Reliance Project Ventures And ... vs Ecl Finance Ltd. And 4 Ors
2019 Latest Caselaw 70 Bom

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                  IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                   ORDINARY AND ORIGINAL CIVIL JURISDICTION
                           IN ITS COMMERCIAL DIVISION
                COMMERCIAL NOTICE OF MOTION (L) NO.401 OF 2019
                                     IN
                     COMMERCIAL SUIT (L) NO.191 OF 2019
Reliance Project Ventures and
Management Pvt. Ltd. and Anr.                   ....Applicants/Plaintiffs
          Vs.
ECL Finance Limited and Ors.                    ....Defendants
                                   ----
     Shri Aspi Chinoy and Shri Darius Khambata, senior advocates a/w.
Shri Ashish Kamat, Shri Rohan Dakshini, Ms. Nikita Mishra, Ms. Aakansha
Saxena, Shri Aman Kacheria, Shri Kyrus Modi and Shri Bhavin Shah I/b.
M/s. Rashmikant and Partners for applicants/plaintiffs.

     Shri Janak Dwarkadas, senior advocate a/w. Dr. Birendra Saraf,
Shri Vikram Trivedi, Shri Sunil Tilokchandani, Shri Sachin Chandarana,
Shri Faisal Sayyed, Shri Rohit Lalwani and Shri Vatsal Parikh I/b. Manilal
Kher Ambalal and Company for defendant no.1.

     Shri Gaurav Joshi, senior advocate a/w. Shri Vikram Trivedi,
Shri Sunil Tilokchandani, Shri Sachin Chandarana, Shri Faisal Sayyed,
Shri Rohit Lalwani and Shri Vatsal Parikh I/b. Manilal Kher Ambalal and
Company for defendant no.2.

     Shri Dinyar Madon, senior advocate a/w. Shri Yashesh Kamdar,
Shri Vikram Trivedi, Shri Sunil Tilokchandani, Shri Sachin Chandarana,
Shri Faisal Sayyed, Shri Rohit Lalwani and Shri Vatsal Parikh I/b. Manilal
Kher Ambalal and Company for defendant no.3.

     Shri Ravi Kadam, senior advocate a/w. Shri Vikram Trivedi, Shri Sunil
Tilokchandani, Shri Sachin Chandarana, Shri Faisal Sayyed, Shri Rohit
Lalwani and Shri Vatsal Parikh I/b. Manilal Kher Ambalal and Company for
defendant no.4.

     Shri Chetan Kapadia a/w. Shri Vinod Kothari I/b. M/s. Apex Law
Partners for defendant no.5.
                                 ----
                                   CORAM : K.R.SHRIRAM, J.

                                   DATE    : 13th FEBRUARY 2019

Gauri Gaekwad





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P.C.:

1                  It is stated in the plaint that plaintiff no.1 had issued two series

of debentures to defendant no.1 and defendant no.2 for an aggregate

amount of Rs.300 Crores under various transaction documents. The said

debentures were secured by a pledge of shares constituting approximately

9% of the listed capital of Reliance Power Limited (RPL) and approximately

2% of Reliance Communications Limited (RCOM) created in favour of

defendant no.5 (the debenture trustee) by plaintiff no.1 and plaintiff no.2.

Plaintiffs are both promoter companies of RPL a listed company

of the Reliance ADAG group of companies alongwith other entities. Similarly

RCOM is also a part of Reliance ADAG group of companies.

2 On 14th August 2017, it is stated in the plaint, plaintiff no.1 had

entered into a Term Sheet with defendant no.3 for a proposed issue of

redeemable non-convertible debentures by plaintiff no.1 to defendant nos.1

and 2 and its subsidiaries, affiliates, assignees and other co-investors. These

debentures were to have an interest coupon of 10% p.a. payable on half

yearly basis. The debentures were to be redeemable after a period of five

years and were to be secured by a pledge of shares held by plaintiff no.1 and

other promoter group companies.

3 Pursuant to the Term Sheet, on 6 th October 2017, plaintiff no.1

issued two series of debentures, i.e., Series A and Series B for an aggregate

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amount of Rs.300 Crores (Series A of Rs.150 Crores and Series B of

Rs.150 Crores) to defendant nos.1 and 2 further to which the allotment of

the said debentures took place on 9 th October 2017. Some of these

debentures have subsequently been transferred by defendant nos.1 and 2 to

defendant nos.3 and 4 and defendant nos.1 to 4 hold these debentures on

the date of filing the present suit. The said debentures were secured by a

pledge of shares constituting approximately 9% of the listed capital of RPL

and approximately 2% of RCOM. The pledge has been created by plaintiff

no.1 and plaintiff no.2 in favour of defendant no.5, the debenture trustee.

