Securities and Exchange Board of India vs Rajkumar Nagpal

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2022 Supreme(Bom) 593

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

Advocates:
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 instructed by Aroma Law Group LLP, 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, Mr. Ravi Kadam, Mr. Yohaann Limathwalla, Mr. Shahbaz Malbari instructed by J. Sagar Associates, Dr. Birendra Saraf, Ms. Tine Abraham, Mr. Siddharth Ranade, Ms. Varuna Bhanrale, Ms. Samrudhi Chothani and Mr. Raghav Bhargava instructed by Trilegal, Mr. Janak Dwarkadas, alongwith Mr. Tushad Kakalia, Ms. Anaisha, Zachariah and Ms. Vidhi Dhanuka instructed by Crawford Bayley & Co

Headnote:
Companies Act, 2013 - Section 391- Commercial Courts Act, 2015 - Section 13, (1A) - Reserve Bank of India Act, 1934 - Banking Regulation Act, 1949 - Securities Contracts (Regulations) Act, 1956 - Securities and Exchange Board of India Act, 1992 - Real Estate (Regulation and Development) Act, 2016 - Debenture Holders - Meetings - Voting - Whether any meeting or meetings of Debenture Holders was required to approve ICA and Resolution Plan and if so, Whether voting in this meeting is to be conducted by Debenture Trustee in accordance with SEBI’s Circular - Whether compromise recorded in that order was by consent even of SEBI - Whether or not SEBI Circular is applicable to present matter with due consideration – Held, SEBI has consistently submitted that SEBI Circular has force of law as has been recognized from time to time - Once again, Court do not dispute this proposition - Question however, in present case, is applicability of SEBI Circular to present matter and not whether or not SEBI Circular has force of law - It is insufficient for SEBI to contend that SEBI Circular has force of law in absence of demonstrating how SEBI Circular is applicable retrospectively in first place – Court is informed that in so far as Debenture Trust Deed is concerned, YBL has no voting share - Therefore, unless 32 Debenture Holders under Debenture Trust Deed approve settlement/compromise, settlement/compromise cannot go through - This is irrespective and independent of YBL, considering that YBL does not have any voting rights under this Debenture Trust Deed - In so far as Debenture Trust Deed is concerned, YBL holds 68% of Debentures in value - Majority required to approve Resolution Plan under DTDs is 75% - Therefore, YBL would still require an additional 7% positive vote for approval of Resolution Plan - Therefore, Court do not see how YBL can in fact single handedly determine faith of vote - In any event, Court do not see how interest of retail investors is not protected should voting be carried out in terms of DTDs - Under his procedure, decision making power still vests with each individual Debenture Holder - Every Debenture Holder will have the right to vote and the faith of the vote shall be decided by a majority of 3/4th after taking into consideration votes cast by Debenture Holders - This mechanism, is in Court opinion, fair, just, equitable and in keeping with interest of all stakeholders - 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, 2021, 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 ought 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 ha

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2022 Supreme(Bom) 593

Cases Referred (6)