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

p. 47 Copy page pinpoint

NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]

and Exchange Board of India Act, 1992 and the rules, regulations A and circulars issued thereunder from time to time, then the Debenture Trustee(s) shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA. Under these circumstances, the resolution plan shall not be binding on the Debenture Trustee(s). B 7.3. The resolution plan shall be finalized within 180 days from the end of the review period. If the resolution plan is not finalized within 180 days from the end of the review period, then the Debenture Trustee(s) shall be free to exit the ICA altogether with the same rights as if it had never signed the ICA and the resolution plan shall not be binding on the ·Debenture Trustee(s). C However, if the finalization of the resolution plan extends beyond 180 days, the Debenture Trustee(s) may consent to an extension beyond 180 days subject to the approval of the investors regarding the total timeline. The total timeline shall not exceed 365 days from the date of commencement of the review period. D 7.4. If any of the terms of the approved Resolution Plan are contravened by any of the signatories to the ICA, the Debenture Trustee(s) shall be free to exit the ICA and seek appropriate legal recourse or any other action as deemed fit in the interest of the investors.” E (emphasis supplied) Hence, 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. F 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 G holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented.

75Copy pinpoint75. The purpose of the SEBI Circular is multi-fold – not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause H

48 SUPREME COURT REPORTS [2022] 15 S.C.R.

A 6.6). If RCFL’s argument was to be accepted, both these protections would fail. In the absence of Clause 7, debenture trustees would likely be unable to exit the ICA or the Resolution Plan even if they were not “in the interest of investors”22 or if the Resolution Plan was not finalized within 180 days from the end of the review period. 23 It is indubitable that tremendous hardship would be caused to the debenture holders in both B these situations. Significantly, the absence of Clause 6.6 could mean that dissenting debenture holders would be bound by decisions taken even by way of a simple majority. While Clause 23 of the Fifth Schedule to the Debenture Trust Deed(s) in this case provides for a majority of 75%, other Debenture Trust Deed(s) could provide for a simple majority. C Dissenting debenture holders would then be unable to avail of the protection provided to them by the SEBI Circular.

76Copy pinpoint76. We agree that the language in Regulation 15(7) of the 1993 Regulations and the SEBI Circular is facilitative and not mandatory. This is in recognition of the fact that debenture holders may opt to exercise D their rights through mechanisms other than the execution of a Resolution Plan. The language cannot be construed to be facilitative in the sense of providing debenture holders with the option of by-passing the modalities prescribed by the SEBI Circular while accepting a Resolution Plan. The ICA continues to be the foundation or mother document for the Resolution Plan. E iii. Dissenting ISIN level debenture holders are bound by the ICA / Resolution Plan

77Copy pinpoint77. Clause 6.6 of the SEBI Circular inter alia requires the “approval of not less than 60% of the investors by number at the ISIN F level” for entering into an ICA. RCFL has argued that the ISIN level voting could potentially frustrate a Resolution Plan. The concern is that a single debenture holder who holds an entire ISIN (or more than one ISIN) can prevent the creditors from arriving at an ICA / a Resolution Plan, especially in the absence of a provision for their “exit” from this process. In response, SEBI has argued that the issuer company can G “adjust” the size of the security by proportionally reducing it and releasing it to the extent that debenture holders agree to the ICA / Resolution Plan. Both these arguments miss the crux of the matter.

p. 49 Copy page pinpoint

NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]

78Copy pinpoint78. Dissenting creditors do not have the option of “exiting” the compromise or arrangement arrived at in terms of Section 230 Companies Act.24 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.

79Copy pinpoint79. The argument that the SEBI Circular is not applicable because a single debenture holder will be able to frustrate the Resolution Plan is a consequential one. The applicability of a circular cannot be determined on the basis of such a concern. We need not comment upon this aspect in the absence of a challenge to the SEBI Circular. We also note that it is open to the relevant stakeholders to approach SEBI with any concerns, commercial or otherwise, and request an amendment to the SEBI Circular. SEBI as a statutory regulator can always look at such concerns and has the power to factor them in if it deems fit to do so in public interest and for the orderly functioning of the securities’ market. iv. The SEBI Circular has retroactive application

80Copy pinpoint80. Mr. N Venkataraman, learned senior counsel and Additional Solicitor General has argued that the SEBI Circular is retroactive in nature as it does not take away or impair any vested rights. It operates in the future, based on events that arose prior to its issuance. Mr. Darius Khambata, learned senior counsel appearing for RCFL argued that the effect of applying the SEBI Circular to the present case will render it retrospective and not retroactive. According to him, Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) vested debenture holders with the right to authorize debenture trustees “to sanction any compromise or arrangement proposed to be made between the company and the beneficial owner(s) / debenture holder(s)”. This sanction could be authorized by a majority of “not less than three-fourths of the persons voting … or if a poll is demanded … not less than three-fourths in value of the votes cast on such poll”. The SEBI Circular, it has been urged, changed the nature of the special majority required to sanction a 24 The NCLT will look into the overall fairness of the compromise or arrangement under Section 230 Companies Act. 25 The RBI Circular states that the ICA may provide for the protection of dissenting lenders. H

50 SUPREME COURT REPORTS [2022] 15 S.C.R.

A compromise by introducing the requirement of a majority of 60% of ISIN level votes.

