Supreme Court Orders Deposit of Debt in Rapid Metro Case: Rapid MetroRail Gurgaon Ltd. vs. Haryana Mass Rapid Transport Corporation Ltd. (26 March 2021)

Introduction

Date of the Judgment: 26 March 2021

Citation: 2021 INSC 178

Judges: Dr. Justice Dhananjaya Y Chandrachud, J, M R Shah, J, and Sanjiv Khanna, J. This was a unanimous decision by a three-judge bench.

Can a state entity avoid its financial obligations under a consent order, especially when it involves public funds and infrastructure projects? The Supreme Court of India recently addressed this critical question in a dispute concerning the Rapid Metro project in Gurgaon. The core issue was whether the Haryana Mass Rapid Transport Corporation Limited (HMRTC) and Haryana Shehri Vikas Pradhikaran (HSVP) were obligated to deposit 80% of the debt due to the lenders of the Rapid Metro project, as determined by an audit, following the termination of the concession agreements.

Case Background

In 2008, HSVP initiated a project for a metro rail link in Gurgaon. A consortium led by IL&FS Rail Limited (IRL) won the bid. This led to the incorporation of Rapid MetroRail Gurgaon Limited (RMGL) which entered into a concession agreement with HSVP on 9 December 2009 for Project No. 1. A similar process occurred in 2012 for Project No. 2, with Rapid MetroRail Gurgaon South Limited (RMGSL) being incorporated and a concession agreement signed on 3 January 2013. RMGL completed Project No. 1 on 14 November 2013, and RMGSL completed Project No. 2 on 31 March 2017. In 2014, the Haryana government mandated that all metro projects would be handled by HMRTC.

In 2018, RMGL and RMGSL issued notices to HSVP alleging breaches of the concession agreements. Subsequently, the Union of India filed a petition against IL&FS, the parent company of RMGL and RMGSL, due to concerns of mismanagement. This led to the supersession of the IL&FS board and the appointment of a new board. In 2019, both RMGL and RMGSL issued termination notices for their respective concession agreements. HSVP also issued termination notices to RMGL and RMGSL. The matter reached the High Court of Punjab and Haryana, where a consent order was eventually passed.

Timeline

Course of Proceedings

The High Court of Punjab and Haryana initially intervened to prevent the disruption of metro services, directing the continuation of operations by the appellants. Subsequently, the High Court facilitated negotiations between the parties, leading to a consent order on 20 September 2019. This order mandated a financial audit by the Comptroller and Auditor General (CAG) to determine the debt due and stipulated that 80% of the debt was to be deposited in an escrow account. The High Court also addressed the issue of the validity of the termination notices and the claims of the parties, directing that the same shall be decided by arbitration.

Despite the consent order and the subsequent audit report, HMRTC raised objections, claiming the audit was incomplete. The High Court, however, did not enforce the deposit of funds, leading to the appellants filing Special Leave Petitions before the Supreme Court.

Legal Framework

The judgment primarily revolves around the interpretation and enforcement of the Concession Agreements between HSVP and RMGL/RMGSL. Key provisions include:

• ✓ Article 1.1 of the Concession Agreement dated 9 December 2009: Defines “Debt Due” as
  
  “the aggregate of the following sums expressed in Indian Rupees outstanding on the Transfer Date: (a) the principal amount of the debt provided by the Senior Lenders under the Financing Agreements for financing the Total Project Cost (the “Principal”) but excluding any part of the Principal that had fallen due for repayment two years prior to the Termination Date; (b) all accrued interest, financing fees and charges payable under the Financing Agreements on, or in respect of, the debt referred to in Sub- clause (a) above until the Transfer Date but excluding (i) any interest, fees or charges that had fallen due one year prior to the Transfer Date, (ii) any penal interest or charges payable under Financing Agreements to any Senior Lender, and (iii) any pre- payment charges in relation to accelerated repayment of debt except where such charges have arisen due to Authority Default; and (c) any Subordin ated Debt and all accrued interest thereon, which is included in the Financial Package and disbursed by Lenders for financing the Total Project Cost as per the Financing Documents.”
  
