Supreme Court Approves Resolution Plan for Reliance Home Finance Limited, Protecting Small Debenture Holders

Date of the Judgment: March 3, 2023

Citation: 2023 INSC 175

Judges: B.R. Gavai, J. and Aravind Kumar, J.

Can a resolution plan be approved for a company facing financial difficulties, even if it doesn’t strictly adhere to all regulatory requirements? The Supreme Court recently addressed this question in a case involving Reliance Home Finance Limited (RHFL). The court considered the interests of small debenture holders and the need for a swift resolution. The judgment was delivered by a two-judge bench comprising Justices B.R. Gavai and Aravind Kumar.

Case Background

Reliance Home Finance Limited (RHFL) faced significant financial challenges, having defaulted on loan obligations to various lenders, with an outstanding debt of around Rs. 11,540 crore by May 2019. RHFL had issued debentures with a face value of Rs. 5 lakhs each on August 30, 2018. A consortium of lenders, led by Bank of Baroda, entered into an Inter-Creditor Agreement (ICA) in July 2019 to resolve the stressed assets, as per the Reserve Bank of India (RBI) guidelines. RHFL defaulted on its debenture obligations on August 26, 2019. IDBI Trusteeship Services Ltd. filed a petition before the National Company Law Tribunal (NCLT) in January 2020, seeking repayment of Rs. 2,850 crore with interest to the debenture holders. Authum Investment and Infrastructure Limited (AIIL) submitted a Resolution Plan (RP) for RHFL on June 19, 2021, which was approved by 96% of the ICA lenders. This RP proposed that 19,353 small debenture holders, with exposures up to Rs. 5 lakhs, would receive 100% of their principal dues. The Securities and Exchange Board of India (SEBI) required that debenture holders’ consent be taken as per a SEBI circular dated October 13, 2020 which prescribed that at least 75% of investors by value and 60% by number at ISIN level must approve the RP. A commercial suit was filed in the High Court of Bombay to conduct voting on the RP. The voting took place on May 13, 2022, with 94.55% of participating debenture holders voting in favor of the RP. RHFL filed an application seeking approval of the RP, citing the Supreme Court’s decision in a similar case involving its sister concern, Reliance Commercial Finance Limited (RCFL). The High Court dismissed the application, stating it could not exercise powers similar to the Supreme Court under Article 142 of the Constitution of India. AIIL and RHFL then appealed to the Supreme Court.

Timeline

Course of Proceedings

The High Court of Bombay initially directed a meeting of debenture holders to vote on the Resolution Plan (RP). After the voting, the High Court allowed the disclosure of the voting results. Subsequently, RHFL sought approval of the RP, citing a similar case involving its sister concern, RCFL, where the Supreme Court had approved a similar RP under Article 142 of the Constitution of India. However, the High Court dismissed RHFL’s application, stating that it could not exercise similar powers under Section 151 of the Civil Procedure Code, 1908 (CPC). The High Court held that the power to mould relief and approve the RP, as had been done by the Supreme Court under Article 142 of the Constitution of India in the case of Rajkumar Nagpal (supra) could not be done by the High Court in exercise of its inherent powers under Section 151 of the CPC. Aggrieved by this decision, AIIL and RHFL appealed to the Supreme Court.

Legal Framework

The case primarily involves the application of the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 (RBI Circular), which allows lenders to enter into an Inter-Creditor Agreement (ICA) for implementing a Resolution Plan (RP). The Securities and Exchange Board of India (SEBI) Circular dated 13th October 2020, titled ‘Standardisation of procedure to be followed by Debenture Trustee(s) in case of ‘Default’ by Issuers of listed debt securities’, also plays a crucial role. This circular prescribes that the voting by debenture holders, before entering into an ICA, shall mean an approval of not less than 75% of investors by value and 60% by number at ISIN level. The case also involves Section 151 of the Civil Procedure Code, 1908 (CPC), which deals with the inherent powers of the court, and Article 142 of the Constitution of India, which grants the Supreme Court the power to pass any order necessary for doing complete justice.

Arguments

Arguments on behalf of the Appellants (Authum Investment and Infrastructure Limited and Reliance Home Finance Limited):

• The Resolution Plan (RP) for RHFL is beneficial to the debenture holders, especially those with an exposure of up to Rs. 5 lakhs, who would receive 100% of their principal amount.
• The RP was approved by 96% of the ICA lenders.
• If the RP is not accepted, RHFL would be driven into liquidation, which would be detrimental to the interests of the debenture holders.
• The facts in the present case are identical to the facts in the case of Securities and Exchange Board of India v. Rajkumar Nagpal and Others [2022 SCC Online SC 1119], where the Supreme Court approved a similar RP under Article 142 of the Constitution of India.

