalia, Ms. Anaisha Zachariah and Ms. Vidhi Dhanuka instructed by Crawford Bayley & Co. for the Applicant in IAL-855-2022. JUDGMENT (Per: S.J. KATHAWALLA & MILIND N. JADHAV, JJ.) INTRODUCTION : 1. This Appeal filed by the Securities & Exchange Board of India ("SEBI") challenges an order dated 28th October, 2021 read with an order dated 15th November, 20211, both passed by the Ld. Single Judge ("Impugned Orders"). FACTS 2. Prior to proceeding further, it would be necessary to set-out the following facts: 2.1 On 3rd May, 2017, a Debenture Trust Deed was executed between Reliance Commercial Finance Limited / Respondent No.11 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of amended prayer clause (a)(i) restraining the 1st and 2nd Defendants from creating any third party rights over the security mentioned in the plaint. The reason is that if these Defendants are permitted to transact the security which was offered in a contract to the Plaintiff Debenture Holders, then there is every likelihood that the Plaintiffs will be left without any recourse. It is equally likely that the suit itself will be rendered infructuous as a result. On the other hand, the grant of the injunction for a limited period of time can cause no conceivable prejudice either to the 1st and 2nd Defendants or to other lenders/security holders in question. It surely cannot be suggested that the security (especially by way of a hypothecation of book debts) in favour of the Plaintiffs should be allowed to be rendered meaningless by making operational an inter-creditor agreement that permits the disbursal of the 1st Defendant's cash in hand to all classes of lenders irrespective of their security. When a Debenture Holder has a security for the redemption of the debenture, prima facie this cannot be permitted to be compromised without an affirmative consent of that Debenture Holder. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. It is one thing to ask a Civil Court to adjudicate on the correctness or otherwise of a decision of a regulator or a validity of a rule or regulation. But I am unable to see how a Civil Court can direct that a notice that is required by the Trust Deed or by the applicable regulation should be shortened or that a meeting should be held of all Debenture Holders in one particular manner over preference to another. These are directions that only a regulator can issue. 6. A common request from all sides is that SEBI be requested to respond urgently to Vistra's application or representation of 11th August 2021 for a clarification on the first aspect, i.e. the manner holding the meeting. I have no doubt that this is urgently required. There is financial prejudice all around. It should not be worsened by a delay in deciding what seems to me to be an administrative or ministerial clarification. The fact that this clarification can only be done by SEBI only adds to the urgency. 7. Vistra may also need to make a supplemental representation by seeking a direction that the required notice period be curtailed. It is at liberty to make that application. 8. I must request SEBI to consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st October 2021. 4. Previous order, if any, to continue until next date." 2.25 The next order passed was on 28th October, 2021 which would be necessary to reproduce as under: "1. It is agreed that the following order will suffice to dispose of the IA and the Suit itself. 2. The resolution plan approved by the Inter Creditor Agreement ("ICA") Lenders presently proposes to pay to all secured debenture holders as on cut-off date of 15th July 2021 an amount equivalent to 24.96% of the total principal outstanding (including all amounts already paid) to secured creditors. 3. In terms of the ICA-lenders' approved resolution plan, the Plaintiffs would be entitled to receive an aggregate sum of Rs. 1,34,78,400/- being 24.96% of the total principal outstanding. 4. Of the aforesaid sum of Rs. 1,34,78,400/- (24.96% of the total principal outstanding), the Plaintiffs have already received a sum of Rs. 72,36,000/- leaving thereby Rs. 62,42,400/- as the balance amount in terms of the ICA-lenders' approved resolution plan. 5. In view of the negotiations between the Plaintiffs, debenture holders, the company and the resolution applicant/their advisors, the resolution applicant has agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mr Ankhad for the 3rd Defendant, the Debenture Trustee, points out that the Debenture Trust Deeds require a meeting to be called in a certain manner. On Affidavit, SEBI has taken a different position. SEBI's submission has been that it is the very latest or most recent of the SEBI resolutions that will govern such meetings, irrespective