Supreme Court Approves Resolution Plan for Reliance Home Finance Limited, Protecting Small Debenture Holders (2023)

Date of the Judgment: March 3, 2023

Citation: 2023 INSC 205

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

Can a resolution plan, beneficial to the majority of debenture holders, be approved even if it doesn’t strictly adhere to all regulatory requirements? The Supreme Court of India addressed this question in a recent case involving Reliance Home Finance Limited (RHFL). The court considered the financial distress of RHFL and the need to protect the interests of its numerous small debenture holders. The judgment was delivered by a bench comprising Justice B.R. Gavai and Justice Aravind Kumar, with Justice B.R. Gavai authoring the opinion.

Case Background

Reliance Home Finance Limited (RHFL) faced significant financial difficulties after defaulting on loan obligations in May 2019, with outstanding debts of approximately Rs. 11,540 crore. RHFL had issued debentures with a face value of Rs. 5 lakhs each on 30th August 2018. A consortium of lenders entered into an Inter-Creditor Agreement (ICA) in July 2019 to implement a resolution plan (RP). Authum Investment and Infrastructure Limited (AIIL) submitted a RP in June 2021, which was approved by 96% of the ICA lenders. This plan proposed that 19,353 small debenture holders, with exposures up to Rs. 5 lakhs, would receive 100% of their principal dues. However, the plan needed approval from debenture holders as per SEBI guidelines, leading to a commercial suit in the High Court of Judicature at Bombay.

Timeline

Course of Proceedings

Initially, a commercial suit was filed in the High Court of Judicature at Bombay, seeking voting by debenture holders on the RP. The High Court directed a meeting of debenture holders to vote on the RP, and later ordered that the results be submitted in a sealed envelope. After the voting results were disclosed, RHFL filed an Interim Application seeking approval of the RP, citing the Supreme Court’s decision in Securities and Exchange Board of India v. Rajkumar Nagpal and Others. The High Court dismissed this application, stating it lacked the power to approve the RP under Section 151 of the Civil Procedure Code, 1908 (CPC). This led to the appeals before the Supreme Court.

Legal Framework

The case involves the interplay of several regulatory frameworks:

• Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 (RBI Circular): Clause 10 allows lenders to enter into an Inter-Creditor Agreement (ICA) for implementing a resolution plan (RP).
• SEBI Circular dated 13th October, 2020: This circular standardizes the procedure for Debenture Trustees in case of default by issuers of listed debt securities. It requires that voting by debenture holders for an ICA should have the approval of not less than 75% of investors by value and 60% by number at the ISIN level. An ISIN is a 12-digit alphanumeric code that uniquely identifies a specific security.
• Section 151 of the Civil Procedure Code, 1908 (CPC): This section deals with the inherent powers of the court to make orders necessary for the ends of justice.
• Article 142 of the Constitution of India: This article grants the Supreme Court the power to pass any order necessary for doing complete justice in any cause or matter pending before it.

Arguments

Appellants’ Arguments (Authum Investment and Infrastructure Limited and Reliance Home Finance Limited):

• The Resolution Plan (RP) is beneficial to the majority of 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.
• Rejecting the RP would likely lead to liquidation, which would be detrimental to the interests of the debenture holders.
• The facts of the case are nearly identical to the case of Securities and Exchange Board of India v. Rajkumar Nagpal and Others, where the Supreme Court approved a similar RP under Article 142 of the Constitution.

Respondents’ Arguments (SEBI):

• The SEBI Circular requires approval of not less than 75% of investors by value and 60% by number at the ISIN level. The 60% threshold by number at the ISIN level was not met.
• The option to opt out of the RP should be given to both dissenting debenture holders and those who abstained from voting.
• Claims of many debenture holders are pending before the NCLAT, and accepting the RP would prejudicially affect their rights.
• The SEBI Circular requires a negative or positive consent from the debenture holders.

Bank of Baroda’s Argument:

• They have no objection if the RP is accepted, provided that the payment is made before the end of the Financial Year 2022-23 (31st March 2023).

