SECURITIES AND EXCHANGE BOARD OF INDIA versus RAJKUMAR NAGPAL & ORS on 30 August 2022

1. Section 15Y of the SEBI Act stipulates that no civil courtshall have the jurisdiction to entertain any suit in respect of anymatter which an adjudicating officer appointed under the SEBIAct is empowered to determine. Section 15-I of the SEBI Actprovides that an adjudicating officer may be appointed to adjudgecases under Sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB,15F, 15G, 15H, 15HA, 15HB. None of the sections mentioned inSection 15-I of the SEBI Act would confer jurisdiction on theadjudicating officer to grant the relief sought by the plaintiffs inthe first instance. Hence, the bar in Section 15Y would not operateas against the suit in the present case. Similarly, Section 430 ofthe Companies Act provides that no civil court shall have thejurisdiction to entertain any suit in respect of any matter whichthe National Company Law Tribunal or the National CompanyLaw Appellate Tribunal is empowered to determine. Nothing inthe Companies Act 2013 or any other law for the time being inforce vests either the National Company Law Tribunal or theNational Company Law Appellate Tribunal with the jurisdictionto adjudicate upon a challenge to the RBI Circular. Hence, thebar in Section 430 is not attracted. [Paras 65-66][43-E-H]

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

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A2. The SEBI Circular does not stipulate that the signing ofan ICA is the only route to entering into a compromise with theissuer company. Besides the absence of a clause mandating anICA pursuant to an event of default, Clause 6.5.3 of the SEBICircular recognizes that the debenture holders (through theDebenture Trustees) may undertake actions besides thoseBcontemplated in the SEBI Circular. However, if debenture holderschoose to implement a Resolution Plan to which the lenders areparty, they must do so in compliance with the conditions laid downin the SEBI Circular. [Para 68][44-B-C]

3. The SEBI Circular was issued with reference to the RBICCircular; it does not specify the conditions for the execution ofan independent ICA or Resolution Plan which is separate fromthe ICA and Resolution Plan under the RBI Circular. Both theRBI Circular and the SEBI Circular refer to one and the sameICA and Resolution Plan. This is evident from Clause 4 of theDSEBI Circular. By issuing the SEBI Circular, SEBI subscribedto the overall framework of the RBI Circular and permitteddebenture holders to participate in the process specified in theRBI Circular to enter into a Resolution Plan. Under the RBICircular, the Resolution Plan cannot come into existence withoutan ICA. The SEBI Circular does not disturb this position. WhenEthe SEBI Circular came into force, it specified the conditionsunder which the debenture holders (through the DebentureTrustees) could access this Resolution Plan and participate in itsformulation via the ICA. The ICA and the Resolution Plan areinextricably intertwined and the latter has its genesis in theFformer, and flows from it. Any reference to an ICA in the SEBICircular is also necessarily a reference to the Resolution Planand vice versa. It is not open to debenture holders to participatein the implementation of the Resolution Plan without beinginvolved in its genesis through the ICA. There is only one “door”, so to speak, through which debenture holders can gain entry intoGthe Resolution Plan with the lenders and that is through the ICA.Therefore, while the SEBI Circular does not mandate theexecution of an ICA as the only route to entering a compromisewith the issuer company, it lays down a procedure in the eventthat debenture holders choose the route of implementing aH

Resolution Plan with the lenders. This procedure cannot becircumvented. [Paras 72-74][45-C, G-H; 46-A-B, C; 47-F-G]Dissenting ISIN level debenture holders are bound by theICA/Resolution Plan

4. Dissenting creditors do not have the option of - exitingthe compromise or arrangement arrived at in terms of Section230 Companies Act. Similarly, dissenting lenders do not havethe option of “exiting” the ICA / Resolution Plan under the RBICircular.25 The respective majorities provided for in each of theselaws bind dissenting creditors. It is along these lines that theSEBI Circular binds dissenting debenture holders. Indeed, theSEBI Circular could bind dissenting debenture holders even inthe absence of similar provisions in other laws.[Para 78][49-A-B]

The SEBI Circular has retroactive application

5. In the present case, RCFL issued the debentures anddefaulted on the payments to the debenture holders prior to theissuance of the SEBI Circular. However, as of 13 October 2020(the date on which the SEBI Circular came into force), acompromise or agreement on the restructuring of the debt owedby RCFL did not exist. The debenture holders were not vestedwith any rights with respect to the resolution of RCFL‘s debt.The existence of the debt and the subsequent default by RCFLwas the status of events, which existed prior to 13 October 2020.Once it came into force, the SEBI Circular applied to the mannerof resolution of debt, as specified therein. [Para 84][51-D-E]

6. The SEBI Circular was issued partly in exercise of thepowers under the 1993 Regulations. Further, Regulation 15(7)of the 1993 Regulations lays the foundation for the conditionsspecified in the SEBI Circular. As such, the phrase “provisionsof the [1993 Regulations]” in Clause 59 must be read to includethe SEBI Circular. Clauses 22 and 23 of the Fifth Schedule to theDebenture Trust Deed are evidently in conflict with the SEBICircular 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]

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AExercise of this Court’s power under Article 142 of theConstitution

7. Small investors, especially those whose exposure is upto INR 10 lakhs, are benefiting to the extent of 100% of theirprincipal amount. Even debenture holders whose exposure isBmore than 10 lakhs are receiving 29.96% of their principalamount. In comparison, the secured ICA lenders would receive24.96% of their principal amount, which is lower than the recoverymade by the debenture holders. It is also important to highlightthat none of the debenture holders have raised any grievanceCwith regard to the proposed compromise. In such a situation,application of the SEBI Circular, though right in law, may lead tounjust outcomes for the retail debenture holders if this court wereto reverse the entire course of action which has occurred in thepresent case. Depending upon the facts and circumstances of aDcase, this Court can, having regard to Article 142 of theConstitution of India, stipulate suitable directions to mitigate thepotential denial of rights. [ Paras 88 and 90][52-G; 53-A-B, D]

9. Pertinently, the SEBI circular only contemplates twosituations where ISIN-wise voting is mandated : (i) non-Eenforcement of security; and (ii) entering into an ICA. Althoughit applies retroactively, it admittedly does not contemplate ascenario where the debenture holders could give ex post factoconsent to ICAs agreed prior to the commencement of the SEBICircular, that is 13 October 2020. In the present case, theapplication of the SEBI Circular will lead to a scenario where aFResolution Plan validly agreed upon by the ICA lenders underthe RBI Framework will have to be unscrambled. For this reason,we consider it necessary to extend the benefit under Article 142to the retail debenture holders by allowing the Resolution Planto pass muster. The Court reiterates that this Court is issuingGthe directions to mould the relief under Article 142 in view of thepeculiar facts and circumstances of the present case. The Courtaccept the submissions which have been urged by SEBI anddisapprove of the interpretation placed by the Division Bench ofthe Bombay High Court on the SEBI Circular. The appeal isH

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allowed in part, subject to the directions issued above underArticle 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 ofIndia (2005) 7 SCC 584 : [2005] 3 Suppl. SCR 200;State v. Kalyan Singh (2017) 7 SCC 444 : [2017] 6SCR 946; Laxmidas Morarji v. Behrose Darab Madan(2009) 10 SCC 425 : [2009] 14 SCR 777 - referredto.

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Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No.5247of 2022.

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From the Judgment and Order dated 21.03.2022 of the High Courtof Judicature at Bombay in Commercial Appeal (L) No.27370 of 2021.

N. Venkataraman, ASG, Jayesh K. Ashar, Dhaval Mehrotra,Abhishek Singh, Suraj Chaudhary, Sudhanshu Sikka, ChanderashekharEBharti, M/s. K Ashar & Co., Advs. for the Appellant.

Darius J. Khambata, K.V. Viswanathan, Sr. Advs. MaheshAgarwal, Prateek Seksaria, M.S. Ananth, Divyanshu Srivastava, KaranRukhana, Rohan Talwar, Subir Kumar, Ms. Disha Shah, Karan Verma,Ms. Deepsikha Mishra, Archit Jain, Yash Chheda, Nishant Chotani, E.C.Agrawala, Yohaann Limathwalla, Angad Baxi, Dheeraj Nair, RahulSangwan, Sivagnanam K., Ms. Tine Abraham, Akshay Puri, Syed JafarAlam, Advs. for the Respondents.

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The Judgment of the Court was delivered by G

DR. DHANANJAYA Y. CHANDRACHUD, J.

Table of Contents*

A.Facts ............................................................................. 4

i.The dispute ....................................................... 4

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* Ed. Note : Pagination in the table of Contents is as per the original judgment.

8SUPREME COURT REPORTS[2022] 15 S.C.R.Aii.The suit before the Bombay High Court ..... 5iii.The impugned judgment ............................... 10B.Issues ..........................................................................12C.Submissions ................................................................12BD.Overview of contractual arrangements .................. 19i.The Debenture Trust Deeds ........................19ii.Steps taken by the Debenture Trustee(Vistra) .............................................................23CE.Evolution of the law surrounding the resolutionof debts........................................................................25i.The framework for the resolution of debtunder the Companies Act 1956 ...................25Dii.The RBI Circular dated 6 July 2019 and thelegal framework thereafter ...........................27iii.SEBI (Debenture Trustees) Regulations1993..................................................................32E

[2022] 15 S.C.R.

iv.The SEBI Circular dated 13 October 2020

[2022] 15 S.C.R.

iv.The SEBI Circular dated 13 October 2020

and the legal framework thereafter.............34a.The SEBI Circular: Overview andFImplications .................................................. 34b.Voting at the ISIN level ............................... 42c.The SEBI Circular has a statutorycharacter ...................................................... 44GF.Analysis ......................................................................47i.There is no bar to the civil court’sjurisdiction ......................................................47ii.The SEBI Circular is applicable if debentureH

holders wish to implement a Resolution Plan toA

which the lenders are a party .......................49

iii.Dissenting ISIN level debenture holders are bound by the ICA / Resolution Plan............54

iv.The SEBI Circular has retroactive applicationB56

v.Exercise of this Court’s power under Article 142 of the Constitution ................................. 59

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vi.Dissenting debenture holders in the presentcase ............................................................................. 63

A. Facts

i. The dispute

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1. Reliance Commercial Finance Limited[1] issued Non-ConvertibleDebentures to various persons.[2] Vistra ITCL (India) Limited was theDebenture Trustee[3] under three Debenture Trust Deeds dated 3 May2017, 23 May 2017 and 5 February 2018.[4] RCFL committed its firstdefault under the Debenture Trust Deeds in March 2019.

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2. On 7 June 2019, RBI issued the Reserve Bank of India(Prudential Framework for the Resolution of Stressed Assets)[5] Directions2019, with “a view to providing a framework for early recognition, reportingand time bound resolution of stressed assets”.[6] The RBI Circular providedthat certain lenders may opt for a resolution strategy available to themunder the existing legal framework, including entering into a resolutionplan[7] or initiating legal proceedings for recovery or insolvency. If thelenders chose to implement a Resolution Plan, they were required toenter into an inter-creditor agreement.[8] Bank of Baroda and other lenders 1 “RCFL”

2 “debenture holders”

3 “Vistra”

4 “Debenture Trust Deeds” or “Debenture Trust Deed”

5 “RBI Circular”

6 Clause 4, RBI Circular.

7 “Resolution Plan”

8 “ICA”

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Aof 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.