The transaction documentation relating to the issuance of the debentures

included two Debenture Trust Deeds dated 6 th October 2017, four Share

Pledge Agreements dated 6th October 2017, a Debenture Trustee Agreement

and certain other ancillary documents. The following are the relevant terms

of the two Debenture Trust Deeds :

"1.1 Definitions In this Deed, except where the context otherwise requires (a) capitalised terms defined anywhere in this Deed by inclusion in quotations and/or parenthesis have the meanings so ascribed, and (b) the following terms shall have the following meanings :

"Business Day" means a day (other than a Saturday, Sunday and a public holiday) on which banks are open for general business in Mumbai.

3.4 Covenant to pay default interest

(a) If the (i) Company fails to pay any amount payable by it under a Transaction Document on its due date, or (ii) a Category A Event of Default occurs, then interest shall accrue on the outstanding Debt from the due date/date of the occurrence of Category A Event of Default up to the date of actual payment (both before and after judgment)/the date on which such Category A Event of Default has been rectified, at a rate

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which is 2% (two per cent) per annum over and above the Interest ("Default Interest").

(b) Default Interest (if unpaid) arising on an outstanding Debt will be compounded with the outstanding Debt on the last day of each calendar month but will remain immediately due and payable.

(c) The Company agrees that the Default Interest is a genuine pre- estimate of the loss likely to be suffered by the Debenture Holders on account of any default by the Company in paying such amounts.

7.SECURITY 7.1Description of Security In consideration of the Debenture Holders subscribing to or purchasing the Debentures and to secure the repayment of the Debt, the Company agrees and shall procure that the following Security Interests shall be created in favour of the Trustee for the benefit of the Secured Parties:

(a) a first ranking and exclusive pledge by the Security Providers pursuant to the RPL Share Pledge Agreement;

(b) a first ranking and exclusive pledge by the Security Providers pursuant to the RCOM Share Pledge Agreement; and

(c) signed post-dated cheques (in relation to the Interest payments) and the signed undated cheques (in relation to the principal redemption payment and the Assured IRR payments) issued by the Company as security in relation to the payment of Debt along with the letter in the form provided in Schedule 11 (Letter for Cheques).

11. EVENTS OF DEFAULT Each of the events or circumstances set out in the following sub-clauses of this Clause 11 (other than Clauses 11.27 (Consequences of Event of Default), 11.28 (Trustee to be Indemnified) and 11.29 (Fees and Expenses)) is an Event of Default.

11.19 Downgrade in credit rating of RPL The credit rating of RPL granted by ICRA Limited is downgraded below BBB.

11.23 Pledged Securities

(g) If there is a fall in the Closing Price (as adjusted for any relevant corporate actions, including but not limited to stock splits, bonus issues and mergers, but excluding dividend declarations) of either of the RPL Shares or the RCOM Shares, by 40% (Forty Percent) from the respective Closing Price of the RPL Shares or the RCOM Shares, as on the Deemed Date of Allotment.

Provided that no event specified in Clauses 11.23(a) to (i) above shall be considered an Event of Default, if forthwith upon the occurrence of such event in relation to the RCOM Shares or RCOM, as the case may be, the

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Company immediately creates or procures the creation of a first ranking exclusive pledge in favour of the Trustee (for the benefit of the Secured Parties) of requisite number of RPL Shares to replace the RCOM Pledged Shares to the satisfaction of the Trustee, unless the Trustee (acting on Approved Instructions) or the Debenture Holders determine that such pledge of RPL Shares is not acceptable as Security, as per the Transaction Documents.

11.27 Consequences of Event of Default Upon the occurrence of an Event of Default, the Trustee may, in its discretion or upon request in writing of the Debenture Holders of an amount representing not less than 66.66% (sixty-six decimal six six percent) in value of the nominal amount of the Debentures for the time being outstanding, by a notice in writing to the Company :

(i) require the Company to mandatorily redeem the Debentures and

(ii) repay the principal amount on the Debentures, along with accrued but unpaid Interest, Redemption Premium, Early Redemption Costs, and other costs, charges and expenses incurred under or in connection with the Transaction Documents;

(ii) enforce any Security towards repayment of the Debt;

(iii) exercise of voting rights in relation to the Pledged Shares;

