# SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR NAGPAL & ORS

- **Citation:** [2022] 15 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 2022-08-30
- **Case number:** Civil Appeal No. 5247 of 2022
- **Bench:** Dr. Dhananjaya Y Chandrachud, Surya Kant, A. S. Bopanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/securities-and-exchange-board-of-india-v-rajkumar-nagpal-ors-35531
- **Pages:** 56

## Headnote

SEBI (Debenture Trustees) Regulations 1993 - Companies
Act 1956 - S. 391 (s. 230 Analogous provision, Present law) -
Company Act 2013 - SS. 1(4), 430 - Recovery of Debts - Resolution
Plan - Debenture Holders - Debenture Trust Deeds - Reliance
Commercial Finance Limited (RCFL) issued Non-Convertible
Debentures to various persons - Vistra ITCL was the Debenture
Trustee - RCFL committed default under the Debenture Trust Deed
on March 4, 2019 - On June 07, 2019, a 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 - Thereafter, SEBI issued a circular dated 13 October
2020 providing 'Standardisation of procedure to be followed by
Debenture Trustee(s) in case of default by issuers of listed debt
securities' - Debenture Holders instituted a suit before the High
Court, for the protection of their interests with respect to amount
due to them by RCFL - Single Judge of the High Court suggested
that all the concerned parties to enter into a negotiated settlement -
Pursuant to that, the terms of repayments under Resolution Plan
was formulated under the inter-creditor agreement (ICA) and
approved by the company's lenders - Single Judge also held that
SEBI Circular dated 13 October 2020 could not be permitted to
operate retrospectively and didn't govern the Debenture Trust Deed
- It directed debenture trustee to conduct a meeting of all debenture
holders in terms of Debenture Trust Deed and SEBI Circular would
not override the express terms of any of the Debenture Trust Deed -
SEBI challenged the Single Judge's order dated 28 October 2021
and 15 November 2021 before the Division Bench - Division Bench
of the High Court held that SEBI circular would not apply
retrospectively to defaults committed prior to 13 October 2020 -
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SUPREME COURT REPORTS
[2022] 15 S.C.R.
Aggrieved by this decision SEBI moved to the Supreme Court - (i)
Whether the Debenture Holders and other parties were required to
follow the Procedure under the SEBI Circular - (ii) Whether the
civil Court had the jurisdiction to entertain the lis in this case - On
appeal, held : SEBI Circular does not stipulate that the signing of
an ICA is the only route to entering into a compromise with the
issuer company - Besides the absence of a clause mandating an
ICA pursuant to an event of default, clause 6.5.3 of the SEBI Circular
recognizes that the debenture holders (through the Debenture
Trustees) may undertake actions besides those contemplated in the
SEBI Circular - However, if the Debenture Holder's choose to
implement a Resolution Plan to which the lenders are party, they
must do so in compliance with the conditions laid down in the SEBI
Circular - SEBI circular was issued with reference to the RBI circular
- Both the RBI Circular and the SEBI Circular refer to one and the
same ICA and Resolution Plan - This is evident from Clause 4 of
the SEBI Circular - When the SEBI circular came into force, it
specified the conditions under which the debenture holders (through
the Debenture Trustees) could access this Resolution Plan and
participate in its formulation via the ICA - The ICA and the
Resolution Plan are inextricably intertwined and the latter has its
genesis in the former, and flows from it - Any reference to an ICA in
the SEBI Circular is also necessarily a reference to the Resolution
Plan and vice versa - 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 -
As far as civil court's jurisdiction is concerned, bar in section 15Y
would not operate as against the suit in the present case - Similarly,
nothing in the Companies Act 2013 or any other law

## Text

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SECURITIES AND EXCHANGE BOARD OF INDIA
v.
RAJKUMAR NAGPAL & ORS.
(Civil Appeal No. 5247 of 2022)
AUGUST 30, 2022
[DR. DHANANJAYA Y CHANDRACHUD,
SURYA KANT AND A. S. BOPANNA, JJ.]