3. The RBI Circular applied to banks and specified categories oflenders. Other investors were outside its purview. SEBI issued a circularon 13 October 2020. The subject was the ‘Standardisation of procedureBto be followed by Debenture Trustee(s) in case of ‘default’ by issuers oflisted debt securities’.[9] On 11 March 2021, RCFL and Vistra amendedthe Debenture Trust Deeds by executing a Supplementary DebentureTrust Deed which took note of the SEBI circular. On 15 July 2021, theResolution Plan submitted by Authum Investment and InfrastructureLimited[10] was approved by RCFL’s lenders.C

ii. The suit before the Bombay High Court

ii. The suit before the Bombay High Court

4. Seventeen debenture holders instituted a suit on the OriginalSide of the Bombay High Court on 1 July 2021. The debenture holdersinstituted the suit for the protection of their interests with respect to theamounts due to them by RCFL. RCFL was impleaded as the firstDdefendant to the suit. The debenture holders urged that Vistra, who wasimpleaded as the third defendant, should have taken necessary steps toprotect their interests. The debenture holders also alleged that certainfunds available with the Bank of Baroda, the second defendant, weredistributed amongst creditors without regard to their status as ‘secured’or ‘unsecured’ creditors. They also alleged that this was done withoutEtheir 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. They also stated that RCFL, Bank of Baroda, andVistra could not seek an ex post facto consent from the debenture holdersfor either the ICA or the Resolution Plan. They urged that it wasFmandatory for Vistra to sign the ICA on behalf of the debenture holdersbefore considering the Resolution Plan. The plaintiffs in the suit beforethe High Court sought the setting aside of the RBI Circular as illegal andultra vires. They also sought an injunction restraining RCFL, Bank ofBaroda, and RBI from implementing the RBI Circular.

G5. On 20 August 2021, Justice G S Patel of the Bombay HighCourt opined prima facie that a meeting of debenture holders wasrequired. The Court, however, held that it could not recommend themanner in which the meeting of debenture holders should be convened,observing that: 9 “SEBI Circular”H10 “Authum”

“3. Prima facie, it is clear that a meeting or possibly meetings ofdebenture holders are required. The question presently that Vistrafaces relates to the terms on which such a meeting is to be called.Mr. Ankhad explains that one option is to proceed according tothe ISIN series. The second is to proceed according to theDebenture Trust Deeds. There are three different Debenture TrustDeeds. The first option does not commend itself. Surely, this seriesof debentures is immaterial in a situation like this.

4. Another problem that presents itself is the curtailing orabbreviation of the necessary notice that is required.

5. Both aspects are not, prima facie, one on which this Court canmake a recommendation, it is one thing to ask a Civil Court toadjudicate on the correctness or otherwise of a decision of aregulator or a validity of a rule or regulation. But I am unable tosee how a Civil Court can direct that a notice that is required bythe Trust Deed or by the applicable regulation should be shortenedor that a meeting should be held of all debenture holders in oneparticular manner over preference to another. These are directionsthat only a regulator can issue.”

6. The Court noted that Vistra had sought a clarification on 11August 2021, regarding the manner in which the meeting was to be held.It directed SEBI to respond to Vistra’s representation on a “priority andextremely urgent basis”. SEBI issued a clarificatory letter on 23 August2021 in response to this representation. The clarificatory letter referredto Regulation 15(7) of SEBI (Debenture Trustees) Regulations 1993[11]and the SEBI Circular and clarified that the voting would have to beconducted in accordance with the SEBI Circular. The relevant extractof this letter reads as follows:

“5. In view of regulation 15(7) of the DT Regulations read withclause 3, 6.5, 6.6 and 7 of SEBI Circular, it is stated that it shall bemandatory for DTs to sign the Inter-Creditor Agreement (ICA)on behalf of debenture holders before considering the resolutionplan to be implemented as a result of ICA proceedings.”

7. SEBI was not impleaded as a party to the suit. On 17 September2021, the Single Judge granted leave to the debenture holders to join A

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ASEBI as a respondent to an interlocutory application, Interim ApplicationNo. 14224 of 2021. SEBI entered appearance on 24 September 2021.SEBI in its affidavit before the High Court submitted that the debenturetrustees are obligated to comply with its circular in case of a defaultcommitted by an issuer of listed debt securities even though the event ofdefault has taken place prior to the issuance of its circular. B

8. On 14 October 2021 and 20 October 2021, the Single Judge ofthe High Court suggested that all the concerned parties enter into anegotiated settlement.

9. The terms of repayment under the Resolution Plan formulatedCunder the ICA and approved by the company’s lenders are as follows:

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GIn terms of the above table, all individuals/ HUFs holding debenturesof a value less than Rs. 10 Lakhs were to get 100% of their principalsum due, while individuals and HUFs holding debentures in excess ofRs. 10 lakhs were to receive 24.96% of the principal.

10. By an order dated 28 October 2021, the Single Judge recordedHthat RCFL and the resolution applicant had agreed to pay the debenture holders an additional sum of 5% of the total principal sum outstanding asan additional settlement. Therefore, the debenture holders were to receivean aggregate sum of Rs. 91,00,000/- representing 29.96% of the totalprincipal outstanding. In return, debenture holder parties to the suit wouldhave to accept the terms of the negotiated settlement in full and finalsatisfaction of all their claims against the parties and agreed to transfertheir debentures in favour of the resolution applicant. In the same order,the Court held that the SEBI Circular could not be permitted to operateretrospectively and did not govern the Debenture Trust Deeds. The Courtdirected Vistra to conduct a meeting of all debenture holders in terms ofthe Debenture Trust Deed(s):

“13. In view of this, the 3rd Defendant is directed to call andconduct meeting of all the debenture holders under all threeDebenture Trust Deeds within 30 days of this order ensuring thatthe calling and conduct of the meeting/s and the voting at suchmeetings conforms to the terms of the respective Debenture TrustDeeds. At such meeting/s, the 3rd Defendant will place forconsideration and approval of the beneficial owners or debentureholders the settlement offer/compromise/arrangement asenvisaged in the approved resolution plan, and as modified to theextent provided herein above.

14. If there is any further or later or supplementary trust deed,then the provisions of that supplementary trust deed will also betaken into account.

15. All parties agree and undertake to maintain confidentially ofthe settlement and/or compromise and/or arrangement arrivedthereto.

16. In view of the above comprise arrived at between the parties,the suit stands disposed off in these terms.

17. It is made clear that the aforesaid order is passed consideringthe peculiar facts and circumstances of the present case. It alsohas consent of all the parties.

18. As regards SEBI, I am making it clear that this order willconstitute no precedent against SEBI nor will SEBI be held to theterms of this order for other cases. This order is made on thepeculiar facts and circumstances of this case.”

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AOn 15 November 2021, the Single Judge passed a clarificatoryorder indicating that the meeting should not deviate from the terms ofthe Debenture Trust Deed(s) and that the Supplementary Trust Deedswould have to be read with the Debenture Trust Deed(s) in a consistentmanner. The court also held that a mere reference to the SEBI Circularwould not override the express terms of any of the Debenture TrustBDeeds.

iii. The impugned judgment

11. SEBI challenged the Single Judge’s orders dated 28 October2021 and 15 November 2021 before a Division Bench. SEBI submittedCin its appeal, that the SEBI Circular is applicable and the consent of thedebenture holders at the International Securities Identification Number[12]level is necessary before a Resolution Plan could be implemented.

12. At the first hearing, SEBI took objection to paragraphs 15 to17 of the Single Judge’s order dated 28 October 2021. Accordingly, theDDivision Bench passed an order dated 3 December 2021 granting libertyto SEBI to move the Single Judge to obtain a clarification. On 3December2021, the Single Judge clarified that SEBI was not a party to the suit andcould therefore not be a party to the compromise.

13. On 6 December 2021, the Division Bench admitted the appealEfiled by SEBI and allowed the meeting to be held on 8 December 2021.On 21 December 2021, a co-ordinate bench passed an order directingthat the results of e-voting of the meeting conducted on 8 December2021 be placed on record.

14. After consideration of the rival submissions, the Division BenchFdismissed the appeal filed by SEBI for the following reasons:

a.The SEBI Circular would not apply retrospectively todefaults committed prior to 13 October 2020 because: (a) itcomes into force on 13 October 2020 and therefore onlyapplies to defaults committed after 13 October 2020; and(b) it does not contain any provision for retrospectiveGapplication to defaults prior to 13 October 2020; b.The SEBI Circular will only apply in two situations, namely,enforcement of security or entering into an ICA. The SEBICircular will not apply to the present case as the debenture holders are not proposing to enforce their security or enterinto an ICA;

c.The Supplementary Debenture Trust Deed executed on 11March 2021 makes the SEBI Circular applicable to defaultsoccurring after it was issued or to defaults after 13 October2020; d.Clause 23 of the Fifth Schedule to the Debenture TrustDeed(s) is consistent with the 1993 Regulations. Therefore,the SEBI Circular will not defeat the Debenture TrustDeed(s) in lieu of clause 59 of the Debenture Trust Deed(s);and e.The clarificatory letter dated 23 August 2021 issued by SEBIis also inapplicable since the SEBI Circular is inapplicable.

The Court also observed that the application of the SEBI Circularwould lead to a situation where one debenture holder holding debenturesworth Rs. 5 crores could veto a Resolution Plan worth Rs. 9,017 crores.Thus, in the view of the Division Bench, holding an ISIN-wise meetingof debenture holders would defeat the interests of small investors, whowere realizing 100% of the debt owed to them, under the ResolutionPlan.

B. Issues

15. Based on the submissions which have been canvassed by theparties, the issues which arise for determination are:

a.Whether the debenture holders and other parties in thepresent case were required to follow the procedure underthe SEBI Circular; and b.Whether the civil court had the jurisdiction to entertain thelis in this case.

C. Submissions

16. Mr. N Venkataraman, learned senior counsel and AdditionalSolicitor General made the following submissions in support of theappellant’s argument that the SEBI Circular applies to the present case:

a.The parties to the Debenture Trust Deeds have enteredinto a Master Supplementary Debenture Trust Deed on 11

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16SUPREME COURT REPORTS

March 2021 to align the Debenture Trust Deeds with theSEBI Circular. Therefore, the parties were aware that theSEBI Circular is applicable to the debenture holders. Themeeting of debenture holders directed by the Single Judgewas in contravention of Clauses 6.5 and 6.6 of the SEBICircular; A

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b.The SEBI Circular is retroactive in nature because it doesnot travel backwards and take away or impair vested rights.The SEBI Circular operates in future, but its operation isbased on events that arose prior to it. Although theDebenture Trust Deeds were signed prior to the SEBICCircular, the circular was brought into force before votingtook place. Therefore, the voting ought to have taken placein accordance with the SEBI Circular;

c.The SEBI Circular has the force of law; Dd.Under the SEBI Circular, voting is required to be conductedas per ISINs. ISIN-wise voting ensures that rights of smallinvestors are protected against the excesses of largeinvestors. The possibility of ISIN-wise voting will not defeatthe Resolution Plan as the issuer company can always‘adjust’ the size of the security; E

e.The Resolution Plan expressly states that it has to be carriedout in terms of the “Applicable Law”, which includes lawsenacted by SEBI. Therefore, compliance with regulatoryprovisions mandated by the circular issued by SEBI isrequired before implementing the Resolution Plan; F

f.Prior to the coming into force of the SEBI Circular on 13October 2020, a joint of meeting of a class of creditors wasgoverned by section 230 of the Companies Act 2013.[13] TheSEBI Circular adopted a special majority of 60% of theinvestors by ISIN and 75% of the investors by value fordebenture holders to resolve their debt under a resolutionplan or compromise. The SEBI Circular adopted a higherthreshold than Section 230 of the Companies Act to bindthe dissenting/ abstaining debenture holders. The civil courtdoes not have jurisdiction over the present matter by virtue G

H13 “Companies Act”

of Section 15Y of the SEBI Act 1992[14] and Section 430 ofthe Companies Act; and A

g.After the SEBI Circular came into force on 13 October2020, only two possible options were available to thedebenture holders to restructure the debt: (i) a compromiseindependent of the NCLT under the SEBI Circular; or (ii)Bapproaching the NCLT under section 230 of the CompaniesAct. No third option, especially under the Debenture TrustDeed, is available to the debenture holders. Contrary to theexpress provisions of law, the High Court incorrectlyassumed jurisdiction and directed a meeting of debentureCholders to consider the Resolution Plan in accordance withthe terms of the Debenture Trust Deeds. The High Courtcould not have exercised jurisdiction to direct the calling ofa meeting of debenture holders to consider the ResolutionPlan without complying with the SEBI Circular.

