TaxTMI 
TaxTMI 
2023 (2) TMI 1379
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.... 151 of the Code of Civil Procedure, 1908 (hereinafter referred as 'CPC'), whereby the appellant sought ad interim directions permitting him to exercise his voting rights with respect to his 32,82,720 equity shares ('Pledged Shares') in the respondent no. 3 Company, in the proposed meeting of the equity shareholders of respondent no. 3 scheduled on 27.10.2023. 3. In order to effectively deal with the issue as stated by the appellant, it would be necessary to elaborate on the facts of the present case. 4. The Appellant is a citizen of the USA and claims ownership of the 32,82,720 equity shares ('Pledged Shares') amounting to 26% of the total paid up capital of the Respondent No. 3. 5. The Respondents No. 1 & 2 are companies incorporated under the Companies Act, 2013 and are duly registered as a Debenture Trustee under the Securities Exchange Board of India (hereinafter referred to as 'SEBI'). 6. A Debenture Trust Deed (hereinafter referred to as 'DTD') was executed between Respondent No.1 and Respondent No.3 on 07.08.2017, for a loan of Rs. 75,00,00,000/. By means of the DTD, respondent no. 3 issued secured, taxable, redeemable Non-Convertible Debentures (hereinafter....
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....ny as well as all its subsidiaries. The Respondent No.1 thereafter issued an Invocation Notice dated 03.02.2022, invoking the pledged shares i.e the Pledge created by the Appellant over the pledged shares under the SPA and the pledge created over the NOVA pledged shares under Section 176 of the Indian Contract Act 1872 (hereinafter referred to as 'The Act'). These shares were thereafter transferred to the Demat accounts of Respondent No.1. 10. Aggrieved by the above mentioned actions of the Respondent No.1, the Appellant filed a suit, CS(COMM) 108 of 2022, seeking a permanent injunction restraining the Respondents No.1 and Respondent No.2 from selling, disposing of or creating any third-party rights in terms of the pledged shares. Vide order dated 16.02.2022, the Respondents were directed to maintain status quo with respect to the Appellant's pledged shares. The Respondent No.1 then preferred an appeal against the said order, FAO(OS)(COMM) No.56 of 2022 which was allowed vide order dated 04.03.2022 and the order dated 16.02.2022 was set aside. 11. Furthermore, the Respondent No.3 had also filed a suit, CS(COMM) 138 of 2022 in relation to the invocation of pledged shares of NO....
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....s the case of appellant in CS (COMM.) No. 108/2022 before the learned Single Judge of this Court that 'Composite Scheme of Arrangement' entered into between the defendant no. 3, Nova and Panacea Infotech Pvt. Ltd. is highly detrimental to his interest as the decision of defendant no. 3 to hive off its E-Business Solutions Division to Nova would result in devaluation of his pledged shares to only about Rs. 12 lakhs. Accordingly, the appellant preferred the IA No. 16191 of 2023, being desirous of opposing the 'Composite Scheme of Agreement', for ad-interim relief, which was dismissed. It was in said circumstances, present appeal has been preferred. Submissions of Appellant: 16. Ms. Poojam Saigal, learned counsel for the appellant has submitted that appellant has pledged his 26% shares in the respondent no. 3 company only as a collateral security and has not in any manner extended any guarantee for repayment of the amount under DTD, which is evident from SPA and any right in respect of the pledged shares could be claimed by respondent no. 1 and respondent no. 2 only upon a default in the repayment of the loan. Moreso, there is no default as on date and 'Event of Default' includi....
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.... the value of the pledged shares. It was submitted that respondent no. 1 despite having invoked the pledged shares of which appellant continues to be owner, cannot claim any right in the pledged shares. To further consolidate the submissions, reliance was placed on the case of Ajoy Khanderia vs. Barclays Bank and Anr. (2021) SCC Online Del. 3740. 19. The learned counsel has sought to refer to Clause 17.9 of the SPA to contend that the Appellant is liable to pay the entire amount is untenable. The said clause does not provide that the liability of the pledgor will continue post the invocation of pledged shares and would be contrary to the legal position as settled by the Apex Court. Learned counsel further submits that appellant is not a party to the DTD and therefore his liability is only limited to the pledged shares and not beyond that. In case of any occurrence of 'Event of Default', as mentioned in Schedule IV, the company i.e. KSSL will be in default and not the Appellant. The 'Event of Default' may be triggered by a promoter, key managerial personnel or by operation of law but the 'Event of Default' will always be that of the company. 20. It was submitted that the impug....
