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2020 (8) TMI 944
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....) declined the Plaintiff ad interim relief. The Defendants had not then filed any affidavits. The Plaintiff appealed. The Defendants filed affidavits before the appeals court. By its order of 24th July 2020, the appeals court remanded the matter. It said that all parties should be heard after affidavits were filed. Although the appellate order contains a summary factual narrative, it said in paragraph 12 that the matter should be heard afresh on merits after considering the rival submission and without being influenced either by the order of Gupte J or the appellate order itself. The appeals court requested that the matter be taken up on 3rd August 2020. The matter could not be taken up on that day. It was listed before me on 10th August 2020. There was not enough time to complete the hearing. With the consent of the parties, I posted the matter to 13th August 2020. By this time, not only had affidavits in opposition been filed, but both the Plaintiff and the 1st Defendant (the principal contestant) had also filed fairly comprehensive written submissions. Parties also agreed that the matter could be taken up for hearing and final disposal rather than merely ad interim. I noted this....
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....holly unwarranted and erroneous interpretation of law; that very many parties have been needlessly joined to the action; and that the IA must necessarily fail. For separate reasons, though required by the Commercial Courts Act, I have not awarded costs. 4. I should note that the appellate order of 24th July 2020 notes an argument on jurisdiction. While this has been addressed in the Plaintiff's written submissions, there is no worthwhile response to it by the Defendants, and none of the Defendants pressed any point of jurisdiction before me during the time available for oral arguments. I have, therefore, a little later in this judgment simply noted this aspect of the matter. I was not asked to decide it. PARTIES 5. The Plaintiff is YES Bank Ltd. ("YBL" and "YES Bank"). This is a full-service commercial bank, regulated by the Banking Regulation Act, 1949. Today, the State Bank of India is its majority shareholder. It has a presence across the country, an IFSC Business Unit in Gujarat and a representative office in Abu Dhabi. It has been much in the news lately, for all manner of unflattering reasons, and on 13th March 2020, was 'reconstructed' by the Central Gov....
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....with Axis DIFC. 12. To fund this share acquisition in Veria (and to refinance certain intercorporate deposits used for the Veria buy-in), finance was sought from YES Bank in March 2016 for a loan to LELM. YES Bank made USD 50 million available to LEML to buy Veria stock. The loan was under a Facility Letter and Addendum both dated 30th March 2016.^1 There was a later Facility Agreement dated 8th June 2016 for buying up the shares of Veria and refinancing the inter-corporate deposits.^2 Some of the Veria shares acquired by LELM were pledged to YES Bank. In addition, YES Bank had a charge on LELM's assets. 13. The result of the assignment was that it was entitled to exercise the Put Option (the one available to LEML against ATL) on the occurrence of an event of default. An 'event of default' is defined in the Facility Agreement/s. 14. In summary: LEML needed finance to buy Veria stock. YES Bank provided that finance. LEML and ATL had a put option agreement in place: LEML could compel ATL to take up LEML's holding in Veria, thus bringing cash/funds into LEML. YES Bank agreed to finance the LEML's purchase of Veria shares; and says that, as security, on the....
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.... not routed cash flows through the designated Mauritius bank account. It had not maintained the Required Reserve Balance in the Debt Service Reserve Account. It had failed to disclose information demanded. 18. YES Bank also sent two notices to ATL on the same day, 7th November 2019 (through Axis DIFC, acting as (1) security trustee; and (2) on behalf of LEML),^4 stating that the security was now enforceable, and, second, triggering the Put Option between LELM and ATL, i.e., requiring ATL to buy up a defined percentage of LELM's stake in Veria. The settlement date was notified as 11 November 2019, and, since this was a put option, the exercise price was also set out at US$ 52.5 million. This is the amount that ATL had to bring in to LELM to acquire the Veria stake. 19. LELM replied on 9th November 2019.^5 It acknowledged delay, and promised repayment of the present dues by 8th December 2019; and the entire loan facility by 31st March 2020. Since the exercise period for the put option was 30th December 2026, LELM requested a waiver of the put option. 20. There then followed three letters from YES Bank to Zee. These are dated 21st November 2019,^6 9th January 2020;^7 and ....