Arguments on behalf of the Respondents (SEBI):

• There are three categories of debenture holders: those who accepted the RP, those who dissented, and those who abstained from voting.
• The option to opt out of the RP should be given to both the dissenting debenture holders and those who abstained from voting.
• The claims of many debenture holders are pending before the National Company Law Appellate Tribunal (NCLAT), and accepting the RP would prejudicially affect their rights.
• The SEBI Circular requires that there has to be a negative consent or positive consent.
• As per the SEBI Circular, the consent of a majority of investors would mean an approval of not less than 75% of investors by value of outstanding debt and 60% of investors by number at the ISIN level.
• The condition regarding approval of 60% of investors by ISIN level is not satisfied in the present case.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was whether the Resolution Plan (RP) for RHFL should be approved, considering the interests of the debenture holders and the fact that the voting process did not strictly adhere to the SEBI Circular. A sub-issue was whether the High Court could exercise powers similar to the Supreme Court under Article 142 of the Constitution of India to approve the RP.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court:

• Securities and Exchange Board of India v. Rajkumar Nagpal and Others [2022 SCC Online SC 1119]: The Supreme Court followed this judgment, noting the similarity in facts and the benefit to small debenture holders. The Court observed that in the case of Rajkumar Nagpal (supra), the Court had held that small investors, especially those whose exposure is up to INR 10 lakhs, are benefiting to the extent of 100% of their principal amount and even debenture holders whose exposure is more than 10 lakhs are receiving 29.96% of their principal amount. The Court noted that in comparison, the secured ICA lenders would receive 24.96% of their principal amount. It was also highlighted that none of the debenture holders had raised any grievance with regard to the proposed compromise. The Court stated that in such a situation, application of the SEBI Circular, though right in law, may lead to unjust outcomes for the retail debenture holders if the Court were to reverse the entire course of action which has occurred in the present case.
• Article 142 of the Constitution of India: The Court exercised its powers under Article 142 to approve the RP and protect the rights of small debenture holders.
• Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 (RBI Circular): The Court considered the RBI Circular, which allows lenders to enter into an Inter-Creditor Agreement (ICA) for implementing a Resolution Plan (RP).
• SEBI Circular dated 13th October 2020: The Court considered the SEBI Circular regarding the voting process for debenture holders but did not strictly enforce it due to the unique circumstances.
• Section 151 of the Civil Procedure Code, 1908 (CPC): The Court distinguished the powers under Section 151 of the CPC, stating that the High Court could not exercise powers similar to the Supreme Court under Article 142 of the Constitution of India.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to protect the interests of small debenture holders, who were set to receive 100% of their principal dues under the Resolution Plan (RP). The Court also considered the fact that the RP was approved by a significant majority of the lenders and that rejecting it would likely lead to liquidation, which would be detrimental to all stakeholders. The Court emphasized the similarity of the case to Rajkumar Nagpal (supra), where a similar RP was approved under Article 142 of the Constitution of India. The Court also noted that the application of the SEBI Circular would further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. The Court observed that “small investors, whose exposure is up to Rs. 5 lakhs, are benefiting to the extent of 100% of their principal amount.” The Court also noted that “even debenture holders whose exposure is more than Rs. 5 lakhs are receiving 23.24% of their principal amount, similar to the case of Rajkumar Nagpal (supra).” The Court stated that “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.”

Logical Reasoning:

Key Takeaways

• The Supreme Court can exercise its powers under Article 142 of the Constitution of India to approve a Resolution Plan (RP) in order to protect the interests of small investors, even if the plan does not strictly adhere to all regulatory requirements.
• Dissenting debenture holders have the option to either accept the terms of the RP or pursue other legal means to recover their dues.
• The High Court cannot exercise powers similar to the Supreme Court under Article 142 of the Constitution of India.
• The Court prioritized the benefit to small debenture holders and the need for a swift resolution over strict adherence to the SEBI Circular.

Directions

The Supreme Court directed AIIL to make the payments as per the Resolution Plan (RP) prior to March 31, 2023. The Court also directed that the dissenting debenture holders should be provided an option to accept the terms of the RP. Alternatively, the dissenting debenture holders will have a right to stand outside the proposed RP framed under the lender’s ICA and pursue other legal remedies to recover their entitled dues.

Development of Law

The ratio decidendi of the case is that the Supreme Court can exercise its powers under Article 142 of the Constitution of India to approve a Resolution Plan (RP) in order to protect the interests of small investors, even if the plan does not strictly adhere to all regulatory requirements. This case reinforces the precedent set in Rajkumar Nagpal (supra) and clarifies that the High Court cannot exercise similar powers under Section 151 of the CPC. This decision also highlights the court’s willingness to prioritize the substance of justice over strict adherence to procedural rules, especially when it comes to protecting vulnerable stakeholders.

Conclusion

The Supreme Court allowed the appeals and approved the Resolution Plan (RP) for Reliance Home Finance Limited (RHFL), protecting the interests of small debenture holders. The Court exercised its powers under Article 142 of the Constitution of India, following its earlier decision in Rajkumar Nagpal (supra). The Court also directed that dissenting debenture holders should be given an option to either accept the terms of the RP or pursue other legal remedies. This decision underscores the Supreme Court’s commitment to ensuring equitable outcomes in financial distress cases, especially for small investors.