Bombay High Court
Reliance Nippon Life Asset Management ... vs Dewan Housing Finance Corporation ... on 10 October, 2019
Equivalent citations: AIRONLINE 2019 BOM 1102, 2019 (6) ABR 800
Author: A.K. Menon
Bench: A.K. Menon
NMCDL-2320-19.doc
Dixit
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION (LODGING) NO.2320 OF 2019
IN
COMMERCIAL SUIT (LODGING) NO.1034 OF 2019
Reliance Nippon Life Asset Management Ltd.,
Mumbai ....Applicant
In the matter between
Reliance Nippon Life Asset Management Ltd.,
Mumbai ....Plaintiff
V/s.
Dewan Housing Finance Corporation Ltd.,
Mumbai and Ors. ....Defendants
Mr. Iqbal Chagla, Senior Advocate, with Mr. Zal Andhyarujina, Mr. Karan
Bhide, Mr. Mayur Khandeparkar, Mr. Venanoo D'Costa, Mr. Prateek Mishra,
Mr. Rugved More and Mr. Tejas Gokhale, i/by Mr. Akhil Mahesh, for the
Applicant-Plaintiff.
Mr. Ravindra Kadam, Senior Advocate, with Mr. Munaf Virjee and
Mr.Rushabh Parekh, i/by ABH Law LLP, for Defendant Nos.1 and 3.
Ms. Vinita Hombalkar, i/by Orbit Law Services, for Defendant No.2.
CORAM : A.K. MENON, J.
DATED : 10TH OCTOBER, 2019.
P.C. :
1. The suit seeks a money decree in a sum of Rs.479,21,29,113/-, along 1/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc with interest @ 18% p.a.; a declaration that the plaintiff cannot be subjected to and is not bound by an Inter-Creditor Agreement (ICA) under the auspices of Reserve Bank of India (RBI) in view of certain payments claimed by the plaintiff under certain Debenture Groups "A" to "D". Pending the hearing of the suit, ad-interim and interim reliefs are sought in terms of the notice of motion.
2. On 30th September 2019, an ad-interim application was made in the above suit. Upon hearing learned counsel for the parties, an ad-interim order was passed in terms of prayer clause (c), thereby temporarily restraining the defendant no.1 from making payments specified in prayer clause (c) while clarifying that defendant no.1 would not be prohibited from making payments for staff salaries and other costs, charges and office expenses.
Affidavits-in-reply have since been filed and the application was renewed today.
3. On behalf of the plaintiff, Mr. Chagla applies for continuation of relief granted and prays for further relief in terms of prayer clause (h), which seeks disclosure on oath of the assets owned by defendant no.3, who is the Managing Director of the 1st defendant. This is promptly opposed by Mr.Kadam who states that the defendant no.3 has no personal liability and the plaint makes out no case against defendant no.3 personally. Mr. Kadam also submits that the order dated 30 th September 2019 be vacated. 2/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 :::
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4. The facts, in brief, leading to the present dispute are as under :-
The Plaintiff is an Asset Management Company (AMC). Defendant no.1 is a Non-Banking Financial Company, focusing on housing finance. Defendant no.2 is a company offering trusteeship services and has accepted an assignment as a 'Debenture Trustee' for the debentures issued by defendant no.1. The 3rd defendant is the Managing Director of defendant no.1.
5. According to the plaintiff, between the years 2016 and 2018, the plaintiff subscribed to Non-Convertible Debentures (NCDs) of defendant no.1, aggregating to Rs.63,41,72,000/- through a Public Issue. The plaintiff also subscribed to further issues of NCDs in 2017-18, aggregating to Rs.365,00,00,000/- on a Private Placement basis. The defendant no.1 is said to have committed defaults resulting in the NCDs being downgraded in the industry ratings. Events of default are said to have occurred in May, 2019, when the defendant no.1 failed to pay Rs.397,88,22,896/- towards early redemption. Defendant no.1 also failed to pay interest and repay principal due during August and September 2019.
