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TMI Blog2022 (9) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the adjudicating officer to grant the relief sought by the plaintiffs in the first instance. Hence, the bar in Section 15Y would not operate as against the suit in the present case. Similarly, Section 430 of the Companies Act provides that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine. Nothing in the Companies Act 2013 or any other law for the time being in force vests either the National Company Law Tribunal or the National Company Law Appellate Tribunal with the jurisdiction to adjudicate upon a challenge to the RBI Circular. Hence, the bar in Section 430 is not attracted. Single Judge of the Bombay High Court (in the first instance) as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. SEBI Circular is applicable if debenture holders wish to implement a Resolution Plan to which the lenders are a party - By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs even in the absence of similar provisions in other laws. The argument that the SEBI Circular is not applicable because a single debenture holder will be able to frustrate the Resolution Plan is a consequential one. The applicability of a circular cannot be determined on the basis of such a concern. We need not comment upon this aspect in the absence of a challenge to the SEBI Circular. We also note that it is open to the relevant stakeholders to approach SEBI with any concerns, commercial or otherwise, and request an amendment to the SEBI Circular. SEBI as a statutory regulator can always look at such concerns and has the power to factor them in if it deems fit to do so in public interest and for the orderly functioning of the securities market. SEBI Circular has retroactive application - In the present case, RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular. However, as of 13 October 2020 (the date on which the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution of India, stipulate suitable directions to mitigate the potential denial of rights. Pertinently, the SEBI Circular only contemplates two situations where ISIN-wise voting is mandated: (i) non-enforcement of security; and (ii) entering into an ICA. Although it applies retroactively, it admittedly does not contemplate a scenario where the debenture holders could give ex post facto consent to ICAs agreed prior to the commencement of the SEBI Circular, that is 13 October 2020. In the present case, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled. For this reason, we consider it necessary to extend the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. We would like to reiterate that this Court is issuing the directions to mould the relief under Article 142 in view of the peculiar facts and circumstances of the present case noted above. Dissenting debenture holders in the present case - It is clear that a compromise arrived under the SEBI Circular or Section 230 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lam, AOR JUDGEMENT Dr. Dhananjaya Y. Chandrachud, J. Table of Contents A. Facts .................................................................................................................. 4 i. The dispute .............................................................................................................. 4 ii. The suit before the Bombay High Court ............................................................... 5 iii. The impugned judgment ...................................................................................... 10 B. Issues ............................................................................................................... 12 C. Submissions ................................................................................................... 12 D. Overview of contractual arrangements ......................................................... 19 i. The Debenture Trust Deeds ................................................................................. 19 ii. Steps taken by the DebentureTrustee (Vistra) .................................................... 23 E. Evolution of the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 4, RBI Circular The RBI Circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan Resolution Plan or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an inter-creditor agreement. ICA Bank of Baroda and other lenders of RCFL entered into an ICA on 6 July 2019, pursuant to the RBI Circular. Bank of Baroda was later appointed as the lead bank under the ICA. 3. The RBI Circular applied to banks and specified categories of lenders. Other investors were outside its purview. SEBI issued a circular on 13 October 2020. The subject was the Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities . SEBI Circular On 11 March 2021, RCFL and Vistra amended the Debenture Trust Deeds by executing a Supplementary Debenture Trust Deed which took note of the SEBI circular. On 15 July 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited Authum was approved by RCFL s lenders. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, prima facie, one on which this Court can make a recommendation, 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. The Court noted that Vistra had sought a clarification on 11 August 2021, regarding the manner in which the meeting was to be held. It directed SEBI to respond to Vistra s representation on a priority and extremely urgent basis . SEBI issued a clarificatory letter on 23 August 2021 in response to this representation. The clarificatory letter referred to Regulation 15(7) of SEBI (Debenture Trustees) Regulations 1993 1993 Regulations and the SEBI Circular and clarified that the voting would have to be conducted in accordance with the SEBI Circular. The relevant extract of this letter reads as follows: 5. In view of regulation 15(7) of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 2.2.4 Unsecured NCDs 21 81.00 16.46 20.32 2.2.5 Related Party 1 200.00 26.90 13.45 Total 9,017.22 2,206.83 In terms of the above table, all individuals/ HUFs holding debentures of a value less than Rs. 10 Lakhs were to get 100% of their principal sum due, while individuals and HUFs holding debentures in excess of Rs. 10 lakhs were to receive 24.96% of the principal. 10. By an order dated 28 October 2021, the Single Judge recorded that RCFL and the resolution applicant had agreed to pay the debenture holders an additional sum of 5% of the total principal sum outstanding as an additional settlement. Therefore, the debenture holders were to receive an aggregate sum of Rs. 91,00,000/- representing 29.96% of the total principal outstanding. In return, debenture holder parties to the suit would have to accept the terms of the negotiated settlement in full and final sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted in its appeal, that the SEBI Circular is applicable and the consent of the debenture holders at the International Securities Identification Number ISIN level is necessary before a Resolution Plan could be implemented. 12. At the first hearing, SEBI took objection to paragraphs 15 to 17 of the Single Judge s order dated 28 October 2021. Accordingly, the Division Bench passed an order dated 3 December 2021 granting liberty to SEBI to move the Single Judge to obtain a clarification. On 3 December 2021, the Single Judge clarified that SEBI was not a party to the suit and could therefore not be a party to the compromise. 13. On 6 December 2021, the Division Bench admitted the appeal filed by SEBI and allowed the meeting to be held on 8 December 2021. On 21 December 2021, a co-ordinate bench passed an order directing that the results of e-voting of the meeting conducted on 8 December 2021 be placed on record. 14. After consideration of the rival submissions, the Division Bench dismissed the appeal filed by SEBI for the following reasons: a. The SEBI Circular would not apply retrospectively to defaults committed prior to 13 October 2020 because: (a) it comes into for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Clauses 6.5 and 6.6 of the SEBI Circular; b. The SEBI Circular is retroactive in nature because it does not travel backwards and take away or impair vested rights. The SEBI Circular operates in future, but its operation is based on events that arose prior to it. Although the Debenture Trust Deeds were signed prior to the SEBI Circular, the circular was brought into force before voting took place. Therefore, the voting ought to have taken place in accordance with the SEBI Circular; c. The SEBI Circular has the force of law; d. Under the SEBI Circular, voting is required to be conducted as per ISINs. ISIN-wise voting ensures that rights of small investors are protected against the excesses of large investors. The possibility of ISIN-wise voting will not defeat the Resolution Plan as the issuer company can always adjust the size of the security; e. The Resolution Plan expressly states that it has to be carried out in terms of the Applicable Law , which includes laws enacted by SEBI. Therefore, compliance with regulatory provisions mandated by the circular issued by SEBI is required before implementing the Resolution Plan; f. Prior to the coming into force of the SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular does not provide a mechanism by which dissenting ISIN level debenture holders can exit an ICA / Resolution Plan. ISIN wise voting would enable a single ISIN number to defeat the Resolution Plan; c. The SEBI Circular is issued under section 11(1) of the SEBI Act. Hence, the SEBI circular is administrative in nature and is not delegated legislation. An administrative circular cannot have retrospective operation as it takes away vested rights. Moreover, the SEBI Act does not provide for retrospective or retroactive application of subordinate legislation; d. The SEBI Circular extinguishes the vested rights of debenture holders under the Debenture Trust Deeds. Under Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deeds, the debenture holders by a special majority