TaxTMI 
TaxTMI 
2022 (3) TMI 1113
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....ngwith Mr. Prateek Sekseria, Mr. Subir Kumar, Ms. Disha Shah, Mr. Karan Rukhana, Mr. Nishant Chotani and Mr. Yash Chheda instructed by SDS Advocates for Respondent No.11. Mr. Ravi Kadam, Senior Advocate alongwith Mr. Yohaann Limathwalla and Mr. Shahbaz Malbari instructed by J. Sagar Associates for Respondent No.12. 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 for Respondent No.13 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. for the Applicant in IAL-855-2022. JUDGMENT (Per: 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 15^th 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....
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.... "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 has a security for the redemption of the debenture, prima facie this cannot b....
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.... abbreviation of the necessary notice that is required. 5. Both aspects are not, prima facie, ones on which this Court can make a recommendation. It is one thing to ask a Civil Court to adjudicate on the correctness or otherwise of a decision of a regulator or a validity of a rule or regulation. But I am unable to see how a Civil Court can direct that a notice that is required by the Trust Deed or by the applicable regulation should be shortened or that a meeting should be held of all Debenture Holders in one particular manner over preference to another. These are directions that only a regulator can issue. 6. A common request from all sides is that SEBI be requested to respond urgently to Vistra's application or representation of 11th August 2021 for a clarification on the first aspect, i.e. the manner holding the meeting. I have no doubt that this is urgently required. There is financial prejudice all around. It should not be worsened by a delay in deciding what seems to me to be an administrative or ministerial clarification. The fact that this clarification can only be done by SEBI only adds to the urgency. 7. Vistra may also need to make a supplement....
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.... will meet today on a Zoom call. I have briefly considered both the proposals from Mr Seksaria for Defendant No. 1 and Mr Khandeparkar for the Plaintiffs. I see no reason why a negotiated settlement is not possible. 3. List the matter on 21st October 2021. 4. Previous order, if any, to continue until next date." 2.25 The next order passed was on 28th October, 2021 which would be necessary to reproduce as under: "1. It is agreed that the following order will suffice to dispose of the IA and the Suit itself. 2. The resolution plan approved by the Inter Creditor Agreement ("ICA") Lenders presently proposes to pay to all secured debenture holders as on cut-off date of 15th July 2021 an amount equivalent to 24.96% of the total principal outstanding (including all amounts already paid) to secured creditors. 3. In terms of the ICA-lenders' approved resolution plan, the Plaintiffs would be entitled to receive an aggregate sum of Rs. 1,34,78,400/- being 24.96% of the total principal outstanding. 4. Of the aforesaid sum of Rs. 1,34,78,400/- (24.96% of the total principal outstanding), the Plaintiffs have already received a sum of Rs. 7....
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....olders. 11. For placing such terms of settlement, compromise or arrangement before the Debenture Holders seeking their assent in terms of the respective Debenture Trust Deeds, the Debenture Trustee (Defendant No.3) is directed to call and conduct a meeting in the manner specified in the respective Debenture Trust Deeds. 12. Mr Ankhad for the 3rd Defendant, the Debenture Trustee, points out that the Debenture Trust Deeds require a meeting to be called in a certain manner. On Affidavit, SEBI has taken a different position. SEBI's submission has been that it is the very latest or most recent of the SEBI resolutions that will govern such meetings, irrespective of what a Debenture Trust Deed says in regard to the holding of a meeting. Prima facie, I do not think this is a submission that I can accept. The Debenture Trust Deed is a contract between the parties to it. They must know the terms of the contract at the time when the execute it. Those terms cannot be later altered except with their consent. The submission by SEBI would amount to saying that a critical term of the contract is always unknown and always liable to change or modification at any given time, conceiv....
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....t to dispose of the Suit itself with all undertakings given to the Court being accepted. So ordered. The suit is disposed of in these terms. xxx 22. The IA is infructuous and disposed of accordingly." 2.26 On 15th November, 2021, a clarificatory order came to be passed by the Ld. Single Judge as under : "2. This seeks a clarification of my order of 28th October 2021 and particularly paragraph 14. It is clarified that I have not, by that paragraph, directed that the meeting that is to be held should be in deviation from the terms of the Debenture Trust Deed. I also clarified that at no time had any of the party made any submissions on the basis of any later or Supplementary Trust Deed. 3. Obviously, the Supplementary Trust Deed will have to be read with the previous three Trust Deeds in a coherent and consistent manner. . A mere reference to SEBI circulars will not and cannot override the express terms of any of the Trust Deeds. 4. The 30 day period will commence from today in view of this clarification." 2.27 Challenging the Impugned Orders, the Appeal came to be filed on 25th November, 2021. At the first hearing held on 3rd ....
