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TMI Blog2023 (2) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 3 company w.e.f. 13.01.2022. There was non-compliance with the repayment obligation of the respondent no. 3 company. The management and the control of respondent no. 3 company was thereafter assumed by the new management of respondent no. 3 company. The Board of the respondent no. 3 company has been reconstituted and the new management has undertaken various steps for the revival of the business and operations of the Company and the Reference Entity including restructuring of DTD - The learned Single Judge has rightly held that the actions taken by the respondent no. 1 2 are protected under Clause 17.2 and will have no effect on the obligations of the appellant as a pledgor and that the amendment to the DTD executed on 22.04.2023, would not come in the way of exercise of rights, which had already accrued in favour of respondent no. 1 upon the occurrence of Event of Default . Conclusion - The appellant being a pledgor, who is guilty of default as per clause 16(j) and (h) of the SPA, cannot be now permitted to urge that voting rights continue to vest in him. The findings of learned Single Judge does not suffer any illegality, consequently, the appeal is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was to be utilized for general corporate purposes. 7. The Appellant, to secure debt of the Respondent No.3 as per the DTD, pledged 26% of his shares in the company as collateral, acting in the capacity of promoter and managing director of the Respondent No.3. To secure the same, the Appellant and the Respondent No.1 entered into a 'Unattested Share Pledge Agreement' (hereinafter referred as 'SPA') on 08.08.2017. Debt was also secured by Hypothecation and charge created over the Bank accounts of Respondent No.3, hypothecation and charge created over the Bank accounts of Nova and also by way of pledge of Respondent No.3's shareholding in Nova. Pertinently, Nova is a subsidiary of Respondent No.3, which holds 99.98% of shareholding in Nova. 8. It was pointed out in the appeal, the Respondent No.3 had not defaulted in making timely payments in accordance with DTD towards the loan advanced by respondent no. 1 up until 2019 but due to a severe liquidity crunch, Respondent No.3 lacked sufficient funds to pay the second and third instalments which were due on 30.09.2019. To avoid a default in payment due to the same, the Respondent No.3 entered into an amendment to the DTD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent no. 3 forwarded a copy of consolidated financial statements of the company for the financial year 2021-2022 alongwith the report of the independent auditor, that appellant came to know that restructuring of the DTD has taken place with effect from 01.08.2022. 12. On 14.08.2023, the Appellant in his capacity of a shareholder in the Respondent No.3 company, received a notice for convening the meeting of equity shareholders of the Respondent No.3 company pursuant to the orders dated 01.06.2023 and 03.08.2023 passed by the learned NCLT, Mumbai. As per the notice, the agenda of the meeting was to get the consent of 75% of the total equity shareholders by the way of E-voting in order to consider and pass a resolution to approve the 'Composite Scheme of Arrangement' between Respondent No.3, NOVA and Panacea Infotech Pvt Ltd (a third party transferor company). In the said scheme, it was stated that Respondent No.3 and Respondent No.2 (through Respondent No.1) entered into a Term Sheet dated 31.01.2023 for restructuring the debt under the DTD. 13. Pursuant to the said notice, the Appellant on 23.08.2023, filed I.A No.16191 of 2023, inter alia, seeking urgent ex-parte ad-interi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent no. 2 had invoked the pledged shares on 04.02.2022, the position has since changed as respondent no. 3 is no longer defaulter and thus, the voting rights in the aforesaid pledged shares ought to be restored to the appellant and respondent no. 1 and respondent no. 2 cannot exercise any right over the pledged shares. 17. The learned counsel pointed towards the amended Term Sheet dated 31.01.2023, wherein it is provided that except for the 'Event of Default' leading to the restructuring of the NCDs and which have since been cured, no other 'Event of Default' has occurred and is continuing on the date of the transaction. It is also submitted that a similar condition was incorporated in the third amendment deed providing that the period between 01.08.2021 to 31.07.2022 is to be treated as the interim moratorium period during which non-payment of debenture amount or interest was not to be considered as a default and therefore there can be no 'Event of Default' existing as on date. Furthermore, even if there was any 'Event of Default' against the company post the Term Sheet or the Third DTD Amendment, as per the provisions of the DTD, Lenders are required to issue a fresh 'Event of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed order and more particularly submitting that in the impugned order, two 'Events of Default' have erroneously presumed by the learned Single Judge to be continuing 'Events of Default'. The first being the resignation of the Appellant as a director of the Respondent No. 3 company, however, the said fact was known to Respondents No, 1 & 2 as recorded in letter dated 14.01.2020 but not been treated as an 'Event of Default'. Secondly, the Appellant has not shown to be a promoter by the Respondent No.3 in its financial statement and the Third amendment to DTD which records that the appellant was a promoter, however, since appellant is not a promoter now, him being a willful defaulter or not, would not trigger an 'Event of Default'. 