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....nds on whether Zee had--as a matter of demonstrated fact--ever accepted that the LoC was indeed a guarantee. 26. As of 20th June 2020, the Essel Group's shareholding in Zee carried a value of about Rs. 791 crores. Of this, 79.13% shares were unencumbered, and were valued at just under Rs. 627 crores. There is also a statement in the Plaint about Zee's promoters having divested some preference shares, and the allegation is that this is an attempt to 'take out substantial monies from Zee'. Then there is a statement that Zee made known its intention to invest a large amount in another entity in which it already holds substantial equity. All this is supposed to lead to the conclusion that Zee does not intend to 'honour its obligations under the Guarantee including the Letter of Comfort'.^9 E. PRAYERS IN THE SUIT & INTERIM APPLICATION 27. YES Bank filed this suit on 26th June 2020 for these reliefs: "a) declare that the Letter of Comfort dated 31st May 2016, being Exhibit G hereto, is valid, subsisting and binding on Defendant No. 1 and that the Plaintiff continues to be the beneficiary under the guarantee evidenced by the said letter of comfort....
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....y allowing any further sale of its Promoter/Promoter Group shareholding until it makes payment of USD 51,634,564 (United States Dollars Fifty One Million Six Hundred and Thirty Four Thousand Five Hundred and Sixty Four only), being the amount outstanding to the Plaintiff under the Loan and contract of Guarantee, as on the date of filing this suit; (Emphasis added) 28. These are the reliefs in the Interim Application: "a) pass an order of temporary injunction restraining Defendant No. 1, through itself and/or Defendant Nos. 2 to 10, its officers, agents, servants, assigns and/or executors and/or any persons claiming through or under them, from directly or indirectly, transferring, alienating, selling, hiving off, leasing, creating any third party right, title, interest and/or in any other manner encumbering, parting with possession, surrendering, relinquishing, disposing of and/or dealing with receivables, assets (movable and/or immovable) and/or the business of Defendant No. 1, including its liquid assets, being cash in hand and cash in bank, including those which may be disclosed by Defendant No. 1, without prior, express and specific approval of this Hon'ble Co....
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....,000 (United states Dollars Fifty Two Million Five Hundred Thousand only), being the amount required to be infused by Zee into the ATL under the Letter of Comfort, and further direct Defendant No. 16 to submit before this Hon'ble Court on affidavit, its report disclosing such liability; i) appoint an independent and reputed Audit Firm to conduct a forensic audit of all non-core, discretionary expenses incurred by Defendant No. 1 on and from March, 2016 and submit its report within such time as this Hon'ble Court may direct, and to monitor the cash flow of Defendant No. 1 and submit its report on the same to this Hon'ble Court at such intervals as this Hon'ble Court may determine for this purpose; j) pass an order of temporary injunction restraining Defendant Nos. 2 and 3 from leaving the Country without the prior, express and specific approval of this Hon'ble Court; k) in the alternative to prayer clauses (a) to (i) above, direct Defendant No. 1 to deposit with the Prothonotary and Senior Master of this Hon'ble Court, the amount of USD 51,634,564 (United States Dollars Fifty One Million Six Hundred Thirty Four Thousand Five Hundred....
