{"id":272834,"date":"2022-09-02T09:00:43","date_gmt":"2022-09-02T03:30:43","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=272834"},"modified":"2022-09-02T09:00:43","modified_gmt":"2022-09-02T03:30:43","slug":"supreme-court-upholds-resolution-process-of-reliance-commercial-finance-sebi-circular-applicable-lbc-rbi-legal-updates-legal-news","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2022\/09\/02\/supreme-court-upholds-resolution-process-of-reliance-commercial-finance-sebi-circular-applicable-lbc-rbi-legal-updates-legal-news\/","title":{"rendered":"SC upholds applicability of SEBI Circular; but gives a green signal to Reliance Commercial Finance resolution to avoid \u201cunscrambling of resolution process\u201d\u00a0"},"content":{"rendered":"

Supreme Court:<\/span><\/b> In the Reliance Commercial takeover dispute, the 3-judges Bench comprising <\/span>Dr. D Y Chandrachud*,<\/span><\/b> Surya Kant and A S Bopanna, JJ., gave a green signal to the voting process to implement the resolution plan. The Court, though upheld the applicability of SEBI circular, it opined that the different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. The Court noted,\u00a0<\/span>\u00a0<\/span><\/p>\n

\u201cSuch unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court.\u201d<\/span><\/b>\u00a0<\/span><\/p><\/blockquote>\n

Factual Matrix<\/b>\u00a0<\/span><\/h4>\n

The instant case relates to takeover of Reliance Commercial Finance Ltd. (RCFL) by Authum Investment and Infrastructure Ltd.; where a dispute arose with regard to the applicability of two circulars issued by RBI and SEBI\u2014 Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019 and SEBI Standardisation of procedure Circular (13-10-2020).\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

RCFL had issued Non-Convertible Debentures to various persons and Vistra ITCL (India) Ltd. was the Debenture Trustee under three Debenture Trust Deeds. RCFL committed its first default under the Debenture Trust Deeds in March 2019.<\/span>\u00a0<\/span><\/p>\n

The dispute<\/b>\u00a0<\/span><\/h4>\n

Seventeen debenture holders instituted a suit on the Original Side of the Bombay High Court for protection of their interests with respect to the amounts due to them by RCFL, alleging that certain funds available with the Bank of Baroda, were distributed amongst creditors without regard to their status as secured or unsecured creditors without their consent and that they had a first charge on the receivables of RCFL.\u00a0<\/span>\u00a0<\/span><\/p>\n

The debenture holders further alleged that the RBI Circular permitted this illegal distribution of funds and hence they urged for setting aside of the RBI Circular as illegal and ultra vires. They also sought an injunction restraining RCFL, Bank of Baroda, and RBI from implementing the RBI Circular.<\/span>\u00a0<\/span><\/p>\n

Impugned Decision\u00a0<\/b>\u00a0<\/span><\/h4>\n

The Single Judge held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds.\u00a0 However, opining that a mere reference to the SEBI Circular would not override the express terms of any of the Debenture Trust Deeds, the Single Judge allowed to proceed with the voting process for the takeover of RCFL according to Debenture Trust Deeds signed in compliance with the RBI circular. In appeal, the Division Bench affirmed the aforesaid order of the Single Judge.<\/span>\u00a0<\/span><\/p>\n

Issues\u00a0<\/b>\u00a0<\/span><\/h4>\n

Based on the submissions canvassed by the parties, the following issues arose for determination:<\/span>\u00a0<\/span><\/p>\n

    \n
  1. Whether the civil court had the jurisdiction to entertain the <\/span>lis<\/span><\/i> in this case; and\u00a0<\/span><\/li>\n
  2. Whether the debenture holders and other parties in the present case were required to follow the procedure under the SEBI Circular.\u00a0<\/span><\/li>\n<\/ol>\n

    Issue 1: Jurisdiction\u00a0<\/b>\u00a0<\/span><\/h4>\n

    On the first issue, the Court noted that Section 15Y of the SEBI Act imposes a bar on the civil court to entertain any suit in respect of any matter that an adjudicating officer appointed under the SEBI Act is empowered to determine; however, since the Adjudicating officer has no jurisdiction under the SEBI Act to grant the relief sought by the plaintiffs in the first instance, the bar in Section 15Y would not operate as against the suit in the instant case.<\/span>\u00a0<\/span><\/p>\n

    Similarly, with regard to the bar under Section 430 of the Companies Act that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine, the Court observed that since neither the NCLT nor the NCLAT has jurisdiction to adjudicate upon a challenge to the RBI Circular, the bar in Section 430 is not attracted in the case at hand.<\/span>\u00a0<\/span><\/p>\n

    Therefore, the Court held that the Single Judge as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit.<\/span>\u00a0<\/span><\/p>\n

    Issue 2: Applicability of the SEBI Circular<\/span>\u00a0<\/span><\/b>\u00a0<\/span><\/h4>\n

    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 Inter-creditor Agreement (ICA).<\/span>\u00a0<\/span><\/p>\n

    By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan (RBI circular provides only lenders can participate). Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. Hence, both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan.\u00a0<\/span>\u00a0<\/span><\/p>\n

    Rejecting the RCFL\u2019s argument that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, the Court observed that RCFL\u2019s suggestion that the ICA and the Resolution Plan are distinct and severable is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former and flows from it.<\/span>\u00a0<\/span><\/p>\n

    Hence, the Court held that any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. The Court remarked,\u00a0<\/span>\u00a0<\/span><\/p>\n

    \u201cThere is only one \u2015door, so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented.”<\/span><\/b>\u00a0<\/span><\/p><\/blockquote>\n

    Upholding the applicability of the SEBI circular, the Court pointed out the following:<\/span>\u00a0<\/span><\/p>\n