SEBI (Debenture Trustees) Regulations 1993 - Companies
Act 1956 - S. 391 (s. 230 Analogous provision, Present law) -
Company Act 2013 - SS. 1(4), 430 - Recovery of Debts - Resolution
Plan - Debenture Holders - Debenture Trust Deeds - Reliance
Commercial Finance Limited (RCFL) issued Non-Convertible
Debentures to various persons - Vistra ITCL was the Debenture
Trustee - RCFL committed default under the Debenture Trust Deed
on March 4, 2019 - On June 07, 2019, a 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 - Thereafter, SEBI issued a circular dated 13 October
2020 providing 'Standardisation of procedure to be followed by
Debenture Trustee(s) in case of default by issuers of listed debt
securities' - Debenture Holders instituted a suit before the High
Court, for the protection of their interests with respect to amount
due to them by RCFL - Single Judge of the High Court suggested
that all the concerned parties to enter into a negotiated settlement -
Pursuant to that, the terms of repayments under Resolution Plan
was formulated under the inter-creditor agreement (ICA) and
approved by the company's lenders - Single Judge also held that
SEBI Circular dated 13 October 2020 could not be permitted to
operate retrospectively and didn't govern the Debenture Trust Deed
- It directed debenture trustee to conduct a meeting of all debenture
holders in terms of Debenture Trust Deed and SEBI Circular would
not override the express terms of any of the Debenture Trust Deed -
SEBI challenged the Single Judge's order dated 28 October 2021
and 15 November 2021 before the Division Bench - Division Bench
of the High Court held that SEBI circular would not apply
retrospectively to defaults committed prior to 13 October 2020 -
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[2022] 15 S.C.R.
Aggrieved by this decision SEBI moved to the Supreme Court - (i)
Whether the Debenture Holders and other parties were required to
follow the Procedure under the SEBI Circular - (ii) Whether the
civil Court had the jurisdiction to entertain the lis in this case - On
appeal, held : SEBI Circular does not stipulate that the signing of
an ICA is the only route to entering into a compromise with the
issuer company - Besides the absence of a clause mandating an
ICA pursuant to an event of default, clause 6.5.3 of the SEBI Circular
recognizes that the debenture holders (through the Debenture
Trustees) may undertake actions besides those contemplated in the
SEBI Circular - However, if the Debenture Holder's choose to
implement a Resolution Plan to which the lenders are party, they
must do so in compliance with the conditions laid down in the SEBI
Circular - SEBI circular was issued with reference to the RBI circular
- Both the RBI Circular and the SEBI Circular refer to one and the
same ICA and Resolution Plan - This is evident from Clause 4 of
the SEBI Circular - When the SEBI circular came into force, it
specified the conditions under which the debenture holders (through
the Debenture Trustees) could access this Resolution Plan and
participate in its formulation via the ICA - The ICA and the
Resolution Plan are inextricably intertwined and the latter has its
genesis in the former, and flows from it - Any reference to an ICA in
the SEBI Circular is also necessarily a reference to the Resolution
Plan and vice versa - 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 -
As far as civil court's jurisdiction is concerned, bar in section 15Y
would not operate as against the suit in the present case - Similarly,
nothing in the Companies Act 2013 or any other law for the time
being in force vests either the National Company Law Tribunal or
the National Company Law Appellate Tribunal with the jurisdiction
to adjudicate upon a challenge to the RBI Circular - Hence, the
bar in Section 430 of the Companies Act, 2013 is not attracted.
SEBI (Debenture Trustees) Regulations 1993 - Companies
Act 1956 - S. 391 (s. 230 Analogous provision, Present law) -
Company Act 2013 - SS. 1(4), 430 -Retroactive application of SEBI
Circular 13 October 2020 - Held: In the instant case, RCFL issued
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the debentures and defaulted on the payments to the debenture
holders prior to the issuance of the SEBI Circular - However, as of
13 October 2020 (the date on which the SEBI Circular came into
force), a compromise or agreement on the restructuring of the debt
owed by RCFL did not exist - The debenture holders were not vested
with any rights with respect to the resolution of RCFL's debt - The
existence of the debt and the subsequent default by RCFL was the
status of events, which existed prior to 13 October 2020 - Once it
came into force, the SEBI Circular applied to the manner of
resolution of debt, as specified therein.
Words/Phrases - Retrospective and retroactive - Discussed.