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....d at least 51% of shares of ATL during the tenure of the facility; 4) We also confirm that all shareholder loans to ATL would be subordinate to all obligations of ATL under the Facility in case of event of default; 5) This letter of Comfort is effective from the date of release of the credit facilities by your Bank to the borrower and shall remain in force and in effect during the currency of the credit facilities to the Borrower and till all the advances/loans/dues, interest and all money in respect thereof are repaid to your book. We confirm that the signatory to this letter of comfort has the necessary authority and power to issue the said letter under his signature. For Zee Entertainment Enterprises Ltd. Punit Goenka 31. Dr. Tulzapurkar emphasizes the first part, clause (1) of the LoC. He submits that this is nothing but an unequivocal commitment by YES Bank to pay off LELM's loan, when demanded by YES Bank; in other words, a guarantee. The promise of infusion of capital into ATL was, inter alia, for 'honouring put options', and that is a reference to the present Put Option Agreement that could be exercised by LELM aga....
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....urther, I think it is sufficient to note that Mr. Chinoy does not dispute the mention of the LoC's conditions in the Facility Letter. He also does not dispute the execution of the LoC or its wording. The dispute is about the implications or consequences of the LoC and what, in law, it constitutes--or could fairly be said to be constitute. 35. I note, too, that the Facility Letter is 30th March 2016, and the LoC itself is much later, of 31st May 2016. Prima facie, therefore, the wording of the LoC is something that YES Bank must have insisted on, or at least accepted. 36. This is important because it takes us to Dr. Tulzapurkar's next submission, which is that the LoC is not to be read in a sterile fashion or mechanical manner. It does not exist in an independent contractual silo. It is an integral and inseverable or indivisible part of the security for YES Bank's loan. That it was part of the 'security' is indisputable; and, therefore, he submits, there is simply no question of saying that there is no 'privity of contract' between YES Bank and Zee. There is very much a direct privity, and the contract is the loan and its repayment. The LoC is a com....
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....rim stage. The first of these was framed thus: 52. (I) Whether a concluded contract of guarantee between the plaintiff and the defendant no. 1 had come into existence binding the plaintiff to guarantee and securing the proposed loan of Rs. 484 crores and/or the two bridge loans? Then in paragraph 53, the High Court said: 53. The first issue for consideration therefore is whether a contract of guarantee had come into existence binding the plaintiff to guarantee and secure the proposed loan of Rs. 484 crores or the advancement of the two bridge loans of Rs. 50 crores each totalling to Rs. 100.00 crores. 40. It seems that at the request of one of the parties, Lucent provided a 'letter of comfort' to the effect that it would issue the proposed guarantee in future at the time of the proposed facility of Rs. 484 crores being finalized 'subject to the terms and conditions in the terms and satisfactory documentation.' There were arguments that Lucent had accepted the terms stipulated by ICICI Bank and had acted on these and that Lucent had in fact been described as a guarantor. Specifically, it was contended that the term sheet contained an unconditi....
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....riod of time or have expended considerable sums of money in reliance on it. The fact that the parties envisage that the letter is to be superseded by a later, more formal, contractual document does not, of itself prevent it from taking effect as a contract." (Emphasis added) 42. There can be no quarrel with these propositions. 43. Then there is a reference in Lucent Technologies from paragraphs 75 to 77 to the decision in Banque Brussels Lambert SA v Australian National Industries Ltd. (1989) 21 NSWLR 502. by Rogers CJ in the Commercial Division of the Supreme Court of New South Wales, Australia.^12 75. It would also be useful however to consider the principles laid down by the Australian courts reported at Banque Brussels Lambert S.A. (BBL) v. Australian National Industries reported at (1989) 21 NSW LR 502. 76. The Judge in this case, Sir Rogers, C.J., was strongly critical of the approach of the court of appeal in the Kleinwort Benson case, as excessively technical and commercially unrealistic, and favoured the view that commercial agreements should be given commercial effect. In this behalf, it was held by the Chief Justice that: "the whole th....