6. It is the plaintiff's case that without their knowledge or consent, the defendant no.1 has dealt with receivables, which were duly secured in favour of the plaintiff, in addition to other mutual funds, on a pari passu basis and to the detriment of all these funds and AMCs. Defendant no.2 is said to have 3/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc facilitated execution of the ICA contemplated in RBI's circular dated 7 th June 2019 with respect to the Debenture Group, which is a part of the Private Placement Non-Convertible Debentures subscribed by the plaintiff. As far as the plaintiff is concerned, there are four groups of NCDs, as under :-
Debentures Date of Issue Size of Issue Groups Public Issue of 400,00,000 Secured Redeemable NCDs of face-value of Prospectus-A 26th July 2016 Rs.1,000/- each, aggregating to Rs.4,00,000/-.
Public Issue of 10,00,00,000 Secured Redeemable NCDs of face-value of Prospectus-B 25th August 2016 Rs.1,000/- each, aggregating to Rs.10,00,000/-.
Private Placement of 5,000 Secured NCDs of Series 21 of the face-value of Prospectus-C 24th July 2017 Rs.10,00,000/- each, aggregating to Rs.500 crores.
Private Placement of 50,000 Secured Rated NCDs of Series 24 with face-
Prospectus-D 23rd August 2018 value of Rs.10,00,000/- each, aggregating to Rs.5,000 crores.
7. In cases of public issues of NCDs, the defendant no.1 had the option of retaining over-subscription upto the ceiling limit disclosed and which option the defendant no.1 is believed to have exercised. It is the plaintiff's case that the key terms agreed between the parties and contained in the prospectus 4/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc contemplated "Events of Default" which granted rights to the debenture trustee to enforce the trust by selling and realizing proceeds of the trust properties, recovering the same, retaining the cash proceeds for repaying the 1st defendant's obligations to NCD holders and the debenture trustee. For that purpose, the debenture trustee had authority to execute documents including re-conveyance and re-transfer of the trust properties and other rights such as nominating a Director on the Board of the 1 st defendant-company under the Debenture Trustees Regulations. If default was committed in re-payment of the principal sum of the NCDs on the due date and if such default continued for seven working days and/or if defendant no.1 committed default in payment of interest on the NCDs on due dates and such default continued beyond seven working days, the debenture trustee was bound to act in the interest of the debenture holder.
8. It is the case of the plaintiff that as a result of events of such defaults in payment or if the rating agency CARE had downgraded ratings of the 1 st defendant's NCDs, the plaintiff could exercise an early redemption option and upon exercising such option, defendant no.1 was required to pay the principal sum, along with interest,due as on that date.
9. Mr. Chagla on behalf of the plaintiff submitted that, by the Debenture Trust Deed dated 18th September 2017, executed between the defendant no.1 and 2, the defendant no.1 created a mortgage and charge in favour of 5/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc defendant no.2 on a pari passu basis. A first charge was created on all present and future movable properties. The extent of the charge is reproduced in Schedule-3 of the Debenture Trust Deed dated 18 th September 2017, which is reproduced below for ease of reference. It is the contention of the plaintiff that under each of the debenture series, the defendant no.1 had committed defaults.
Date of Rate of
NCDs Groups Size of Issue
Subscription Interest
Plaintiff subscribed to 9.25%
130163 Series of NCDs. p.a.
19th Aug.2016
"A" Plaintiff subscribed to 9 9.10%
and
Public Issue Series of NCDs. p.a.
26th Feb.2018
Totally amounting to
Rs.13,01,72,000/-.
Plaintiff subscribed to
162000 Series of NCDs.
14th Sep.2016 Plaintiff subscribed to
"B" 9.05%
and 342000 Series of NCDs.
Public Issue p.a.
1st Feb.2018
Totally amounting to
Rs.13,01,72,000/-.
"C" Plaintiff subscribed to 1150
nd
Private 2 Aug.2017 NCDs of aggregate amount
Placement of Rs.115 crores.