of what a Debenture Trust Deed says in regard to the holding of a meeting. Prima facie, I do not think this is a submission that I can accept. The Debenture Trust Deed is a contract between the parties to it. They must know the terms of the contract at the time when the execute it. Those terms cannot be later altered except with their consent. The submission by SEBI would amount to saying that a critical term of the contract is always unknown and always liable to change or modification at any given time, conceivably upsetting the entire structure. Further, SEBI's regulations all say that they are with effect from a particular date. It is not possible to read them as operating retrospectively. Correctly read, SEBI's submission is to be understood as meaning that it is the latest of the SEBI resolutions as amended at the time of the Debenture Trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y paragraph 14. It is clarified that I have not, by that paragraph, directed that the meeting that is to be held should be in deviation from the terms of the Debenture Trust Deed. I also clarified that at no time had any of the party made any submissions on the basis of any later or Supplementary Trust Deed. 3. Obviously, the Supplementary Trust Deed will have to be read with the previous three Trust Deeds in a coherent and consistent manner. . A mere reference to SEBI circulars will not and cannot override the express terms of any of the Trust Deeds. 4. The 30 day period will commence from today in view of this clarification." 2.27 Challenging the Impugned Orders, the Appeal came to be filed on 25th November, 2021. At the first hearing held on 3rd December, 2021, we passed the following order: "1. By the above Appeal, the Appellant (SEBI) has impugned the Order dated 28th October, 2021. We have gone through the impugned Order dated 28th October, 2021. Paragraphs 15 to 17 of the said Order reads thus : "15. All parties agree and undertake to maintain confidentiality of the settlement and/or compromise and/or arrangement arrived hereto. 16. In view of the above compromise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o consider a settlement, which they ultimately did. SEBI obviously could not be a party to any such compromise. Paragraph 12 of my order therefore dealt, though briefly, with the contentions of the SEBI. That paragraph of the order is not by consent, but is an order in invitum. Paragraph 18 of the order is specifically for SEBI's protection and is also not by consent. 4. Consequently, the last line of paragraph 17 which says that the order is by consent of all parties is necessarily subject to this one exception as regards the contentions of SEBI and which I have dealt with in paragraphs 12 and 18. 5. I do not believe any further clarification is required. Mr Seksaria, Mr Khandeparkar and Mr Kadam all urge me to note that the SEBI did not protest or object when this order was being passed in open Court. I do not think I can make any such observation at all. SEBI had placed its submissions on Affidavit and through Counsel and which I dealt with in paragraphs 12 and 18 of my 28th October 2021 order. 6. There is nothing further that needs to be added." 2.29 On 6th December, 2021, this Court passed the following order: "1. The above Appeal is admitted and fixed for hearing and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI Circular is inapplicable as the SEBI Circular cannot be given retrospective effect; (iv) SEBI's stand is premised on a misreading and incorrect application of the SEBI Circular; (v) SEBI's attempted application of the SEBI Circular (which is for the purpose of signing the ICA), after the ICA has already been approved, is entirely misconceived; (vi) SEBI's stand seeks to override a contract between RCFL and its lenders, thereby derailing the debt resolution process carried out following the RBI Circular; (vii) There is no conflict between the SEBI Circular and the DTDs; (viii) The SEBI Circular cannot override the terms of the DTDs; 5. Appearing for BoB, we have heard Ld. Senior Advocate Mr. Ravi Kadam. Mr. Kadam's submissions can be summarized as under: (i) The SEBI Circular has no application to this case as the SEBI Circular does not contemplate a scenario where the debenture holders would enter into a compromise, settlement or arrangement with the issuer of the debentures; (ii) Whilst the logic of mandating / requiring an ISIN-wise consent appears to be to protect debenture holders, having signed the ICA, the Debenture Trustee is entitled to single handedly an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in IKISAN Limited (2015) SCC OnLine Bom 6358, SEBI does not have locus to challenge any order sanctioning a merger scheme under Section 391 of the Companies Act, 2013. Lastly, on maintainability, it was argued that the Impugned Orders do not affect SEBI as has been clarified by the Ld. Single Judge. 