Reliance Home Finance Insolvency : Supreme Court Allows Debenture Holders To Be Covered Under Resolution Plan Of Authum Investments

The Bench further clarified that the dissenting debenture holders should be given the option to accept the terms of the resolution plan or they can pursue other legal remedies to recover their dues.

Factual Background

RHFL executed a number of Debenture Trust Deeds; nine were executed with the IDBI Trusteeship Services Ltd., (Respondent No. 3) for issuance of debentures on a private placement basis in 2018. It had, previously, taken a substantial debt through loans from several banks and financial institutions.

In May, 2019, RHFL defaulted on its loan obligations to various lenders. The outstanding debt was about Rs. 11,540 crores. It’s sister concern, RCFL had previously defaulted its loan obligations in March, 2019.

In 2019, a consortium of lenders led by the lead bank, i.e., Bank of Baroda, (Respondent No. 4) entered into an Inter-Creditor Agreement as per clause 10 of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019. As per clause 10 of the RBI Directions, the lenders can enter into an ICA for implementation of an RP.

RHFL committed default in relation to the Debenture Trust Deeds issued as well. The approved RHFL RP provided that 19,353 small debenture holders would get 100% of their principal dues.

Since the RBI Circular only regulated the debts owed to Banks/Financial Institutions, the consent of the debenture holders had to be taken as per a SEBI Circular titled ‘Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities’.

The SEBI Circular prescribes that the voting by the debenture holders, before entering into an ICA, shall mean an approval of 75% of investors and 60% by number at ISIN level. An ISIN is a 12-digit alphanumeric code that uniquely identifies a specific security.

A commercial suit was moved before the Bombay High Court in 2021 seeking voting by the debenture holders on the RP. The High Court directed for a meeting of the debenture holders to be convened and further, directed that the results of the voting would be placed in a sealed envelope.

A separate plea was moved to give out the voting results. It revealed that 869 of the 919 debenture holders who had participated in the meeting voted in favour of the RP, i.e., 94.55%.

While the proceedings continued, a resolution plan for the RCFL was also submitted, which too was approved by the consortium of lenders. The two RPs are substantially similar. For RCFL too, the High Court, in separate proceedings, had ordered for a meeting of debenture holders to be convened.

SEBI filed an appeal before the Division Bench of the High Court against convening of the meeting on the ground that voting procedure was not as per the SEBI Circular but as per the process provided under the Debenture Trust Deeds. The appeal was dismissed, with the Division Bench noting that the SEBI Circular could not be applied retrospectively. Aggrieved, SEBI moved the Top Court.

A Three Judge of the Supreme Court in the case of Rajkumar Nagpal allowed the appeal, holding that the SEBI Circular would have retrospective application.

However, the Court noted that the RCFL’s resolution plan was extremely beneficial to debenture holders. It proceeded to approve the plan while providing the dissenting debenture holders an option to either accept the plan or stand outside the plan and pursue other legal means to recover their entitled dues.

In light of this decision, RHFL filed an Interim Application seeking the resolution plan’s approval on the same terms.

The High Court dismissed the interim application, holding that the power to mould relief and approve the resolution plan, as had been done by in the case of Rajkumar Nagpal, can’t be done by the High Court under Section 151 of the CPC. This was the main question before the Supreme Court.

What the Court held

In the present case also, the Court noted that small investors, whose exposure is up to Rs. 5 lakhs, are benefiting to the extent of 100% of their principal amount. Even debenture holders whose exposure is more than Rs. 5 lakhs are receiving 23.24% of their principal amount, similar to Rajkumar Nagpal’s case.

“In the present case also, such 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. We find that in the present case also, we should extend the benefit under Article 142 of the Constitution of India to the retail debenture holders. We are inclined to issue such directions to mould the relief in view of the particular facts and circumstances in the present case, which are similar to that in the case of Rajkumar Nagpal (supra). In any case, we also propose to protect the rights of the dissenting debenture holders who stand outside the proposed RP framed under the lender’s ICA and seek to pursue other legal remedies”, the Bench observed while allowing the appeals.

Senior Advocates KK Venugopal and Dhruv Mehta appeared for behalf the appellants. Senior Advocate KV Viswanathan appeared for Bank of Baroda and Canara Bank, and Additional Solicitor General Venkatraman appeared for SEBI.

Case Title: Authum Investment And Infrastructure Limited Vs R.K. Mohatta Family Trust And Others | Arising out of SLP(C) No. 411 of 2023

Citation : 2023 LiveLaw (SC) 173