6/25
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"D" Plaintiff subscribed to
Private 31st Aug.2018 10,000 NCDs of aggregate
Placement amount of Rs.1,000 crores.
10. On 27th February 2019, defendant no.1 issued a press release declaring that it would meet its payment obligations since there was a regular monthly inflow of Rs.2,000 crores from loan receivables. In the following month, CARE, vide its press release dated 6 th March 2019, downgraded credit ratings of Debentures Group "D" of Private Placement NCDs. This, according to Mr.Chagla, entitled the plaintiff to early redemption of the amounts invested.
The plaintiff exercised this right on 25 th March 2019. On 31st March 2019, there was a further downgrading of ratings by CARE of Debentures Group "C".
11. Between 16th April 2019 and 14th May 2019, the defendant no.1 redeemed and bought back NCDs of Debenture Group "D" of the face-value of Rs.750 crores. These were in response to a letter dated 25 th March 2019 of defendant no.3 to the plaintiff suggesting early redemption. In respect of the Debentures Groups "C" and "D", Private Placement Debentures, the plaintiff issued early redemption notices on 17 th May 2019.
12. As on that date, the total outstanding debt, with interest due to the plaintiff, was approximately Rs.397,88,22,896/-. On 23 rd May 2019, defendant no.1 failed to comply with the early redemption notice of 17 th May 7/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc 2019 and thus committed default. On 25 th May, 2019, defendant no.1 vide its e-mail agreed for early redemption in respect of Debentures Groups "C" and "D" NCDs and issued a cheque of Rs.200,00,00,000/-. This cheque was not honoured. On 17th June 2019, the defendant no.1 failed to honour the request for early redemption of the Debentures Groups "C" and "D", (Private Placement Debentures). On 16th July 2019, the plaintiff called upon the 2 nd defendant to issue an 'Event of Default' notice to defendant no.1 in respect of Debentures Groups "C" and "D" specifying the amount outstanding. On 19 th July 2019, defendant no.2 issued Event of Default notices to defendant no.1. According to the plaintiff, the floating charges in respect of these securities had crystallized on that date by virtue of the 1 st defendant's failure to comply. The defendant no.1 then failed to repay the debt in respect of Group "A" Debentures and an amount of Rs.1,20,40,078/- ,which had fallen due on 16 th August 2019. The defendant no.1 also failed to repay the debt in respect of Group "B" and an amount of Rs.20,74,87,036/- had fallen due on 9 th September 2019. The defendant no.1 thus failed to cure this default under Debentures Groups "A" and "D".
13. Meanwhile, defendant no.1 is said to have made the payment of Rs.150,00,00,000/- to one DSP Mutual Fund, of which Rs.75,00,00,000/- was reportedly paid on 7th September 2019 itself. This came to be known to the plaintiff by virtue of a press release issued by DSP Mutual Fund dated 9th September 2019. According to the plaintiff, DSP Mutual Fund was unsecured 8/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc creditor and a preferential payment has thus therefore be made, ignoring the dues of the secured creditors like the plaintiff. Failure to pay the outstanding debt by defendant no.1 continued. The event of default led the defendant no.2-Trustee to issue notice to defendant no.1. The last of such defaults was on 18th September 2019, when defendant no.1 failed to cure default in payment under Group "B" Debentures. As a result of these developments, the suit came to be filed seeking the reliefs as aforesaid.
14. On 30th September 2019, an ad-interim order came to be passed whereby defendant no.1 is temporarily injuncted and restrained from making further payments and/or disbursements to any unsecured creditors of the defendant no.1 and secured creditors of defendant no.1, except in cases where payments made on pro-rata basis to all secured creditors, including the plaintiff including out of its current and further receivables, in preference to the payments owed to the plaintiff, without the sanction of the court and further clarifying that payment of staff salaries and other costs, charges and office expenses is not prohibited. Pursuant thereto, an additional affidavit has been filed on 7th October 2019, in which the defendant no.1 disclosed having 132 bank accounts with balances cumulatively of Rs.589,86,39,112/- and fixed deposits of Rs.1194,33,41,833/-. The cash balance at their corporate office was cumulatively Rs.16,85,54,069/-.