Partly allowing the appeal, the Court
HELD :
There is no bar to the civil court's jurisdiction
1. Section 15Y of the SEBI Act stipulates that no civil court
shall have the jurisdiction to entertain any suit in respect of any
matter which an adjudicating officer appointed under the SEBI
Act is empowered to determine. Section 15-I of the SEBI Act
provides that an adjudicating officer may be appointed to adjudge
cases under Sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB,
15F, 15G, 15H, 15HA, 15HB. None of the sections mentioned in
Section 15-I of the SEBI Act would confer jurisdiction on the
adjudicating officer to grant the relief sought by the plaintiffs in
the first instance. Hence, the bar in Section 15Y would not operate
as against the suit in the present case. Similarly, Section 430 of
the Companies Act provides 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. Nothing in
the Companies Act 2013 or any other law for the time being in
force vests either the National Company Law Tribunal or the
National Company Law Appellate Tribunal with the jurisdiction
to adjudicate upon a challenge to the RBI Circular. Hence, the
bar in Section 430 is not attracted. [Paras 65-66][43-E-H]
The SEBI Circular is applicable if debenture holders wish
to implement a Resolution Plan to which the lenders are a party.
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL
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2. The SEBI Circular does not stipulate that the signing of
an ICA is the only route to entering into a compromise with the
issuer company. Besides the absence of a clause mandating an
ICA pursuant to an event of default, Clause 6.5.3 of the SEBI
Circular recognizes that the debenture holders (through the
Debenture Trustees) may undertake actions besides those
contemplated in the SEBI Circular. However, if debenture holders
choose to implement a Resolution Plan to which the lenders are
party, they must do so in compliance with the conditions laid down
in the SEBI Circular. [Para 68][44-B-C]
3. The SEBI Circular was issued with reference to the RBI
Circular; it does not specify the conditions for the execution of
an independent ICA or Resolution Plan which is separate from
the ICA and Resolution Plan under the RBI Circular. Both the
RBI Circular and the SEBI Circular refer to one and the same
ICA and Resolution Plan. This is evident from Clause 4 of the
SEBI Circular. By issuing the SEBI Circular, SEBI subscribed
to the overall framework of the RBI Circular and permitted
debenture holders to participate in the process specified in the
RBI Circular to enter into a Resolution Plan. Under the RBI
Circular, the Resolution Plan cannot come into existence without
an ICA. The SEBI Circular does not disturb this position. When
the SEBI Circular came into force, it specified the conditions
under which the debenture holders (through the Debenture
Trustees) could access this Resolution Plan and participate in its
formulation via the ICA. The ICA and the Resolution Plan are
inextricably intertwined and the latter has its genesis in the
former, and flows from it. 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. There is only one "door",
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
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Resolution Plan with the lenders. This procedure cannot be
circumvented. [Paras 72-74][45-C, G-H; 46-A-B, C; 47-F-G]
Dissenting ISIN level debenture holders are bound by the
ICA/Resolution Plan
4. Dissenting creditors do not have the option of - exiting
the compromise or arrangement arrived at in terms of Section
230 Companies Act. Similarly, dissenting lenders do not have
the option of "exiting" the ICA / Resolution Plan under the RBI
Circular.25 The respective majorities provided for in each of these
laws bind dissenting creditors. It is along these lines that the
SEBI Circular binds dissenting debenture holders. Indeed, the
SEBI Circular could bind dissenting debenture holders even in
the absence of similar provisions in other laws.[Para 78][49-AB]
The SEBI Circular has retroactive application
5. In the present case, RCFL issued the debentures and
defaulted on the payments to the debenture holders prior to the
issuance of the SEBI Circular. However, as of 13 October 2020
(the date on which the SEBI Circular came into force), a
compromise or agreement on the restructuring of the debt owed
by RCFL did not exist. The debenture holders were not vested
with any rights with respect to the resolution of RCFL's debt.
The existence of the debt and the subsequent default by RCFL
was the status of events, which existed prior to 13 October 2020.