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....hat order of 28th October 2021 was by consent even of SEBI. Paragraph 17 of 28th October 2021 order says that the order has the consent of all parties. Hence the request for clarification. 3. SEBI was not, as I recollect, a party to the Suit but was a Respondent to the IA. I had directed notice to SEBI and called for an Affidavit. Mr Dada learned Senior Advocate argued extensively on that Affidavit. After judgment was reserved, I asked the principal contesting parties (other than SEBI) to consider a settlement, which they ultimately did. SEBI obviously could not be a party to any such compromise. Paragraph 12 of my order therefore dealt, though briefly, with the contentions of the SEBI. That paragraph of the order is not by consent, but is an order in invitum. Paragraph 18 of the order is specifically for SEBI's protection and is also not by consent. 4. Consequently, the last line of paragraph 17 which says that the order is by consent of all parties is necessarily subject to this one exception as regards the contentions of SEBI and which I have dealt with in paragraphs 12 and 18. 5. I do not believe any further clarification is required. Mr Seksaria, Mr ....
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....ssary to protect the interest of small debenture holders otherwise Yes Bank Limited ("YBL"), which holds a substantial number of debentures, can influence the outcome of the resolution process single handedly; (vi) Hardship is not a factor on the basis of which the applicability of the SEBI Circular can be decided. 4. Appearing for RCFL, we have heard Ld. Senior Advocate Mr. Darius Khambata. Mr. Khambata's submissions can be summarized as under: (i) SEBI's Appeal is not maintainable; (ii) SEBI's stand completely disregards the rights of the Debenture Holders of RCFL; (iii) The SEBI Circular is inapplicable as the SEBI Circular cannot be given retrospective effect; (iv) SEBI's stand is premised on a misreading and incorrect application of the SEBI Circular; (v) SEBI's attempted application of the SEBI Circular (which is for the purpose of signing the ICA), after the ICA has already been approved, is entirely misconceived; (vi) SEBI's stand seeks to override a contract between RCFL and its lenders, thereby derailing the debt resolution process carried out following the RBI Circular; (vii) There is no conflict ....
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....lassification of Debenture Holders ISIN-wise will be inequitable, invidious, discriminatory and arbitrary; (iv) SEBI's Circular was never intended to apply to cases in which defaults took place prior to 13th October, 2020. MAINTAINABILITY OF THE APPEAL : 7. RCFL has argued that this Appeal is not maintainable owing to SEBI not having any locus to file it. In support of this submission, it was argued that admittedly, SEBI is not a party to the Suit as filed. It is only a party to the Interim Application and consequently, SEBI cannot be recognized as an 'aggrieved party'. Pertinently, SEBI made no application to be made a party to the Suit. It was also argued that in view of the law laid down by the Supreme Court in IKISAN Limited (2015) SCC OnLine Bom 6358, SEBI does not have locus to challenge any order sanctioning a merger scheme under Section 391 of the Companies Act, 2013. Lastly, on maintainability, it was argued that the Impugned Orders do not affect SEBI as has been clarified by the Ld. Single Judge. 8. We have considered the aforesaid submissions. This Appeal, as filed, has been filed under Section 13 of the Commercial Courts Act, 2015. Section 13 (1A) prov....
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....uments on maintainability of the Appeal. THE DTDs : 12. As stated hereinabove, there are in question 3 DTDs. All 3 DTDs were executed prior in time to the SEBI Circular. Under the DTDs, various Listed, Secured and Unsecured Debentures came to be issued by RCFL. Vistra came to be appointed as Debenture Trustee under all the DTDs. 13. Of the 3 DTDs, there are no ICA Lenders in the Debenture Trust Deed dated May 23, 2017. The Debenture Trust Deed dated May 23, 2017 comprises of 6 ISIN(s) with 32 Debenture Holders holding Rs. 81 Crores in aggregate which is 0.90% of the total debt of RCFL. 14. In the Debenture Trust Deed dated May 3, 2017, YBL holds Rs. 869.4 Crores out of the Rs. 1,277 Crores worth of debentures translated to 68%. 15. Certain relevant clauses of the DTDs read as under: "(xiii) "Meeting of the Beneficial Owner(s)/Debenture-holder(s)" means a meeting of the Beneficial Owner(s)/Debenture-holder(s) duly called, convened and held in accordance with the provisions set out in the Fifth Schedule hereunder written;" 16. The aforesaid Clause 1(xiii) provides that a meeting of the Debenture Holders is to be conducted in the manner set-out in S....
