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2025 Supreme(Online)(SCDRC) 7001
STATE CONSUMER DISPUTES REDRESSAL COMMISSION
RAJESH K. ARYA, MEMBER
JYOTI KHEMKA – Appellant
Versus
CATALYST TRUSTEESHIP LIMITED – Respondent
Appeal No. : 58 of 2023|Consumer Complaint No.932 of 2019
For the Appellants/Petitioners: Sh. Shreenath K. Khemka
For the Respondents: Sh. Anirudh Gambhir, Sh. N. S. Jagdeva, Sh. Rajender S. Rana, Ms. Shweta
Trustees have a fiduciary duty to protect debenture holders, and credit rating agencies must provide accurate ratings. Failure in these duties constitutes a breach, resulting in liability for financial losses incurred by investors.
Headnote:(A) The Indian Trusts Act, 1882 - Sections 12, 13, 14, 15, 19 & 23 - SEBI (Credit Rating Agencies) Regulations, 1999 - Consumer complaint filed regarding failure to redeem secured debentures issued by a housing finance company. The complainant alleged that the trustee failed to enforce security and that credit rating agencies misrated the debentures despite the issuer’s financial distress. The court found the trustee liable for negligence for not acting to protect the interests of the debenture holders. Credit rating agencies were found at fault for misleading ratings that led to financial loss for investors. (Paras 11, 19, 22, 24, 27)
(B) Legal Responsibilities of Trustee - A debenture trustee's obligations are proactive and their failure to enforce security or take timely action constitutes a serious breach of duty.
(C) Credit Rating Agencies - Rating agencies must exercise due diligence and provide accurate ratings reflecting true risk, failing which they are liable for misleading investors.
(D) Failure to act by responsible parties can lead to dire consequences for the investors.
Facts of the case:
The appellant purchased debentures that were later downgraded from ‘AAA’ to ‘D’, leading to financial loss as the issuer defaulted on repayment. The trustee’s inaction contributed significantly to the appellant's losses.
Findings of Court:
The appeal was accepted; the trustee was ordered to compensate the appellant. The credit rating agencies were also found liable for deficiency in service.
Issues: Whether the trustee fulfilled its duties to protect debenture holders; whether rating agencies acted with due diligence.
Ratio Decidendi: The court ruled that neglect of fiduciary responsibility by the trustee is tantamount to a breach of trust, while flawed ratings by credit rating agencies severely affect investor interests.
Result: Appeal accepted; judgment against trustee and credit rating agencies for compensation.
PER RAJESH K. ARYA, MEMBER
Instant appeal has been filed by the complainant, namely, Smt. Jyoti Khemka (appellant herein) seeking setting side order dated 06.03.2023 vide which, her consumer complaint No.932 of 2019 has been dismissed by the District Consumer Disputes Redressal Commission-I, U.T., Chandigarh (in short ‘District Commission’).
2] The facts as stated in the impugned order passed by the District Commission reads thus:-
“1. The present consumer complaint has been filed by the complainant against the opposite parties (hereinafter referred to as the OP/OPs). Briefly stated, on 26.7.2016 OP No.4 issued a Public Prospectus approved by SEBI (respondent No.5) for the public issue of secured Redeemable Non-convertible Debentures, each having a face value of INR 1,000/- and a tenures of 3 years. OP No.1 was the Debenture Trustee for the said issue, and the said public issue was given ‘AAA’ credit rating i.e. the highest degree of safety by OP No.2 and OP No.3 and pursuant to the said public issue the complainant purchased 342 secured Non-convertible Debentures in the retail category on 16.8.2016 the next investment was of INR3,42,000/- . The Debentures in question were to mature on 16.8.2019 and were to yield interest amounting to INR 31,464/- on an annual basis. In the early 2018 there was speculation that DHFL might be heading towards a financial crises. However Ops No.2&3 continued to rate the debentures at ‘AAA’ rating i.e. the highest degree of safety regarding timely service of financial obligations. It is stated as reported by OP No.1 in its communication dated 5th August 2019, the OPs No.2&3 downgraded the credit rating of the debentures from ‘AAA’ to ‘D’ i.e. the lowest possible score overnight in February 2019. Therefore, the debentures that were marked at the highest score were downgraded to the lowest score, all in a night’s time after DHFL i.e. No.4 had siphoned thousands of crores of public money in subsequent tranches of its public issue but the OP No.5 remained as a mute bystander. It is alleged that on the date of maturity i.e. 16.8.2019 DHFL defauted to redeem the debenture principal and interest amount to Rs.3,73,464/-. Alleging the aforesaid act of Opposite Parties No. 1 to 3 deficiency in service and unfair trade practice on their part, this complaint has been filed.
2. The Opposite Parties NO.1 in its reply while admitting the factual matrix of the case stated that as per provisions of Companies Act, 2013 and SEBI regulations, it is the duty of the issuer company respondent No.4 to make timely payment of interest/principal amount due to the debenture holders on or before the due date. The answering OP has ensured that the OP No.4 creates security and maintained the securities from time to time. The answering OP has also ensured that the OP No.4 has submitted “end use” certificate as well as ensured that the asset security cover as specified in offer documents are maintained by the OP No.4. It is averred that when the answering OP noticed that OP No.4 has committed non-financial defaults as stipulated in the debenture true deed, OP No.1 has issued legal notice dated 24th June 2019 to OP No.4 calling upon them to rectify the breaches and brought to the notice of OP No.4 that if breaches are not rectified then suitable action will be taken. When OP No.4 failed to pay the installments of interest due on 16th August 2019 immediately after the said defaults OP No.1 took actions immediately against it. It is averred that payment obligation is of OP No.4 and in case default the answering OP no.1 is only under obligation to take steps for recovery and enforcement of security which is already initiated by the answering OP. It is averred that there is no deficiency on the part of the answering OP. All other allegations made in the complaint has been denied being wrong.
3. The OP No.2 in its reply stated that the answering OP is a SEBI registered credit rating agency, and as part of regulatory requirement as well as