Once it came into force, the SEBI Circular applied to the manner
of resolution of debt, as specified therein. [Para 84][51-D-E]
6. The SEBI Circular was issued partly in exercise of the
powers under the 1993 Regulations. Further, Regulation 15(7)
of the 1993 Regulations lays the foundation for the conditions
specified in the SEBI Circular. As such, the phrase "provisions
of the [1993 Regulations]" in Clause 59 must be read to include
the SEBI Circular. Clauses 22 and 23 of the Fifth Schedule to the
Debenture Trust Deed are evidently in conflict with the SEBI
Circular 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]
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL
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Exercise of this Court's power under Article 142 of the
Constitution
7. Small investors, especially those whose exposure is up
to INR 10 lakhs, are benefiting to the extent of 100% of their
principal amount. Even debenture holders whose exposure is
more than 10 lakhs are receiving 29.96% of their principal
amount. In comparison, the secured ICA lenders would receive
24.96% of their principal amount, which is lower than the recovery
made by the debenture holders. It is also important to highlight
that none of the debenture holders have raised any grievance
with regard to the proposed compromise. In such a situation,
application of the SEBI Circular, though right in law, may lead to
unjust outcomes for the retail debenture holders if this court were
to reverse the entire course of action which has occurred in the
present case. Depending upon the facts and circumstances of a
case, this Court can, having regard to Article 142 of the
Constitution of India, stipulate suitable directions to mitigate the
potential denial of rights. [ Paras 88 and 90][52-G; 53-A-B, D]
9. Pertinently, the SEBI circular only contemplates two
situations where ISIN-wise voting is mandated : (i) nonenforcement of security; and (ii) entering into an ICA. Although
it applies retroactively, it admittedly does not contemplate a
scenario where the debenture holders could give ex post facto
consent to ICAs agreed prior to the commencement of the SEBI
Circular, that is 13 October 2020. In the present case, the
application of the SEBI Circular will lead to a scenario where a
Resolution Plan validly agreed upon by the ICA lenders under
the RBI Framework will have to be unscrambled. For this reason,
we consider it necessary to extend the benefit under Article 142
to the retail debenture holders by allowing the Resolution Plan
to pass muster. The Court reiterates that this Court is issuing
the directions to mould the relief under Article 142 in view of the
peculiar facts and circumstances of the present case. The Court
accept the submissions which have been urged by SEBI and
disapprove of the interpretation placed by the Division Bench of
the Bombay High Court on the SEBI Circular. The appeal is
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allowed in part, subject to the directions issued above under
Article 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 of
India (2005) 7 SCC 584 : [2005] 3 Suppl. SCR 200;
State v. Kalyan Singh (2017) 7 SCC 444 : [2017] 6
SCR 946; Laxmidas Morarji v. Behrose Darab Madan
(2009) 10 SCC 425 : [2009] 14 SCR 777 - referred
to.
Case Law Reference
[2020] (9) SCC 1 27
referred to
Para 82
[2005] 3 Suppl. SCR 200
referred to
Para 83
[2017] 6 SCR 946
referred to
Para 91
[2009] 14 SCR 777
referred to
Para 92
CIVIL APPELLATE JURISDICTION : Civil Appeal No.5247
of 2022.
From the Judgment and Order dated 21.03.2022 of the High Court
of 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, Chanderashekhar
Bharti, M/s. K Ashar & Co., Advs. for the Appellant.
Darius J. Khambata, K.V. Viswanathan, Sr. Advs. Mahesh
Agarwal, Prateek Seksaria, M.S. Ananth, Divyanshu Srivastava, Karan
Rukhana, 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, Rahul
Sangwan, Sivagnanam K., Ms. Tine Abraham, Akshay Puri, Syed Jafar
Alam, Advs. for the Respondents.
The Judgment of the Court was delivered by
DR. DHANANJAYA Y. CHANDRACHUD, J.
Table of Contents*
A.
Facts ............................................................................. 4
i.
The dispute ....................................................... 4
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL
* Ed. Note : Pagination in the table of Contents is as per the original judgment.
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[2022] 15 S.C.R.
ii.
The suit before the Bombay High Court ..... 5
iii.
The impugned judgment ............................... 10
B.
Issues ..........................................................................12
C.
Submissions ................................................................12
D.
Overview of contractual arrangements .................. 19
i.
The Debenture Trust Deeds ........................19
ii.
Steps taken by the Debenture Trustee
(Vistra) .............................................................23
E.
Evolution of the law surrounding the resolution
of debts........................................................................25
i.
The framework for the resolution of debt
under the Companies Act 1956 ...................25
ii.
The RBI Circular dated 6 July 2019 and the
legal framework thereafter ...........................27
iii.