have a vested right to sanction any compromise or arrangement with the company. However, the SEBI Circular subjects the will of the majority to the will of the ISIN number holders, and in the process impairs the vested rights conferred under the Debenture Trust Deeds. Thus, the application of the SEBI Circular will not only be retroactive, but also renders it retrospective; e. The SEBI Circular d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the impugned order should not be interfered with because: a. The SEBI Circular has no retrospective/ retroactive operation because it is not a regulation in terms of section 30 of the SEBI Act. b. The compromise under the Resolution Plan does not fall foul of section 430 read with section 230 of the Companies Act, 2013 because the latter is only an enabling provision. The jurisdiction of the NCLT is invoked only when a company which proposes to enter into a compromise with its creditors opts to file an application before the NCLT. c. Any further change to the extant resolution process carried out validly under the RBI Prudential Framework would derail the efforts undertaken by all the stakeholders. Particularly, it would prejudice all the creditors of the company, including 69% of the retail debenture holders who are poised to receive 100% of the principal exposure. 20. Mr. Dhruv Mehta, learned senior counsel, appeared for Authum, the Resolution Applicant. Authum is not a party to the present proceedings. Mr Mehta submitted that the SEBI Circular can only apply prospectively and not retrospectively/retroactively. He also submitted that this Court can, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is as under: Demerger of commercial finance business of RCL (Reliance Capital Ltd.) into RCFL 24.03.2017; Mr. Devang Mody, CEO of the company resigned 31.12.2018; Default in repayment of Andhra Bank s Term Loan 22.03.2019; Rating (LT) downgraded from CARE BBB+ to D-26.04.2019; PWC, the erstwhile auditor of the company resigned 11.06.2019 22. On 15 July 2019, an ICA was entered into between Bank of Baroda and the other lenders of RCFL. On 24 August 2020, Bank of Baroda issued a process note elucidating the process for seeking a Resolution Plan from eligible bidders. The process note set out three options of which the first option was in the following terms: Option I Submission of bid for RCFL as a going concern, on as-is-where-is and as-is-what-is basis. Under Option-I, bidders are invited to submit bid for the acquisition of entire shareholding and business of RCFL as a going concern, on as-is-where-is and as-is-what-is basis including each of the Asset Books, and all rights, obligations, debts (secured and unsecured) titles, interests, assets, properties whether movable or immovable real or personal, in possession or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, decrees, injunctions, writs or orders of any court statutory or regulatory authority, tribunal, board, or stock exchange in any jurisdiction, as may be in force and effect including any amendment, modification or reenactment from time to time 24. On 11 March 2021, parties entered into the Supplementary Debenture Trust Deed to amend the earlier Debenture Trust Deeds. The recitals to the Supplementary Trust Deed inter alia provide that: WHEREAS A. The Parties have entered into Principal Deeds as listed in Schedule 1 hereunder for recording the terms and conditions for issuance of Debentures by the Company in accordance with the provisions of the Companies Act, 2013 and the regulations applicable to issue of debentures notified by Securities Exchange Board of India ( SEBI ), from time to time. B. SEBI has amended certain provisions of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Debenture Trustee) Regulations, 1993 through its Gazette Notifications Nos. 34 and 35, respectively and each dated October 8, 2020. Further, SEBI has issued certain guidelines regarding debt instruments and debenture trustees through its circulars bearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the recovery of the outstanding dues of secured debenture holders from RCFL. On 12 June 2020, Bank of Baroda informed Vistra that under the Resolution Plan, it was proposed to distribute the funds of RCFL to those lenders who had signed the ICA and the deed of indemnity. 26. Vistra addressed a communication to the Bank of Baroda on 18 June 2020 objecting to this mechanism and the non-involvement of the debenture holders in the decision-making process. On 1 July 2020 Bank of Baroda intimated that the total amount available for distribution was Rs. 523 crores and that the debenture holders would be receiving 5.7% of the amount they had invested. Bank of Baroda stated that upon signing the ICA, a proportionate amount would be paid to the debenture holders. Vistra adverted to the steps which it took of intimating the debenture holders on various aspects of signing the ICA. 27. The Resolution Plan advisor requested Vistra to sign the ICA on behalf of the debenture holders pursuant to which a meeting of the ICA lenders was held on 6 November 2020. This meeting was inter alia attended by Vistra as an observer, along with four debenture holders. In the meantime, Vistra received pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial majority as stipulated in Section 391(2) was that the scheme would bind even those who dissented or abstained from voting. These provisions applied to all kinds of creditors without exception. 