2014 (7) TMI 1255 - HC - Indian Laws

Court Upholds Plaintiff's Contractual Rights in Corporate Debt Restructuring Case

Yes Bank Limited Versus A2Z Maintenance & Engineering Services Ltd. & ors.

The court upheld the plaintiff's contractual rights in a case involving the validity and enforcement of a Corporate Debt Restructuring (CDR) Package. It ... Lenders exclusive charge on a specific asset - lenders assets of the project kept outside the ambit of the proposed CDR package - proof of Curtailment of contractual rights of the plaintiff - modifications in the proposed CDR Package seeked - Held that:- It is rightly argued by Mr.Sethi and it appears to the Court that the defendant No.3 (ICICI Bank) has given consent to the CDR Package because they are a part of the CDR Mechanism in question and as the defendant No.3 has a higher exposure in the working capital facility as opposed to the term loan facility. Therefore, the defendant No.3 has joined the CDR scheme even if ICICI Bank has consented and other banks who are not a party to the Rupees Term Loan agreement dated 17th May, 2011, there is no obligation on the plaintiff to consent as well. From the entire gamut of the case, this Court is of the view that the lenders having exclusive charge on a specific asset cannot be forced to share their charge on the security. The said assets are to keep outside the ambit of the proposed CDR package. The said assets of the project shall continue to be charged exclusively to the term lenders of the said project and security on the said assets of the project shall not be shared with other lenders of the defendant No.1. The defendants No.1 & 2 in the present case want to proceed with a CDR package by violating the contractual rights of the plaintiff. The plaintiff in the present case admittedly sought modifications in the proposed CDR Package as the plaintiff and the defendant No.3/pro-forma defendant had extended financial assistance for purposes of funding the said project and that as a security, a first charge was created in favour of the Security Trustee exclusively for the benefit of inter alia the plaintiff and the defendant No.3/pro-forma defendant herein qua the said assets of the said project. Therefore, the prayer made in the application under Section 151 CPC for modification and under Order XXXIX Rule 4 CPC for vacation of ex- parte order, cannot be allowed as there is no merit in the said applications. The same are dismissed. However, it is clarified that if defendants No. 1 and 2 shall keep the said assets of the project outside the ambit of the proposed CDR package, they may continue with the said scheme but they cannot force the plaintiff to share their charge on the security. In view of the aforesaid reason, similar is the position filed by defendant No.3. The prayer made in the applications cannot be granted. The said application filed by defendant No.3 is accordingly dismissed. Another application filed by State Bank of Patiala under Order 1 Rule 10 CPC is also infructuous and the same is dismissed. Issues Involved:1. Validity and enforcement of the Corporate Debt Restructuring (CDR) Package.2. Rights and obligations under the Rupee Term Loan Agreement and related documents.3. Creation of charges on assets and compliance with prior consent requirements.4. Impact of RBI guidelines on restructuring and the applicability of CDR mechanisms.5. Balance of convenience and potential irreparable harm.Issue-wise Detailed Analysis:1. Validity and Enforcement of the Corporate Debt Restructuring (CDR) Package:The plaintiff, a bank, opposed the CDR Package approved in the Corporate Debt Restructuring Executive Committee meeting dated 24th December 2013. The CDR Package included restructuring of term loans and creation of a second charge on power plant assets, which the plaintiff argued violated their contractual rights. The court held that the Corporate Debt Restructuring (CDR) mechanism is voluntary, and no lender can be forced to approve it. The court emphasized that the plaintiff's contractual rights must be protected, and the defendants cannot enforce the CDR Package in a manner that breaches these rights.2. Rights and Obligations under the Rupee Term Loan Agreement and Related Documents:The plaintiff provided a term loan of Rs. 90 crores to the defendant No.1, secured by a first charge over specific project assets, as per the Rupee Term Loan Agreement dated 27th May 2011 and related documents, including a Deed of Hypothecation. The defendant No.1 was prohibited from creating any further charge on these assets without the plaintiff's prior written consent. The court found that the defendants attempted to create additional charges and restructure debt without obtaining the necessary consent from the plaintiff, thereby violating the terms of the agreement.3. Creation of Charges on Assets and Compliance with Prior Consent Requirements:The court noted that the defendant No.1 executed various documents, including a Deed of Hypothecation, creating a first charge over the project assets in favor of the plaintiff. The defendant No.1 was required to obtain prior written consent from the plaintiff before creating any further charges on these assets. The court held that the defendants failed to obtain such consent and attempted to create additional charges in violation of the agreement, which constituted a breach of contractual obligations.4. Impact of RBI Guidelines on Restructuring and the Applicability of CDR Mechanisms:The defendants argued that the restructuring under the CDR mechanism was in accordance with RBI guidelines, which allow restructuring if agreed upon by a minimum of 75% of creditors by value and 60% by number. However, the court held that these guidelines do not override the specific contractual rights of the plaintiff. The court emphasized that the plaintiff is not obligated to join the CDR mechanism and that the defendants cannot use the RBI guidelines to force the plaintiff to accept terms that breach their contractual rights.5. Balance of Convenience and Potential Irreparable Harm:The court found that the plaintiff had established a prima facie case that their contractual rights were being violated by the defendants' actions. The court noted that the balance of convenience favored the plaintiff, as they would suffer irreparable harm if the defendants were allowed to proceed with the CDR Package without protecting the plaintiff's rights. The court issued interim orders restraining the defendants from creating any further charges on the assets and from proceeding with the CDR Package in a manner that breaches the plaintiff's rights.Conclusion:The court dismissed the applications filed by the defendants seeking to modify or vacate the interim orders. The court upheld the plaintiff's contractual rights and restrained the defendants from creating further charges on the project assets without the plaintiff's consent. The defendants were allowed to proceed with the CDR Package only if they kept the project assets outside the ambit of the CDR Package and did not breach the plaintiff's contractual rights.