SEBI (Debenture Trustees) Regulations
1993..................................................................32
iv.
The SEBI Circular dated 13 October 2020
and the legal framework thereafter.............34
a.
The SEBI Circular: Overview and
Implications .................................................. 34
b.
Voting at the ISIN level ............................... 42
c.
The SEBI Circular has a statutory
character ...................................................... 44
F.
Analysis ......................................................................47
i.
There is no bar to the civil court's
jurisdiction ......................................................47
ii.
The SEBI Circular is applicable if debenture
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holders wish to implement a Resolution Plan to
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 application
56
v.
Exercise of this Court's power under Article
142 of the Constitution ................................. 59
vi.
Dissenting debenture holders in the present
case ............................................................................. 63
A. Facts
i. The dispute
1. Reliance Commercial Finance Limited1 issued Non-Convertible
Debentures to various persons.2 Vistra ITCL (India) Limited was the
Debenture Trustee3 under three Debenture Trust Deeds dated 3 May
2017, 23 May 2017 and 5 February 2018.4 RCFL committed its first
default under the Debenture Trust Deeds in March 2019.
2. On 7 June 2019, RBI issued the Reserve Bank of India
(Prudential Framework for the Resolution of Stressed Assets)5 Directions
2019, with "a view to providing a framework for early recognition, reporting
and time bound resolution of stressed assets".6 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
plan7 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.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"
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]
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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.
3. 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. The subject was the 'Standardisation of procedure
to be followed by Debenture Trustee(s) in case of 'default' by issuers of
listed debt securities'.9 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
Limited10 was approved by RCFL's lenders.
ii. The suit before the Bombay High Court
4. Seventeen debenture holders instituted a suit on the Original
Side of the Bombay High Court on 1 July 2021. The debenture holders
instituted the suit for the protection of their interests with respect to the
amounts due to them by RCFL. RCFL was impleaded as the first
defendant to the suit. The debenture holders urged that Vistra, who was
impleaded as the third defendant, should have taken necessary steps to
protect their interests. The debenture holders also alleged that certain
funds available with the Bank of Baroda, the second defendant, 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. They also stated that RCFL, Bank of Baroda, and
Vistra could not seek an ex post facto consent from the debenture holders
for either the ICA or the Resolution Plan. They urged that it was
mandatory for Vistra to sign the ICA on behalf of the debenture holders
before considering the Resolution Plan. The plaintiffs in the suit before
the High Court sought the 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.
5. On 20 August 2021, Justice G S Patel of the Bombay High
Court opined prima facie that a meeting of debenture holders was
required. The Court, however, held that it could not recommend the
manner in which the meeting of debenture holders should be convened,
observing that:
9 "SEBI Circular"
10 "Authum"
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"3. Prima facie, it is clear that a meeting or possibly meetings of
debenture holders are required. The question presently that Vistra
faces relates to the terms on which such a meeting is to be called.
Mr. Ankhad explains that one option is to proceed according to
the ISIN series. The second is to proceed according to the
Debenture Trust Deeds. There are three different Debenture Trust
Deeds. The first option does not commend itself. Surely, this series
of debentures is immaterial in a situation like this.
4. Another problem that presents itself is the curtailing or
abbreviation of the necessary notice that is required.
5. Both aspects are not, prima facie, one on which this Court can
make a recommendation, it is one thing to ask a Civil Court to
adjudicate on the correctness or otherwise of a decision of a
regulator or a validity of a rule or regulation. But I am unable to
see how a Civil Court can direct that a notice that is required by
the Trust Deed or by the applicable regulation should be shortened
or that a meeting should be held of all debenture holders in one
particular manner over preference to another. These are directions
that only a regulator can issue."
6. The Court noted that Vistra had sought a clarification on 11
August 2021, regarding the manner in which the meeting was to be held.
It directed SEBI to respond to Vistra's representation on a "priority and
extremely urgent basis". SEBI issued a clarificatory letter on 23 August
2021 in response to this representation. The clarificatory letter referred
to Regulation 15(7) of SEBI (Debenture Trustees) Regulations 199311
and the SEBI Circular and clarified that the voting would have to be
conducted in accordance with the SEBI Circular. The relevant extract
of this letter reads as follows:
"5. In view of regulation 15(7) of the DT Regulations read with
clause 3, 6.5, 6.6 and 7 of SEBI Circular, it is stated that it shall be
mandatory for DTs to sign the Inter-Creditor Agreement (ICA)
on behalf of debenture holders before considering the resolution
plan to be implemented as a result of ICA proceedings."