81Copy pinpoint81. We are of the opinion that the SEBI Circular has retroactive application. In Principles of Statutory Interpretation by Justice G.P. Singh (14th edition, 2016 at page 583), it is stated that: B “The rule against retrospective construction is not applicable to a statute merely because “a part of the requisites for its action is drawn from a time antecedent to its passing”. If that were not so, every statute will be presumed to apply only to persons born and things which come into existence C after its operation and the rule may well result in virtual nullification of most of the statutes.” (emphasis supplied) 26

82Copy pinpoint82. In Vineeta Sharma v. Rakesh Sharma, this Court described the nature of prospective, retrospective, and retroactive laws: D “61. The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, E its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events.”

83Copy pinpoint83. The terms ‘retrospective’ and ‘retroactive’ are often used interchangeably. However, their meanings are distinct. This Court F succinctly appreciated the difference between these concepts in State Bank’s Staff Union (Madras Circle) v. Union of India:27 “‘Retroactivity’ is a term often used by lawyers but rarely defined. On analysis it soon becomes apparent, moreover, that it is used to cover at least two distinct concepts. The first, which may be called G ‘true retroactivity’, consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as ‘quasi-retroactivity’, occurs when a new rule of law is applied to 26 2020 (9) SCC 1 27 (2005) 7 SCC 584 H

p. 51 Copy page pinpoint

NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]

an act or transaction in the process of completion....The foundation of these concepts is the distinction between completed and pending transactions....” (T.C. Hartley, The Foundations of European Community Law 129 (1981)” Many decisions of this Court define ‘retroactivity’ to mean laws which destroy or impair vested rights. In real terms, this is the definition of ‘retrospectivity’ or ‘true retroactivity’. ‘Quasi-retroactivity’ or simply ‘retroactivity’ on the other hand is a law which is applicable to an act or transaction that is still underway. Such an act or transaction has not been completed and is in the process of completion. Retroactive laws also apply where the status or character of a thing or situation arose prior to the passage of the law. Merely because a law operates on certain circumstances which are antecedent to its passing does not mean that it is retrospective.

84Copy pinpoint84. 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 E 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.

85Copy pinpoint85. Even assuming that debenture holders were vested with the right to sanction a compromise or arrangement in terms of the special majority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed, they were divested of such a right upon the issuance of the SEBI Circular. Clause 59 of the Debenture Trust Deed stipulates that any provision in the Debenture Trust Deed which is in conflict with the 1993 Regulations is null and void. In so doing, it lays down a trigger for the divestment of rights under the Debenture Trust Deed. A contractually vested right may be taken away by the operation of a statutory instrument. A fortiori, in the present case, the SEBI Circular owes its existence to statutory powers conferred by a special legislation enacted with a view to protect the interests of investors and to ensure the stable and orderly growth and development of the market for securities. H

52 SUPREME COURT REPORTS [2022] 15 S.C.R.

86Copy pinpoint86. The SEBI Circular was issued partly in exercise of the powers under the 1993 Regulations.28 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 B 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. v. Exercise of this Court’s power under Article 142 of the Constitution C

87Copy pinpoint87. Under the present scheme of the Resolution Plan, retail debenture holders having an exposure of up to INR 10 lakhs would stand to realize 100% of their principal dues. The secured retail debenture holders having an exposure of more than INR 10 lakhs would realize 29.69%. The table showing the distribution is extracted below: D

88Copy pinpoint88. The above table highlights that small investors, especially those whose exposure is up to INR 10 lakhs, are benefiting to the extent of G 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

28 H Clause 9, SEBI Circular

p. 53 Copy page pinpoint

NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]

holders. It is also important to highlight that none of the debenture holders A 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. B

89Copy pinpoint89. 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. 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 C negotiated settlement before the High Court.