Issues Framed by the Supreme Court

• Whether the Resolution Plan (RP) for RHFL should be approved, considering the interests of the debenture holders and the regulatory requirements under the SEBI Circular.
• Whether the High Court was correct in holding that it could not exercise powers under Section 151 of the CPC to approve the RP, as the Supreme Court did under Article 142 of the Constitution in the case of Rajkumar Nagpal.
• Whether the dissenting debenture holders should be given an option to either accept the RP or stand outside the plan and pursue other legal remedies.

Treatment of the Issue by the Court

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 Court followed this precedent, noting the similarity in facts and extending the benefit under Article 142 to the debenture holders.
• Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019: The Court acknowledged the ICA formed under these directions.
• SEBI Circular dated 13th October, 2020: The Court noted the regulatory requirements of this circular but prioritized the interests of small debenture holders.
• Article 142 of the Constitution of India: The Court exercised its powers under this article to approve the RP and protect the interests of the debenture holders.
• Section 151 of the Civil Procedure Code, 1908 (CPC): The Court did not directly address the High Court’s interpretation of this section, as it used its powers under Article 142.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to protect the interests of small debenture holders and ensure a swift resolution of the financial distress faced by RHFL. The Court emphasized the following points:

• The Resolution Plan (RP) was beneficial to the majority of debenture holders, particularly those with an exposure of up to Rs. 5 lakhs, who would receive 100% of their principal amount.
• The facts of the case were nearly identical to the case of Securities and Exchange Board of India v. Rajkumar Nagpal and Others, where the Supreme Court had approved a similar RP under Article 142 of the Constitution.
• Rejecting the RP would likely lead to liquidation, which would be detrimental to the interests of the debenture holders.
• The Court was also conscious of the fact that any further delay in the resolution process would adversely affect the agreed realized gains to the retail debenture holders.

The court’s reasoning was more inclined towards legal considerations, as it relied heavily on the precedent set in Rajkumar Nagpal and the powers granted under Article 142 of the Constitution.

The Supreme Court considered the arguments against the RP, particularly the non-compliance with the 60% approval threshold at the ISIN level as per the SEBI Circular. However, it rejected these arguments in favor of protecting the interests of small debenture holders and ensuring a swift resolution. The court noted that the RP was beneficial to the majority of the debenture holders and that any further delay in the resolution process would adversely affect the agreed realized gains to the retail debenture holders. The court also considered the fact that the dissenting debenture holders were given an option to either accept the RP or stand outside the plan and pursue other legal remedies.

The Court quoted from Rajkumar Nagpal:

“108. The above table highlights that 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.”

“109. 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 negotiated settlement before the High Court.”

The court also observed:

“In the present case also, 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 the case of Rajkumar Nagpal (supra).”

Key Takeaways

• The Supreme Court can exercise its powers under Article 142 of the Constitution to approve a resolution plan (RP) that is beneficial to the majority of stakeholders, even if it does not strictly adhere to all regulatory requirements.
• In cases involving financial distress, the interests of small investors should be prioritized.
• Dissenting debenture holders should be given the option to either accept the RP or pursue other legal remedies.
• The Court may use its powers to ensure a swift resolution of financial disputes, particularly when further delays would be detrimental to the stakeholders.

Directions

The Supreme Court directed that:

• The Resolution Plan (RP) preferred by AIIL is approved for all debenture holders except the dissenting debenture holders.
• Dissenting debenture holders should be provided with an option to accept the terms of the RP. Alternatively, they have the right to stand outside the proposed RP and pursue other legal remedies.
• AIIL is directed to make the payments prior to 31st March 2023.

Development of Law

The ratio decidendi of this case is that the Supreme Court can exercise its powers under Article 142 of the Constitution to approve a resolution plan that is beneficial to the majority of stakeholders, even if it does not strictly adhere to all regulatory requirements. The court has reiterated its position in Rajkumar Nagpal, emphasizing the need to protect the interests of small investors and ensure a swift resolution of financial disputes. This case reinforces the court’s willingness to use its powers to achieve complete justice and prevent unjust outcomes for retail investors.

Conclusion

The Supreme Court approved the Resolution Plan for Reliance Home Finance Limited, prioritizing the interests of small debenture holders. The Court exercised its powers under Article 142 of the Constitution to ensure a swift and equitable resolution, providing an option for dissenting debenture holders to opt out. This decision underscores the Court’s commitment to protecting retail investors and ensuring fair outcomes in complex financial disputes.