Supreme Court allows retroactive application of SEBI Circular on Standardisation of procedure to be followed by Debenture Trustee(s)

Supreme Court allows retroactive application of SEBI Circular on Standardisation of procedure to be followed by Debenture Trustee(s)

The bench comprised of Justice Dhananjaya Y Chandrachud, Justice Surya Kant and Justice A S Bopanna.

The Supreme Court has recently allowed retroactive application of SEBI Circular on Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers who are listed debt securities. Accordingly, the shareholders of Reliance Commercial Finance Ltd are required carry out a voting process based on the SEBI guidelines and not just the Debenture Trust Deeds signed by the shareholders in compliance with the Reserve Bank of India (RBI) circular.

The facts of the case are straightforward. Reliance Commercial Finance Limited (RCFL) issued Non-Convertible Debentures to various persons, one of which was Vistra ITCL (India) Limited. RCFL committed its first default under the Debenture Trust Deeds in March 2019. On 7 June 2019, RBI issued the Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019. The 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. If the lenders chose to implement a Resolution Plan, they were required to enter into an Intercreditor agreement (ICA). Bank of Baroda and other lenders of RCFL entered into an ICA on 6 July 2019, pursuant to the RBI Circular. Bank of Baroda was later appointed as the lead bank under the ICA. The RBI Circular applied to banks and specified categories of lenders. Other investors were outside its purview.

SEBI issued a circular on 13 October 2020 on Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities. On 11 March 2021, RCFL and Vistra amended the Debenture Trust Deeds by executing a Supplementary Debenture Trust Deed which took note of the SEBI circular. On 15 July 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited was approved by RCFL's lenders.

On1st July 2021 seventeen debenture holders instituted a suit in the Bombay High Court for the protection of their interests with respect to the amounts due to them by RCFL. The debenture holders urged that Vistra should have taken necessary steps to protect their interests and that certain funds available with the Bank of Baroda were distributed amongst creditors without regard to their status as secured or unsecured creditors. They also alleged that this was done without their consent and that they had a first charge on the receivables of RCFL. The debenture holders alleged that the RBI Circular permitted this illegal distribution of funds. In this case, the Bombay High Court opined prima facie that a meeting of debenture holders was required and suggested that all the concerned parties enter into a negotiated settlement. The court recorded that RCFL and the resolution applicant had agreed to pay the debenture holders an additional sum of 5% of the total principal sum outstanding as an additional settlement. Therefore, the debenture holders were to receive an aggregate sum of Rs. 91,00,000/- representing 29.96% of the total principal outstanding. In return, debenture holder parties to the suit would have to accept the terms of the negotiated settlement in full and final satisfaction of all their claims against the parties and agreed to transfer their debentures in favour of the resolution applicant. In the same order, the Court held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds. The Court directed Vistra to conduct a meeting of all debenture holders in terms of the Debenture Trust Deeds.

This order was challenge by SEBI before a Division Bench and submitted in its appeal, that the SEBI Circular is applicable and the consent of the debenture holders at the International Securities Identification Number level is necessary before a Resolution Plan could be implemented. The division bench dismissed the appeal stating that the SEBI Circular would not apply retrospectively as it did not contain any provision for retrospective application and that it would only apply in two situations– enforcement of security or entering into an ICA. The court stated that the circular wouldn't apply in this case as the debenture holders were not proposing to enforce their security or enter into an ICA. The Supreme Court was approached against this order.

Court's Analysis

The RFCL stated that the SEBI Circular would be applicable only if the debenture holders chose to enter into an ICA under the RBI Circular. According to RCFL, it is open to debenture holders to choose not to enter into an ICA. Instead, they may approve of a Resolution Plan that the lenders have formulated independent of the modalities prescribed in the SEBI Circular. It was argued that this route permitted debenture holders to approve or reject Resolution Plans based on whether their interests were properly accounted for. The court did not accept this submission due to the following reasons:

1. There is no bar to the civil court's jurisdiction

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 court noted that the bar in Section 15Y would not operate as against the suit in the present case. Accordingly, the court stated that the Single Judge of the Bombay High Court (in the first instance) as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit.

2. The SEBI Circular is applicable if debenture holders wish to implement a Resolution Plan to which the lenders are a party

The court stated that 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 could not come into existence without an ICA. As per the court, the SEBI Circular did 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 court further noted that while the SEBI Circular did not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it laid down a procedure in the event that debenture holders chose the route of implementing a Resolution Plan with the lenders. The court stated that this procedure could not be circumvented. It was further opined that–

"The purpose of the SEBI Circular is multi-fold – not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause 6.6). If RCFL's argument was to be accepted, both these protections would fail. In the absence of Clause 7, debenture trustees would likely be unable to exit the ICA or the Resolution Plan even if they were not ―in the interest of investors or if the Resolution Plan was not finalized within 180 days from the end of the review period."

3. The SEBI Circular has retroactive application

The court stated that in the present case, the SEBI Circular owed its existence to statutory powers conferred by a special legislation enacted with a view to protect the interests of investors and to ensure the stable and orderly growth and development of the market for securities. It opined that the SEBI Circular was issued partly in exercise of the powers under the 1993 Regulations. Further, Regulation 15(7) of the 1993 Regulations laid the foundation for the conditions specified in the SEBI Circular. As such, the court stated, the phrase provisions of the [1993 Regulations] in Clause 59 must be read to include the SEBI Circular and the circular would have retroactive application

4. Exercise of the Court's power under Article 142 of the Constitution

Depending upon the facts and circumstances of a case, the court noted that it can, having regard to Article 142 of the Constitution of India, stipulate suitable directions to mitigate the potential denial of rights. Thus, it stated that the compromise arrived at, which was in the interests of all the parties, would be disturbed if a new process was directed to be commenced in accordance with the SEBI Circular. the court stated that–

"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."

Accordingly, the court rejected the interpretation placed by the Division Bench of the Bombay High Court on the SEBI Circular and allowed the appeal.