(iv) encash the signed post-dated cheques (in relation to the Interest payments) and the signed undated cheques (in relation to the principal redemption payment and the amounts payable towards the Assured IRR accrued from the Deemed Date of Allotment till the Redemption Date) issued by the Company as security in relation to the payment of Debt along with the letter in the form provided in Schedule 11 (Letter for Cheques);

(v) disclose the name and details of the Company and/or the other Obligors to CIBIL or RBI or CRILC;

(vi) disclose or publish the name of the Company and the other Security Providers, the Company and the other Security Providers' directors, as willful defaulter in such manner and through such medium as the Trustee in its absolute discretion may think fit and also inform other lenders about such default by the Company and the other Security Providers, the Company and the other Security Providers' directors;

(vii) appoint and remove from time to time Nominee Director and/or Observer;

(viii) take such other action, or exercise such rights, as the Trustee may deed fit, under Transaction Documents or Applicable Law."

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4                     Clause 3.1 (c) of the Schedule 7 of the Debenture Trust Deed

reads as under :

3.1 (c) In the event that at any time there is a fall in the Closing Price (as adjusted for any relevant corporate actions, including but not limited to stock splits, bonus issues and mergers, but excluding dividend declarations) of either of the RPL shares or the RCOM shares by 30% (Thirty Percent) or more from the respective Closing Price of the RPL shares or the RCOM shares, as on the Deemed Date of Allotment :

(i) immediately upon such event having occurred, the Company, the Trustee and the Debenture Holders shall confer on the Security Interest to be provided in addition to the RPL Pledged Shares and the RCOM Pledged Shares, as applicable; and

(ii) additional Security Interest shall be created in favour of the Trustee (for the benefit of the Secured Parties) and to the satisfaction of the Trustee, within such time as may be agreed between the Company and the Trustee and in any event prior to a fall in the Closing Price (as adjusted for any relevant corporate actions, including but not limited to stock splits, bonus issues and mergers, but excluding dividend declarations) of either of the RPL shares or the RCOM shares, as applicable, by 40% (Forty Percent) from the respective Closing Price of the RPL shares or the RCOM shares as on the Deemed Date of Allotment, such that the Security Cover Ratio is restored to at least the Required Security Cover Ratio.

It is clarified that (i) on and from the date of fall in the Closing Price (as adjusted for any relevant corporate actions, including but not limited to stock splits, bonus issues and mergers, but excluding dividend declarations) of either of the RPL shares or the RCOM shares, as applicable, by 40% (Forty Percent) from the respective Closing Price of the RPL shares or the RCOM shares as on the Deemed Date of Allotment, any additional pledge over the shares of RCOM or RPL (i.e. other than as has been created prior to such date), as applicable, shall cease to be acceptable Security; (ii) a failure by the Company to provide such Security Interest as specified in paragraph 3.1 (c) (ii) to the satisfaction of the Trustee prior to the aforesaid date shall constitute an Event of Default as specified in Clause 11 (Events of Defaults) above; and (iii) the Trustee shall be entitled exercise its rights under Clause 11 (Events of Defaults) above, notwithstanding the failure by the Trustee, the Debenture Holders and the Company to reach consensus on the Security Interest to be provided in addition to the RPL Pledged Shares or the RCOM Pledged Shares, as applicable.

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5                  The following are the relevant terms of the Share Pledge

Agreements:


                "3. PLEDGE
                3.1 Pledge of Pledged Securities

(a) In order to secure the Debt, each Pledgor shall, irrevocably and unconditionally pledge to the Trustee (for the benefit of the Secured Parties), within 1 (one) day of the Effective Date, all of its right, title, interest, benefits, claims and demands whatsoever to or in respect of the Pledged Securities upon the terms and conditions set forth in this Agreement.

(b) Within 1 (one) day of the Effective Date, each Pledgor shall, at its cost and expense:

(i) cause its Pledgor DP to mark and confirm the Pledge in favour of the Trustee and issue such requests including the Pledge Form;

(ii) deliver a duly executed and notarized Power of Attorney to the Trustee; and

(iii) sign such documents and do all such acts, deeds and things as shall be required under the Depositories Regulations and other Applicable Laws or by its Pledgor DP for the creation and perfection of the Pledge.

(c) Within 1 (one) day of the Effective Date, each Pledgor shall confirm the creation of Pledge to the Trustee and deliver a copy of the

(i) statement of accounts issued by its Pledgor DP and (ii) Pledge Report obtained from its Pledgor DP indicating the record and entry for the pledge in respect of the Pledged Securities pledged by it.