15. Mr. Chagla contended that in view of the disclosure now made, a sum 9/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc of Rs.1801,05,35,013/- is available. According to the defendant no.1, Rs.1008 crores is held by defendant no.1 towards securitised loans and assets. Assuming that to be correct, that would leave a clear balance of Rs.793,05,35,013/- available. It is, therefore, submitted that sufficient balance is available and that if an ad-interim order is not confirmed, the defendant no.1 would continue to make preferential payments and deprive the secured creditors such as plaintiff and other mutual funds of their rightful dues. This, in my view, would enure to the benefits of the unsecured creditors, to whom the payments have been made, as demonstrated by the plaintiff's remittance made to DSP Mutual Fund. Mr. Chagla therefore sought continuation of the ad-interim order and also sought declaration of personal assets of defendant no.3, who is the Managing Director of the 1 st defendant.
16. On behalf of defendant no.1, the application was opposed by Mr.Kadam, who submitted that there is no substance in the allegations made. He submitted that there is no dispute as to the liability of defendant no.1 to pay the amounts due on the suit debentures; however, owing to various operational reasons, it had become necessary to avail of a restructuring option under the auspices of the RBI's framework for resolution of stressed assets. He submitted that the reliefs sought were in the nature of an attachment before judgment under Order XXXVIII of the Code but one the primary preconditions for making such an application viz averments that the defendant is trying to defeat creditors claims was absent because the 10/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc payments being made were to creditors. He therefore submitted that the plaintiff had failed to make out a case for relief.
17. Mr. Kadam submitted that on 7th June 2019, the RBI has issued directions under what is known as "Prudential Framework for Resolution of Stressed Assets". Under this framework, an Inter Creditor Agreement (ICA) referred to above has been entered into between various lenders and defendant no.1. The plaintiff among other mutual funds had the option of joining the ICA, but the plaintiff has chosen not to do so. Mr. Kadam submitted that if the plaintiff joins the ICA and participates in the Restructuring Plan, the plaintiff's dues would be adequately protected. He submitted that the defendant no.2-the debenture trustee had also supported the restructuring plan and by process of e-voting, 75% of the lenders had agreed to join the ICA. He relied upon the Debenture Trust Deed dated 23 rd November 2018 and invited my attention to the clauses 22 and 23 thereof. Clause 22 provides for power exercisable by special resolution and without prejudice to any of the powers conferred upon the trustee. The trustee can call for a meeting of debenture-holders and sanction any modification of rights of the debenture-holders against the 1 st defendant or the property of defendant no.1; whether such rights arose under a Trust Deed or otherwise. Clause 23, provides that a special resolution passed by the 2 nd defendant pursuant to clause 22 would bind all debenture-holders which shall not be subject to appeal. By virtue of the said clauses of Debenture Trust Deed, 11/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc Mr.Kadam submitted that it was for defendant no.2 to take appropriate action in accordance therewith. Mr.Kadam submitted that it is entitled for the defendant no.2 to decide the manner in which rights of debenture-trustee should be exercised.
18. Mr. Chagla, however, submitted that this issue would not arise since no notice of such a meeting was ever given to the plaintiff, in order to enable the plaintiff to appreciate the proposed Resolution Plan to be adopted by the defendant no.2 apropos the rights of the debenture-holders. In this respect, Ms.Hombalkar appearing on behalf of defendant no.2, submitted that the Debenture Trust Deed had been amended pursuant to the powers exercised by Securities and Exchange Board of India (SEBI) under Section 30 of the Act, whereby the meeting could be called by a Body Corporate by a requisition in writing of at-least 1/10th of the debenture-holders and under Regulation 15(2), the Debenture Trustee was empowered to deal with and that there was no impediment in the rights of the debenture-holders being so modified.