7. SEBI was not impleaded as a party to the suit. On 17 September
2021, the Single Judge granted leave to the debenture holders to join
11 "1993 Regulations"
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
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SEBI as a respondent to an interlocutory application, Interim Application
No. 14224 of 2021. SEBI entered appearance on 24 September 2021.
SEBI in its affidavit before the High Court submitted that the debenture
trustees are obligated to comply with its circular in case of a default
committed by an issuer of listed debt securities even though the event of
default has taken place prior to the issuance of its circular.
8. On 14 October 2021 and 20 October 2021, the Single Judge of
the High Court suggested that all the concerned parties enter into a
negotiated settlement.
9. The terms of repayment under the Resolution Plan formulated
under the ICA and approved by the company's lenders are as follows:
In terms of the above table, all individuals/ HUFs holding debentures
of a value less than Rs. 10 Lakhs were to get 100% of their principal
sum due, while individuals and HUFs holding debentures in excess of
Rs. 10 lakhs were to receive 24.96% of the principal.
10. By an order dated 28 October 2021, the Single Judge recorded
that RCFL and the resolution applicant had agreed to pay the debenture
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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 Deed(s):
"13. In view of this, the 3rd Defendant is directed to call and
conduct meeting of all the debenture holders under all three
Debenture Trust Deeds within 30 days of this order ensuring that
the calling and conduct of the meeting/s and the voting at such
meetings conforms to the terms of the respective Debenture Trust
Deeds. At such meeting/s, the 3rd Defendant will place for
consideration and approval of the beneficial owners or debenture
holders the settlement offer/compromise/arrangement as
envisaged in the approved resolution plan, and as modified to the
extent 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 be
taken into account.
15. All parties agree and undertake to maintain confidentially of
the settlement and/or compromise and/or arrangement arrived
thereto.
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 considering
the peculiar facts and circumstances of the present case. It also
has consent of all the parties.
18. As regards SEBI, I am making it clear that this order will
constitute no precedent against SEBI nor will SEBI be held to the
terms of this order for other cases. This order is made on the
peculiar facts and circumstances of this case."
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]
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On 15 November 2021, the Single Judge passed a clarificatory
order indicating that the meeting should not deviate from the terms of
the Debenture Trust Deed(s) and that the Supplementary Trust Deeds
would have to be read with the Debenture Trust Deed(s) in a consistent
manner. The court also held that a mere reference to the SEBI Circular
would not override the express terms of any of the Debenture Trust
Deeds.
iii. The impugned judgment
11. SEBI challenged the Single Judge's orders dated 28 October
2021 and 15 November 2021 before a Division Bench. SEBI submitted
in its appeal, that the SEBI Circular is applicable and the consent of the
debenture holders at the International Securities Identification Number12
level is necessary before a Resolution Plan could be implemented.
12. At the first hearing, SEBI took objection to paragraphs 15 to
17 of the Single Judge's order dated 28 October 2021. Accordingly, the
Division Bench passed an order dated 3 December 2021 granting liberty
to SEBI to move the Single Judge to obtain a clarification. On 3December
2021, the Single Judge clarified that SEBI was not a party to the suit and
could therefore not be a party to the compromise.
13. On 6 December 2021, the Division Bench admitted the appeal
filed by SEBI and allowed the meeting to be held on 8 December 2021.
On 21 December 2021, a co-ordinate bench passed an order directing
that the results of e-voting of the meeting conducted on 8 December
2021 be placed on record.
14. After consideration of the rival submissions, the Division Bench
dismissed the appeal filed by SEBI for the following reasons:
a.
The SEBI Circular would not apply retrospectively to
defaults committed prior to 13 October 2020 because: (a) it
comes into force on 13 October 2020 and therefore only
applies to defaults committed after 13 October 2020; and
(b) it does not contain any provision for retrospective
application 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 SEBI
Circular will not apply to the present case as the debenture
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holders are not proposing to enforce their security or enter
into an ICA;
c.