32. In the absence of a provision such as Section 391 of the erstwhile Companies Act 1956, a contract for the repayment of the dues of creditors would be governed by the provisions of Section 62 of the Contract Act. Section 62 envisages that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Similarly, Section 63 envisages that every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance or may accept instead of it any satisfaction which he may think fit. The provisions of Sections 62 and 63 would obviously apply to consenting parties. Hence, the terms of an earlier agreement between a debtor and a creditor would be varied by a specific act of acceptance. 33. The impact of Section 391 of the Companies Act 1956 lay in its ability, in relation to the creditors or members of a company, to bind non-consen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBF-C-D) 37. The RBI Circular envisages that all lenders must recognize incipient stress in loan accounts immediately on default by classifying such assets as special mention accounts . The expression default means a non-payment of a debt, as defined in the Insolvency and Bankruptcy Code 2016 when the whole or any part or an instalment has become due and payable and is not paid by the debtor or corporate debtor. The framework which has been put into place by the circular includes the following provisions:- a. The framework requires that lenders initiate the process of implementing a Resolution Plan even before a default occurs. Once the borrower is reported to be in default, lenders must undertake a prima facie review of the borrower s account within 30 days from such default, within which a resolution strategy has to be decided (clause 9); b. In cases where a Resolution Plan is to be implemented, all lenders have to enter into an ICA during the review period (clause 10); and c. The ICA has to provide that any decision agreed by lenders representing 75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nders. This means that where the requisite majority of lenders supports the decision, the decision binds all lenders including those who may dissent or abstain. The ICA is to inter alia provide for the protection of rights of dissenting lenders and in particular, for a payment of not less than the liquidation value to the dissenters. The liquidation value (as specified in footnote 6 to the RBI Circular) means the estimated realizable value of the assets of the borrower, if the borrower were to be liquidated as on the date of the commencement of the review period. Footnote 6, RBI Circular: Liquidation value would mean the estimated realizable value of the assets of the relevant borrower, if such borrower were to be liquidated as on the date of commencement of the Review Period. Hence the ability to bind all lenders, including those who dissent or abstain is conditioned on the decision being backed by the requisite majority representing 75% by value and 60% by number. 39. Section 1(4)(e) of the Companies Act recognizes that banking companies can be regulated by a special legislation. Section 230(2)(c)(iv) of the Companies Act contemplates that the company or person by whom a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently, on and from 7 June 2019 (the date of issuance of the RBI Circular), lending institutions governed by Clause 3 of the RBI Circular can avail of the special mechanism which has been introduced under it for the purpose of entering into a compromise, resolution, plan or arrangement for restructuring the debt due to lenders, with the ability to bind dissenters or those who abstain, without having to approach the NCLT under Section 230 of the Companies Act. iii. SEBI (Debenture Trustees) Regulations 1993 42. Regulation 2(bb) defines debenture trustee to mean a trustee appointed in respect of any issue of debentures of a body corporate. Chapter II of the 1993 Regulations contains provisions for the registration of a debenture trustee. Chapter III provides the responsibilities and obligations of debenture trustees. Chapter IV provides for inspection and disciplinary proceedings. Chapter V provides the procedure for action in case of default. Chapter VI contains a provision to relax the strict enforcement of the 1993 Regulations. Regulation 15 provides for the duties of debenture trustees. Among them is the duty to take steps to convene a meeting of the holders of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t including seeking the consent of the investors for refraining from enforcing the security and/or entering into an ICA. Section B of the SEBI Circular provides for the