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....ened and held in accordance with provisions herein contained and carried by a majority consisting of not less than three-fourth of the persons voting thereat upon a show of hands or if a poll is demanded by a majority representing not less than three-fourths in value of votes cast on such poll. Such a Resolution is hereinafter called 'Special Resolution'." 18. As can be seen from the aforesaid Clause 25, the majority required to carry a Special Resolution is a 3/4th majority. 19. The DTDs came to be amended by execution of the Supplementary DTDs on March 11, 2021 incorporating a reference to the SEBI Circular. ISIN(s) : 20. The International Securities Identification Number or ISIN is a 12 digit alphanumeric code that uniquely identifies a specific security. An ISIN is generated for a particular issue of debt securities which have similar terms and conditions of such issue. 21. SEBI informs us that in a particular Information Memorandum / Issue Document, there may be multiple sets of bonds/securities issued having different terms and conditions. For example, there may be four tranches/buckets of bonds requiring quarterly pay-out of interest, while others may have mon....
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....solution of stressed assets. B. Implementation of Resolution Plan 9. All lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default. In any case, once a borrower is reported to be in default by any of the lenders mentioned at 3(a), 3(b) and 3(c), lenders shall undertake a prima facie review of the borrower account within thirty days from such default ("Review Period"). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery. 10. In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilitie....
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....0 130.02 20.32 2 Non - ICA Lenders 2.1 Secured Term Loan 1 250.00 62.40 24.96 2.2 NCDs 2.2.1 Individuals & HUFs up to Rs. 10 Lacs 227 13.92 13.92 100 2.2.2 Individuals & HUFs more than Rs. 10 Lacs 37 43.95 13.17 29.96 2.2.3 Other secured NCDs 41 202.30 50.49 24.96 2.2.4 Unsecured NCDs 21 81.00 16.46 20.32 2.2.5 Related Party 1 200.00 26.90 13.45 Total 9,017.22 2,206.83 33. As can be seen from the aforesaid table, all Individuals / HUFs holding debentures less than Rs. 10 Lacs are to get 100% of their principal amounts. As opposed to them, Individuals / HUFs holding debentures in excess of Rs. 10 Lacs will only receive 29.96% of their principal due. Further, the secured ICA lenders, secured term loan holders and other secured debenture holders will receive 24.96% of the principal debt due to them. All other unsecured ICA lenders and unsecured NCD holders will receive 20.32% of the principal debt due to them. 34. As we see it, the signatories to the ICA (being a class of creditors distinct from Debenture Holders), have al....
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....a notification including a read receipt, and proof of dispatch of such notice or email, shall be maintained. 6.2. The notice shall contain the following: 6.2.1. negative consent for proceeding with the enforcement of security; 6.2.2. positive consent for signing the ICA; 6.2.3. the time period within which the consent needs to be provided, viz. consent to be given within15 days from the date of notice; and 6.2.4. the date of meeting to be convened, 6.3. Debenture Trustee(s) shall convene the meeting of all investors within 30 days of the event of default (as per para 6.1 above): Provided that in case the default is cured between the date of notice and the date of meeting, then the convening of such a meeting may be dispensed with. 6.4. In view of Regulation 15(2)(b) of SEBI (Debenture Trustees) Regulations, 1993, in case of debt securities issued by way of public issue, the notice sent by the Debenture Trustee(s) in para 6.2 shall not contain the consent as per para 6.2.1 and the requirement to convene a meeting for enforcement of security, as per para 6.3, shall not be applicable. 6.5. The Debenture T....
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....olution plan is not finalized within 180 days from the end of the review period, then the Debenture Trustee(s) shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the resolution plan shall not be binding on the Debenture Trustee(s). However, if the finalization of the resolution plan extends beyond 180 days, the Debenture Trustee(s) may consent to an extension beyond 180 days subject to the approval of the investors regarding the total timeline. The total timeline shall not exceed 365 days from the date of commencement of the review period. 7.4. If any of the terms of the approved Resolution Plan are contravened by any of the signatories to the ICA, the Debenture Trustee(s) shall be free to exit the ICA and seek appropriate legal recourse or any other action as deemed fit in the interest of the investors. 8. The Debenture Trustee(s) shall ensure that the conditions mentioned in paragraphs7.2, 7.3 and 7.4 are suitably incorporated in the ICA, before signing of the ICA." 39. As can be seen from the aforesaid paragraphs, the SEBI Circular provides for the process to be followed for seeking consent from investors for ....
