SEBI Circular On Standardisation Of Procedure For Debenture Trustees Has Retroactive Application : Supreme Court

The Supreme Court bench comprising Justice Dhananjaya Y Chandrachud, Justice Surya Kant and Justice A S Bopanna allowed retroactive application of SEBI Circular on Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities. Accordingly, the shareholders of Reliance Commercial Finance Ltd are required carry out a voting process based on the SEBI guidelines and not just the Debenture Trust Deeds signed by the shareholders in compliance with the Reserve Bank of India (RBI) circular.BackgroundReliance Commercial Finance Limited (RCFL) issued Non-Convertible Debentures to various persons, one of which was Vistra ITCL (India) Limited. RCFL committed its first default under the Debenture Trust Deeds in March 2019. On 7 June 2019, RBI issued the Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019. The RBI Circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an Intercreditor agreement (ICA). Bank of Baroda and other lenders of RCFL entered into an ICA on 6 July 2019, pursuant to the RBI Circular. Bank of Baroda was later appointed as the lead bank under the ICA. The RBI Circular applied to banks and specified categories of lenders. Other investors were outside its purview. SEBI issued a circular on 13 October 2020 on Standardisation of procedure to be followed by Debenture Trustee(s) in case of default by issuers of listed debt securities. On 11 March 2021, RCFL and Vistra amended the Debenture Trust Deeds by executing a Supplementary Debenture Trust Deed which took note of the SEBI circular. On 15 July 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited was approved by RCFL's lenders.Seventeen debenture holders instituted a suit in the Bombay High Court on 1 July 2021 for the protection of their interests with respect to the amounts due to them by RCFL. The debenture holders urged that Vistra should have taken necessary steps to protect their interests and that certain funds available with the Bank of Baroda were distributed amongst creditors without regard to their status as secured or unsecured creditors. They also alleged that this was done without their consent and that they had a first charge on the receivables of RCFL. The debenture holders alleged that the RBI Circular permitted this illegal distribution of funds. In this case, the Bombay High Court opined prima facie that a meeting of debenture holders was required and suggested that all the concerned parties enter into a negotiated settlement. The court recorded that RCFL and the resolution applicant had agreed to pay the debenture holders an additional sum of 5% of the total principal sum outstanding as an additional settlement. Therefore, the debenture holders were to receive an aggregate sum of Rs. 91,00,000/- representing 29.96% of the total principal outstanding. In return, debenture holder parties to the suit would have to accept the terms of the negotiated settlement in full and final satisfaction of all their claims against the parties and agreed to transfer their debentures in favour of the resolution applicant. In the same order, the Court held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds. The Court directed Vistra to conduct a meeting of all debenture holders in terms of the Debenture Trust Deeds. Impugned JudgementSEBI challenged this order before a Division Bench and submitted in its appeal, that the SEBI Circular is applicable and the consent of the debenture holders at the International Securities Identification Number level is necessary before a Resolution Plan could be implemented. The division bench dismissed the appeal stating that the SEBI Circular would not apply retrospectively as it did not contain any provision for retrospective application and that it would only apply in two situations– enforcement of security or entering into an ICA. The court stated that the circular wouldn't apply in this case as the debenture holders were not proposing to enforce their security or enter into an ICA. The Supreme Court was approached against this order.Court's AnalysisThe RFCL stated that the SEBI Circular would be applicable only if the debenture holders chose to enter into an ICA under the RBI Circular. According to RCFL, it is open to debenture holders to choose not to enter into an ICA. Instead, they may approve of a Resolution Plan that the lenders have formulated independent of the modalities prescribed in the SEBI Circular. It was argued that this route permitted debenture holders to approve or reject Resolution Plans based on whether their interests were properly...

SEBI Circular On Standardisation Of Procedure For Debenture Trustees Has Retroactive Application : Supreme Court

Padmakshi Sharma

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