(d) Upon receipt of the aforesaid intimation, the Trustee shall cause the Trustee DP to mark and confirm the Pledge in favour of the Trustee and issue such requests and sign such documents and do all such acts, deeds and things as shall be required under the Depositories Regulations and other Applicable Laws or by the Trustee DP for the creation and perfection of the Pledge.

7. ENFORCEMENT OF THE PLEDGE 7.1 Enforcement and sale Upon the occurrence of an Event of Default and the issuance of a notice in relation thereto Trustee to the Issuer and to each Pledgor, the Trustee shall be entitled to enforce the Pledge and exercise all rights, powers and remedies vested in it (whether under this Agreement or by law) for such enforcement, including, without limitation, the right to :

(a) receive all amounts payable in respect of the Pledged Securities and/or the Collateral;

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(b) vote in respect of any Pledged Securities (whether or not transferred into the name of the Trustee) and otherwise act with respect thereto as though it were the outright owner thereof, in accordance with the terms hereof;

(c) after giving a written notice of 1 (One) Business Day to the Pledgors (which each Pledgor acknowledges and agrees to be reasonable notice under Applicable Law), take any of the following actions:

(i) Transfer or register any Pledged Securities in the name of the Trustee, any Debenture Holder or any of their respective nominees;

(ii) appropriate the Pledged Securities in the name of the Debenture Holders or their nominees in lieu of any Debt; and/or

(iii) without intervention of courts, sell or otherwise dispose of any Pledged Securities and/or the Collateral in such manner, at such times, and for such consideration (whether payable immediately or in instalments) as the Trustee in its commercial opinion thinks fit (whether by private sale or otherwise) and the Pledged Securities and/or the Collateral may be sold or otherwise disposed of subject to any conditions, which the Trustee at its absolute discretion may think fit to impose, to any third party buyer; provided that it is not obligated to make any such sale if it determines not to do so regardless of any notice of sale having been given.

It is clarified that the Trustee may, if permitted under Applicable Law and the Depository Regulations, sell, dispose, realise and Transfer any Pledged Securities without having the same first transferred to or registered in the name of the Trustee. Provided that, if upon sale of the Collateral, the amounts realized is in excess of the amounts payable towards the full satisfaction of the Debt, then such excess amounts shall be released in favour of, or accrue to the benefit of, the Pledgors.

14. NOTICES 14.1 Unless otherwise stated, all notices, approvals, instructions and other communications for the purposes of this Agreement may be given by facsimile or by courier or by personal delivery or in electronic form or by sending the same by prepaid registered mail, addressed to the party concerned at its address or the fax numbers or e-mail address set out herein and/or any other address subsequently notified to the other Party with a period of 5 (five) days from any change thereof.

For the purposes of this clause, each communication shall be deemed to be effective (a) in the case of registered mail, when delivered to the postal authority, (b) in the case of facsimile at the time when dispatched with a report confirming proper transmission, (c) in the case of personal delivery, at the time of delivery, (d) in case of courier, when delivered to the courier, and (e) in case of e-mail, at the time when it is sent."

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6                   It is also plaintiffs case that from 9th October 2017 till the date

of filing the present suit, plaintiff no.1 has regularly serviced both series of

debentures by paying interest thereon in a timely manner. Plaintiff no.1 has

not defaulted on its obligations in this regard. That from 9 th October 2017

till the date of filing the present suit, plaintiffs have from time to time

pledged additional shares held by them in RCOM and RPL or as the case

may be obtained release of some of the pledged shares under the Share

Pledge Agreements, as a result of which as on 4 th February 2019 the total

number of shares pledged by plaintiffs in favour of defendant no.5 are as

follows :-

                (a) Shares of RPL        : 21,09,67,570

                (b) Shares of RCOM       : 5,31,30,313


7                   The reason why plaintiffs have approached this Court is

because according to plaintiffs, on 5th February 2019, defendants sold

2,74,08,000 pledged shares of RPL in the F & O segment and 3,22,91,119

pledged shares in the cash segment totaling to 596,99,119 = approximately

2.12% of the issued shares of RPL in the stock market in one day. According

to plaintiffs, this resulted in a further fall in the price of RPL shares to

Rs.12 thereby reducing the value of shares sold by Rs.274 Crores and

therefore, defendants should be restrained from selling the remaining

pledged shares until plaintiffs are paid a sum of Rs.274 Crores as damages.

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It is also plaintiffs case that due to the acts of defendants, plaintiffs are also

entitled to compensation/damages in the sum of Rs.2734,41,00,000/-, i.e.,

in excess of Rs.2734 Crores.