8. We have considered the aforesaid submissions. This Appeal, as filed, has been filed under Section 13 of the Commercial Courts Act, 2015. Section 13 (1A) provides that "Any person aggrieved" by a judgment / order of the Commercial Division of a High Court may appeal to the Commercial Appellate Division. 9. In order to appreciate whether or not SEBI would qualify as "Any person aggrieved", it would be necessary to trace certain events that transpired before the Ld. Single Judge. On 20th August, 2021, the Ld. Single Judge recorded the joint request of all parties requesting SEBI to urgently respond to Vistra's application / representation dated 11th August, 2021 seeking a clarification from SEBI. Thereafter, on 17th September, 2021, the Ld. Single Judge granted leave to the Plaintiffs to join SEBI as a Respondent to their Interim Application. Thereafter, SEBI entered appearance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8%. 15. Certain relevant clauses of the DTDs read as under: "(xiii) "Meeting of the Beneficial Owner(s)/Debenture-holder(s)" means a meeting of the Beneficial Owner(s)/Debenture-holder(s) duly called, convened and held in accordance with the provisions set out in the Fifth Schedule hereunder written;" 16. The aforesaid Clause 1(xiii) provides that a meeting of the Debenture Holders is to be conducted in the manner set-out in Schedule V of the DTDs. Schedule V is as under: Schedule V, Clause 22 : "22. A meeting of the Beneficial Owner(s)/Debenture holder(s) as the case may be shall, inter alia, have the following powers exercisable in the manner hereinafter specified in Clause 23 hereof. i Power to sanction reconvevance and release, substitution or exchange of all or any part of the Mortgaged Premises from all or any part of the principal moneys and interest owing upon the debentures. ii Power to sanction any compromise or arrangement proposed to be made between the Company and the Beneficial Owner(s)/Debenture holder(s). iii Power to sanction any modification, alteration or abrogation of any of the rights of the Beneficial Owner(s)/Debenture holder(s) as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar terms and conditions of such issue. 21. SEBI informs us that in a particular Information Memorandum / Issue Document, there may be multiple sets of bonds/securities issued having different terms and conditions. For example, there may be four tranches/buckets of bonds requiring quarterly pay-out of interest, while others may have monthly pay out, cumulative and annual. Each set of conditions of such an issuance will have a unique ISIN. All these 4 tranches may be possible to raise in a particular issue. Debenture Trust Deeds would be executed after the closure of the issue either for each set of ISIN or single Debenture Trust Deed for multiple ISINs within the period of three months from the date of closure of the issue. 22. According to SEBI, the rationale for calling an Event of Default at the ISIN level has been provided in the Board Memo on Review of the Regulatory Framework for Corporate Bonds and Debenture Trustees as under : "It was observed that the practice of issuance of debenture in the market varies from issuer to issuer. The debentures are sometimes issued in multiple tranches under an umbrella DTD. Often it is observed that there are multiple International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender. The ICA shall provide that any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of lenders by number shall be binding upon all the lenders. Additionally, the ICA may, inter alia, provide for rights and duties of majority lenders, duties and protection of rights of dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc. In particular, the RPs shall provide for payment not less than the liquidation value due to the dissenting lenders." 