22. It is further submitted that the fact that the Appellant ceases to be a Director of KSSL on account of resignation cannot be held against him as the management of the Respondent No.3 company was going to remove the Appellant from its management. In order to save himself, the embarrassment on account of the oppressive act of the majority shareholder, the Appellant resigned from the management control of KSSL. 23. The appellant further submits that the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in respondent no. 3 in the meeting of the equity shareholder of the respondent no. 3 company in connection with the 'Scheme of Arrangement'. Respondent's submissions: 26. The Respondent No.1 is a SEBI registered intermediary acting for the interest of over 600 retail investors who are to be refunded monies. The Respondent No.1 contends that the learned Single Judge has committed no illegality in the impugned order, as long as a default exists, the Respondent No.1 is entitled to deal with the shares as if it is the owner thereof. 27. The Respondent No.1 submits that the debt has been reconstructed, however, that does not imply that the 'Event of Default' on behalf of the appellant does not continue to exist. In such event, the Respondents are to deal with the shares as if it were their own. 28. The Respondent No.1 also states that the parties had themselves agreed that if the Appellant ceases to be a director and is declared a willful defaulter, it would amount to an 'Event of Default'. Rights of the parties are governed by the terms of the DTD and parties are bound by the same. Learned counsel submits that this position stands expressly recognized by Clause 16 of the Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rival submissions of the parties recorded before the learned Single Judge and on appreciating the record, the learned Single Judge proceeded to observe as follows:- "21. In my view, when the parties had themselves agreed in clause 16 (h) & of Schedule IV to the DTD that an 'Event of Default' would also encompass a situation where a person does not remain a Director of the Company as also a situation where he is declared as a wilful defaulter, the plaintiff's plea that there is no existing 'Event of Default' has to be rejected. Once the plaintiff admits that he is no longer a Director in the defendant no.3 Company, this act in itself would, in my considered view, amount to an "Event of Default' in terms of clause 16 (j) of the DTD noted hereinabove. The plaintiff has also not denied, that as urged by the defendants, he has been declared a wilful defaulter by Yes Bank Limited. This factual position would also fall within the ambit of the term 'Events of Default' as prescribed in clause 16 (h) of the Schedule IV to the DTD. In the light of these specific provisions of the DTD, the plaintiff cannot be permitted to urge that the "Event of De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except the right to sell, transfer, assign or encumber these shares. It was further agreed between the parties that after the occurrence of an "Event of Default", the debenture trustee i.e. defendant no.1, would be authorised to exercise voting rights in respect of these pledged shares. In the present case, it is an admitted case of the parties that after the "Event of Default" occurred in February, 2022, the defendant no.1 has, in accordance with clause 2.3.1 of the SPA, been exercising all voting rights in respect of the shares pledged by the plaintiff. The plaintiff's plea that the position has now changed and there is no continuing "Event of Default" has already been rejected hereinabove and, therefore, I am unable to appreciate as to how in the light of clause 2.3.1, the plaintiff can be permitted to urge that the defendant no.1 is not entitled to exercise voting rights qua these pledged shares which already stand invoked in February, 2022 itself. 27. Even this clause of the SPA makes it clear that upon the occurrence of an "Event of Default'", the voting rights in respect of all the pledged shares irrespective of whether they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no existing 'Event of Default', thus, respondent no. 1 is debarred from exercising voting rights regarding shares. Apart from this, the appellant firmly relied upon Clause 2.7 of the Third amendment to the DTD and Amended Term Sheet. Per contra, the case of respondents is that by restructuring of the loan, would not imply that 'Event of Default' on the part of appellant does not continue to exist, therefore, in the situation when 'Event of Default' continues, their right to deal with shares as if they are the owners thereof is in the terms of the SPA remains uncurbed. 