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....ve rise to a liability in damages where the shares .. were sold without the plaintiff being given 90 days' notice." The Australian court was of the view that it would be inimical to the effective administration of justice in commercial disputes, that a court should use a "finely tuned linguistic fork." 44. The conclusion the Delhi High Court reached on the first question framed was this: 114. Applying the legal principles laid down in the several judgments noticed hereinabove, the circumstances and documents do not indicate that the parties intended to create any legal relations. The very terms of the letter dated 13th September, 2000, the term sheet enclosed therewith and the response of the plaintiff as contained in letters of comfort dated 27th September, 2000 and 30th November, 2000 are a strong indicator in this regard. Both use phrases and concepts having clear technical legal significance and do not manifest any intent that a final and concluded contract had been entered into. In view of the above discussion, it, therefore, has to be held that the communications placed before this court do not contain the kind of assent required to make for a binding....
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.... guarantee takes is immaterial. But that only goes part of the required distance. I put no value to Zee's assertion of there being 'no privity'. This seems to me to be the kind of typically unthinking catch-phrase thrown out when a demand is made. Of course there is some privity; the question is whether there is a privity of a contract of guarantee--for that is the claim. A guarantee creates a very specific type of obligation. It undertakes and assures the repayment of another's debt on the default of that other. Therefore, there must be an unambiguous affirmation that the guarantor assumes or takes on this liability. 50. Returning to (1) the first clause in the LoC and (2) the corresponding security clause in the Facility Letter, this is a confirmation by Zee that it will 'support' ATL. The next part tells us of the form that 'support' is to take: the infusion of equity/debt into ATL. This means that Zee would get some share purchase money into ATL's coffers, or give it a loan. The next part of the clause tells us for what, and this has a string of purposes. Of these, the 'honouring put options' is the clause that concerns us. Thus, t....
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....tters from Zee. Copies of the Plaintiff's letters dated 21st November 2019, 9th January 2020 (incorrectly dated as 9th January 2019) and 18th March 2020 addressed to Zee are annexed hereto and marked as Exhibit R, Exhibit S and Exhibit T, respectively. (Emphasis added) The emphasized portion is, in fact, precisely what the LoC says; and paragraph 19 does not, therefore, advance the case of it being a 'guarantee'. This is also not what the plaint seeks, as the prayers extracted above show. 54. Curiously, paragraph 4 of YES Bank's then muddles things a bit and presents a cocktail of a 'guarantee' (Zee to pay YES Bank directly) and an invocation of the exact terms of the LoC: 4. It is submitted that the Letter of Comfort is to be interpreted as a commercial document and that the question to be answered is whether a party thereto has undertaken any obligation in the nature of a guarantee. For this purpose, it is immaterial whether the Letter of Comfort uses the word "guarantee" or not. In the present case, not only the Letter of Comfort, but also the other accompanying documents and correspondence between the parties, clearly show that Responde....
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.... a loan recovery action against the principal debtor, LELM. 58. Mr. Chinoy is therefore correct, in my view, in saying that the LoC contains no 'guarantee' by Zee to repay LELM's debt to YES Bank. It only contains a confirmation--one issued in terms of what YES Bank sought, as seems prima facie apparent from the Facility Letter--that Zee would support ATL (in the manner I have described above). Zee cannot fairly be said to have any liability directly to YES Bank to pay off LELM's loan debt. 59. There is an instructive decision of a Division Bench of the Karnataka High Court in United Breweries (Holding) Ltd. v Karnataka State Industrial Investment & Development Corporation Ltd. : AIR 2012 Kar 65: (013) 176 Comp Cas 292. to which Mr. Chinoy invites attention. Here, the Karnataka State Financial Corporation gave a loan to one Dominion Chemical Industries Ltd. This was a wholly-owned subsidiary of United Breweries (Holdings) Ltd. UBHL issued a letter of comfort saying this: M/s. Dominion Chemical Industries Ltd., is one of our associate companies. We hereby confirm that it our normal practice to see that all our associates companies meet their financial ....