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17. Mr. Darius Khambata, learned senior counsel appearing forRCFL (Respondent No. 11) made the following submissions in supportof his argument that the SEBI Circular does not apply retroactively orretrospectively to the present case:

a.The language employed in the SEBI Circular and inRegulation 15(7) of the1993 Regulations is facilitative andEnot mandatory. There is no separate or independent ICAimposed by SEBI outside RBI’s Circular. RBI itself readsits framework as not extending to debenture holders. TheSEBI Circular does not provide that the signing of an ICAis the only route to entering into a compromise orFarrangement with the issuer company. Correspondingly,there is no prohibition, express or implied, on the freedomof debenture holders to take any course of action as theysee fit. In particular, the SEBI Circular does not excludethe provisions of Sections 62 and 63 of the Indian ContractAct 1872;G

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b.The SEBI Circular does not provide a mechanism by whichdissenting ISIN level debenture holders can ‘exit’ an ICA /Resolution Plan. ISIN wise voting would enable a singleISIN number to defeat the Resolution Plan; 14 “SEBI Act”

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Ac.The SEBI Circular is issued under section 11(1) of the SEBIAct. Hence, the SEBI circular is administrative in natureand is not delegated legislation. An administrative circularcannot have retrospective operation as it takes away vestedrights. Moreover, the SEBI Act does not provide forretrospective or retroactive application of subordinateBlegislation; d.The SEBI Circular extinguishes the vested rights ofdebenture holders under the Debenture Trust Deeds. UnderClauses 22 and 23 of the Fifth Schedule to the DebentureTrust Deeds, the debenture holders by a special majorityChave a vested right to sanction any compromise orarrangement with the company. However, the SEBI Circularsubjects the will of the majority to the will of the ISINnumber holders, and in the process impairs the vested rightsconferred under the Debenture Trust Deeds. Thus, theDapplication of the SEBI Circular will not only be retroactive,but also renders it retrospective; e.The SEBI Circular does not prohibit the debenture holdersfrom conferring the authority on the debenture trustee inrespect of the matters enumerated under Clause 22 of theEFifth Schedule to the Debenture Trust Deeds. Themandatory language used in the SEBI Circular applies onlyto the two eventualities mentioned in Clause 6.5 and doesnot encompass all the generalities which are covered underthe Debenture Trust Deeds. The SEBI Circular is applicableto only two situations: (i) a negative consent for proceedingFwith enforcement of security; and (ii) a positive consentfor signing an ICA. The subject matter of the ResolutionPlan covers neither of the aforesaid situations; f.The Supplementary Trust Deed does not expressly amend,substitute, or modify the provisions of Clauses 22 and 23 ofGthe Fifth Schedule to the Debenture Trust Deeds. Even if itis assumed that the Supplementary Trust Deed incorporateseach and every term of the SEBI Circular, this will not resultin overriding or superseding the provisions of Clauses 22and 23; H

g.The Resolution Plan places the debenture holders in a betterAposition than they would be in under a new ICA process. Itprovides for 100% repayment to debentures holders withan exposure of upto Rs. 10 lakhs. The debenture holderswill constitute only 21.02% of the total value of debt if theybecome a part of the ICA along with the lenders. Resultantly,Bthey could be easily outvoted by the lenders, who wouldconstitute 78.98% of the ICA by value; and A

h.SEBI’s contention that Section 230 read with Section 430of the Companies Act excludes the jurisdiction of the HighCourt is untenable because the law does not expressly bara company from entering into a contractual compromisewith any of its creditors.

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18. It is necessary to record that Mr. Khambata does not contestthe following principles of law relied upon by the appellants:

a.Circulars issued by SEBI constitute special law and arebinding, with the force of law; D

b.Where SEBI prescribes a particular procedure to do aparticular thing, such a process cannot be dispensed with;

c.There can be no waiver of a provision of law based onpublic policy; and E

d.No court will give effect to a contract which is forbiddeneither expressly or by necessary implication by statute.

19. Mr. KV Viswanathan, learned senior counsel appearing forBank of Baroda (Respondent No. 12) submitted that the impugned ordershould not be interfered with because:

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a.The SEBI Circular has no retrospective/ retroactiveoperation because it is not a regulation in terms of section30 of the SEBI Act.

b.The compromise under the Resolution Plan does not fallfoul of section 430 read with section 230 of the CompaniesAct, 2013 because the latter is only an enabling provision.The jurisdiction of the NCLT is invoked only when acompany which proposes to enter into a compromise withits creditors opts to file an application before the NCLT.

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Ac.Any further change to the extant resolution process carriedout validly under the RBI Prudential Framework wouldderail the efforts undertaken by all the stakeholders.Particularly, it would prejudice all the creditors of thecompany, including 69% of the retail debenture holders whoare poised to receive 100% of the principal exposure.

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20. Mr. Dhruv Mehta, learned senior counsel, appeared for Authum,the Resolution Applicant. Authum is not a party to the presentproceedings. Mr Mehta submitted that the SEBI Circular can only applyprospectively and not retrospectively/retroactively. He also submittedthat this Court can, after declaring the correct legal position, exercise itsCdiscretion under Article 136 of the Constitution to mould the final reliefbased on equitable considerations.

D. Overview of contractual arrangements

i. The Debenture Trust Deeds

D21. Three Debenture Trust Deeds were entered into between theissuer company (RCFL) and the Debenture Trustee (Vistra) on 3 May2017, 23 May 2017, and 5 February 2018. Clauses 58 and 59 of the firstDebenture Trust Deed are as follows:

“58. SEVERABILITY

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Each Provision of these presents shall be considered severableand if for any reason any provision of these presents is determinedby a court of competent jurisdiction to be invalid or unenforceableand contrary to Indian laws or existing or future applicable law,such invalidity shall not impair the operation or prevent thoseFprovisions of these presents which are valid. In that case, thesepresents shall be construed so as to limit any term or provision soas to make it enforceable or valid within the requirements of anyapplicable law and in vent such term or provision cannot be solimited, these presents shall be construed to omit such invalid orunenforceable provisions. Following the determination that anyGprovision of these presents is unenforceable, the Parties shallnegotiate in good faith a new provision that as far as legallypossible, most nearly reflects the intent of the Parties and thatrestores these presents as nearly as possible to its original intentand effect.

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59. CONFLICT OF TERMS

The parties agree that in the event any of the terms or provisionsas contained in this indenture are in conflict with the provisions ofthe SEBI (Debenture Trustees) Regulations, 1993 as amendedfrom time to time, then such clauses shall stand null and void.Further the Parties have agreed that in case there is inconsistencyin clauses mentioned in this Deed and Information Memorandum,then the clauses mentioned in the Information Memorandum shallprevail.”

The defaults by RCFL took place from March 2019. The leadbank – Bank of Baroda – in its letter dated 13 June 2020 to RBI statedthat:

“The Company (Reliance Commercial Finance Limited) availedcredit facilities aggregating to Rs.9017 Crs from various banks. Itstarted defaulting in servicing debt since March 2019. Sequenceof Events lead to start Resolution Process in the company’saccount is as under:

��Demerger of commercial finance business of RCL (RelianceCapital Ltd.) into RCFL – 24.03.2017; ��Mr. Devang Mody, CEO of the company resigned – 31.12.2018; ��Default in repayment of Andhra Bank’s Term Loan –22.03.2019; ��Rating (LT) downgraded from CARE BBB+ to D-26.04.2019; ��PWC, the erstwhile auditor of the company resigned –11.06.2019"

22. On 15 July 2019, an ICA was entered into between Bank ofBaroda and the other lenders of RCFL. On 24 August 2020, Bank ofBaroda issued a process note elucidating the process for seeking aResolution Plan from eligible bidders. The process note set out threeoptions of which the first option was in the following terms:

“Option I – Submission of bid for RCFL as a going concern, onas-is-where-is and as-is-what-is basis.

Under Option-I, bidders are invited to submit bid for the acquisitionof entire shareholding and business of RCFL as a going concern, B

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Aon as-is-where-is and as-is-what-is basis including each of theAsset Books, and all rights, obligations, debts (secured andunsecured) titles, interests, assets, properties whether movable orimmovable real or personal, in possession or reversion, corporealor incorporeal, tangible or intangible, present or continent, powers,allotments, approvals, allotments, consents, privileges, employeesBetc., of RCFL. Under this Option-I, bid for selective or part of theAsset Book will not be accepted. Exercise of this option wouldresult in change in management of RCFL. The acquirer shall havethe flexibility to structure the acquisition either as share purchaseor scheme of arrangement (including merger, demerger etc.) orCin such other manner which is mutually beneficial from acommercial, tax, and regulatory perspective.

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It is hereby clarified that an amount of Rs.100 crores will beretained in RCFL for its day to day operations. Any amount inexcess of Rs.100 crores may be utilised for the benefit of theDlenders.”

23. The Resolution Plan was submitted by Authum on 15 January2021. The relevant terms and conditions of the Resolution Plan submittedby Authum were as follows:

“Clause 7.5.ii - After the settlement of the Resolution Plan relatedexpenses, employee related expenses in operations relatedexpenses, the Resolution Applicant will settle the dues of theDissenting Financial Creditors and Consenting Financial Creditors E

Clause 7.5.vi - It is clarified the FC claims of the DissentingFinancial Creditors shall be paid in priority to the payments to anyFConsenting Financial Creditors Clause 41 - Financial Creditors (FC) shall mean the existingsecured and unsecured lenders to the Company including but notlimited to … debenture holders etc. as identified in the informationmemorandum of the company”

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Clause 40 - Financial Claims or FC Claims or Financial CreditorClaims or FC Dues means all amounts or claims to a financialcreditor Clause 33 - Dissenting Financial creditors or Dissenting Lendersshall mean the financial creditors who vote against the Resolution H

Plan or abstain from voting in favour of the Resolution Plan, asapproved by the ICA Lenders.

Clause 6.1 - …..In line with this thought process the RA proposesto acquire the entire business of the company ongoing basis underOption 1 of the BID documents through either one or combinationof options mentioned in section 5 herein.

Clause 6 - “Applicable Law means all applicable Indian statutes,enactments, laws, ordinances, bye-laws, rules, regulations,guidelines, notifications, notices and/or judgments, decrees,injunctions, writs or orders of any court statutory or regulatoryauthority, tribunal, board, or stock exchange in any jurisdiction, asmay be in force and effect including any amendment, modificationor reenactment from time to time”

24. On 11 March 2021, parties entered into the SupplementaryDebenture Trust Deed to amend the earlier Debenture Trust Deeds.The recitals to the Supplementary Trust Deed inter alia provide that:

“WHEREAS

A. The Parties have entered into Principal Deeds as listed inSchedule 1 hereunder for recording the terms and conditions forissuance of Debentures by the Company in accordance with theprovisions of the Companies Act, 2013 and the regulationsapplicable to issue of debentures notified by Securities ExchangeBoard of India (“SEBI”), from time to time.

B. SEBI has amended certain provisions of the SEBI (Issue andListing of Debt Securities) Regulations, 2008 and SEBI (DebentureTrustee) Regulations, 1993 through its Gazette Notifications Nos.34 and 35, respectively and each dated October 8, 2020. Further,SEBI has issued certain guidelines regarding debt instruments anddebenture trustees through its circulars bearing reference numbersi) SEBI/HO/DDHS/CIR/P/2020/198 and dated October 5, 2020;ii) SEBI/HO/MIRSD/CRADT/CIR/P/2020/203 and dated October13, 2020; iii) SEBI/HO/MIRSD/CRADT/CIR/P/2020/207 anddated October 22, 2020; iv) SEBI/HO/MISRD/CRADT/CIR/P/2020/218 and dated November 3, 2020; and v) SEBI/HO/MIRSD/CRADT/CIR/P/2020/230 and dated November 12, 2020(collectively referred to as the “Debenture Circulars”).

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C. In accordance with the applicable laws including the termsstipulated under the Debenture Circulars, the Parties are nowdesirous of making amendments to the Principal Deeds byexecuting this Supplementary Deed.”

