SEBI (Debenture Trustees) Regulations 1993 – Companies Act 1956 – S. 391 (s. 230 Analogous provision, Present law) – Company Act 2013 – SS. 1(4), 430 – Recovery of Debts – Resolution Plan – Debenture Holders – Debenture Trust Deeds – Reliance Commercial Finance Limited (RCFL) issued Non-Convertible Debentures to various persons – Vistra ITCL was the Debenture Trustee – RCFL committed default under the Debenture Trust Deed on March 4, 2019 – On June 07, 2019, a RBI circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan or initiating legal proceedings for recovery or insolvency – Thereafter, SEBI issued a circular dated 13 October 2020 providing ‘Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities’ – Debenture Holders instituted a suit before the High Court, for the protection of their interests with respect to amount due to them by RCFL – Single Judge of the High Court suggested that all the concerned parties to enter into a negotiated settlement – Pursuant to that, the terms of repayments under Resolution Plan was formulated under the inter-creditor agreement (ICA) and approved by the company’s lenders – Single Judge also held that SEBI Circular dated 13 October 2020 could not be permitted to operate retrospectively and didn’t govern the Debenture Trust Deed – It directed debenture trustee to conduct a meeting of all debenture holders in terms of Debenture Trust Deed and SEBI Circular would not override the express terms of any of the Debenture Trust Deed – SEBI challenged the Single Judge’s order dated 28 October 2021 and 15 November 2021 before the Division Bench – Division Bench of the High Court held that SEBI circular would not apply retrospectively to defaults committed prior to 13 October 2020 – Aggrieved by this decision SEBI moved to the Supreme Court – (i) Whether the Debenture Holders and other parties were required to follow the Procedure under the SEBI Circular – (ii) Whether the civil Court had the jurisdiction to entertain the lis in this case – On appeal, held : SEBI Circular does not stipulate that the signing of an ICA is the only route to entering into a compromise with the issuer company – Besides the absence of a clause mandating an ICA pursuant to an event of default, clause 6.5.3 of the SEBI Circular recognizes that the debenture holders (through the Debenture Trustees) may undertake actions besides those contemplated in the SEBI Circular – However, if the Debenture Holder’s choose to implement a Resolution Plan to which the lenders are party, they must do so in compliance with the conditions laid down in the SEBI Circular – SEBI circular was issued with reference to the RBI circular – Both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan – This is evident from Clause 4 of the SEBI Circular – When the SEBI circular came into force, it specified the conditions under which the debenture holders (through the Debenture Trustees) could access this Resolution Plan and participate in its formulation via the ICA – The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former, and flows from it – Any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa – The SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders – This procedure cannot be circumvented – As far as civil court’s jurisdiction is concerned, bar in section 15Y would not operate as against the suit in the present case – Similarly, nothing in the Companies Act 2013 or any other law for the time being in force vests either the National Company Law Tribunal or the National Company Law Appellate Tribunal with the jurisdiction to adjudicate upon a challenge to the RBI Circular – Hence, the bar in Section 430 of the Companies Act, 2013 is not attracted. SEBI (Debenture Trustees) Regulations 1993 – Companies Act 1956 – S. 391 (s. 230 Analogous provision, Present law) – Company Act 2013 – SS. 1(4), 430 –Retroactive application of SEBI Circular 13 October 2020 – Held: In the instant case, RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular – However, as of
13 October 2020 (the date on which the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist – The debenture holders were not vested with any rights with respect to the resolution of RCFL‘s debt – The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020 – Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein.
Words/Phrases – Retrospective and retroactive – Discussed.
Partly allowing the appeal, the Court
HELD :
There is no bar to the civil court’s jurisdiction
1. Section 15Y of the SEBI Act stipulates that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which an adjudicating officer appointed under the SEBI Act is empowered to determine. Section 15-I of the SEBI Act provides that an adjudicating officer may be appointed to adjudge cases under Sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA, 15HB. None of the sections mentioned in Section 15-I of the SEBI Act would confer jurisdiction on the adjudicating officer to grant the relief sought by the plaintiffs in the first instance. Hence, the bar in Section 15Y would not operate as against the suit in the present case. Similarly, Section 430 of the Companies Act provides that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine. Nothing in the Companies Act 2013 or any other law for the time being in force vests either the National Company Law Tribunal or the National Company Law Appellate Tribunal with the jurisdiction to adjudicate upon a challenge to the RBI Circular. Hence, the bar in Section 430 is not attracted. [Paras 65-66][43-E-H]
The SEBI Circular is applicable if debenture holders wish to implement a Resolution Plan to which the lenders are a party.