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....uity share held by KSSL in NOVA will get cancelled. This would result in NOVA ceasing to be a subsidiary of KSSL and NTL will allot redeemable preference shares with no voting rights to the shareholders of KSSL. 24. The Appellant further states that even after raising an amount of 75 Crores through the DTD out of which 62 Crores were used for acquiring NOVA, the Valuation of the Respondent No.3 company is sought to be put merely to Rs.53 Lakhs. As per this valuation, the value of 26% pledged shares of the Appellant would approximately be Rs. 13.83 Lakhs, if that is the case, the Appellant is willing to pay for it. 25. Finally, the Appellant states that in the event of him not being able to exercise his voting rights, the scheme would be approved by the majority shareholder in respondent no. 3 company. Respondent No 1&2 are working with KSSL which is being managed by the majority group and will cast a vote in favor of the scheme. Even if the Respondents No.1 & 2 do not vote, the scheme would be approved by the majority share holder. Post the approval of the scheme, nothing substantial would be left in the KSSL and the subject matter will be eroded. This will cause grave loss t....
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....oter seized to be a director in the company and when the pledgor is declared a wilful defaulter by any bank. The appellant has not only been declared a 'wilful defaulter' by Yes Bank but he also ceases to be a Director in respondent no. 3 company for having resigned. Thus, apparently 'Events of Default' continues to subsist and rights of voting rightfully reside with respondent no. 1. 30. Learned counsel further submits that since the 'Event of Default', the Respondent No.1 has been exercising voting rights in terms of the pledged shares since February 2022 without any objection from the appellant. The pledged shares stood invoked in February, 2022 as per Clause 2.3.1 of the SPA, the Respondent No.1 has been exercising all voting rights in terms of the said pledged shares. The appellant was entitled to exercise voting rights until the occurrence of an 'Event of Default', in terms of clause 2.5.1(c) of SPA, the voting rights in terms of the pledged shares would be vested in the debenture trustee, irrespective of them being transferred to the Respondent No. 1 or not, therefore, respondent no. 1 is entitled to exercise the voting rights. 31. Further, although the invoked shares ....
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....t of Default' as on date. Once, as per terms of the DTD, the 'Events of Defaults' are continuing, this Court cannot merely on account of the restructuring of the loan hold that the 'Event of Default' stands cured. 23. In the light of the aforesaid, there can be no doubt about the fact that despite the loan account of defendant no.3 having been regularised as on date, the question whether an "Event of Default" continues to exist has to be seen in the context of the definition of the said term as set out under clause 16 of Schedule IV of the DTD, which defines 'Events of Default'. Once it is evident that the case of the plaintiff clearly falls within sub clause (j) & (h) of clause 16 of the Schedule IV to the DTD, this Court has no other option, but to hold that an "Event Default" continues in accordance with the terms and conditions agreed between the parties. The plaintiff is, therefore, bound by the terms of clause 16 of the DTD and cannot be permitted to urge that the "Event of Default" must be confined to a default in payment of the loan amount/debenture interest by defendant no.3. I am, therefore, unable to agree with the plaintiff that the ....
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.... voting rights, cannot be now permitted to urge that these rights continue to vest in him. I may also note that as per the terms of the agreement, on account of the plaintiff having been declared a wilful defaulter by the Yes Bank Limited and his no longer being a Director of defendant no. 3, the 'Events of Defaults' in terms of the DTD continue to subsist as on date and therefore, the rights of voting rightfully vest with defendant no. 1." Analysis 34. Aggrieved by the aforesaid order dated 20.10.2023, the appellant has approached this Court by means of the present First Appeal. 35. We have examined the principles governing the pledge of shares under the contract between the parties in the given factual scenario and in the conspectus of the submissions of the counsels for all the parties. 36. As noted herein above, it is undisputed that respondent no. 3 company and respondent no. 1, being the Debenture Trustee have entered into a DTD on 07.08.2017, was amended by the First Amendment deed dated 27.09.2019 and again amended by Second Amendment deed dated 21.08.2020. The appellant herein pledged 32,82,720 equity shares constituting 26% of the paid-up share capital....