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The Supplementary Trust Deed also contains the followingBprovisions:

“2.2 Immediately after the last provision/article/section clause ofthe respective Principal Deeds, the following shall be inserted:

“In order to incorporate the terms of the SEBI DebentureCirculars within this Deed,all the provisions set out under theCschedule hereto named ‘Schedule-SEBI AMENDMENTS 2020’is hereby included as an integral part of this Deed …

2.3 A new Schedule as ‘Schedule-SEBI Amendments 2020’Dshall be inserted after the last existing Schedule of each respectivePrincipal Deed as follows:

…

5. The Company shall ensure due compliance and adherence tothe SEBI Debenture Circulars in letter and spirit.”

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The above contents of the Supplementary Trust Deed clearly takenotice of the 1993 Regulations and the SEBI Circular, among others.Moreover, the Supplementary Debenture Trust Deed expresslyincorporated the terms of SEBI’s debenture circulars within its ambitFand the requirement that RCFL shall ensure due compliance andadherence to SEBI’s circulars in letter and spirit. The Resolution Plansubmitted by Authum was approved thereafter on 15 July 2021.

ii. Steps taken by the Debenture Trustee (Vistra)

25. In an affidavit filed before the Bombay High Court, Vistraelucidated the steps which it had taken upon being intimated by RCFL ofits liquidity crisis. Vistra stated that it scheduled a meeting of the debentureholders on 17 October 2019, 6 November 2019 and 14 January 2020 onwhether or not an ICA should be entered into. Vistra provided updatesregarding all these meetings to SEBI and RBI. In February 2020, Vistra G

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had filed proceedings before the Debts Recovery Tribunal, Bombay forthe recovery of the outstanding dues of secured debenture holders fromRCFL. On 12 June 2020, Bank of Baroda informed Vistra that underthe Resolution Plan, it was proposed to distribute the funds of RCFL tothose lenders who had signed the ICA and the deed of indemnity.

26. Vistra addressed a communication to the Bank of Baroda on18 June 2020 objecting to this mechanism and the non-involvement ofthe debenture holders in the decision-making process. On 1 July 2020Bank of Baroda intimated that the total amount available for distributionwas Rs. 523crores and that the debenture holders would be receiving5.7% of the amount they had invested. Bank of Baroda stated that uponsigning the ICA, a proportionate amount would be paid to the debentureholders. Vistra adverted to the steps which it took of intimating thedebenture holders on various aspects of signing the ICA.

27. The Resolution Plan advisor requested Vistra to sign the ICAon behalf of the debenture holders pursuant to which a meeting of theICA lenders was held on 6 November 2020. This meeting was interalia attended by Vistra as an observer, along with four debenture holders.In the meantime, Vistra received payments in the amount of Rs. 38.6crore (5 September 2020) Rs. 23.4 crore (29 January 2021) and Rs. 9crore (23 April 2021) which were distributed to the debenture holders.

28. Thereafter, Vistra received an email on 16 July 2021 statingthat the Resolution Plan submitted by Authum had been approved by theICA lenders on 15 July 2021 and requesting the convening of a meetingof the debenture holders for completing the resolution process. The detailsof the approved Resolution Plan were sent to the debenture holders on19 July 2021.

29. Vistra conducted a meeting of the debenture holders on 30July 2021. After several concerns were raised by the debenture holders,Vistra communicated with the officials of SEBI. By a letter dated 23August 2021, SEBI clarified that in consonance with the SEBI Circular,voting by the debenture holders would have to be conducted ISIN wise.Finally, Vistra clarified in its affidavit before the Bombay High Courtthat despite making several requests to debenture holders to provideinstructions on whether to sign the ICA, it had not received any response.

E. Evolution of the law surrounding the resolution of debts A

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Ai. The framework for the resolution of debt under theCompanies Act 1956

30. Prior to 6 July 2019, Section 391 of the Companies Act 1956in Chapter V of the erstwhile legislation inter alia dealt withcompromises, arrangements and reconstructions. Section 391 as itsBmarginal notes indicated, elucidated upon the power to compromise ormake arrangements with creditors and members. Under the provision, acompromise or arrangement could be contemplated between a companyand;

a. A creditor or any class of them; or

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b. Its members or any class of them.

31. In terms of sub-section (1) of Section 391, the Company Court(prior to the substitution of the National Company Law Tribunal for theCompany Court) could order a meeting of the creditors or a class ofcreditors or of members or of a class of members. Sub-section (2) ofDSection 391 required a stipulated majority representing three-fourths invalue of the creditors or members or a class of them present and votingto agree to a compromise or arrangement. In that event upon sanctionby the judicial body it would be binding on all creditors or members or aclass of them, as the case may be. The impact of a compromise orEarrangement when approved by the special majority as stipulated inSection 391(2) was that the scheme would bind even those who dissentedor abstained from voting. These provisions applied to all kinds of creditorswithout exception.

32. In the absence of a provision such as Section 391 of the erstwhileFCompanies Act 1956, a contract for the repayment of the dues of creditorswould be governed by the provisions of Section 62 of the Contract Act.Section 62 envisages that if the parties to a contract agree to substitutea new contract for it, or to rescind or alter it, the original contract neednot be performed. Similarly, Section 63 envisages that every promiseemay dispense with or remit, wholly or in part, the performance of theGpromise made to him, or may extend the time for such performance ormay accept instead of it any satisfaction which he may think fit. Theprovisions of Sections 62 and 63 would obviously apply to consentingparties. Hence, the terms of an earlier agreement between a debtor anda creditor would be varied by a specific act of acceptance.

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33. The impact of Section 391 of the Companies Act 1956 lay inits ability, in relation to the creditors or members of a company, to bindnon-consenting members or creditors where the terms of the compromiseor arrangement were approved by a special majority and assented to bythe judicial body. Upon the enactment of the Companies Act, Section230 which forms a part of Chapter XV is titled “Compromises,arrangements and amalgamations”. Section 230 contains an analogousprovision.

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34. Sub-section (6) of Section 230 provides that where at a meetingwhich is held in pursuance of sub-section (1), the majority of personsrepresenting 3/4[th] in value of the creditors or class of creditors or membersor class of members agree to a compromise or arrangement and uponits sanction by the Tribunal, it shall be binding on the company and all thecreditors or class of creditors or members or class of members and thecontributories of the company. Section 230 of the Companies Act providesfor the manner in which dissenting or abstaining creditors within a classof creditors of the company (such as debenture holders) can be boundby the terms of the compromise or arrangement upon approval by aspecial majority and by the NCLT.

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35. Section 1(4) of the Companies Act, 2013 stipulates that theprovisions of the Act shall apply inter alia to:

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a.Companies incorporated under the Act or the previouscompany legislation; b.Insurance companies;

c.Banking companies;

d.Companies engaged in the generation or supply of electricity;F

e.Any other company governed by a special Act for the timebeing in force.

ii. The RBI Circular dated 6 July 2019 and the legal frameworkthereafter G

36. In exercise of its powers under the Banking Regulation Act1949 and the Reserve Bank of India Act 1934, RBI issued directions on7 June 2019 “with a view to providing a framework for early recognition,reporting and time bound resolution of stressed assets”. The RBI Circularindicates that it applies to:

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a.Scheduled commercial banks excluding regional rural banks;b.Specified All India Term Financial Institutions; A

c.Small Finance Banks; and

d.Deposit and non-deposit taking non-banking financialBcompanies.[15]

37. The RBI Circular envisages that all lenders must recognizeincipient stress in loan accounts immediately on default by classifyingsuch assets as ‘special mention accounts’. The expression ‘default’means a non-payment of a debt, as defined in the Insolvency andCBankruptcy Code 2016 when the whole or any part or an instalment hasbecome due and payable and is not paid by the debtor or corporatedebtor. The framework which has been put into place by the circularincludes the following provisions:- a.The framework requires that lenders initiate the process ofDimplementing a Resolution Plan even before a defaultoccurs. Once the borrower is reported to be in default,lenders must undertake a prima facie review of theborrower’s account within 30 days from such default, withinwhich a resolution strategy has to be decided (clause 9); b.In cases where a Resolution Plan is to be implemented, allElenders have to enter into an ICA during the review period(clause 10); and

c.The ICA has to provide that any decision agreed by lendersrepresenting 75% by value of the total outstanding creditfacilities (“fund based and non-fund based”) and 60% ofFlenders by number shall be binding upon all the lenders(clause 10).

The RBI Circular contains other provisions including those on theimplementation of the Resolution Plan, consequences of delayed G15 “3. The provisions of these directions shall apply to the following entities:

(a) Scheduled Commercial Banks (excluding Regional Rural Banks); (b) All India Term Financial Institutions (NABARD, NHB, EXIM Bank, andSIDBI);

(c) Small Finance Banks; and,

(d) Systemically Important Non-Deposit taking Non-Banking Financial Companies H(NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBF-C-D)”

implementation, prudential norms, supervisory review, disclosures, andexceptions.

38. Clause 3 of RBI’s directions indicates that its ambit is restrictedto lenders as defined in that clause. The directions therefore do notmake any provision for other investors such as debenture holders, apoint which has been highlighted by footnote 1 to the framework.[16] Clause10 provides as follows:

“10. In cases where RP is to be implemented, all lenders shallenter into an inter-creditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisationand implementation of the RP in respect of borrowers with creditfacilities from more than one lender. The ICA shall provide thatany decision agreed by lenders representing 75 per cent by valueof total outstanding credit facilities (fund based as well non-fundbased) and 60 per cent of lenders by number shall be bindingupon all the lenders. Additionally, the ICA may, inter alia, providefor rights and duties of majority lenders, duties and protection ofrights of dissenting lenders, treatment of lenders with priority incash flows/differential security interest, etc. In particular, the RPsshall provide for payment not less than the liquidation value due tothe dissenting lenders.”

Footnote 5 states:

Footnote 5 states:

“In cases where asset reconstruction companies (ARCs) haveexposure to the borrower concerned, they shall also sign the ICAand adhere to all its provisions.”

Clause 10 makes it mandatory for all lenders to enter into an ICA,where a Resolution Plan is to be implemented. The ICA has to provideground rules for finalizing and implementing the Resolution Plan wherethe borrower has credit facilities from more than one lender. Significantly,the ICA must mandate that any decision agreed by lenders representing75% by value of the total outstanding credit facilities and 60% of lendersby number shall be binding upon by all the lenders. This means thatwhere the requisite majority of lenders supports the decision, the decisionbinds all lenders including those who may dissent or abstain. The ICA isto inter alia provide for the protection of rights of dissenting lenders and 16 Footnote 1, RBI Circular: “For the purpose of these directions, ‘lenders’ shall meanall entities mentioned at paragraph 3, unless specified otherwise.”

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Ain particular, for a payment of not less than the liquidation value to thedissenters. The liquidation value (as specified in footnote 6 to the RBICircular) means the estimated realizable value of the assets of theborrower, if the borrower were to be liquidated as on the date of thecommencement of the review period.[17] Hence the ability to bind alllenders, including those who dissent or abstain is conditioned on theBdecision being backed by the requisite majority representing 75% byvalue and 60% by number.

39. Section 1(4)(e) of the Companies Act recognizes that bankingcompanies can be regulated by a special legislation. Section 230(2)(c)(iv)of the Companies Act contemplates that the company or person by whomCan application is made under sub-section (1) shall disclose by affidavitany scheme of corporate debt restructuring consented to by not lessthan 75% of the secured creditors in value, and where the companyproposes to adopt the corporate debt restructuring guidelines specifiedby the RBI, a statement to that effect. Clauses 9, 10 and 13 of the RBIDCircular read together with footnote 7 contemplate a Resolution Planinclusive of restructuring of a default account with lender institutionsfalling within the ambit of Clause 3.[18]

40. Since the circular issued by the RBI is under a special lawwithin the meaning of Section 1(4)(e) of the Companies Act, Section CEprovides for implementation conditions for a Resolution Plan without arequirement of approaching the NCLT under Section 230, where theResolution Plan is being implemented in relation to lenders governed byClause 3 of the RBI Circular.

41. These provisions make it abundantly clear that the RBI CircularFwhich traces its origin to the exercise of its statutory powers envisagesthat:

17 Footnote 6, RBI Circular: “Liquidation value would mean the estimated realizablevalue of the assets of the relevant borrower, if such borrower were to be liquidated ason the date of commencement of the Review Period.”