2. The SEBI Circular does not stipulate that the signing of an ICA is the only route to entering into a compromise with the issuer company. Besides the absence of a clause mandating an ICA pursuant to an event of default, Clause 6.5.3 of the SEBI Circular recognizes that the debenture holders (through the Debenture Trustees) may undertake actions besides those contemplated in the SEBI Circular. However, if debenture holders choose to implement a Resolution Plan to which the lenders are party, they must do so in compliance with the conditions laid down in the SEBI Circular. [Para 68][44-B-C]
3. The SEBI Circular was issued with reference to the RBI Circular; it does not specify the conditions for the execution of an independent ICA or Resolution Plan which is separate from the ICA and Resolution Plan under the RBI Circular. Both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan. This is evident from Clause 4 of the SEBI Circular. By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan. Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. When the SEBI Circular came into force, it specified the conditions under which the debenture holders (through the Debenture Trustees) could access this Resolution Plan and participate in its formulation via the ICA. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former, and flows from it. Any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. There is only one “door”, so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented. [Paras 72-74][45-C, G-H; 46-A-B, C; 47-F-G]
Dissenting ISIN level debenture holders are bound by the ICA/Resolution Plan
4. Dissenting creditors do not have the option of - exiting the compromise or arrangement arrived at in terms of Section
230 Companies Act. Similarly, dissenting lenders do not have the option of “exiting” the ICA / Resolution Plan under the RBI Circular.25 The respective majorities provided for in each of these laws bind dissenting creditors. It is along these lines that the SEBI Circular binds dissenting debenture holders. Indeed, the SEBI Circular could bind dissenting debenture holders even in the absence of similar provisions in other laws.[Para 78][49-AB]
The SEBI Circular has retroactive application
5. In the present case, RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular. However, as of 13 October 2020 (the date on which the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect to the resolution of RCFL‘s debt. The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020. Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein. [Para 84][51-D-E]
6. The SEBI Circular was issued partly in exercise of the powers under the 1993 Regulations. Further, Regulation 15(7) of the 1993 Regulations lays the foundation for the conditions specified in the SEBI Circular. As such, the phrase “provisions of the [1993 Regulations]” in Clause 59 must be read to include the SEBI Circular. Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed are evidently in conflict with the SEBI Circular as they each provide for different voting mechanisms. Therefore, Clauses 22 and 23 must give way to the SEBI Circular, which will take precedence. [Para 86][52-A-B] Exercise of this Court’s power under Article 142 of the Constitution
7. Small investors, especially those whose exposure is up to INR 10 lakhs, are benefiting to the extent of 100% of their principal amount. Even debenture holders whose exposure is more than 10 lakhs are receiving 29.96% of their principal amount. In comparison, the secured ICA lenders would receive 24.96% of their principal amount, which is lower than the recovery made by the debenture holders. It is also important to highlight that none of the debenture holders have raised any grievance with regard to the proposed compromise. In such a situation, application of the SEBI Circular, though right in law, may lead to unjust outcomes for the retail debenture holders if this court were to reverse the entire course of action which has occurred in the present case. Depending upon the facts and circumstances of a case, this Court can, having regard to Article 142 of the Constitution of India, stipulate suitable directions to mitigate the potential denial of rights. [ Paras 88 and 90][52-G; 53-A-B, D]
9. Pertinently, the SEBI circular only contemplates two situations where ISIN-wise voting is mandated : (i) nonenforcement of security; and (ii) entering into an ICA. Although it applies retroactively, it admittedly does not contemplate a scenario where the debenture holders could give ex post facto consent to ICAs agreed prior to the commencement of the SEBI Circular, that is 13 October 2020. In the present case, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled. For this reason, we consider it necessary to extend the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. The Court reiterates that this Court is issuing the directions to mould the relief under Article 142 in view of the peculiar facts and circumstances of the present case. The Court accept the submissions which have been urged by SEBI and disapprove of the interpretation placed by the Division Bench of the Bombay High Court on the SEBI Circular. The appeal is allowed in part, subject to the directions issued above under Article 142 of the Constitution. [Paras 94 and 99][55-A-C;56-D]
Vineeta Sharma v. Rakesh Sharma (2020) 9 SCC 1 27 ; State Bank’s Staff Union (Madras Circle) v. Union of India (2005) 7 SCC 584 : [2005] 3 Suppl. SCR 200; State v. Kalyan Singh (2017) 7 SCC 444 : [2017] 6 SCR 946; Laxmidas Morarji v. Behrose Darab Madan (2009) 10 SCC 425 : [2009] 14 SCR 777 - referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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