Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2022 Supreme(Bom) 241

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
S.J. KATHAWALLA, MILIND N. JADHAV, JJ.
Securities and Exchange Board of India – Appellant
Versus
Rajkumar Nagpal – Respondent
COMMERCIAL APPEAL (L) NO. 27370 OF 2021 IN INTERIM APPLICATION (L) NO. 14224 OF 2021 IN COMMERCIAL SUIT (L) NO. 14223 OF 2021 WITH INTERIM APPLICATION (L) NO. 855 OF 2022 AND INTERIM APPLICATION (L) NO. 27373 OF 2021
Decided on : 21-03-2022

Advocate Appeared:
Mr. Arvind Datar, Senior Advocate alongwith Mr. Mustafa Doctor, Mr. Suraj Choudhary, Mr. Mihir Mody, Mr. Dhaval Patil and Mr. Arnav Misra instructed by K. Ashar & Co., Mr. Rohan Mathur, Mr. D.J. Khambatta, Senior Advocate alongwith Mr. Prateek Sekseria, Mr. Subir Kumar, Ms. Disha Shah, Mr. Karan Rukhana, Mr. Nishant Chotani and Mr. Yash Chheda instructed by SDS Advocates, Mr. Ravi Kadam, Senior Advocate alongwith Mr. Yohaann Limathwalla and Mr. Shahbaz Malbari instructed by J. Sagar Associates, 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, 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.

Point of Law: Question of the Bank “satisfying itself”, and that too by inquiring into whether any specific obligation has been breached simply does not arise

Headnote:
Constitution of India,1950 - Articles 1, 2, 3, 6, 7(D) and 15 - Banking Regulation Act, 1949 - Section 5(c) - Bank Guarantees - Advance Bank Guarantee as well as the Performance Bank Guarantee - Appellant/Original Plaintiff had sought a restraint against Respondent No. l from encashing the mobilization Advance Bank Guarantees issued by Respondent Banks in favour of Respondent No. 1, at Appellant's behest, Single Judge before whom the ad-interim application was moved during Court vacation - Respondent floated a tender inviting bids for setting up two Thermal Power Stations comprising one unit of capacity - Appellant emerged as a successful bidder - Respondent No.1 that the Project was put on hold, it was never asked to demobilise them; (iii) half-hearted instructions not to incur costs were given; (iv) this was not a mandate to demobilise; (v) it could not (and therefore did not) demobilise; (vi) this continued mobilisation resulted in costs and expenses; (vii) being entitled to, it has appropriated this against the Advance; (viii) there is now no Advance left - Instead it has to recover damages; and (ix) in these circumstances, Respondent No.1 cannot invoke the Advance Bank Guarantees.
Finding of the Court:
Respondent No.1 had repeatedly instructed Appellant to “stop the cost” in respect of the Project - Appellant chose to incur costs by not demobilising, Appellant did so at its risk. Respondent No.1 has been very fair and has assessed and admitted a portion of the Appellant’s claims - Respondent No.1, remaining claims are frivolous - Respondent is more than one year ago - Court can restrain encashment of bank guarantee in cases of established fraud in invocation of bank guarantee - Court find that mere fact that Applicant claims that it is entitled to damages is not “fraud” issues raised by parties are arguable, and it is not function of this Court at this stage to get dragged into a larger adjudication of the merits of dispute between the parties.
Result: Appeal dismissed

JUDGMENT :

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 (“RCFL”) as ‘Issuer’ and Vistra ITCL (India) Limited/Respondent No.13 (“Vistra”) as ‘Debenture Trustee’ for the issuance of Non-Convertible Debentures (“NCDs”) in the sum of Rs.2,000 Crores.

2.2 Two further Debenture Trust Deeds were also executed on 23rd May, 2017 and 5th February, 2018 respectively between RCFL as ‘Issuer’ and Vistra as ‘Debenture Trustee’.

2.3 The aforesaid Debenture Trust Deeds are hereinafter collectively referred to as the “DTDs”.

2.4 On 7th June, 2019, the Reserve Bank of India/Respondent No.14 (“RBI”) issued its Prudential Framework for Resolution of Stressed Assets Circular (“RBI Circular”).

2.5 On 6th July, 2019, an Inter-Creditor Agreement was entered into between Bank of Baroda/Respondent No.12 (“BoB”) and other lenders of RCFL (“ICA”). Under the ICA, BoB came to be appointed as the lead Bank.

2.6 On 20th September, 2019, RCFL committed its first default under the DTDs.

2.7 By a letter dated 7th November, 2019, Vistra wrote to SEBI informing them about the steps taken by it as Debenture Trustee and sought guidance in respect of the ICA and mechanism thereunder.

2.8 On 13th October, 2020, SEBI issued a Circular in relation to “Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities” (“SEBI Circular”).

2.9 On 11th March, 2021, a Supplementary Debenture Trust Deed was entered into between RCFL and Vistra amending the DTDs (“Supplementary DTD”).

2.10 On 1st July, 2021, the Plaintiffs, being 17 Debenture Holders, filed a Suit before this Court seeking an injunction restraining RCFL, BoB and RBI from implementing the RBI Circular.

2.11 On 15th July, 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited/the Intervenor (“Authum”) came to be approved by RCFL’s lenders with a majority of over 75% in value and 60% in number (“Resolution Plan”).

2.12 Following approval of the Resolution Plan, the Plaint came to be amended now seeking an injunction restraining RCFL and BoB from acting upon, implementing or taking any steps for diluting, extinguishing or creating third party rights in respect of the security provided under the DTD.

2.13 On 9th August, 2021, on the Plaintiffs’ Interim Application, the Ld.

Single Judge passed the following order:

“4. Until that date (and no further), there will be an ad-interim order in terms 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 h

Click Here to Read the rest of this document

2022 Supreme(Bom) 241

Point of Law: Question of the Bank “satisfying itself”, and that too by inquiring into whether any specific obligation has been breached simply does not arise

Cases Referred (5)