18 Footnote 7, RBI Circular: “Restructuring is an act in which a lender, for economic orGlegal reasons relating to the borrower’s financial difficulty, grants concessions to theborrower. Restructuring would normally involve modification of terms of the advances/ securities, which would generally include, among others, alteration of payment period/ payable amount / the amount of instalments / rate of interest; roll over of creditfacilities; sanction of additional credit facility / release of additional funds for an accountin default to aid curing of default / enhancement of existing credit limits; compromisesettlements where time for payment of settlement amount exceeds three months.”H

a.All lenders must enter into an ICA where a Resolution PlanAis being implemented;

b.The ICA shall provide that a decision by lenders representing75% by value and 60% by number shall bind all lenders,including those who may dissent. Entering into an ICA bythe lenders is a mandatory first step to the implementationof the Resolution Plan; and B

c.It is the ICA which will stipulate the ability to bind all lendersonce the decision has been agreed upon by the stipulatedmajority.

Significantly, the RBI Circular has prescribed a higher votingthreshold than the threshold mandated by Section 230(6) of the CompaniesAct. Consequently, on and from 7 June 2019 (the date of issuance of theRBI Circular), lending institutions governed by Clause 3 of the RBICircular can avail of the special mechanism which has been introducedunder it for the purpose of entering into a compromise, resolution, planor arrangement for restructuring the debt due to lenders, with the abilityto bind dissenters or those who abstain, without having to approach theNCLT under Section 230 of the Companies Act.

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iii. SEBI (Debenture Trustees) Regulations 1993

42. Regulation 2(bb) defines ‘debenture trustee’ to mean a trusteeappointed in respect of any issue of debentures of a body corporate.Chapter II of the 1993 Regulations contains provisions for the registrationof a debenture trustee. Chapter III provides the responsibilities andobligations of debenture trustees. Chapter IV provides for inspectionand disciplinary proceedings. Chapter V provides the procedure for actionin case of default. Chapter VI contains a provision to relax the strictenforcement of the 1993 Regulations. Regulation 15 provides for theduties of debenture trustees. Among them is the duty to take steps toconvene a meeting of the holders of debentures as and when a meetingis required to be held (Clause (l)). Regulation 14 provides for the obligationof debenture trustees.[19]

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19 Regulation 14, 1993 Regulations: “14. Every debenture trustee shall amongst othermatters, accept the trust deeds which shall contain the matters as specified in section71 of Companies Act, 2013 and Form No. SH.12 specified under the Companies(Share Capital and Debentures) Rules, 2014. Such trust deed shall consist of twoparts:

a. Part A containing statutory/standard information pertaining to the debt issue;b. Part B containing details specified to the particular debt issue.”

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A43. As already noted earlier, the RBI Circular specifically appliesto the category of lenders specified in Clause 3. The requirement thatlenders enter into an ICA is triggered where a Resolution Plan is to beimplemented, as specified in Clause 10.

44. Regulation 15(7) of the 1993 Regulations was inserted by theBSEBI (Debenture Trustees) (Amendment) Regulation 2020 with effectfrom 8 October 2020. Regulation 15 (7) provides as follows: - “15(7) Subject to the approval of the debenture holders and theconditions as may be specified by the Board from time to time,the debenture trustee, on behalf of the debenture holders, mayCenter into inter-creditor agreements provided under the frameworkspecified by the Reserve Bank of India.”

Regulation 15(7) contemplates that the debenture trustees “may”enter into ICAs provided under RBI’s framework subject to:

a.the approval of the debenture holders; and Db.the conditions which may be specified by SEBI from timeto time.

45. Regulation 15(7) is facilitative in character. Regulation 15(7)indicates that the debenture trustee may enter into an ICA in terms ofRBI’s framework with the approval of the debenture holders. But ClauseE7 does not in and of itself specify the modalities or manner in which theapproval by the debenture holders is to be provided.

iv. The SEBI Circular dated 13 October 2020 and the legalframework thereafter

a. The SEBI Circular: Overview and Implications F

46. The subject of the SEBI Circular is the standardization of theprocedure to be followed by debenture trustees when there is a defaultby an issuer of listed debt securities. The circular prescribes the processto be followed by the debenture trustees in the event of such defaultincluding seeking the consent of the investors for refraining fromGenforcing the security and/or entering into an ICA. Section B of theSEBI Circular provides for the consent of the investors for theenforcement of security and for signing an ICA. Section B is extractedin its entirety below:

“B. Consent of investors for enforcement of security and for signingthe ICAH

4. The Reserve Bank of India (“RBI”), vide Circular dated June07, 2019 issued the Reserve Bank of India (Prudential Frameworkfor Resolution of Stressed Assets) Directions 2019 which interalia specified the mechanism for resolution of stressed assets byLenders (viz. Scheduled Commercial Banks, All-India TermFinancial Institutions, Small Finance Banks, SystematicallyImportant Non-Deposit Taking Non-Banking Finance Companies(NBFCs) as well as Deposit Taking NBFCs). In terms thereof,investors in debt securities, being financial creditors, areapproached by other lenders to sign an agreement, referred to asthe Inter Creditor Agreement (“ICA”), under specific termsdetailed in the framework as stipulated by RBI.

5. Regulation 59 of LODR Regulations provides that materialmodification in the structure of debt securities shall be made onlyafter obtaining the consent of the requisite majority of investors.Regulation 18 of the Securities and Exchange Board of India(Issuer and Listing of Debt Securities) Regulations, 2008 (“ILDSRegulations”), applicable in case of public issue of debt securities,stipulates a period of fifteen days for giving notice in case of roll-over of debt securities and further provides for approval to beobtained from not less than 75% of the holders by value of suchdebt securities.

6. As resolution plan in the ICA may involve restructuring includingroll-over of debt securities, requiring the consent of the investors,the process to be followed for seeking consent for enforcementof security and/or entering into an Inter-Creditor Agreement shallbe as under:

6.1. The Debenture Trustee(s) shall send a notice to the investorswithin 3 days of the event of default by registered post/acknowledgement due or speed post/acknowledgement due orcourier or hand delivery with proof of delivery as also throughemail as a text or as an attachment to email with a notificationincluding a read receipt, and proof of dispatch of such notice oremail, shall be maintained.

6.2. The notice shall contain the following:

6.2.1. negative consent for proceeding with the enforcement ofsecurity; B

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A6.2.2. positive consent for signing the ICA; 6.2.3. the time period within which the consent needs to beprovided, viz. consent to be given within 15 days from the date ofnotice; and 6.2.4. the date of meeting to be convened, B

6.3. Debenture Trustee(s) shall convene the meeting of all investorswithin 30 days of the event of default (as per para 6.1 above); Provided that in case the default is cured between the date ofnotice and the date of meeting, then the convening of such ameeting may be dispensed with.

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6.4. In view of Regulation 15(2)(b) of SEBI (Debenture Trustees)Regulations, 1993, in case of debt securities issued by way ofpublic issue, the notice sent by the Debenture Trustee(s) in para6.2 shall not contain the consent as per para 6.2.1 and theDrequirement to convene a meeting for enforcement of security, asper para 6.3, shall not be applicable.

6.5. The Debenture Trustee(s) shall take necessary action toenforce security or enter into the ICA or as decided in the meetingof investors, subject to the following:

E6.5.1. In case(s) where the majority of investors expressed theirdissent against enforcement of the security, the DebentureTrustee(s) shall not enforce security.

6.5.2. In case(s) where majority of investors expressed theirconsent to enter into ICA, the Debenture Trustee(s) shall enterFinto the ICA.

6.5.3. In case(s) consents are not received for enforcement ofsecurity and for signing ICA, Debenture Trustee(s) shall takefurther action, if any, as per the decision taken in the meeting ofthe investors.

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6.5.4. The Debenture Trustee(s) may form a representativecommittee of the investors to participate in the ICA or to enforcethe security or as may be decided in the meeting.

6.6. The consent of the majority of investors shall mean theapproval of not less than 75% of the investors by value of the H

outstanding debt and 60% of the investors by number at the ISINlevel.”

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47. Clause 4 envisages that the RBI Circular dated 7 June 2019has specified the mechanism for the resolution of stressed assets bylenders. In terms of the RBI Circular, investors in debt securities whoare financial creditors are approached by other lenders to sign an ICAunder specific terms which are detailed in the framework which isstipulated by the RBI.

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48. Clause 6 of the SEBI Circular acknowledges that the ResolutionPlan in the ICA may involve the restructuring of debt security whichwould, as a consequence, require the consent of the investors. It specifiesthe process to be followed for seeking the consent of investors for:

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a.Enforcing the security; and / or

b. Entering into an ICA.

Clause 6.2 specifies the requirement of issuing a notice to investorswithin a specified period of the event of default. The notice must contain:

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a.A negative consent for proceeding with the enforcementof the security; b.A positive consent for signing the ICA; E

c.The requirement that the consent needs to be given within15 days from the date of notice; and d.The date of the meeting to be convened for the purpose.

The debenture trustee has to convene a meeting of all investorswithin 30 days of the event of default. Clause 6.5 mandates thatthe debenture trustee must take necessary action:

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a.To enforce the security; or

b.To enter into the ICA; or c.As decided in the meeting of investors; subject to certainGconditions namely:

i.Where the majority of investors has expressed itsdissent against the enforcement of the security, thesecurity is not to be enforced by the debenturetrustees; H

Aii.Where the majority of investors has expressed itsconsent to enter into an ICA, the debenture trusteesmust enter into the ICA;

iii.Where consents are not received for the enforcementof security or signing the ICA, the debenture trusteeBshall take further action according to the decisionwhich is taken in the meeting of the investors.

49. Significantly, Clause 6 of the SEBI Circular contains mandatorylanguage by the use of the expression “shall” when it relays the processto be followed for seeking the consent for enforcement of the securityCor entering into an ICA and the steps which are adopted thereafter. Theexpression “shall” is used in the prefatory part of Clause 6 and in Clauses6.1, 6.2, 6.3. 6.5 and 6.6. However, in contradistinction, Clause 6.5.4adopts the expression “may”. Clause 6.5.4 permits the debenture trusteeto form a representative committee of investors to participate in theICA; or to enforce the security; or as may be decided in the meeting.D

50. Clause 6.6 of the SEBI Circular specifies that the consent ofthe majority of investors shall mean the approval of not less than 75% ofthe investors by value of the outstanding debt and 60% of the investorsby number at the ISIN level.

E51. Clause 7 of the SEBI Circular specifies conditions for thesigning of an ICA by a debenture trustee on behalf of the investors.Evidently, the debenture trustee is vested with a discretion (“may signthe ICA and consider the resolution plan on behalf of the investors”)upon compliance with certain conditions, namely:

Fa.The signing of the ICA and acceptance of the ResolutionPlan would be in the interest of the investors; b.This would be in compliance with the Companies Act, theSecurities Contracts (Regulation) Act 1956,[20] and the SEBIAct and the rules, regulations, and circulars issuedthereunder; G

c.The debenture trustee shall be free to exit the ICA if theResolution Plan imposes conditions which are not inaccordance with the Companies Act, 2013, the SCRA andthe SEBI Act together with the rules, regulations, andH20 “SCRA”circulars issued thereunder; d.If the Resolution Plan is not finalized within a period of 180days from the end of the review period, the debenture trusteeshall be free to exit the ICA altogether; and e.The debenture trustee is free to exit the ICA and seek legalrecourse if the terms of the Resolution Plan are contravenedby any of the signatories to the ICA.

52. The mechanism which has been prescribed by the RBI Circularis restricted only to those lending institutions which fall within the ambitof Clause 3. Apart from these lending institutions, debenture holdersconstitute another class of financial creditors to whom a debt may bedue by the debtor company. Other creditors including debenture holderscould voluntarily enter into a contractual arrangement for the restructuringof the debt within the ambit of Section 62 of the Contract Act. Theseprovisions are, however, restricted to consenting parties. Prior to theissuance of the SEBI Circular, the ability to bind creditors who fell outsidethe purview of Clause 3 of the RBI Circular would be based on theinvocation of the provisions of Section 230 of the Companies Act.

