Supreme Court in Reliance Home Finance Insolvency Allows the Resolution Plan Preferred by Authum Investments to cover Debenture Holders

Supreme Court in Reliance Home Finance Insolvency Allows the Resolution Plan Preferred by Authum Investments to cover Debenture Holders

The Supreme Court by its division bench comprising of Justices BR Gavai and Aravind Kumar while adjudicating an appeal in relation to Reliance Home Finance Limited (hereinafter referred to as ‘RHFL’), allowed the resolution plan proposed by Authum Investments and Infrastructure Ltd. (AIIL), a non-banking finance company, to cover the debenture holders of RHFL.

In the aforementioned case an appeal was filed by AIIL which had originally proposed the Resolution Plan (RP) for RHFL. RHFL executed a number of Debenture Trust Deeds, of which nine were executed with the IDBI Trusteeship Services Limited, respondent No. 3 herein, for issuance of debentures on a private placement basis, having face value of Rs. 5 lakhs on 30th August, 2018.

RHFL had, previously, taken upon itself substantial debt through loans from several banks and financial institutions. In May 2019, RHFL defaulted on its loan obligations to various lenders. The outstanding debt was quantified to around Rs. 11,540 crore. It is important to note that its sister concern, Reliance Commercial Finance Limited (hereinafter referred to as ‘RCFL’), had previously defaulted on its loan obligations in March 2019.

On 6th July 2019, a consortium of lenders led by the lead bank, i.e., Bank of Baroda, respondent No. 4 herein, entered into an Inter-Creditor Agreement (hereinafter referred to as ‘ICA’) in terms of clause 10 of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 (hereinafter referred to as ‘RBI Circular’). As per clause 10 of the RBI Circular, the lenders may enter into an ICA for implementation of a RP.

On 26th August 2019, RHFL committed default in relation to the Debenture Trust Deeds issued as well. The approved RHFL RP provided that 19,353 small debenture holders would get 100% of their principal dues.

Since the RBI Circular only regulated the debts owed to Banks/Financial Institutions, the consent of the debenture holders had to be taken as per a Securities and Exchange Board of India (SEBI) Circular dated 13th October, 2020, titled ‘Standardization of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities.’

The SEBI circular prescribed that the voting by the debenture holders, before entering into an ICA, shall mean an approval of not less than 75% of investors by value and 60% by number at ISIN level. An ISIN is a 12-digit alphanumeric code that uniquely identifies a specific security.

In pursuance of the requirement prescribed by the SEBI Circular, a commercial suit was originally filed by R.K. Mohatta Family Trust, respondent No.1 herein and one of the debenture holders of RHFL, before the High Court of Bombay in 2021, seeking voting by the debenture holders on the RP. The High Court, vide its order dated 31st March 2022, directed for a meeting of the debenture holders to be convened to allow the debenture holders to vote on the RP.

SEBI filed an appeal- Securities and Exchange Board of India vs. Rajkumar Nagpal and Other before the Division Bench of the Bombay High Court against convening of the meeting on the ground that voting procedure was not as per the SEBI Circular but as per the process provided under the Debenture Trust Deeds entered into by the parties therein. The appeal was dismissed, with the Division Bench noting that the SEBI Circular could not be applied retrospectively and that the voting process would be governed by the Debenture Trust Deed. Aggrieved thereby, SEBI preferred an appeal before the Apex Court.

A bench of three Judges of the Supreme Court in the case of Rajkumar Nagpal allowed the appeal, holding that the SEBI Circular would have retrospective application. However, the Court noted that the RCFL RP was extremely beneficial to debenture holders in as much that, for those with exposure upto Rs. 10 lakhs would receive 100% of their principal amount, whereas those with exposure of more than Rs. 10 lakhs would receive 29.96% of the principal amount, which is greater than the amount of recovery made by secured lenders, who would receive 24.96% of the principal amount.

Considering this decision, RHFL filed an Interim Application seeking the resolution plan’s approval on the same terms.

The Bombay High Court dismissed the Interim Application, holding that the power to mold relief and approve the RP, in the case of Rajkumar Nagpal could not have been done by the High Court in exercise of its inherent powers under Section 151 of the Code of Civil Procedure (CPC). Hence, these appeals were preferred.

The Apex Court in the present case also stated that, small investors, whose exposure is up to Rs. 5 lakhs, are benefiting to the extent of 100% of their principal amount. Even debenture holders whose exposure is more than Rs. 5 lakhs are receiving 23.24% of their principal amount, similar to the case of Rajkumar Nagpal.

The Apex Court found that the facts in the present case are identical to the facts in the case of Rajkumar Nagpal and observed that a different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders.

The bench expressed, “such unscrambling of the resolution process will not only prove time consuming but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court. We find that in the present case also, we should extend the benefit under Article 142 of the Constitution of India to the retail debenture holders.”

The bench proposed to protect the rights of the dissenting debenture holders who stand outside the proposed RP framed under the lender’s ICA and seek to pursue other legal remedies.

Therefore, in exercise of the powers under Article 142 of the Constitution of India, Apex Court allowed the RP preferred by AIIL qua the debenture holders, except the dissenting debenture holders.

However, the Court while allowing the appeals further directed that dissenting debenture holders should be provided an option to accept the terms of the RP. Alternatively, the dissenting debenture holders shall have a right to stand outside the proposed RP framed under the lender’s ICA and pursue other legal remedies to recover their entitled dues.