The Supplementary Debenture Trust Deed executed on 11
March 2021 makes the SEBI Circular applicable to defaults
occurring after it was issued or to defaults after 13 October
2020;
d.
Clause 23 of the Fifth Schedule to the Debenture Trust
Deed(s) is consistent with the 1993 Regulations. Therefore,
the SEBI Circular will not defeat the Debenture Trust
Deed(s) in lieu of clause 59 of the Debenture Trust Deed(s);
and
e.
The clarificatory letter dated 23 August 2021 issued by SEBI
is also inapplicable since the SEBI Circular is inapplicable.
The Court also observed that the application of the SEBI Circular
would lead to a situation where one debenture holder holding debentures
worth 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 meeting
of debenture holders would defeat the interests of small investors, who
were realizing 100% of the debt owed to them, under the Resolution
Plan.
B. Issues
15. Based on the submissions which have been canvassed by the
parties, the issues which arise for determination are:
a.
Whether the debenture holders and other parties in the
present case were required to follow the procedure under
the SEBI Circular; and
b.
Whether the civil court had the jurisdiction to entertain the
lis in this case.
C. Submissions
16. Mr. N Venkataraman, learned senior counsel and Additional
Solicitor General made the following submissions in support of the
appellant's argument that the SEBI Circular applies to the present case:
a.
The parties to the Debenture Trust Deeds have entered
into a Master Supplementary Debenture Trust Deed on 11
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
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March 2021 to align the Debenture Trust Deeds with the
SEBI Circular. Therefore, the parties were aware that the
SEBI Circular is applicable to the debenture holders. The
meeting of debenture holders directed by the Single Judge
was in contravention of Clauses 6.5 and 6.6 of the SEBI
Circular;
b.
The SEBI Circular is retroactive in nature because it does
not travel backwards and take away or impair vested rights.
The SEBI Circular operates in future, but its operation is
based on events that arose prior to it. Although the
Debenture Trust Deeds were signed prior to the SEBI
Circular, the circular was brought into force before voting
took place. Therefore, the voting ought to have taken place
in accordance with the SEBI Circular;
c.
The SEBI Circular has the force of law;
d.
Under the SEBI Circular, voting is required to be conducted
as per ISINs. ISIN-wise voting ensures that rights of small
investors are protected against the excesses of large
investors. The possibility of ISIN-wise voting will not defeat
the Resolution Plan as the issuer company can always
'adjust' the size of the security;
e.
The Resolution Plan expressly states that it has to be carried
out in terms of the "Applicable Law", which includes laws
enacted by SEBI. Therefore, compliance with regulatory
provisions mandated by the circular issued by SEBI is
required before implementing the Resolution Plan;
f.
Prior to the coming into force of the SEBI Circular on 13
October 2020, a joint of meeting of a class of creditors was
governed by section 230 of the Companies Act 2013.13 The
SEBI Circular adopted a special majority of 60% of the
investors by ISIN and 75% of the investors by value for
debenture holders to resolve their debt under a resolution
plan or compromise. The SEBI Circular adopted a higher
threshold than Section 230 of the Companies Act to bind
the dissenting/ abstaining debenture holders. The civil court
does not have jurisdiction over the present matter by virtue
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of Section 15Y of the SEBI Act 199214 and Section 430 of
the Companies Act; and
g.
After the SEBI Circular came into force on 13 October
2020, only two possible options were available to the
debenture holders to restructure the debt: (i) a compromise
independent of the NCLT under the SEBI Circular; or (ii)
approaching the NCLT under section 230 of the Companies
Act. No third option, especially under the Debenture Trust
Deed, is available to the debenture holders. Contrary to the
express provisions of law, the High Court incorrectly
assumed jurisdiction and directed a meeting of debenture
holders to consider the Resolution Plan in accordance with
the terms of the Debenture Trust Deeds. The High Court
could not have exercised jurisdiction to direct the calling of
a meeting of debenture holders to consider the Resolution
Plan without complying with the SEBI Circular.
17. Mr. Darius Khambata, learned senior counsel appearing for
RCFL (Respondent No. 11) made the following submissions in support
of his argument that the SEBI Circular does not apply retroactively or
retrospectively to the present case:
a.