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....ights unless by express words or necessary implication it appears that such was the intention of the Legislature. Parliament can delegate its legislative power within the recognised limits. Where any rule or regulation is made by any person or authority to whom such powers have been delegated by the Legislature it may or may not be possible to make the same so as to give retrospective operation. It will depend on the language employed in the statutory provision which may in express terms or by necessary implication empower the authority concerned to make a rule or regulation with retrospective effect. But where no such language is to be found it has been held by the courts that the persons or authority exercising subordinate legislative functions cannot make a rule, regulation or bye-law which can operate with retrospective effect; (see Subha Rao, J., in Dr Indramani Pyarelal Gupta v. W.R. Nathu [(1963) 1 SCR 721], the majority not having expressed any different opinion on the point; Modi Food Products Ltd. v. Commissioner of Sales Tax U.P. [AIR 1956 All 35] ; India Sugar Refineries Ltd. v. State of Mysore [AIR 1960 Mysore 326] and General S. Shivdev Singh v. State of Punjab [1959 ....
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....ration, unless otherwise provided, either expressly or by necessary implication." 45. Keeping the aforesaid considerations in mind and considering that there is no mention whatsoever in the SEBI Circular suggesting its retrospective applicability, we are unable to rule that the SEBI Circular would also apply to defaults committed prior to 13th October, 2020. As a consequence, it follows that the SEBI Circular cannot be applied retrospectively to the present case in view of the admitted fact that RCFL committed defaults prior to 13th October, 2020 and the ICA was executed on 6th July, 2019 which are dates prior to the coming into force of the SEBI Circular and prior to the Supplementary DTD incorporating reference to the SEBI Circular. 46. In our considered opinion, having held that the SEBI Circular cannot be applied retrospectively on settled principles of statutory interpretation, we are unable to appreciate SEBI's submission that the SEBI Circular being beneficial in nature ought to be applied nonetheless. We cannot also accept the submission that it must also apply in view of the fact that the SEBI Circular does not take away or impair the voting rights of debenture holde....
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....incorporation or at best, to defaults post 13th October, 2020. 50. Mr. Datar next relied on the decisions in Newtech Promoters and Developers Pvt. Ltd. vs. State of Uttar Pradesh 2021 SCC OnLine SC 1044 and Kingfisher Airlines Limited vs. Competition Commission of India 2019 SCC OnLine Bom 2186 to defeat the argument that the SEBI Circular is retrospective. We have carefully analysed these decisions. However, once again, we are unable to be apply the SEBI Circular to the present case. In Newtech Promoters, the Supreme Court ruled that the agreements in question even though executed prior in time, would be governed by subsequent legislation considering that they provided for applicability of subsequent legislations. However, this finding cannot be viewed in isolation. The paragraphs preceding this paragraph contain the finding that the subsequent statute in question, i.e. the Real Estate (Regulation and Development) Act, 2016, was retroactive in nature. It was on this basis that the Supreme Court proceeded to apply the subsequent legislation retroactively to past agreements. In the present case, as we have already held, the SEBI Circular, by its very language, is prospective in n....
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....a provides for the "entering into an Inter-Creditor Agreement" can have no application to an ICA which has already been previously entered into. In the present case, we note that the Debenture Holders are not even proposing to enforce their security or enter into an Inter-Creditor Agreement. The notice convening the meeting specifically provides that the agenda/business to be discussed is to "Vote on the compromise, settlement or arrangement" as per the Impugned Orders. 56. Mr. Datar has argued that SEBI took note of the fact that RBI could only mandate compulsory out of court resolution for "Lenders" and therefore, the SEBI Circular came to be issued to specify the conditions under which Debenture Holders could accede to a Resolution Plan under the RBI framework. It was next argued by Mr. Datar that even under the RBI Circular, entering into an ICA is a precedent for implementation of any Resolution Plan and therefore, the ICA is the umbrella framework and the first step under which the Resolution Plan is to be implemented. Once again, we are not finding fault with the mechanism prescribed by SEBI under the SEBI Circular for it has not been challenged before us. Our considerati....
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.... for seeking approval of Debenture Holders but does not prescribe the procedure or % of majority to do so. Clause 23 of the DTDs prescribes for the procedure for Debenture Holders to enter into a settlement. To that end, Clause 23 of the DTDs is consistent with the DT Regulations and therefore, there is no question of any conflict and no further question of the SEBI Circular and/or the DT Regulations defeating the DTDs by applying Clause 59 of the DTDs. SEBI's LETTER DATED 23rd AUGUST, 2021 : 59. SEBI relies on its letter dated 23rd August, 2021 which came to be issued pursuant to the Ld. Single Judge's order dated 20th August, 2021 who asked for SEBI's "clarification". In effect, the letter clarifies that under the SEBI Circular, there is a mandatory requirement of entering into the ICA as a pre-condition to considering the Resolution Plan. 60. In our considered opinion, having held that the SEBI Circular does not apply to the present case (for the reasons stated herein), we fail to appreciate how this clarificatory letter can expand the scope of the SEBI Circular and/or make it applicable to the present case. Once we have held the SEBI Circular to be inapplicable it woul....