consent of the investors for the enforcement of security and for signing an ICA. Section B is extracted in its entirety below: B. Consent of investors for enforcement of security and for signing the ICA 4. The Reserve Bank of India ( RBI ), vide Circular dated June 07, 2019 issued the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 which inter alia specified the mechanism for resolution of stressed assets by Lenders (viz. Scheduled Commercial Banks, All-India Term Financial Institutions, Small Finance Banks, Systematically Important Non-Deposit Taking Non-Banking Finance Companies (NBFCs) as well as Deposit Taking NBFCs). In terms thereof, investors in debt securities, being financial creditors, are approached by other lenders to sign an agreement, referred to as the Inter Creditor Agreement ( ICA ), under specific terms detailed in the framework as stipulated by RBI. 5. Regulation 59 of LODR Regulations provides that material modification in the structur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 47. Clause 4 envisages that the RBI Circular dated 7 June 2019 has specified the mechanism for the resolution of stressed assets by lenders. In terms of the RBI Circular, investors in debt securities who are financial creditors are approached by other lenders to sign a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SEBI Circular specifies that 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. 51. Clause 7 of the SEBI Circular specifies conditions for the signing of an ICA by a debenture trustee on behalf of the investors. Evidently, the debenture trustee is vested with a discretion ( may sign the ICA and consider the resolution plan on behalf of the investors ) upon compliance with certain conditions, namely: a. The signing of the ICA and acceptance of the Resolution Plan would be in the interest of the investors; b. This would be in compliance with the Companies Act, the Securities Contracts (Regulation) Act 1956, SCRA and the SEBI Act and the rules, regulations, and circulars issued thereunder; c. The debenture trustee shall be free to exit the ICA if the Resolution Plan imposes conditions which are not in accordance with the Companies Act, 2013, the SCRA and the SEBI Act together with the rules, regulations, and circulars issued thereunder; d. If the Resolution Plan is not finalized within a period of 180 days from the end of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side the purview of RBI s framework may be approached by the lenders to sign an ICA. This is for the reason that the Resolution Plan in the ICA which has been entered into by the lenders may involve the restructuring of debt security. 55. Where a Resolution Plan has to be implemented, it has to be preceded by all lenders entering into an ICA, in terms of the RBI Circular. Debenture holders who lie outside the purview of the RBI Circular may agree to enter into the ICA in which event, the Resolution Plan which is being implemented in pursuance of the ICA entered into with the lenders would enure to the benefit of the debenture holders subject to the obligations and duties cast under it. The debenture holders are not bound to enter into an ICA in which event they would not be governed by its provisions or of the Resolution Plan which is entered into under the ICA. But to bind the entire class of debenture holders, the decision to enter into an ICA has to be backed by the stipulated majority which is prescribed in the SEBI Circular. The ability to bind the dissenting debenture holders or those who abstain is precisely conditional on whether the decision to enter into an ICA is back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate class or category, the SEBI Circular mandates that the voting is required to be done ISIN wise. SEBI has explained that it is left to the debenture holder in each ISIN to determine how they wish to vote and adopt or reject the Resolution Plan. SEBI has asserted that nothing prevents an individual holder of an ISIN to accept a haircut in the payment of its dues. But this cannot be forced upon them without following the framework prescribed by SEBI to protect the interests of debenture holders. In the present case, the three Debenture Trust Deeds with 19 ISIN numbers are distributed in the following manner: a. Debenture Trust Deed-1 dated 5 February 2018 has four (4) ISIN with an approximate principal amount of Rs.564.77 crores; b. Debenture Trust Deed-2 dated 3 May 2017 has nine (9) ISIN with an approximate principal amount of Rs.1249.8 crores; and c. Debenture Trust Deed-3 dated 23 May 2017 has six (6) ISIN with an approximate principal amount of Rs.81.00 crores. 