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....eral meeting of members or meeting of any class of members or meeting of creditors of the Pledgor, exercise the voting rights in respect of the Pledged Shares in any manner as the Debenture Trustee may deem fit, or take any other action in terms of the Applicable law at any time as the lawfully constituted attorney of the Pledgor. To enable the Debenture Trustee to exercise voting rights as aforesaid, the Pledgor shall on the Effective Date register this Agreement with the Pledgor with the instructions that as and when any intimation is received from the Majority Debenture Holders in this behalf, the Debenture Trustee should be permitted to attend and exercise the voting rights in respect of the Pledged Shares on any matter at any meeting of the members of the Pledgor. The Pledgor shall also for forward copies of the notices of the meeting to the Finance Parties and the Debenture Trustee as and when such notices are issued to the shareholders. The Pledgor shall execute and deliver to the Finance Parties all proxies and such other instruments as the Debenture Trustee may require for exercising such voting and other rights." "2.5 Remedies on an Event of Default 2.5.....
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....umstances set out in Schedule 4 (Events of Default) is an event of default {"Event of Default"). 14.2 The Company shall notify the Debenture Trustee of any Event of Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence. 14.3 Promptly upon a request by the Debenture Trustee, the Company shall supply to the Debenture Trustee a certificate (in such form as may be required by the Debenture Trustee) signed by two of its directors or senior officers on its behalf certifying that no Event of Default is continuing (or if an Event of Default is continuing, specifying the Event of Default and the steps, if any, being taken to remedy it)." 14.4 Acceleration and other consequences of Events of Default 14.4.1 If, in the opinion of the Debenture Holders, an Event of Default has occurred and which Event of Default has not been cured by the Company within the applicable cure periods, if any, specified for such Event of Default, then in addition to any other rights and remedies available to the Debenture Holders and/or the Debenture Trustee under any contract, agreement or Applicable Law, including ability to fil....
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....s of Clause 2 of Schedule 4 of the DTD, the failure of the Company to maintain the required balance in the Escrow Account as required under the DTD and the Escrow Account amounts to an Event of Default. (c) In terms of the various provisions of the DTD, the Company is required to furnish various reports and information, on a timely basis, to the Debenture Trustee. However, the Company has not been furnishing the same, even after being sought by us. In terms of the provisions of Clause 13 of Schedule 4 of the DTD, the failure of the Company to submit reports as required under the DTD by the Company and I or the Reference Entity amounts to an Event of Default. The above are a few of the instances of the non-compliance in default by the Company of the provisions of the DTD, which have resulted in the occurrence of Events of Default by the Company. Accordingly, we hereby declare occurrence of an Event of Default in terms of the DTD and hereby accelerate all the Secured Obligations and thus, all the Secured Obligations and all other amounts accrued and outstanding under Debentures Documents have now become immediately due and payable. 41. Consequently, the ....
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.... 'Event of Default' and 'Invocation of Pledge' based on the Consolidated Financial Statements of Respondent No. 3 company, that there had been a restructuring of the DTD dated 07.08.2017 and that DTD had been restructured and Respondent No. 3 company has agreed to reschedule the same with the Lender. The appellant has relied on the Third amendment deed to the DTD dated 22.04.2023 in this respect. 44. On this basis, the appellant is thus contending that due to the restructuring of DTD by the respondents, the default under the DTD due to which the shares of the appellant had been invoked by respondent no. 1 has ceased to exist and stands cured. This factum of restructuring has not been disputed by the respondents, which is evident from the Third amendment to DTD dated 07.08.2017 by amendment deed. 45. The crucial question is, whether upon restructuring of the debenture trust deed by the respondents, the appellant is entitled to exercise the voting rights in respect to the pledged shares. In the present case, the appellant under the SPA, authorised the respondent no. 1 to exercise voting rights in respect of the pledged shares on the 'Event of Default'. Further, Power of Attorne....
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....d exercise his voting rights, which right to redeem, the appellant has till such time the pledged property is not sold. 48. The finding of the learned Single Judge that once an 'Event of Default' had taken place in February, 2022, the respondent no. 1 being the debenture trustee, therefore, became entitled to exercise the voting rights in respect of share pledged by plaintiff cannot be faulted. Equally preposterous is the contention of appellant that on account of respondent no. 1 & 2 having executed an amendment to the DTD without his consent, he can no longer be bound by the terms of the pledge, which was made on the basis of the DTD as executed on 07.08.2017. Rather, this contention is contradictory to appellant's own plea that on account of amendment to DTD and consequent restructuring of debenture trust, the appellant is seeking right to cast his vote. The learned Single Judge has rightly held that the actions taken by the respondent no. 1 & 2 are protected under Clause 17.2 and will have no effect on the obligations of the appellant as a pledgor and that the amendment to the DTD executed on 22.04.2023, would not come in the way of exercise of rights, which had already accr....