37. The relevant clauses for the purpose of present proceedings of Unattested Share Pledge Agreement dated 08.08.2017 executed by and between the appellant, the respondent no. 1 and respondent no. 3 are as under:- "2.3 Voting Rights 2.3.1 Subject to Section 2.3.2 below, on and after the Effective Date but until the occurrence of an Event of Default, the Pledgor shall be entitled to exercise any and all voting and other consequential rights pertaining to the Pledged Shares except the right to sell, transfer, assign, or encumber the Pledged Shares and for all or any part thereof for any purpose not in violation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in it (whether vested in it by this Agreement or any Debenture Documents or by Applicable Law) for the protection and enforcement of its rights in respect of the Collateral, and the Debenture Trustee (after obtaining such prior instructions of the Majority Debenture Holders) shall be entitled, without limitation, to exercise any or all of the following rights, as often as it deems fit: (a) to receive all amounts payable in respect of the Collateral or otherwise payable under Section 2.4 above to the Pledgor; " Clause 3. CONTINUING SECURITY 3.1 This Agreement and the Security Interest created hereunder, are and shall be a continuing Security and shall remain in full force and effect until the Final Settlement Date notwithstanding any insolvency or any incapacity of the Pledgor. ... ... ... Upon occurrence or existence of an Event of Default, this. pledge may be enforced against the Pledgor without first having recourse to any other rights available to the Debenture Holders pursuant to the terms of the Debenture Documents." 38. The unattested Share Pledge Agreement dated 08.08.2017 is accompanied by a Power of Attorney executed by the appellant. The relevant clause of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. unless such failure is a result of an administrative or technical error and continues un-remedied for a period of 15 (Fifteen) Business Day from the relevant due date. 2. Escrow Account Balance The Company fails to maintain the required balance in the Company Escrow Account as required under this Deed and the Escrow Agreement. ... ... ... ... 13. Non-Submission of Reports Any failure to submit reports as required under this Deed by the Company or/and the Reference Entity. 40. The respondent no. 1 issued the notice of 'Events of Default' dated 13.01.2022 wherein it, while referring to three specific instances of non- compliance of default by the company of provisions of DTD as under:- (a) In terms of the provisions of Clause 5 of the DTD, the repayment of the principal amount of the NCDs and the payment of the interest and default interest, if any, thereon has to be made to the Debenture Holders as per the timelines stated in the DTD. The Company has delayed various payments to the Debenture Holder from time to time. Further, the Company has not paid the monthly instalments due towards the NCDs since August, 2021, despite the same being brought to the notice of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is a 'notice for invocation' as required under the terms of the Transaction Documents. This notice constitutes a notice for invocation of collateral pledged shares for the purpose of Section 176 of the Indian Contract Act, 1872. 42. In the context of the submissions made and aforesaid clauses from various documents of the parties reproduced herein above, it is to be noted that Hon'ble Supreme Court in PTC India Financial Services Ltd vs Venkateswarlu Kari & Anr (Supra) has observed as under: "(ii) Pawnee has a special and not general right in the pledged property. 5.1 This Court, in Lallan Prasad v. Rahmat Ali and Another, observes that under the common law, a pledge is a bailment of personal property as security for payment of debt or engagement. The two essential ingredients of pledge are (i) the pawn i.e., the property pledged should be actually or constructively delivered to the pawnee and (ii) a pawnee has only special property in the pledge but the general property therein remains in the pawnor and wholly reverts to him on discharge of the debt. The right to property vests in the pawnee only as far as is necessary to secure the debt. A pawn or pledge is an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Chairman of the Board of respondent no. 3 company w.e.f. 13.01.2022. There was non-compliance with the repayment obligation of the respondent no. 3 company. The management and the control of respondent no. 3 company was thereafter assumed by the new management of respondent no. 3 company. The Board of the respondent no. 3 company has been reconstituted and the new management has undertaken various steps for the revival of the business and operations of the Company and the Reference Entity including restructuring of DTD. The restructuring vide Third amendment to DTD dated 22.04.2023 is based on clause 3 of the said deed, which reads as under:- "3. OTHER TERMS AND CONDITIONS 3.1 The Parties agree that the Proposed Merger Event is one of the key terms of the restructuring of the Debentures, post the occurrence of the Event of Default on the part of the Company and in case any of the Parties hereto or any shareholder of the Company or the Reference Entity undertakes any steps or takes any action or inaction, which in any respect jeopardizes such Proposed Merger Event, then the step I action I inaction shall be treated as the occurrence of an Event of Default and the Debenture Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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