• ✓ Article 18 of the Concession Agreement dated 9 December 2009: Details the establishment and operation of the Escrow Account, where all funds related to the project are to be deposited and disbursed.
• ✓ Article 24.4 of the Concession Agreement dated 9 December 2009: Specifies that upon termination by HUDA (now HSVP) due to a concessionaire event of default, HUDA shall pay the lenders 80% of the debt due as termination payment.
  
  “Upon Termination by HUDA on account of occurrence of Concessionaire Event of Default during the Operations Period, the HUDA shall take over the complete system (all Project Assets), HUDA shall pay the Lenders of the Project, as per financial documents, an amount equal to 80% of debt “due, as Termination payment. No termination payment shall be due or payable on account of Concessionaire’s default occurring prior to COD.”
  
• ✓ Article 24.5.2 of the Concession Agreement dated 9 December 2009: Outlines the consequences of termination by the concessionaire due to a default by HUDA, entitling the concessionaire to receive the debt due and 110% of the adjusted equity.
  
  “Upon Termination by the Concessionaire on account of an HUDA Event of Default, HUDA shall take over the complete system (all Project Assets) and the Concessionaire shalt be entitled to receive from HUDA by way of Termination Payment a sum equal to : (a) Debt due (b) 110% of the Adjusted Equity”
  
• ✓ Article 30.2 of the Concession Agreement dated 9 December 2009: Contains the arbitration agreement for resolving disputes.
  
  “Disputes or differences shall be due for arbitration only if all the conditions in Sub-Article 30.1 are fulfilled.”
  
• ✓ Section 241(2) and 242 of the Companies Act, 2013: Under which the Union of India filed a petition against IL&FS, leading to the supersession of its board.

Arguments

Arguments by RMGL and RMGSL (Appellants):

• ✓ The consent order of the High Court dated 20 September 2019 was a binding agreement, requiring HSVP to deposit 80% of the debt due as determined by the CAG.
• ✓ The appointment of the CAG was to determine the debt due as per the Concession Agreements, and the CAG’s report was final for the purposes of the deposit.
• ✓ The termination of the agreements triggered the obligation to pay 80% of the debt due to protect the interests of the lenders.
• ✓ The appellants had handed over the projects to HMRTC, and the deposit was essential to secure the dues of the banks and financial institutions.
• ✓ The High Court could not reopen the terms of a consent order.
• ✓ The CAG had clarified that the audit was complete and conclusive, and the objections raised by HMRTC were without substance.
• ✓ The FIR against the IL&FS group could not be a reason to avoid the contractual obligation to deposit 80% of the debt due.

Arguments by HMRTC and HSVP (Respondents):

• ✓ Investigations were underway against the IL&FS group, and RMGL/RMGSL were classified as ‘red entities’.
• ✓ There were allegations of fake invoices and inflated project costs against RMGL/RMGSL.
• ✓ The CAG’s audit was limited and did not consider all relevant factors, making the audit incomplete and inconclusive.
• ✓ The audit report itself admitted that other matters could have a significant impact on the debt due.
• ✓ The High Court was the appropriate forum to decide the objections raised against the audit report.

Arguments by Andhra Bank and Canara Bank (Financial Institutions):

• ✓ The banks had provided substantial financial facilities for the projects, and the deposit of 80% of the debt due was essential to secure their interests.
• ✓ The Escrow Account was specifically created to protect the lenders, and the deposit was necessary to ensure the recovery of their dues.
• ✓ The projects were completed using funds from the lenders, who were the biggest stakeholders.
• ✓ The amount deposited would be subject to the orders of the NCLAT, ensuring the funds were secure.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the court addressed was:

1. Whether the High Court was correct in not enforcing the deposit of 80% of the debt due as per the consent order, despite the submission of the CAG audit report.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities and legal provisions:

Judgment

The Supreme Court allowed the appeals, directing HSVP to deposit 80% of the debt due as determined by the CAG, within three months. The Court emphasized that the consent order of the High Court was binding, and the CAG’s audit was conducted in accordance with the terms of the Concession Agreements. The Court also highlighted the importance of securing the dues of financial institutions that had funded the project.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ Sanjana M. Wig vs. Hindustan Petroleum Corporation Limited [CITATION]* – The Court used this case to justify the High Court’s intervention under Article 226, emphasizing that writ jurisdiction can be invoked in cases involving public interest, even in contractual matters.
• ✓ Manish Mohan Sharma vs. Ram Bahadur Thakur Limited [CITATION]* – The Court relied on this case to underscore the binding nature of a consent decree, which is more than a mere contract.
• ✓ Bisra Lime Stone Co. Ltd. vs Orissa SEB [CITATION]* – The Court cited this case to highlight that disputes which are arbitrable should be referred to arbitration.
• ✓ Article 1.1 of the Concession Agreement dated 9 December 2009 – The Court used this definition to establish the basis for the CAG’s audit and the amount to be deposited.
• ✓ Article 18 of the Concession Agreement dated 9 December 2009 – The Court used this article to explain the purpose of the Escrow Account and how it should be used for the project.
• ✓ Article 24.4 of the Concession Agreement dated 9 December 2009 – The Court used this article to emphasize the contractual obligation of HSVP to pay 80% of the debt due upon termination.
• ✓ Article 24.5.2 of the Concession Agreement dated 9 December 2009 – The Court used this article to highlight the payment to be made in case of termination by the concessionaire due to a default by HUDA.
• ✓ Article 30.2 of the Concession Agreement dated 9 December 2009 – The Court used this article to emphasize the availability of arbitration for resolving the disputes between the parties.
• ✓ Sections 241(2) and 242 of the Companies Act, 2013 – The Court used these provisions to explain the background of the case and the proceedings against IL&FS.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• ✓ Sanctity of Consent Orders: The Court emphasized that consent orders are binding agreements that must be upheld, and parties cannot resile from their obligations.
• ✓ Contractual Obligations: The Court stressed that the Concession Agreements contained clear provisions regarding termination payments, and these obligations had to be enforced.
• ✓ Public Interest: The Court noted the public interest in ensuring that financial institutions that fund infrastructure projects are secured, and that the deposit of funds in the Escrow Account was essential for this purpose.
• ✓ Finality of Audit: The Court agreed that the CAG audit was conducted as per the terms of the Concession Agreements and was final for the purpose of the deposit, with any disputes to be resolved through arbitration.
• ✓ Fairness and Due Process: The Court observed that the CAG had followed a fair process, providing opportunities for all parties to submit their responses and objections.

Ratio Decidendi

The ratio decidendi of this judgment can be summarized as follows:

• ✓ Binding Nature of Consent Orders: A consent order passed by a court is a binding agreement between the parties and must be enforced unless there are compelling reasons not to do so.
• ✓ Enforcement of Contractual Obligations: Parties to a contract are bound by its terms, and the courts must ensure that these obligations are fulfilled, especially when they involve public funds and infrastructure projects.
• ✓ Importance of Financial Security: Financial institutions that provide funding for infrastructure projects must have their dues secured, and the courts must take steps to protect their interests.
• ✓ Finality of Audit Reports: When an audit is conducted as per the terms of a contract, the audit report is final for the purpose for which it was commissioned, and any disputes should be resolved through the dispute resolution mechanism specified in the contract.

Obiter Dicta

The Supreme Court made the following observations that are not essential to the decision but provide valuable guidance:

• ✓ The Court emphasized the need for transparency and accountability in public projects, especially those involving substantial public funds.
• ✓ The Court noted that disputes should be resolved expeditiously to avoid disruptions in essential services like metro rail projects.
• ✓ The Court observed that the parties should adhere to the dispute resolution mechanisms provided in their contracts.
• ✓ The Court expressed its concern over the delays in the implementation of infrastructure projects and the need for timely resolution of disputes.

Flowchart of Events

Conclusion

The Supreme Court’s judgment in the Rapid Metro case underscores the importance of honoring consent orders and contractual obligations, especially when they involve public funds and infrastructure projects. The Court’s decision to enforce the deposit of 80% of the debt due highlights the need for transparency, accountability, and financial security in such projects. The judgment also serves as a reminder that parties must adhere to the dispute resolution mechanisms provided in their contracts and that courts will take steps to protect the interests of financial institutions that fund infrastructure projects. This case sets a precedent for similar disputes, emphasizing the binding nature of consent decrees and the need for parties to honor their agreements.