53. However, subsequent to the issuance of the SEBI Circular,debenture holders can bind dissenters by taking recourse to the SEBICircular as well. The SEBI Circular facilitates the process of seekingconsent for enforcement of security and/or entering into an ICA. TheSEBI Circular recognizes that investors in debt securities who arefinancial creditors falling outside the purview of the RBI Circular areapproached by other lenders to sign the ICA under the RBI Circular.SEBI’s circular has enunciated the modalities for standardizing theprocedure.

54. Clause 6.6 incorporates the requirement of a special majorityby stipulating that the consent of the majority of investors shall mean theapproval of not less than 75% of the investors by value of the outstandingdebt and 60% of the investors by number at the ISIN level. We havealready seen how a provision for a special majority is stipulated in Section230(6) of the Companies Act. The RBI Circular on the one hand and theSEBI Circular on the other contain separate provisions indicating thenature of the majority necessary under each circular. The SEBI Circularstipulates the requirement of the consent of a heightened majority of notless than 75% of the investors by value and 60% of the investors bynumber at the ISIN level. The SEBI Circular contemplates that the A

B

E

F

G

H

Ainvestors who lie outside the purview of RBI’s framework may beapproached by the lenders to sign an ICA. This is for the reason that theResolution Plan in the ICA which has been entered into by the lendersmay involve the restructuring of debt security.

55. Where a Resolution Plan has to be implemented, it has to beBpreceded by all lenders entering into an ICA, in terms of the RBI Circular.Debenture holders who lie outside the purview of the RBI Circular mayagree to enter into the ICA in which event, the Resolution Plan which isbeing implemented in pursuance of the ICA entered into with the lenderswould enure to the benefit of the debenture holders subject to theobligations and duties cast under it. The debenture holders are not boundCto enter into an ICA in which event they would not be governed by itsprovisions or of the Resolution Plan which is entered into under theICA. But to bind the entire class of debenture holders, the decision toenter into an ICA has to be backed by the stipulated majority which isprescribed in the SEBI Circular. The ability to bind the dissentingDdebenture holders or those who abstain is precisely conditional on whetherthe decision to enter into an ICA is backed by the requisite majority. Inthe absence of the consent expressed by the majority of investors toenter into an ICA in terms of Clause 6.5.2 the debenture trustee wouldhave no authority to enter into an ICA in which event, the trustee shalltake such further action in terms of the decision taken in the meeting ofEthe investors. Such further action would, however, not comprehend theability to bind dissenting debenture holders. Dissenters can be boundonly if a requisite majority as defined in Clause 6.6 expresses its consent.

56. To recapitulate, in the case of an NCLT approved scheme ofcompromise or arrangement within the ambit of Section 230 of theFCompanies Act, the threshold is of a “majority of persons representing3/4[th] in value of the creditors or class of creditors or members or classof members”. When it comes to the prudential framework for resolutiongoverning lenders within the description of Clause 3 of the RBI Circular,the threshold is 75% by value of the total outstanding credit facilities andG60% of lenders by number. The SEBI Circular on the other hand mandatesthe approval of not less than 75% of the investors by value of theoutstanding debt and 60% of the investors by number at the ISIN level.The majority prescribed in Section 230(6) would govern NCLT approvedcompromises within the meaning of Section 230 in its ability to bindthose who do not consent to the compromise or arrangement. Likewise,H

the importance of the heightened majority prescribed in the RBI Circularlies in the consequence of binding dissenting lenders. In the same vein,the heightened majority prescribed in Clause 6.6 of the SEBI Circularhas the consequence of binding dissenting debenture holders.

b. Voting at the ISIN level

57. Each debenture instrument has an international securityidentification number (ISIN) related to a particular issue. Each ISINforms a separate class or category having the same feature such as anissue date, face value, rate of interest, maximum duration or date ofredemption. These features are homogenous for all debentures withinthe same ISIN or tranches when compared to debentures across differentISINs. In the present case there are three Debenture Trust Deeds having19 ISIN numbers, with ISINs split across the three Debenture TrustDeeds dated 3 May 2017, 23 May 2017 and 5 February 2018.

58. Each ISIN being a separate class or category, the SEBICircular mandates that the voting is required to be done ISIN wise.SEBI has explained that it is left to the debenture holder in each ISIN todetermine how they wish to vote and adopt or reject the ResolutionPlan. SEBI has asserted that nothing prevents an individual holder of anISIN to accept a haircut in the payment of its dues. But this cannot beforced upon them without following the framework prescribed by SEBIto protect the interests of debenture holders. In the present case, thethree Debenture Trust Deeds with 19 ISIN numbers are distributed inthe following manner:

a.Debenture Trust Deed-1 dated 5 February 2018 has four(4) ISIN with an approximate principal amount of Rs.564.77crores; b.Debenture Trust Deed-2 dated 3 May 2017 has nine (9)ISIN with an approximate principal amount of Rs.1249.8crores; and

c.Debenture Trust Deed-3 dated 23 May 2017 has six (6)ISIN with an approximate principal amount of Rs.81.00crores.

59. Clauses 22 (ii) and 22(iii) of the Fifth Schedule to the DebentureTrust Deeds contains the following provision:

A

BC

F

G

A“22. A meeting of the Beneficial Owner(s) / Debenture holder(s)as the case may be shall, inter alia, have the following powersexercisable in the manner hereinafter specified in Clause 23 hereof …

(ii) Power to sanction any compromise or arrangement proposedBto be made between the Company and the Beneficial Owner(s) /Debenture holder(s).

(iii) Power to sanction any modification, alteration, or abrogationof any of the rights of the Beneficial Owner(s) / Debentureholder(s) as the case may be against the Company or against theCMortgaged Premises or other properties whether such right shallarise under the Trust Deed or Debentures or otherwise.”

Clause 23 of the of the Fifth Schedule to the Debenture TrustDeeds provides thus:

D“The powers set out in Clause 22 hereof shall be exercisable by aSpecial Resolution passed at a meeting of the Beneficial Owner(s)/ Debenture holder(s) as the case may be duly convened and heldin accordance with the provisions herein contained and carried bya majority consisting of not less than three-fourth of the personsvoting thereat upon a show of hands or if a poll is demanded by aEmajority representing not less than three-fourths in value of thevotes cast on such poll. Such a Resolution is hereinafter called“Special Resolution”.”

60. All the Debenture Trust Deeds were executed prior to theRBI Circular. Clause 22(ii) deals with voting on a compromise proposedFto be made between the issuer company and the debenture holder. Theconcept of a third party resolution applicant stepping into a debtorcompany in terms of a Resolution Plan led by the lenders came in withthe RBI Circular. The Debenture Trust Deeds which are earlier in pointof time must consequently be with reference to a compromise underSection 230 of the Companies Act. Clause 22(ii) and 23 can thereforeGnot have precedence over the requirement of the special majorityprescribed by the circulars of the RBI or SEBI.

c. The SEBI Circular has a statutory character

c. The SEBI Circular has a statutory character

61. The SEBI Circular has been issued in exercise of the powersHconferred by the SEBI Act, the 1993 Regulations, the Securities and Exchange Board of India (Listing Obligations and DisclosureRequirements) Regulations 2015 and the Securities and Exchange Boardof India (Issue and Listing of Debt Securities) Regulations 2008 to protectthe interest of investors in securities for promoting the development ofand regulation of the securities market.[21] Now it is important to emphasisethat the ICA which has been referred to in the SEBI Circular is the ICAwhich is provided for in the RBI Circular. Clause 4 of the SEBI Circularindicates that investors in debt security who are financial creditors areapproached by other lenders to sign an agreement namely an ICA “underspecific terms detailed in the framework as stipulated by RBI.” Moreover,Regulation 15(7) of the 1993 Regulations confers an enabling powerupon the debenture trustee, subject to the approval of the debentureholders and the conditions specified by SEBI to enter into an ICA“provided under the framework specified by the RBI”. In its affidavitfiled before the Bombay High Court, RBI clarified that :

“8. Given that the ICA is a contractual agreement between thecreditors to a borrower undergoing resolution, inter se disputesbetween the signatories to the ICA have to be resolved within theICA which is a contract. Since the Prudential Framework wasissued by the RBI under powers conferred upon it by the provisionsof the Reserve Bank of India Act, 1934 and Banking RegulationAct, 1949, the provisions of the Prudential Framework aremandatory only for the RBI-regulated lenders. These powers donot extend to other creditors of a borrower such as the debentureholders whose primary regulator is the Securities and ExchangeBoard of India (SEBI).”

“9. At the same time, other creditors to the borrower can voluntarilyagree to be a party to the ICA since it is ultimately a contractbetween the creditors. If such creditors are regulated by otherfinancial sector regulators, signing of the ICA by such creditorsmay be subject to permission from their respective regulators. In 21 Clause 9, SEBI Circular: “9. This circular is issued in exercise of the powers conferredupon SEBI under Section 11(1) of the Securities and Exchange Board of India Act, 1992read with the provisions of Regulation 2A of the Securities and Exchange Board of India(Debenture Trustees) Regulations, 1993, Regulation 31(1) of the Securities and ExchangeBoard of India (Issue and Listing of Debt Securities) Regulations, 2008 and Regulation101(1) or the Securities and Exchange Board of India (Listing Obligation and DisclosureRequirements) Regulations, 2015 to protect the interest of investors in securities andto promote the development of, and to regulate, the securities market.”

A

B

C

D

E

F

G

H

Athis connection, it is pertinent to note that SEBI vide circular SEBI/HO/MIRSD/CRADT/CIR/P/2020/203 dated October 13, 2020has prescribed the conditions under which Debenture Trusteesmay sign an ICA under the Prudential Framework.”

62. The above extract indicates that RBI’s stated position was Bthat:

a.The prudential framework for the resolution of stressedassets formulated in the RBI Circular was in exercise ofthe powers conferred by the RBI Act 1934 and the BankingRegulation Act 1949; C

b.The provisions of the prudential framework are mandatoryonly for RBI regulated lenders;

c.RBI’s powers do not extend to other creditors of a borrowersuch as debenture holders who are primarily regulated bySEBI; D

d.Other creditors of a borrower may voluntarily agree to theICA since it is a contract between creditors; a.e. Where the other creditors are regulated by a distinctfinancial sector regulator such as SEBI, the signing of theICA by such creditors would be subject to permission byEthe concerned regulator; and

f.In this backdrop, SEBI prescribed the conditions underwhich debenture trustees may sign an ICA under theprudential framework, by issuing the SEBI Circular.

FRBI has, in the above extract of its affidavit, clarified that theresolution of stressed assets is ultimately an act of commercial negotiationbetween the debtor and the creditor and between various creditors ofthe borrower under resolution.

F. Analysis

G

63. It is RCFL’s case that the SEBI Circular is applicable only ifthe debenture holders choose to enter into an ICA under the RBI Circular.According to RCFL, it is open to debenture holders to choose not toenter into an ICA. Instead, they may approve of a Resolution Plan thatthe lenders have formulated independent of the modalities prescribed inHthe SEBI Circular. It is argued that this route permits debenture holders to approve or reject Resolution Plans based on whether their interestsare properly accounted for. It has been urged that this may be preferableto entering into an ICA, where the debenture holders may find themselvesat the mercy of the lenders (who may wield greater power whileformulating the Resolution Plan, either due to their number or due to thevalue of the debt owed to them or both). Debenture holders would, it hasbeen argued, consequently be forced to abide by a Resolution Plan whichdoes not properly account for their interests. Hence, according thesubmission, they may opt out of an ICA and instead approve or rejectthe restructuring of debt at the stage of implementation of a ResolutionPlan. While this argument may seem attractive at first blush, it givesway on closer inspection. The reasons why we are not inclined to acceptthe submission are formulated below:

i. There is no bar to the civil court’s jurisdiction

64. As noted above, the suit before the Single Judge of the BombayHigh Court (on the original side) sought the setting aside of the RBICircular as illegal and ultra vires. An injunction restraining RCFL, Bankof Baroda, and RBI from implementing the RBI Circular was also sought.