The language employed in the SEBI Circular and in
Regulation 15(7) of the1993 Regulations is facilitative and
not mandatory. There is no separate or independent ICA
imposed by SEBI outside RBI's Circular. RBI itself reads
its framework as not extending to debenture holders. The
SEBI Circular does not provide that the signing of an ICA
is the only route to entering into a compromise or
arrangement with the issuer company. Correspondingly,
there is no prohibition, express or implied, on the freedom
of debenture holders to take any course of action as they
see fit. In particular, the SEBI Circular does not exclude
the provisions of Sections 62 and 63 of the Indian Contract
Act 1872;
b.
The SEBI Circular does not provide a mechanism by which
dissenting ISIN level debenture holders can 'exit' an ICA /
Resolution Plan. ISIN wise voting would enable a single
ISIN number to defeat the Resolution Plan;
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c.
The SEBI Circular is issued under section 11(1) of the SEBI
Act. Hence, the SEBI circular is administrative in nature
and is not delegated legislation. An administrative circular
cannot have retrospective operation as it takes away vested
rights. Moreover, the SEBI Act does not provide for
retrospective or retroactive application of subordinate
legislation;
d.
The SEBI Circular extinguishes the vested rights of
debenture holders under the Debenture Trust Deeds. Under
Clauses 22 and 23 of the Fifth Schedule to the Debenture
Trust Deeds, the debenture holders by a special majority
have a vested right to sanction any compromise or
arrangement with the company. However, the SEBI Circular
subjects the will of the majority to the will of the ISIN
number holders, and in the process impairs the vested rights
conferred under the Debenture Trust Deeds. Thus, the
application of the SEBI Circular will not only be retroactive,
but also renders it retrospective;
e.
The SEBI Circular does not prohibit the debenture holders
from conferring the authority on the debenture trustee in
respect of the matters enumerated under Clause 22 of the
Fifth Schedule to the Debenture Trust Deeds. The
mandatory language used in the SEBI Circular applies only
to the two eventualities mentioned in Clause 6.5 and does
not encompass all the generalities which are covered under
the Debenture Trust Deeds. The SEBI Circular is applicable
to only two situations: (i) a negative consent for proceeding
with enforcement of security; and (ii) a positive consent
for signing an ICA. The subject matter of the Resolution
Plan 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 of
the Fifth Schedule to the Debenture Trust Deeds. Even if it
is assumed that the Supplementary Trust Deed incorporates
each and every term of the SEBI Circular, this will not result
in overriding or superseding the provisions of Clauses 22
and 23;
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g.
The Resolution Plan places the debenture holders in a better
position than they would be in under a new ICA process. It
provides for 100% repayment to debentures holders with
an exposure of upto Rs. 10 lakhs. The debenture holders
will constitute only 21.02% of the total value of debt if they
become a part of the ICA along with the lenders. Resultantly,
they could be easily outvoted by the lenders, who would
constitute 78.98% of the ICA by value; and
h.
SEBI's contention that Section 230 read with Section 430
of the Companies Act excludes the jurisdiction of the High
Court is untenable because the law does not expressly bar
a company from entering into a contractual compromise
with any of its creditors.
18. It is necessary to record that Mr. Khambata does not contest
the following principles of law relied upon by the appellants:
a.
Circulars issued by SEBI constitute special law and are
binding, with the force of law;
b.
Where SEBI prescribes a particular procedure to do a
particular thing, such a process cannot be dispensed with;
c.
There can be no waiver of a provision of law based on
public policy; and
d.
No court will give effect to a contract which is forbidden
either expressly or by necessary implication by statute.
19. Mr. KV Viswanathan, learned senior counsel appearing for
Bank of Baroda (Respondent No. 12) submitted that the impugned order
should not be interfered with because:
a.
The SEBI Circular has no retrospective/ retroactive
operation because it is not a regulation in terms of section
30 of the SEBI Act.
b.
The compromise under the Resolution Plan does not fall
foul of section 430 read with section 230 of the Companies
Act, 2013 because the latter is only an enabling provision.
The jurisdiction of the NCLT is invoked only when a
company which proposes to enter into a compromise with
its creditors opts to file an application before the NCLT.
SECURITIES AND EXCHANGE BOARD OF INDIA v. RAJKUMAR
NAGPAL [DR.