59. Clauses 22 (ii) and 22(iii) of the Fifth Schedule to the Debenture Trust Deeds contains the following provision: 22. A meeting of the Beneficial Owner(s) / Debenture holder(s) as the case may be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, SEBI Circular: 9. This circular is issued in exercise of the powers conferred upon SEBI under Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with the provisions of Regulation 2A of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, Regulation 31(1) of the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 and Regulation 101(1) or the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations, 2015 to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market. Now it is important to emphasise that the ICA which has been referred to in the SEBI Circular is the ICA which is provided for in the RBI Circular. Clause 4 of the SEBI Circular indicates that investors in debt security who are financial creditors are approached by other lenders to sign an agreement namely an ICA under specific terms detailed in the framework as stipulated by RBI. Moreover, Regulation 15(7) of the 1993 Regulations confers an enabling power upon the debenture trustee, subject to the approval of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular. RBI has, in the above extract of its affidavit, clarified that the resolution of stressed assets is ultimately an act of commercial negotiation between the debtor and the creditor and between various creditors of the borrower under resolution. F. Analysis 63. It is RCFL s case that the SEBI Circular is applicable only if the debenture holders choose to enter into an ICA under the RBI Circular. According to RCFL, it is open to debenture holders to choose not to enter into an ICA. Instead, they may approve of a Resolution Plan that the lenders have formulated independent of the modalities prescribed in the SEBI Circular. It is argued that this route permits debenture holders to approve or reject Resolution Plans based on whether their interests are properly accounted for. It has been urged that this may be preferable to entering into an ICA, where the debenture holders may find themselves at the mercy of the lenders (who may wield greater power while formulating the Resolution Plan, either due to their number or due to the value of the debt owed to them or both). Debenture holders would, it has been argued, consequently be forced to abide by a Resolution Plan which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an ICA is the only route to entering into a compromise with the issuer company. Besides the absence of a clause mandating an ICA pursuant to an event of default, Clause 6.5.3 of the SEBI Circular recognizes that the debenture holders (through the Debenture Trustees) may undertake actions besides those contemplated in the SEBI Circular. However, if debenture holders choose to implement a Resolution Plan to which the lenders are party, they must do so in compliance with the conditions laid down in the SEBI Circular. 69. Clause 9 of the RBI Circular stipulates that the lenders are to undertake a review of the borrower s accounts within 30 days from the date of default, during which they may decide on the resolution strategy. The lenders may opt for any resolution strategy available to them under the existing legal framework, including (i) entering into a Resolution Plan; or (ii) initiating legal proceedings for recovery; or (iii) insolvency. If the lenders choose to implement a Resolution Plan, they are required to enter into an ICA in terms of Clause 10 of the RBI Circular. The existence of an ICA which is in compliance with the RBI Circular is a sine qua non for the implementat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasis supplied) 73. By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan. Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. When the SEBI Circular came into force, it specified the conditions under which the debenture holders (through the Debenture Trustees) could access this Resolution Plan and participate in its formulation via the ICA. 74. By arguing that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, RCFL is suggesting that the ICA and the Resolution Plan are distinct and severable. The implication is that debenture holders may opt in to the Resolution Plan after it has been formulated, without concerning themselves with the ICA. This is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the signatories to the ICA, the Debenture Trustee(s) shall be free to exit the ICA and seek appropriate legal recourse or any other action as deemed fit in the interest of the investors. (emphasis supplied) Hence, any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. There is only one door , so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented. 