65. Section 15Y of the SEBI Act stipulates that no civil court shallhave the jurisdiction to entertain any suit in respect of any matter whichan adjudicating officer appointed under the SEBI Act is empowered todetermine. Section 15-I of the SEBI Act provides that an adjudicatingofficer may be appointed to adjudge cases under Sections 15A, 15B,15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA, 15HB. None of thesections mentioned in Section 15-I of the SEBI Act would conferjurisdiction on the adjudicating officer to grant the relief sought by theplaintiffs in the first instance. Hence, the bar in Section 15Y would notoperate as against the suit in the present case.

66. Similarly, Section 430 of the Companies Act provides that nocivil court shall have the jurisdiction to entertain any suit in respect ofany matter which the National Company Law Tribunal or the NationalCompany Law Appellate Tribunal is empowered to determine. Nothingin the Companies Act 2013 or any other law for the time being in forcevests either the National Company Law Tribunal or the National CompanyLaw Appellate Tribunal with the jurisdiction to adjudicate upon a challengeto the RBI Circular. Hence, the bar in Section 430 is not attracted.

A

B

C

D

E

F

G

A67. The Single Judge of the Bombay High Court (in the firstinstance) as well as the Division Bench of the Bombay High Courtproperly exercised jurisdiction over the subject matter of the suit.

ii.The SEBI Circular is applicable if debenture holders wishto implement a Resolution Plan to which the lenders are a partyB68. It is undoubtedly true that the SEBI Circular does not stipulatethat the signing of an ICA is the only route to entering into a compromisewith the issuer company. Besides the absence of a clause mandating anICA pursuant to an event of default, Clause 6.5.3 of the SEBI Circularrecognizes that the debenture holders (through the Debenture Trustees)Cmay undertake actions besides those contemplated in the SEBI Circular.However, if debenture holders choose to implement a Resolution Plan towhich the lenders are party, they must do so in compliance with theconditions laid down in the SEBI Circular.

69. Clause 9 of the RBI Circular stipulates that the lenders are toDundertake a review of the borrower’s accounts within 30 days from thedate of default, during which they may decide on the resolution strategy.The lenders may opt for any resolution strategy available to them underthe existing legal framework, including (i) entering into a Resolution Plan;or (ii) initiating legal proceedings for recovery; or (iii) insolvency. If thelenders choose to implement a Resolution Plan, they are required toEenter into an ICA in terms of Clause 10 of the RBI Circular. The existenceof an ICA which is in compliance with the RBI Circular is a sine quanon for the implementation of a Resolution Plan.

70. After the RBI Circular was issued, all creditors could opt forone of the following courses of action:F

a. Enforce the security;

b. Initiate CIRP under the IBC;

c. File a suit for the recovery of the monies due to them; In addition, lenders could choose to implement a Resolution PlanGin terms of the RBI Circular (with other lenders). The debenture holderscould enter into an arrangement or scheme under Section 230 CompaniesAct (with any other creditors). Needless to say, creditors were free toexercise other options available in law, besides those detailed in thisparagraph.H

71. As evident from the definition of ‘lenders’, the RBI Circulardid not apply to debenture holders. Debenture holders continued to begoverned by Section 230 Companies Act. However, the options availableto debenture holders increased with the issuance of the SEBI Circular.The SEBI Circular laid down the process to be followed for:

a. Refraining from enforcing security; and

b. Entering into an ICA.

72. The SEBI Circular was issued with reference to the RBICircular; it does not specify the conditions for the execution of anindependent ICA or Resolution Plan which is separate from the ICAand Resolution Plan under the RBI Circular. Both the RBI Circular andthe SEBI Circular refer to one and the same ICA and Resolution Plan.This is evident from Clause 4 of the SEBI Circular which states:

“The Reserve Bank of India (“RBI”), vide Circular dated June07, 2019 issued the Reserve Bank of India (Prudential Frameworkfor Resolution of Stressed Assets) Directions 2019 which interalia specified the mechanism for resolution of stressed assets byLenders … In terms thereof, investors in debt securities, beingfinancial creditors, are approached by other lenders to sign anagreement; referred to as the Inter Creditor Agreement(“ICA”), under specific terms detailed In the frameworkas stipulated by RBI.”

Further, Regulation 15(7) of the 1993 Regulations relates to theduties of Debenture Trustees. It provides:

“Subject to the approval of the debenture holders and the conditionsas may be specified by the Board from time to time, the debenture-trustee, on behalf of the debenture holders,may enter into intercreditor agreements provided under the framework”specified by the Reserve Bank of India.

(emphasis supplied)

73. By issuing the SEBI Circular, SEBI subscribed to the overallframework of the RBI Circular and permitted debenture holders toparticipate in the process specified in the RBI Circular to enter into aResolution Plan. Under the RBI Circular, the Resolution Plan cannot A

B

C

D

E

F

G

H

Acome into existence without an ICA. The SEBI Circular does not disturbthis position. When the SEBI Circular came into force, it specified theconditions under which the debenture holders (through the DebentureTrustees) could access this Resolution Plan and participate in itsformulation via the ICA.

B74. By arguing that Clauses 22 and 23 of the Fifth Schedule to theDebenture Trust Deed(s) are not concerned with signing an ICA or withthe subject matter of the SEBI Circular in general, RCFL is suggestingthat the ICA and the Resolution Plan are distinct and severable. Theimplication is that debenture holders may opt in to the Resolution Planafter it has been formulated, without concerning themselves with theCICA. This is an incorrect interpretation of the circulars in question. TheICA and the Resolution Plan are inextricably intertwined and the latterhas its genesis in the former, and flows from it. The SEBI Circular, too,recognizes this fact in Clause 6, which states:

“As the resolution plan in the ICAmay involve restructuringDincluding roll-over of debt securities, requiring the consent of theinvestors, the process to be followed for seeking consent forenforcement of security and/or entering Into an Inter-CreditorAgreement shall be as under …”

EFurther, Clause 7 recognizes the interdependence between theICA and the Resolution Plan:

“The Debenture Trustee(s) may sign the ICA and considerthe resolution planon behalf of the investors upon complianceFwith the following conditions:

7.1 The signing of the ICA and agreeing to the resolutionplanis in the interest of investors and in compliance with theCompanies Act, 2013 and the rules made thereunder, the SecuritiesContracts (Regulations) Act, 1956 and the Securities and ExchangeBoard of India Act, 1992 and the rules, regulations and circularsGissued thereunder from time to time.

7.2. If the resolution plan imposes condition(s) on theDebenture Trustee(s)that are not in accordance with theprovisions of Companies Act, 2013 and the rules made thereunder,the Securities Contracts (Regulations) Act, 1956 and the Securities H

and Exchange Board of India Act, 1992 and the rules, regulationsand circulars issued thereunder from time to time, then theDebenture Trustee(s) shall be free to exit the ICA altogether withthe same rights as if it had never signed the ICA. Under thesecircumstances, the resolution plan shall not be binding on theDebenture Trustee(s).

7.3. The resolution plan shall be finalized within 180 days from the end of the review period. If the resolution plan is notfinalized within 180 days from the end of the review period, thenthe Debenture Trustee(s) shall be free to exit the ICA altogetherwith the same rights as if it had never signed the ICA and theresolution plan shall not be binding on the ·Debenture Trustee(s).However, if the finalization of the resolution plan extends beyond180 days, the Debenture Trustee(s) may consent to an extensionbeyond 180 days subject to the approval of the investors regardingthe total timeline. The total timeline shall not exceed 365 daysfrom the date of commencement of the review period.

7.4. If any of the terms of the approved Resolution Plan arecontravened by any of the signatories to the ICA, theDebenture Trustee(s) shall be free to exit the ICAand seekappropriate legal recourse or any other action as deemed fit in theinterest of the investors.”

Hence, any reference to an ICA in the SEBI Circular is alsonecessarily a reference to the Resolution Plan and vice versa. It is notopen to debenture holders to participate in the implementation of theResolution Plan without being involved in its genesis through the ICA.There is only one “door”, so to speak, through which debenture holderscan gain entry into the Resolution Plan with the lenders and that is throughthe ICA. Therefore, while the SEBI Circular does not mandate theexecution of an ICA as the only route to entering a compromise with theissuer company, it lays down a procedure in the event that debentureholders choose the route of implementing a Resolution Plan with thelenders. This procedure cannot be circumvented.

75. The purpose of the SEBI Circular is multi-fold – not only doesit protect the interests of debenture holders at large (Clause 7), but italso protects the interests of any dissenting debenture holders (Clause A

D

E

F

G

H

A6.6). If RCFL’s argument was to be accepted, both these protectionswould fail. In the absence of Clause 7, debenture trustees would likelybe unable to exit the ICA or the Resolution Plan even if they were not“in the interest of investors”[22] or if the Resolution Plan was not finalizedwithin 180 days from the end of the review period.[23] It is indubitable thattremendous hardship would be caused to the debenture holders in bothBthese situations. Significantly, the absence of Clause 6.6 could meanthat dissenting debenture holders would be bound by decisions takeneven by way of a simple majority. While Clause 23 of the Fifth Scheduleto the Debenture Trust Deed(s) in this case provides for a majority of75%, other Debenture Trust Deed(s) could provide for a simple majority.CDissenting debenture holders would then be unable to avail of theprotection provided to them by the SEBI Circular.

76. We agree that the language in Regulation 15(7) of the 1993Regulations and the SEBI Circular is facilitative and not mandatory.This is in recognition of the fact that debenture holders may opt to exerciseDtheir rights through mechanisms other than the execution of a ResolutionPlan. The language cannot be construed to be facilitative in the sense ofproviding debenture holders with the option of by-passing the modalitiesprescribed by the SEBI Circular while accepting a Resolution Plan. TheICA continues to be the foundation or mother document for the ResolutionPlan.Eiii.Dissenting ISIN level debenture holders are bound by theICA / Resolution Plan

77. Clause 6.6 of the SEBI Circular inter alia requires the“approval of not less than 60% of the investors by number at the ISINFlevel” for entering into an ICA. RCFL has argued that the ISIN levelvoting could potentially frustrate a Resolution Plan. The concern is thata single debenture holder who holds an entire ISIN (or more than oneISIN) can prevent the creditors from arriving at an ICA / a ResolutionPlan, especially in the absence of a provision for their “exit” from thisprocess. In response, SEBI has argued that the issuer company canG“adjust” the size of the security by proportionally reducing it and releasingit to the extent that debenture holders agree to the ICA / ResolutionPlan. Both these arguments miss the crux of the matter.

22 Clause 7.1, SEBI Circular23 Clause 7.3, SEBI CircularH

22 Clause 7.1, SEBI Circular23 Clause 7.3, SEBI CircularH

78. Dissenting creditors do not have the option of “exiting” thecompromise or arrangement arrived at in terms of Section 230 CompaniesAct.[24] Similarly, dissenting lenders do not have the option of “exiting”the ICA / Resolution Plan under the RBI Circular.[25] The respectivemajorities provided for in each of these laws bind dissenting creditors. Itis along these lines that the SEBI Circular binds dissenting debentureholders. Indeed, the SEBI Circular could bind dissenting debenture holderseven in the absence of similar provisions in other laws.

79. The argument that the SEBI Circular is not applicable becausea single debenture holder will be able to frustrate the Resolution Plan isa consequential one. The applicability of a circular cannot be determinedon the basis of such a concern. We need not comment upon this aspectin the absence of a challenge to the SEBI Circular. We also note that itis open to the relevant stakeholders to approach SEBI with any concerns,commercial or otherwise, and request an amendment to the SEBI Circular.SEBI as a statutory regulator can always look at such concerns and hasthe power to factor them in if it deems fit to do so in public interest andfor the orderly functioning of the securities’ market.

iv. The SEBI Circular has retroactive application

80. Mr. N Venkataraman, learned senior counsel and AdditionalSolicitor General has argued that the SEBI Circular is retroactive innature as it does not take away or impair any vested rights. It operatesin the future, based on events that arose prior to its issuance. Mr. DariusKhambata, learned senior counsel appearing for RCFL argued that theeffect of applying the SEBI Circular to the present case will render itretrospective and not retroactive. According to him, Clauses 22 and 23of the Fifth Schedule to the Debenture Trust Deed(s) vested debentureholders with the right to authorize debenture trustees “to sanction anycompromise or arrangement proposed to be made between the companyand the beneficial owner(s) / debenture holder(s)”. This sanction couldbe authorized by a majority of “not less than three-fourths of the personsvoting … or if a poll is demanded … not less than three-fourths in valueof the votes cast on such poll”. The SEBI Circular, it has been urged,changed the nature of the special majority required to sanction a 24 The NCLT will look into the overall fairness of the compromise or arrangement underSection 230 Companies Act.

