The Bombay High Court has held that the Reserve Bank Of India's circulars dated March 27 and May 23 granting moratorium on payment of installment of term loans for three months and extending the moratorium on such payments respectively are not applicable to mutual funds and debentures.
A division bench of Justice RD Dhanuka and Justice VG Bisht delivered the judgment in a writ petition filed on behalf of Zee Learn Ltd, which runs various schools and vocational educational institutes across the country.
The petitioner, Zee Learn Ltd, made a private placement of 650 unlisted redeemable non-convertible debentures of Rs. 10 lakh each from UTI Asset Management Ltd, in the month of March, 2015 with 10.40% XIRR (external internal rate of return), payable at the time of maturity and having redemption date of July 8, 2020.
In the writ petition, Zee Learn sought extension of redemption date, which is July 8, 2020, to a date three months after the Government allows schools to reopen, subject to the balance/outstanding debenture amount continuing to bear interest at 10.40 % per annum till such extended date.
According to Zee, under the said agreement, various payments were made to the respondents. However, since March 2020, in view of the situation arising out of Covid-19 pandemic, the petitioner committed default in making payment of certain installments. A payment of Rs.44 cr has to be made to the respondent as per the said agreement. However, the petitioner company could not make any payment. Hence, the petition was filed seeking extension of redemption date which is on July 8, 2020.
Appearing on behalf of Zee, Senior Advocate Aspi Chinoy argued that UTI Asset Management Co. Ltd. is a public undertaking, as more than 70% shares are held by other public authorities.
Although the said moratorium does not refer to the mutual funds or debentures, principles behind the said circular issued by Reserve Bank of India should be extended to the petitioner also, Chinoy said.
On the other hand, Senior Advocate Darius Khambatta strongly opposed the petition questioning its maintainability. He submitted that petitioner is in default of making payments under the said Debenture Deed not only during the period of COVID-19 pandemic but has been a defaulter since July 4, 2019. The last default was committed by the petitioner on March 31, 2020.
There are above 21,000 small investors who are required to be paid by the respondent for the debentures held by them. If any relief as sought by the petitioner is granted, it would affect those 21,000 small investors, Khambatta said.
The Court held that the writ petition was not maintainable against the respondent.
"In our view even if respondent No.1A falls within the definition prescribed under Section 2 (72) of the Companies Act, merely on that ground the respondent No.1A cannot be subjected to the writ jurisdiction of this Court under Article 226 of the Constitution of India. In our view, Writ Petition itself is not maintainable on that ground."
Despite that, the Court went ahead to adjudicate the merits of the matter, and observed that RBI circulars were not applicable to mutual funds and debentures.
"The entire Petition is based on the reliance placed on the moratoriums dated 27th March, 2020 and 23rd May, 2020 issued by Reserve Bank of India. A perusal of the said circular clearly indicates that it applies to all Commercial Banks, all Primary (Urban) Co-operative Banks, States Co-operative Banks, District Central Cooperative Banks, All India Financial Institutions, All Non-Banking Financial Companies and also deals with terms loans and working capital facilities provided by those entities. It is clearly beyond reasonable doubt that those two circulars would not apply in case of mutual funds and debentures."
Moreover, Court accepted Khambata's assertion that the petitioner has committed default in making payment to the respondents the Debenture Deed not only during the lockdown period since March, 2020 till date but has already been defaulted since July 4, 2019.
Refusing to interfere with the RBI circulars, Court disposed of the petition-
"In our view, Mr. Khambata, learned Senior Counsel for the respondents, is right in his submission that the guarantor Zee Entertainment Enterprises Limited is a profit making company and is liable to face the consequence of default committed by the petitioner. It is for the petitioner to make an arrangement for the balance amount on the due date which the petitioner has failed."
Case : Zee Learn Ltd vs UTI Asset Management