75. The purpose of the SEBI Circular is multi-fold not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause 6.6). If RCFL s argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have the option of exiting the compromise or arrangement arrived at in terms of Section 230 Companies Act. The NCLT will look into the overall fairness of the compromise or arrangement under Section 230 Companies Act Similarly, dissenting lenders do not have the option of exiting the ICA / Resolution Plan under the RBI Circular. The RBI Circular states that the ICA may provide for the protection of dissenting lenders The respective majorities provided for in each of these laws bind dissenting creditors. It is along these lines that the SEBI Circular binds dissenting debenture holders. Indeed, the SEBI Circular could bind dissenting debenture holders even in the absence of similar provisions in other laws. 79. The argument that the SEBI Circular is not applicable because a single debenture holder will be able to frustrate the Resolution Plan is a consequential one. The applicability of a circular cannot be determined on the basis of such a concern. We need not comment upon this aspect in the absence of a challenge to the SEBI Circular. We also note that it is open to the relevant stakeholders to approach SEBI with any concerns, commercial or otherwise, and request an ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events. 83. The terms retrospective and retroactive are often used interchangeably. However, their meanings are distinct. This Court succinctly appreciated the difference between these concepts in State Bank's Staff Union (Madras Circle) v. Union of India: (2005) 7 SCC 584 'Retroactivity' is a term often used by lawyers but rarely defined. On analysis it soon becomes apparent, moreover, that it is used to cover at least two distinct concepts. The first, which may be called 'true retroactivity', consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as 'quasiretroactivity', occurs when a new rule of law is applied to an act or transaction in the process of completion....The foundation of these concepts is the distinction between comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xercise of the powers under the 1993 Regulations.28 Further, Regulation 15(7) of the 1993 Regulations lays the foundation for the conditions specified in the SEBI Circular. As such, the phrase provisions of the [1993 Regulations] in Clause 59 must be read to include the SEBI Circular. Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed are evidently in conflict with the SEBI Circular as they each provide for different voting mechanisms. Therefore, Clauses 22 and 23 must give way to the SEBI Circular, which will take precedence. v. Exercise of this Court s power under Article 142 of the Constitution 87. Under the present scheme of the Resolution Plan, retail debenture holders having an exposure of up to INR 10 lakhs would stand to realize 100% of their principal dues. The secured retail debenture holders having an exposure of more than INR 10 lakhs would realize 29.69%. The table showing the distribution is extracted below: 28 Clause 9, SEBI Circular Particulars Count Exposure (INR) Recovery (In INR) Recovery (In %) Secured individuals and HUF debentu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SCC 444 this Court observed that the jurisdiction under Article 142 can be used to relax the rigors of law depending upon the peculiar facts and circumstances. It was observed: 22. [ ] This article gives a very wide power to do complete justice to the parties before the Court, a power which exists in the Supreme Court because the judgment delivered by it will finally end the litigation between the parties. It is important to notice that Article 142 follows upon Article 141 of the Constitution, in which it is stated that the law declared by the Supreme Court shall be binding on all courts within the territory of India. Thus, every judgment delivered by the Supreme Court has two components - the law declared which binds courts in future litigation between persons, and the doing of complete justice in any cause or matter which is pending before it. It is, in fact, an Article that turns one of the maxims of equity on its head, namely, that equity follows the law. By Article 142, as has been held in State of Punjab [State of Punjab v. Rafiq Masih, (2014) 8 SCC 883: (2014) 4 SCC (Civ) 657: (2014) 6 SCC (Cri) 154: (2014) 3 SCC (L S) 134] judgment, equity has been given precedence ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applies retroactively, it admittedly does not contemplate a scenario where the debenture holders could give ex post facto consent to ICAs agreed prior to the commencement of the SEBI Circular, that is 13 October 2020. In the present case, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled. For this reason, we consider it necessary to extend the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. We would like to reiterate that this Court is issuing the directions to mould the relief under Article 142 in view of the peculiar facts and circumstances of the present case noted above. vi. Dissenting debenture holders in the present case 95. As stated in the above sections, after 13 October 2020, there are two mechanisms in situations where a compromise or resolution is sought: a. A compromise under the SEBI Circular, which lies outside the process of the NCLT, to restructure the debt, binding both dissenting and abstaining debenture holders; b. A compromise under Section 230 of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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