25 The RBI Circular states that the ICA may provide for the protection of dissentinglenders.

AB

C

D

EF

G

H

Acompromise by introducing the requirement of a majority of 60% ofISIN level votes.

81. We are of the opinion that the SEBI Circular has retroactiveapplication. In Principles of Statutory Interpretation by Justice G.P.Singh (14[th] edition, 2016 at page 583), it is stated that:B“The rule against retrospective construction is notapplicable to a statute merely because “a part of therequisites for its action is drawn from a time antecedent to its passing”. If that were not so, every statute will be presumedto apply only to persons born and things which come into existenceCafter its operation and the rule may well result in virtual nullificationof most of the statutes.”

82. In Vineeta Sharma v. Rakesh Sharma,[26]this Court describedthe nature of prospective, retrospective, and retroactive laws:D

“61. The prospective statute operates from the date of itsenactment conferring new rights. The retrospective statuteoperates backwards and takes away or impairs vested rightsacquired under existing laws. A retroactive statute is the one thatdoes not operate retrospectively. It operates in futuro. However,Eits operation is based upon the character or status that arose earlier.Characteristic or event which happened in the past or requisiteswhich had been drawn from antecedent events.”

83. The terms ‘retrospective’ and ‘retroactive’ are often usedinterchangeably. However, their meanings are distinct. This CourtFsuccinctly appreciated the difference between these concepts in StateBank’s Staff Union (Madras Circle) v. Union of India:[27]

“‘Retroactivity’ is a term often used by lawyers but rarely defined.On analysis it soon becomes apparent, moreover, that it is used tocover at least two distinct concepts. The first, which may be calledG‘true retroactivity’, consists in the application of a new rule of lawto an act or transaction which was completed before the rule waspromulgated. The second concept, which will be referred to as‘quasi-retroactivity’, occurs when a new rule of law is applied to 26 2020 (9) SCC 127 (2005) 7 SCC 584H

an act or transaction in the process of completion....The foundationof these concepts is the distinction between completed and pendingtransactions....”

(T.C. Hartley, The Foundations of European Community Law 129(1981)”

Many decisions of this Court define ‘retroactivity’ to mean lawswhich destroy or impair vested rights. In real terms, this is the definitionof ‘retrospectivity’ or ‘true retroactivity’. ‘Quasi-retroactivity’ or simply‘retroactivity’ on the other hand is a law which is applicable to an act ortransaction that is still underway. Such an act or transaction has notbeen completed and is in the process of completion. Retroactive lawsalso apply where the status or character of a thing or situation aroseprior to the passage of the law. Merely because a law operates on certaincircumstances which are antecedent to its passing does not mean that itis retrospective.

84. In the present case, RCFL issued the debentures and defaultedon the payments to the debenture holders prior to the issuance of theSEBI Circular. However, as of 13 October 2020 (the date on which theSEBI Circular came into force), a compromise or agreement on therestructuring of the debt owed by RCFL did not exist. The debentureholders were not vested with any rights with respect to the resolution ofRCFL’s debt. The existence of the debt and the subsequent default byRCFL was the status of events, which existed prior to 13 October 2020.Once it came into force, the SEBI Circular applied to the manner ofresolution of debt, as specified therein.

85. Even assuming that debenture holders were vested with theright to sanction a compromise or arrangement in terms of the specialmajority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed,they were divested of such a right upon the issuance of the SEBI Circular.Clause 59 of the Debenture Trust Deed stipulates that any provision inthe Debenture Trust Deed which is in conflict with the 1993 Regulationsis null and void. In so doing, it lays down a trigger for the divestment ofrights under the Debenture Trust Deed. A contractually vested rightmay be taken away by the operation of a statutory instrument. A fortiori,in the present case, the SEBI Circular owes its existence to statutorypowers conferred by a special legislation enacted with a view to protectthe interests of investors and to ensure the stable and orderly growthand development of the market for securities.

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A86. The SEBI Circular was issued partly in exercise of the powersunder the 1993 Regulations.[28] Further, Regulation 15(7) of the 1993Regulations lays the foundation for the conditions specified in the SEBICircular. As such, the phrase “provisions of the [1993 Regulations]” inClause 59 must be read to include the SEBI Circular. Clauses 22 and 23of the Fifth Schedule to the Debenture Trust Deed are evidently in conflictBwith the SEBI Circular as they each provide for different votingmechanisms. Therefore, Clauses 22 and 23 must give way to the SEBICircular, which will take precedence.

v. Exercise of this Court’s power under Article 142 of theConstitutionC

87. Under the present scheme of the Resolution Plan, retaildebenture holders having an exposure of up to INR 10 lakhs wouldstand to realize 100% of their principal dues. The secured retail debentureholders having an exposure of more than INR 10 lakhs would realize29.69%. The table showing the distribution is extracted below:D

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88. The above table highlights that small investors, especially thosewhose exposure is up to INR 10 lakhs, are benefiting to the extent ofG100% of their principal amount. Even debenture holders whose exposureis more than 10 lakhs are receiving 29.96% of their principal amount. Incomparison, the secured ICA lenders would receive 24.96% of theirprincipal amount, which is lower than the recovery made by the debenture H28 Clause 9, SEBI Circular holders. It is also important to highlight that none of the debenture holdershave raised any grievance with regard to the proposed compromise. Insuch a situation, application of the SEBI Circular, though right in law,may lead to unjust outcomes for the retail debenture holders if this courtwere to reverse the entire course of action which has occurred in thepresent case.

89. The different voting mechanism proposed under the SEBICircular will further delay the resolution process and potentially disruptthe efforts undertaken by the stakeholders, including the retail debentureholders. Such unscrambling of the resolution process will not only provetime-consuming, but may also adversely affect the agreed realized gainsto the retail debenture holders, who have already consented to thenegotiated settlement before the High Court.

90. Depending upon the facts and circumstances of a case, thisCourt can, having regard to Article 142 of the Constitution of India,stipulate suitable directions to mitigate the potential denial of rights.

91. In its decision in State v. Kalyan Singh[29] this Court observedthat the jurisdiction under Article 142 can be used to relax the rigors oflaw depending upon the peculiar facts and circumstances. It was observed:

“22. […] This article gives a very wide power to do completejustice to the parties before the Court, a power which exists in theSupreme Court because the judgment delivered by it will finallyend the litigation between the parties. It is important to notice thatArticle 142 follows upon Article 141 of the Constitution, in whichit is stated that the law declared by the Supreme Court shall bebinding on all courts within the territory of India. Thus, everyjudgment delivered by the Supreme Court has two components— the law declared which binds courts in future litigation betweenpersons, and the doing of complete justice in any cause or matterwhich is pending before it. It is, in fact, an Article that turns one ofthe maxims of equity on its head, namely, that equity follows thelaw. By Article 142, as has been held in State of Punjab [State ofPunjab v. Rafiq Masih, (2014) 8 SCC 883: (2014) 4 SCC (Civ)657: (2014) 6 SCC (Cri) 154: (2014) 3 SCC (L&S) 134] judgment,equity has been given precedence over law. But it is not thekind of equity which can disregard mandatory substantive A

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54SUPREME COURT REPORTS

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Aprovisions of law when the court issues directions underArticle 142. While moulding relief, the court can go to theextent of relaxing the application of law to the parties orexempting altogether the parties from the rigours of thelaw in view of the peculiar facts and circumstances of thecase. This being so, it is clear that this Court has the power,Bnay, the duty to do complete justice in a case when foundnecessary. […]”

92. In Laxmidas Morarji v. Behrose Darab Madan[30], a three-Cjudge bench of this Court held that the use of powers under Article 142should be based on equitable principles in situations where the provisionsof law cannot do complete justice. It was observed:

“25. Article 142 being in the nature of a residuary power basedon equitable principles, the Courts have thought it advisable toDleave the powers under the article undefined. The power underArticle 142 of the Constitution is a constitutional power and hence,not restricted by statutory enactments. Though the Supreme Courtwould not pass any order under Article 142 of the Constitutionwhich would amount to supplanting substantive law applicable orignoring express statutory provisions dealing with the subject, atEthe same time these constitutional powers cannot in any way, becontrolled by any statutory provisions. However, it is to be madeclear that this power cannot be used to supplant the law applicableto the case. This means that acting under Article 142, the SupremeCourt cannot pass an order or grant relief which is totallyFinconsistent or goes against the substantive or statutory enactmentspertaining to the case. The power is to be used sparingly incases which cannot be effectively and appropriately tackledby the existing provisions of law or when the existingprovisions of law cannot bring about complete justice”between the parties.

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93. The compromise presently arrived at, which is in the interestsof all the parties, will be disturbed if a new process is directed to becommenced in accordance with the SEBI Circular at the present stage.

94. Pertinently, the SEBI Circular only contemplates two situationswhere ISIN-wise voting is mandated: (i) non-enforcement of security;and (ii) entering into an ICA. Although it applies retroactively, it admittedlydoes not contemplate a scenario where the debenture holders could giveex post facto consent to ICAs agreed prior to the commencement of theSEBI Circular, that is 13 October 2020. In the present case, the applicationof the SEBI Circular will lead to a scenario where a Resolution Planvalidly agreed upon by the ICA lenders under the RBI Framework willhave to be unscrambled. For this reason, we consider it necessary toextend the benefit under Article 142 to the retail debenture holders byallowing the Resolution Plan to pass muster. We would like to reiteratethat this Court is issuing the directions to mould the relief under Article142 in view of the peculiar facts and circumstances of the present casenoted above.

vi. Dissenting debenture holders in the present case

95. As stated in the above sections, after 13 October 2020, thereare two mechanisms in situations where a compromise or resolution issought:

a.A compromise under the SEBI Circular, which lies outsidethe process of the NCLT, to restructure the debt, bindingboth dissenting and abstaining debenture holders; b.A compromise under Section 230 of the Companies Act byapproaching the NCLT, binding dissenting/abstainingdebenture holders.

96. It is clear that a compromise arrived under the SEBI Circularor Section 230 of the Companies Act effectively assimilates the rights ofthe dissenting creditors. The SEBI Circular adopts a higher votingthreshold of 60% by number and 75% to bind dissenting/ abstainingdebenture holders.

97. SEBI submits that debenture holders are entitled to fulloutstanding amounts due (principal plus interest) if their debt cannot beresolved under the compromise/ resolution mechanism. However, it hasbeen argued that the compromised arrived at in terms of the direction ofthe Division Bench will also bind all the other debenture holders, whowere not a party to the original suit before the High Court. This willprejudice the dissenting debenture holders as they have to settle for alesser amount – 24.96% of the principal among with a further 5% of the A

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Aprincipal outstanding. We agree with SEBI’s submission that thecompromise arrived at the Debenture Trust Deed level among theconsenting debenture holders should not bind the dissenting debentureholders.

98. The dissenting debenture holders would have been bound byBthe Resolution Plan if it had been approved in accordance with theInsolvency and Bankruptcy Code, 2016 or under an ICA as acceded tounder the SEBI Circular. We accordingly deem it appropriate thatdissenting debenture holders should be provided an option to accept theterms of the Resolution Plan. Alternatively, the dissenting debentureholders have a right to stand outside the proposed Resolution Plan framedCunder the lender’s ICA and pursue other legal means to recover theirentitled dues.

99. For the reasons indicated in the text of the judgment, we acceptthe submissions which have been urged by SEBI and disapprove of theinterpretation placed by the Division Bench of the Bombay High CourtDon the SEBI Circular. The appeal is allowed in part, subject to thedirections issued above under Article 142 of the Constitution.

100. Pending applications, if any, stand disposed of.

EAnkit Gyan(Assisted by : Rakhi, LCRA)

Appeal partly allowed.

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