19. Mr. Kadam then submitted that it is the debenture-trustee alone, who can take action and the present suit is not maintainable. He further submitted that even under the SEBI circular, which the plaintiff seeks to rely upon, the plaintiff was bound to carry out a process, a segregation, which in effect was not done. He refuted the plaintiff's contention that the communication from SEBI dated 29th August, 2019, (Exhibit-DD to the plaint), gives an option to 12/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc the AMC to participate in the ICA, which would entitle the plaintiff to maintain independent proceedings. Mr. Chagla also contended that SEBI had vide its letter dated 29th August 2019 clarified that it was optional for AMCs of mutual funds to participate in the ICA or give consent to the debenture trustee to sign on their behalf. However, participation of AMCs was subject to segregation of portfolio, which Mr. Kadam submitted had not been carried out. According to Mr. Chagla, signing of the ICA and agreeing to a Resolution Plan should be in the best interest of the investors and in compliance with the SEBI Mutual Fund Regulations. He submitted that the AMCs to participate subject to approval of their Boards and if the Resolution Plan seeks to impose upon the AMCs the conditions, which are not in accordance with the SEBI's Mutual Fund Regulations, the AMCs would be free to exit the ICA altogether. It was further contended on behalf of Mr. Chagla that the AMC will have to evaluate / establish in the best interest of the unit holders and whether or not to participate in the ICA.
20. Mr. Kadam contended that the SEBI's instructions notwithstanding the plaintiff have not segregated their portfolio and hence for the reasons unknown had decided against participating in the ICA. It is in this manner that defendant no.1 sought to contend that as far as the NCDs for 250 crores are concerned, it is already covered by the actions proposed to be taken by the debenture trustee and the plaintiff is not entitled to seek relief in an independent suit. Mr. Kadam also relied upon the contents of the Debenture 13/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc Trust Deed and submitted that once an AMC like the plaintiff had submitted to the debenture trustee and agreed to be bound by the Debenture Trust Deed, they were bound by the actions of the debenture trustee. The defendant no.2 is also empowered to seek enforcement of the rights of the debenture-holders and not individual funds. He highlighted the trustee's obligations by making a reference to the provisions of the Debenture Trust Deed. Mr. Kadam further submitted that it is not desirable that each mutual fund independently claims in suits and suits that may be filed by AMCs would be barred by virtue of the obligation of the debenture-trustee, who alone could decide on the proceedings to be adopted. He submitted that there is a particular cut-off date that has been specified under the Resolution Plan and pursuant to the cut-off date, no further payments could be made, except under the ICA and subject to Core Committee's recommendation. According to Mr. Kadam, the participants of ICA together hold a stake of Rs.39,000 crores on behalf of the beneficiaries out of a total debt of Rs.84,000 crores. He, therefore, submitted that more and more lenders and institutions are joining and adopting the Resolution Plan. On a query from the court, Mr. Kadam fairly submitted that Resolution Plan is in its draft form and awaiting finalization. That being so, it was obvious that the Resolution Plan is yet to be made operational. Mr. Kadam further submitted that the payments being made were to public depositors, who would have to be paid amounts in accordance with defendant no.1's obligations to depositors as a housing finance company. The defendant no.1 14/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc was bound to honour such commitments, as evident from the letter dated 14 th August 2019 (Exhibit-G to the affidavit-in-reply dated 3 rd October 2019), whereby the National Housing Bank had instructed the defendant nos.1 and 3 that repayment of public deposits would have to gain priority and that stoppage of payment of public deposits would be detrimental to the Resolution Plan of defendant no.1. The National Housing Bank had advised defendant no.1 not to stop or delay repayment of public deposits on maturity and repay public deposits in cases of death and critical illnesses, as provided in the National Housing Bank Regulations. Failure to do so would be detrimental to the Resolution Plan itself. Furthermore, Mr. Kadam submitted that under Section 29A(6) of the NHB Act, the NHB may cancel the registration granted to a housing financial institution, which is not in a position to pay its present or future depositors in full, as and when their claims accrue.