26. The RBI Circular provides for a comprehensive framework for resolution of stressed assets. The RBI Circular, to our mind, provides lenders with freedom to commercially negotiate and arrive at a resolution plan. The ICA prescribed under the RBI Circular acts as a tool for collective action by RBI regulated lende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34. As we see it, the signatories to the ICA (being a class of creditors distinct from Debenture Holders), have already entered into their inter se arrangement by executing the ICA on 6th July, 2019. The vote to now be cast is that of the Debenture Holders as they have a pari passu charge over certain common securities. The question that has arisen is, what would be the mechanism for such vote. This therefore brings us to the SEBI Circular which SEBI submits is the applicable mechanism for the forthcoming vote. THE SEBI CIRCULAR : 35. As narrated hereinabove, SEBI issued the SEBI Circular on October 13, 2020. The SEBI Circular is titled "Standardisation of procedure to be followed by Debenture Trustee(s) in case of 'Default' by Issuers of listed debt securities". Paragraph no.1 of the SEBI Circular reads: "1. Representations were made by Debenture Trustee(s) regarding the process to be followed in case of 'Default' by issuers of listed debt securities. After consultation with stakeholders including investors, Debenture Trustee(s), Issuers etc., procedures to be followed by the Debenture Trustee(s) in case of 'Default' by issuers of listed debt securities has been decided. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Debenture Trustee(s) shall take necessary action to enforce security or enter in to the ICA or as decided in the meeting of investors, subject to the following: 6.5.1. In case(s)where the majority of investors expressed their dissent against enforcement of the security, the Debenture Trustee(s) shall not enforce security. 6.5.2. In case(s)where majority of investors expressed their consent to enter into ICA, the Debenture Trustee(s) shall enter into the ICA. 6.5.3. In case(s) consents are not received for enforcement of security and for signing ICA, Debenture Trustee(s) shall take further action, if any, as per the decision taken in the meeting of the investors. 6.5.4. The Debenture Trustee(s) may form a representative committee of the investors to participate in the ICA or to enforce the security or as may be decided in the meeting. 6.6. The consent of the majority of investors shall mean the approval of not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level. C. Conditions for signing of ICA by Debenture Trustee(s)on behalf of investors. 7. The Debenture Trustee(s)may sign the ICA and consider the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Agreement. In order for an approval to go through, the SEBI Circular mandates a threshold of not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level. WHETHER OR NOT THE SEBI CIRCULAR CAN BE APPLIED RETROSPECTIVELY : 40. The SEBI Circular itself states that it shall come into force with immediate effect from 13th October, 2020. Admittedly, in the present case, RCFL committed defaults prior to 13th October, 2020 and the ICA was executed on 6th July, 2019 which are dates prior to the coming into force of the SEBI Circular and prior to the Supplementary DTD incorporating reference to the SEBI Circular. 41. On a cumulative reading of Clauses 1 and 10 of the SEBI Circular, in our considered opinion, the SEBI Circular prescribes the process to be followed by Debenture Trustees upon the commission of a default by an issuer after 13th October, 2020. This being so, on first principles, we do not see how the SEBI Circular can be applied to defaults committed prior to 13th October, 2020 also considering that on the date of such default, the mechanism to vote etc. was already provided for under the DTDs. 42. Secondly, we no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . University vs. Jahan Singh (2007) 5 SCC 77 and more particularly, the following paragraphs therefrom: "19. The Act does not confer any power on the Executive Council to make a regulation with retrospective effect. The purported regulations, thus, could not have been given retrospective effect or retroactive operation as it is now well settled that in absence of any provision contained in the legislative Act, a delegatee cannot make a delegated legislation with retrospective effect." 44. Lastly, we also deem it fit to reproduce the following principles recognized by the Supreme Court in Hitendra Vishnu Thakur & Ors. vs. State of Maharashtra & Ors. (1994) 4 SCC 602 as under: "26. The Designated Court has held that the amendment would operate retrospectively and would apply to the pending cases in which investigation was not complete on the date on which the Amendment Act came into force and the challan had not till then been filed in the court. From the law settled by this Court in various cases the illustrative though not exhaustive principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operation may be culled out as follows: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid in mind, we are also guided by the overall structure of the SEBI Circular. Chapter A thereof provides for an Event of Default, Chapter B provides for seeking consent of investors for (i) enforcement of security; and (ii) signing an Inter-Creditor Agreement and lastly; Chapter C provides for the conditions for signing of the Inter-Creditor Agreement by Debenture Trustee(s) on behalf of investors. The structure itself puts in place a chronological mechanism starting with the event of default and consequences thereafter. We fail to understand how this structure can be applied in a piecemeal manner to prior defaults and Inter-Creditor Agreements entered into post such defaults and prior to the SEBI Circular having come into force or even prior to the Supplementary DTD being executed. 