90Copy pinpoint90. 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. D

91Copy pinpoint91. In its decision in State v. Kalyan Singh29 this Court observed that the jurisdiction under Article 142 can be used to relax the rigors of law depending upon the peculiar facts and circumstances. It was observed: “22. […] This article gives a very wide power to do complete justice to the parties before the Court, a power which exists in the E Supreme Court because the judgment delivered by it will finally end the litigation between the parties. It is important to notice that Article 142 follows upon Article 141 of the Constitution, in which it is stated that the law declared by the Supreme Court shall be binding on all courts within the territory of India. Thus, every judgment delivered by the Supreme Court has two components F — the law declared which binds courts in future litigation between persons, and the doing of complete justice in any cause or matter which is pending before it. It is, in fact, an Article that turns one of the maxims of equity on its head, namely, that equity follows the law. By Article 142, as has been held in State of Punjab [State of G Punjab v. Rafiq Masih, (2014) 8 SCC 883: (2014) 4 SCC (Civ) 657: (2014) 6 SCC (Cri) 154: (2014) 3 SCC (L&S) 134] judgment, equity has been given precedence over law. But it is not the kind of equity which can disregard mandatory substantive 29 (2017) 7 SCC 444 H

54 SUPREME COURT REPORTS [2022] 15 S.C.R.

A provisions of law when the court issues directions under Article 142. While moulding relief, the court can go to the extent of relaxing the application of law to the parties or exempting altogether the parties from the rigours of the law in view of the peculiar facts and circumstances of the case. This being so, it is clear that this Court has the power, B nay, the duty to do complete justice in a case when found necessary. […]” (emphasis supplied)

92Copy pinpoint92. In Laxmidas Morarji v. Behrose Darab Madan30, a three- C judge bench of this Court held that the use of powers under Article 142 should be based on equitable principles in situations where the provisions of law cannot do complete justice. It was observed: “25. Article 142 being in the nature of a residuary power based on equitable principles, the Courts have thought it advisable to leave the powers under the article undefined. The power under Article 142 of the Constitution is a constitutional power and hence, not restricted by statutory enactments. Though the Supreme Court would not pass any order under Article 142 of the Constitution which would amount to supplanting substantive law applicable or ignoring express statutory provisions dealing with the subject, at the same time these constitutional powers cannot in any way, be controlled by any statutory provisions. However, it is to be made clear that this power cannot be used to supplant the law applicable to the case. This means that acting under Article 142, the Supreme Court cannot pass an order or grant relief which is totally inconsistent or goes against the substantive or statutory enactments pertaining to the case. The power is to be used sparingly in cases which cannot be effectively and appropriately tackled by the existing provisions of law or when the existing provisions of law cannot bring about complete justice between the parties.” G (emphasis supplied)

93Copy pinpoint93. The compromise presently arrived at, which is in the interests of all the parties, will be disturbed if a new process is directed to be commenced in accordance with the SEBI Circular at the present stage. 30 H (2009) 10 SCC 425

p. 55 Copy page pinpoint

NAGPAL [DR. DHANANJAYA Y CHANDRACHUD, J.]

94Copy pinpoint94. Pertinently, the SEBI Circular only contemplates two situations where ISIN-wise voting is mandated: (i) non-enforcement 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. We would like to reiterate that this Court is issuing the directions to mould the relief under Article C 142 in view of the peculiar facts and circumstances of the present case noted above. vi. Dissenting debenture holders in the present case

95Copy pinpoint95. As stated in the above sections, after 13 October 2020, there are two mechanisms in situations where a compromise or resolution is D sought: a. A compromise under the SEBI Circular, which lies outside the process of the NCLT, to restructure the debt, binding both dissenting and abstaining debenture holders; E b. A compromise under Section 230 of the Companies Act by approaching the NCLT, binding dissenting/abstaining debenture holders.

96Copy pinpoint96. It is clear that a compromise arrived under the SEBI Circular or Section 230 of the Companies Act effectively assimilates the rights of the dissenting creditors. The SEBI Circular adopts a higher voting threshold of 60% by number and 75% to bind dissenting/ abstaining debenture holders.

97Copy pinpoint97. SEBI submits that debenture holders are entitled to full outstanding amounts due (principal plus interest) if their debt cannot be resolved under the compromise/ resolution mechanism. However, it has been argued that the compromised arrived at in terms of the direction of the Division Bench will also bind all the other debenture holders, who were not a party to the original suit before the High Court. This will prejudice the dissenting debenture holders as they have to settle for a lesser amount – 24.96% of the principal among with a further 5% of the H

56 SUPREME COURT REPORTS [2022] 15 S.C.R.

A principal outstanding. We agree with SEBI’s submission that the compromise arrived at the Debenture Trust Deed level among the consenting debenture holders should not bind the dissenting debenture holders.

98Copy pinpoint98. The dissenting debenture holders would have been bound by the Resolution Plan if it had been approved in accordance with the Insolvency and Bankruptcy Code, 2016 or under an ICA as acceded to under the SEBI Circular. We accordingly deem it appropriate that dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan. Alternatively, the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender’s ICA and pursue other legal means to recover their entitled dues.

99Copy pinpoint99. For the reasons indicated in the text of the judgment, we accept the submissions which have been urged by SEBI and disapprove of the interpretation placed by the Division Bench of the Bombay High Court D on the SEBI Circular. The appeal is allowed in part, subject to the directions issued above under Article 142 of the Constitution.

100Copy pinpoint100. Pending applications, if any, stand disposed of.

E Ankit Gyan Appeal partly allowed. (Assisted by : Rakhi, LCRA)