21. Mr. Kadam therefore submitted that the plaintiff could not be paid in priority, ignoring the claims of public deposits and that any order passed by this court preventing public deposits would be detrimental to the defendant no.1 and would risk the licence of defendant no.1 being cancelled. Mr. Kadam further submitted that RBI's stressed assets solution was a comprehensive restructuring plan and various third parties were likely to be affected. The lead bank under the ICA was, therefore, a necessary party to the suit and without hearing all these lenders, no orders may be passed. For this reason 15/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc also, he submitted that the suit is not maintainable. According to defendant no.1, only defendant no.2 can adopt the proceedings for recovery of the dues of all the NCD holders before the Debt Recovery Tribunal. The plaintiff however is seeking benefit only for itself and it is not possible to accede to the request made by the plaintiff.
22. In this respect, Mr.Chagla on behalf of the plaintiff refuted the contention of the defendant no.1 that the plaintiff must also join along with the other lenders and agree with the ICA. He submitted that on the 1 st defendant's own showing a total outstanding was Rs.84,000 crores approximately, whereas total amount owing to the present signatories to the ICA was only Rs.39,000 crores. Clearly, a majority has not favoured implementation of the provisions of the ICA. He relied upon the SEBI Circular dated 29th August 2019, in particular clause 2 thereof, which clearly provides that consent contemplated would have to be voluntary and is not mandatory for the mutual funds to join in the Resolution Plan. He further submitted that since no meeting was convened by the debenture-trustee, there is no question of participation. He reiterated the fact that the payments made by defendant no.1 to DSP Mutual Fund, who was a unsecured creditor, is not disputed. Specific reference has been made to the said payment and even across the bar, it was clearly submitted that the DSP Mutual Fund had issued a press release, which confirmed payment of a sum of Rs.75 crores on 7 th September 2019. He further submitted that a sum of Rs.1008 crores were actually receivables 16/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc secured in favour of the mutual funds under the pari passu charge and that this amount was now being utilized to borrow funds. The security of the debenture-holders, including the plaintiff, had been utilized by defendant no.1 to borrow further amounts thereon, to the detriment of the secured debenture-holders.
23. Mr. Kadam further submitted that out of the total sum of Rs.1008 crores, which had been disclosed as funds presently available with the defendant no.1, Rs.1008 crores represented amounts that were merely collected on behalf of other lenders, to whom the loans had been "sold". This he submitted was not money belonging to the defendant no.1, but in fact owing to various banks and the defendant no.1 was only collecting these amounts.
24. On behalf of defendant no.2, it was contended that it had no role to play except to enforce the obligations of defendant no.1 under the Debenture Trust Deed. Although in the affidavit-in-reply, the defendant no.2 has questioned the maintainability of the suit on the basis that it was for the debenture-trustee to take appropriate actions and that it has taken steps to pursue legal remedies. On a query from the court as to what steps had been taken, the learned counsel for defendant no.2 submitted that it is in the process of finalizing a claim to be filed in the Debt Recovery Tribunal, which it will be filing in the coming days. Specific reference has been made by 17/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc defendant no.2 to the provisions of the Debenture Trust Deed and that appropriate legal action is being taken and that there was no need for the plaintiff to file the present suit.
25. I have heard learned counsel for the parties at length and I am of the prima facie view that the protection granted to the plaintiff must continue to operate, as above, to enure to the benefit of all the mutual funds/subscriber of NCDs and not merely for the parties to the ICA. The plaintiff's case has not been disputed as far as facts are concerned. The defendant no.1 has also not challenged the right of the plaintiff to avail of the early redemption option. In fact, early redemption does have the blessings of defendant no.2 as well. Mr.Kadam's contention that the RBI's framework was comprehensive may be correct; however, what it does provide is for restructuring of all liabilities. All liabilities may, therefore, contemplate amounts owing to the plaintiff as well, but what the Resolution Plan contemplates is (a) conversion of debt to equity for all permissible classes of creditors; (b) issuance of secured, listed and unsecured, unlisted non-convertible debentures to all classes of creditors and;
(c) restructuring of the terms of the term loans, external commercial borrowings (including masala bonds) and public deposits and as seen from Exhibit "B" to the affidavit of Amol Walawalkar in reply on behalf of the defendant no.1. Thus the Resolution plan offers no respite in the short run. Reference to paragraph 10 of the affidavit-in-reply dated 3 rd October 2019 reveals that defendant no.1 in its capacity as a housing finance company has 18/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc exposure of about Rs.84,000 crores by way of borrowings. Of these, Rs.74,000 crores is due to secured creditors and approximately Rs.10,000 crores is due to unsecured creditors, which includes public deposits.