48. SEBI has consistently submitted that the SEBI Circular has the force of law as has been recognized from time to time. Once again, we do not dispute this proposition. The question however, in the present case, is the applicability of the SEBI Circular to the present matter and not whether or not the SEBI Circular has the force of law. It is insufficient for SEBI to contend that the SEBI Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terated by new Act unless the Act specifically says so.". Further, this Court deemed the statute to not be retrospective. Therefore, we do not see how this decision can be of any assistance to Mr. Datar. 51. For the reasons aforesaid, we agree with the findings of the Ld. Single Judge in paragraph no. 12 of the Impugned Order dated 28th October, 2021. APPLICABILITY OF THE SEBI CIRCULAR : 52. On a cumulative reading of the entire SEBI Circular, in our considered opinion, there can be no ambiguity whatsoever as to its extent, scope and application. We are guided first by paragraph no.1 of the SEBI Circular which in one sense is its Preamble and provides "This circular prescribes the process to be followed by the Debenture Trustee(s) in case of 'Default' by issuers of listed debt securities including seeking consent from the investors for enforcement of security and/or entering into an Inter-Creditor Agreement ("ICA")". This paragraph suggests that the SEBI Circular would apply for (i) enforcement of security; and/or (ii) entering into an Inter-Creditor Agreement. 53. When we next consider paragraph no.6 of the SEBI Circular, it too provides for "the process to be followed" for "s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. As has been set-out herein, we deem the SEBI Circular inapplicable to the present matter and therefore, SEBI's rationale in introducing the SEBI Circular merits no consideration. 57. Mr. Datar has also argued that the DTDs and Resolution Plan within themselves contemplate the requirement of compliance with securities laws which would include compliance with the SEBI Circular as also the clarificatory letter dated 23rd August, 2021. It cannot be disputed that clauses of the DTDs and Resolution Plan provide for compliance with applicable laws which may include various laws passed by various regulations and regulators. However, before considering compliance with a particular law, it must first be established that the law under question is applicable. As stated herein, in view of the fact that the SEBI Circular is not applicable to the facts of the present case, we fail to appreciate how the clauses of the DTDs and Resolution Plan mandating compliance with securities law can further the case of SEBI and compel compliance with the SEBI Circular, which, as we have already held, is inapplicable to the present matter. 58. Mr. Datar's next argument is that in the event of a conflic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 61. It is settled law that hardship or inconvenience to a group of persons cannot be a ground to decide that a law is bad. The famous maxim being Dura lex, sed lex which means that the Law is harsh, but it is the law. Therefore, we have not taken into consideration the elaborate submissions canvassed by the Respondents in respect of the consequences of applying the SEBI Circular whilst adjudicating this Appeal. However, for completeness, we only refer to these submissions briefly as under: 62. The Respondents submit that the DTDs have an aggregate of 19 ISINs of which 10 ISINs comprise entirely of a single investor / Debenture Holder. Should ISIN-wise voting be carried out, one single investor may vote against or abstain from voting, the consequence of which, is a failure of the Resolution Plan. Converted into figures, this could result in a situation where one Debenture Holder holding debentures worth Rs. 5 Crores could veto a Resolution Plan worth Rs. 9,017 Crores. This would lead to an incongruous situation wherein even if one single investor either votes against or worse, abstains from voting, the entire resolution plan would fail. In such situation, it would be the retail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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