Supreme Court: SEBI Circular Applies to Debenture Holders in Resolution Plan; Civil Court Jurisdiction; Retroactive Effect

The Supreme Court held that the SEBI Circular applies to debenture holders implementing a Resolution Plan, with consent requirements specified. The court affirmed the civil court's jurisdiction to entertain challenges to regulatory circulars. The SEBI Circular was given retroactive effect, overriding conflicting provisions in the Debenture Trust Deed. Dissenting debenture holders are bound by the ICA/Resolution Plan if approved by the requisite majority. The court invoked Article 142 to uphold the Resolution Plan, safeguarding small investors' interests. The appeal was partially allowed, with directions under Article 142 to protect retail debenture holders and ensure Resolution Plan implementation.

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Issues Involved:
1. Applicability of the SEBI Circular to the debenture holders.
2. Jurisdiction of the civil court to entertain the lis.
3. Retroactive application of the SEBI Circular.
4. Binding nature of the ICA/Resolution Plan on dissenting ISIN level debenture holders.
5. Exercise of the Supreme Court's power under Article 142 of the Constitution.

Detailed Analysis:

1. Applicability of the SEBI Circular to the Debenture Holders:
The SEBI Circular dated 13 October 2020 standardizes the procedure to be followed by debenture trustees in case of default by issuers of listed debt securities. It prescribes the process for seeking investor consent for refraining from enforcing security and/or entering into an Inter-Creditor Agreement (ICA). The SEBI Circular is applicable if debenture holders choose to implement a Resolution Plan to which the lenders are a party. The Circular mandates that the consent of the majority of investors shall mean the approval of not less than 75% of the investors by value of the outstanding debt and 60% of the investors by number at the ISIN level. The SEBI Circular recognizes that investors in debt securities who are financial creditors falling outside the purview of the RBI Circular may be approached by other lenders to sign an ICA under specific terms detailed in the RBI framework.

2. Jurisdiction of the Civil Court to Entertain the Lis:
The court held that the civil court had jurisdiction to entertain the suit challenging the RBI Circular. Section 15Y of the SEBI Act and Section 430 of the Companies Act do not bar the jurisdiction of the civil court in this case. The Single Judge and the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit.

3. Retroactive Application of the SEBI Circular:
The SEBI Circular has retroactive application as it does not take away or impair any vested rights but operates in the future based on events that arose prior to its issuance. The SEBI Circular applied to the manner of resolution of debt, as specified therein, even though the default by RCFL occurred before the Circular came into force. The SEBI Circular, issued partly under the 1993 Regulations, takes precedence over conflicting provisions in the Debenture Trust Deed, such as Clauses 22 and 23 of the Fifth Schedule, which must give way to the SEBI Circular.

4. Binding Nature of the ICA/Resolution Plan on Dissenting ISIN Level Debenture Holders:
The SEBI Circular binds dissenting debenture holders if the decision to enter into an ICA is backed by the stipulated majority. The Circular mandates ISIN-wise voting, ensuring that the interests of small investors are protected. The SEBI Circular facilitates the process of seeking consent for enforcement of security and/or entering into an ICA, and dissenting debenture holders are bound by the ICA/Resolution Plan if approved by the requisite majority. The SEBI Circular provides protections for dissenting debenture holders, ensuring they are not bound by decisions taken by a simple majority.

5. Exercise of the Supreme Court's Power under Article 142 of the Constitution:
The court exercised its power under Article 142 to allow the Resolution Plan to pass muster, considering the peculiar facts and circumstances of the case. The compromise arrived at, which benefits small investors, especially those with exposure up to INR 10 lakhs, should not be disturbed. The SEBI Circular, though right in law, may lead to unjust outcomes for retail debenture holders if the entire process is reversed. The court extended the benefit under Article 142 to retail debenture holders by allowing the Resolution Plan to be implemented, ensuring complete justice.

Conclusion:
The Supreme Court accepted SEBI's submissions, disapproving the interpretation of the SEBI Circular by the Bombay High Court. The appeal was allowed in part, subject to directions issued under Article 142 to protect the interests of retail debenture holders and ensure the Resolution Plan's implementation.

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