26. Thus, it is evident that a bulk, almost 90%, of the amounts borrowed are from secured creditors and that security is bound to be protected. Defendant no.1 claims to have "sold" loans and securitized certain receivables with banks and institutions in order to avail of advances against them and in this manner that defendant no.1 has contended that the sum of Rs.1008 crores does not belong to defendant no.1, but, in fact, is money collected on behalf of the banks, with whom it had entered into securitization agreements. Prima facie, I am of the view that the plaintiff has made out a case that the very securities, over which a pari passu charge has been extended in favour of mutual funds and other secured creditors/NCD subscribers, appears to have been utilized by defendant no.1 to garner further loans by availing of these securitization option. Although it is the 1 st defendant's case that it is subject to multiple regulators such as Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Provident Fund Regulatory and Development Authority and Reserve Bank of India, it is not known on what basis such securities, on which the pari passu charge had been offered and acted upon, could have been further "sold" over to the banks and the institutions in order to avail of securitization advances. This may not have been contemplated by terms of the public issues or private placement 19/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc Debenture Trust Deed. If it was not contemplated, the defendant no.1 and the banks participating in the securitization of receivables already subjected to a charge may have some tough questions to answer.
27. The exposure of lenders, who have joined the ICA, is about Rs.39,000 crores and the argument that the orders passed in the suit would adversely affect those lenders, is no reason to deny relief in the present suit. It is true that defendant no.2 is empowered to take up claims on behalf of the debenture-holders, including the plaintiff, but merely to contend that it proposes to take action will not be of any assistance to the class of the debenture-holders. No concrete action seems to have been taken by defendant no.2 till date. One would have expected a trustee to act in a spirited manner. However, in view of the statement made today across the bar as appropriate action is being taken in the next few days, the benefit of doubt will have to be given to defendant no.2. However, that having been said, the affidavit-in- reply of defendant no.2 to the notice of motion makes interested reading. While on the face of it, the defendant no.2 seems to suggest that the suit is not maintainable. It admits, in terms, that the secured debentures issued by Public Issues and Private Placement, (which would cover all four groups of the plaintiff's investments), were secured by present and future receivables of the defendant no.1 on pari passu basis with other lenders viz. consortium member banks, lenders of external commercial borrowing made by defendant no.1 and refinance from National Housing Bank. It is specified in the 20/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc Debenture Trust Deed that the receivables have been defined and shall mean and include all and any of the receivables, monies, cash flows and proceeds accruing to the company of any nature or arising out of the movable assets of the company, amounts owing to and received and/or receivable by the Issuer and/or any person on its behalf, all book debts, present or future, arising from/in connection with the business related to or in connection with the movable assets of the Issuer, both present and future, including installments, amounts receivable legal charges, license fees or upfront payments or any monies received by the company.
28. In view of the aforesaid averments in the affidavit on behalf of defendant no.2, it is obvious that even the amounts of Rs.1008 crores, which the defendant no.1 now claims to be owing to other lenders, would have formed part of the receivables inasmuch as the power of defendant no.1 to have "sold these securities, the receivables with other lenders" appears to be dubious method. The affidavit goes on to confirm the plaintiff's issue of debentures as pleaded in the plaint amount to Rs.479.21 crores and that out of the original subscription of Rs.1,000 crores, Rs.750 crores had been received by the plaintiff as accelerated payments. The deponent has confirmed that defendant no.1 has committed defaults in payment of principal and interest in respect of the privately placed debentures and ones publicly placed. The deponent also confirmed that defendant no.1 has been granted credit facilities by other banks as well. Reference is made to the 21/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc Resolution Plan and the fact that defendant no.2 had requested debenture- holders to examine the proposed Resolution Plan in the light of "present status" of defendant no.1 vis-a-vis the options available and, if acceptable, to consent in a attached format. Defendant no.2 has made clear that it is not obligatory for any debenture-holder to accede to the ICA.