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....ceivably even Veria. Nobody understood the LoC like this, as I have said, and no such claim was made until the 31st March 2020 notice. 64. Neither the written submissions filed by YES Bank and Zee nor the oral arguments have at any stage referred to any part of the Affidavits in Reply, the Affidavit in Rejoinder or the Additional Affidavit. Apart from arguments, the Reply affidavits deal with the allegations regarding disinvestment by the promoters or the promoters' group and the preference shares, matters wholly irrelevant to the point at hand. The rejoinder adds nothing of value. It reiterates existing correspondence of 2019. For instance, pointing to YES Bank's letters of 12th August 201916 and 19th September 201917 that Goenka, as the Managing Director and CEO of Zee, had 'promised, assured and undertaken' that LELM and ATL 'shall, at all times comply with all terms, conditions and obligations under the Facility, including repayment of the Facility on the respective due dates' is emphatically not a guarantee of repayment by Zee itself. In any case, both these letters are specifically marked 'without prejudice' and could not and should not have....
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.... (b) The ordinary rules of construction and interpretation relating to contracts apply to LoCs. (c) The document is to be construed as a whole, read in a reasonable commercial sense, and in context of events and associated documents. (d) Yet, to be a guarantee, it must conform to the provisions of Section 126 of the Contract Act. (e) Whether the document in question is a guarantee or not depends upon the exact terms to which the guarantor binds himself. In law, no guarantor is liable for more than what the guarantor has undertaken. (f) Where the terms of a written contract are unambiguous and clear, they cannot be altered by addition or subtraction. The terms of a written guarantee cannot be so altered to foist on a party a liability beyond that which the party has undertaken. The contract cannot be rewritten at the instance of one party. (g) The conduct of the parties is a relevant factor in assessing the construction of any contract. (h) Broad allegations of commercial infidelity, immorality or amorality have no role at all to play in the construction of commercial contracts--especially where parties are well-equipped with....
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.... DEFENDANTS 72. Mr. Dwarkadas for the directors says they have been needlessly joined to this suit. Some are independent directors. The intention is only to cause embarrassment. Similarly, Mr. Mehta for Axis DIFC says his client has no role to play. No relief is sought against his client. Mr. Doctor for Deloitte says that while it may be fashionable nowadays to pillory Deloitte in Court in every matter involving high finance, there is absolutely no cause of action against the statutory auditor and no reason to join it as a party defendant. All three lawyers in one voice say that this joinder is entirely thoughtless, without any regard to the provisions of the Code of Civil Procedure, 1908, and some form of litigation carpet-bombing. They submit that only necessary party to a suit for recovery under a guarantee is the guarantor and no one else. Even the principal debtor is never a 'necessary' party to such a suit. Perhaps so. But I am not called upon to decide this, and none of these persons or entities have filed any proceedings for their deletion as defendants or for rejection of the plaint against them or any similar relief. They are free to do so. I make no observatio....
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....ita Mittal J, as she then was. 12 Apparently incorrectly described as the 'Supreme Court of Australia'. There, the apex court is the High Court; and various states and territories each have a Supreme Court in their respective trial jurisdictions. The Supreme Court of New South Wales would, therefore, be the hierarchical equivalent of a High Court with appellate jurisdiction in India. 13 See also Gate Gourmet Australia Pty Ltd. v Gate Gourmet Holding AG, (2004) NSWSC 149, of the Supreme Court of New South Wales, Australia. This also involved a letter of comfort, and was also an action in damages. 14 I do not believe I should consider the decision of a learned single Judge of the Calcutta High Court in IL & FS v Aditya Khaitan & Ors, next cited by Dr. Tulzapurkar. On the point of the LoC being a guarantee, the decision of the learned single Judge was overturned in an appeal filed by some of the other defendants to the action: Mcleod Russel India Ltd. v IL & FS Financial Services, Division Bench decision dated 25th November 2019, APO 143 of 2019. 15 Godhra Electricity Co Ltd. & Anr. v State of Gujarat & Anr., (1975) 1 SCC 199. 16 Exhibit "K", Vol 03, printed pp.....