29. In other words, the defaults by defendant no.1 stand confirmed by defendant no.2 as well. Although the defendant no.1 has sought to rely heavily on the rights vesting in defendant no.2, prima facie, it appears that defendant no.2 has been slow to act in a matter of securing interest of the debenture-holders. Defendant no.2 has questioned the right of the plaintiff to file the suit and has taken technical defences such as non-joinder of the lead bank in the suit, in paragraph 15 of the affidavit-in-reply dated 3 rd October 2019, the defendant no.2 contended that the notice of motion is premature since it is once again attempting to seek a mandate from the debenture- holders on the Resolution Plan finalized by the Core Committee and that the plaintiff has every opportunity to examine the Resolution Plan along with the other debenture holders. In paragraph 17 of the said affidavit, the defendant no.2 has clearly stated that it has already advised defendant nos.1 and 3 to stop securitization of receivables and stop making payments to unsecured creditors, including fixed deposit holders, and to some secured creditors at the cost of secured debenture-holders, "considering the present state of affairs". 22/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 :::
NMCDL-2320-19.doc The defendant no.1 was apparently advised to disclose the payments made so far.
30. It is, therefore, clear that defendant no.2 supports grant of reliefs to the plaintiff in terms of prayer clauses (b) and (e) to the notice of motion against defendant nos.1 and 3. As far as the relief against defendant no.3 is concerned, although Mr. Chagla contended that there is a prayer, Mr. Kadam has pointed out that the plaint contains no averment as to the liability of defendant no.3. Defendant no.3 is not sued in his capacity as a 'guarantor' and as no case whatsoever is made out against defendant no.3, I am inclined to agree that in the absence of any specific pleadings, the plaintiff has not made out any case in this suit for seeking reliefs against defendant no.3 personally and to that extent, Mr. Kadam's contention that no case has been made out under Order XXXVIII of the Code and that the balance of convenience favour refusal of relief does not commend itself to me in the facts of the case. However, in the light of what has been discussed, the fact that a cheque for Rs.200 crores was issued and which was dishonoured despite having more than Rs.595 crores in the bank indicates that the cheque was deliberately issued from an account which did not have sufficient funds. The fact that defendant no.1 has 132 bank accounts yet chose one without the requisite funds is a telling factor.
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31. In view of the aforesaid discussion, I am of the view that the applicant- plaintiff has made out a prima facie case for grant of relief and I pass the following order :-
(i) The ad-interim order granted on 30th September 2019 in terms of prayer clause (c) shall continue to operate till disposal of the motion. Prayer (c ) is reproduced below of ease of reference.
"That pending the hearing and final disposal of the underlying suit, the defendant no.1 be temporarily injuncted and restrained from making further payments and/or disbursements to any unsecured creditors of the defendant no.1 and secured creditors of defendant no.1, except in cases where payments made on pro-rata basis to all secured creditors, including the plaintiff, out of its current and future receivables, in preference to the payments owed to the plaintiff, without the sanction of this Hon'ble Court."
(ii) It is clarified that defendant no.2 may exercise its rights to pursue all legal remedies that it may have and the 24/25 ::: Uploaded on - 11/10/2019 ::: Downloaded on - 12/10/2019 00:19:20 ::: NMCDL-2320-19.doc pendency of the suit will not restrict with their rights to adopt suitable proceedings, as they may be advised.
(iii) Liberty to apply for further relief, if so advised.
(iv) S.O. per CMIS.
(A.K. MENON, J.)
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