8 Shri Chinoy also submitted that defendants should have sold

the shares in a structured manner, even if they had to, so that best value

was obtained and by dumping almost 20% of pledged shares in the market

in one day, defendants ignored its fiduciary obligations to realise fair value

for the pledged shares. Defendants must, therefore, compensate for the loss.

9 Shri Chinoy also argued that the notice given just a day prior to

the sale was inadequate. It was submitted by Shri Chinoy that at 6.10 p.m.

on 5th February 2019 plaintiffs received messages from NSDL informing

them that the pledge in respect of 596,99,119 shares of RPL had been

invoked and the said shares purported to be transferred by defendant no.5

into demat account of defendant nos.1 to 4. In addition, 5,30,47,532 shares

of RCOM were similarly transferred.

Shri Chinoy submitted, as per contract, share sale could have

been initiated only by defendant no.5, Trustee of defendant nos.1 to 4, the

debenture holders and not the debenture holders themselves. In this case,

defendant nos.1 to 4 sold the shares through their brokers on 5 th February

2019 and later in the defendant no.5 sold those shares at a lower price to

defendant nos.1 to 4.

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For all these reasons, the sale must be declared void by the

Court and further sale should be prevented. Prayer clause (a) in the notice

of motion reads as under :

(a) pending the hearing and disposal of the present suit, this Hon'ble Court be pleased to pass an order of temporary injunction restraining the defendants, their employees/servants/agents or any other persons directly or indirectly acting for or on behalf of the defendants, from selling, transferring, alienating or encumbering in any manner whatsoever the unsold pledged securities pursuant to the invocation notices or otherwise.

What plaintiffs are seeking is to stop defendants from exercising

their rights under the contract and applicable law because according to

plaintiffs, by selling the shares in one day, defendants have caused loss to

plaintiffs in the sum in excess of Rs.274 Crores.

10 Shri Dwarkadas's case was defendants were well within its

rights to sell the pledged shares. It was also submitted that in August 2018

price of RPL shares had plummeted and as per their contract, plaintiffs were

to pay an additional interest of 2% p.a. on the debentures, but plaintiffs did

not pay. Shri Dwarkadas also stated that plaintiffs were to also give further

security as the value of pledged shares had gone down by 40% which again

plaintiffs failed to give, despite being called upon repeatedly. It was also

submitted that on 1st February 2019 RCOM had filed for bankruptcy but

plaintiffs never bothered to communicate with defendants and the Trustees

had to protect the debenture holders and sold the shares. Shri Dwarkadas

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said on 1st February 2019 the Chairman of RCOM - Shri Anil Dhirubhai

Ambani made a public announcement that RCOM is going to file for

bankruptcy. Though I did not find the statement in any of the pleadings,

Shri Dwarkadas stated this across the bar and it was not disputed. According

to Shri Dwarkadas this created a scare in the market and the prices started

crashing. RCOM, it is claimed in the plaint, is also part of Reliance ADAG

group and owns and operates the world's largest next generation IP-enabled

connectivity infrastructure comprising fiber optic cable systems in most parts

of the world. It is also stated in the plaint RCOM is presently facing

insolvency proceedings before the NCLT.

11 Shri Dwarkadas, Shri Madon, Shri Joshi and Shri Kapadia

appearing for defendants opposed any ad-interim relief being granted.

It was submitted by the counsel that the events of default occurred on

14th August 2018 and on 8th October 2018 and despite continuously being

informed about the events of default and being put on notice, plaintiffs did

not take any steps to cure the events of default and comply with contractual

terms. Counsel also submitted that upon ICRA downgrading the shares of

RPL from BBB to BB negative plaintiffs should have paid additional

2% interest which plaintiffs did not pay and despite the share price of RPL

going down by 40% on 8th October 2018, plaintiffs did not take any steps to

maintain the security cover ratio. It was also submitted that defendants had

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the right to recall the entire amount under the debentures with interest,

penalty, etc. and those rights were expressly reserved, though there was no

need to, in the communications addressed to plaintiffs. It was also submitted

that on 1st February 2019 when the Chairman of RCOM, which is one of the

flagship companies of Reliance ADAG group and its shares are also pledged,

made a public announcement that he was filing for bankruptcy, in one day

the share price of RPL went down by 35%. Counsel also submitted that even

after selling the shares, plaintiffs still owe more than Rs.200 Crores to

defendants. It was also submitted that even assuming for the sake of

argument what plaintiffs state is correct that they suffered loss, harm and

damage in the sum of Rs.274 Crores as a result of the sale/transfer of

pledged shares, still it will be only a claim for damages that plaintiffs can

seek and as held in Union of India V/s. Raman Iron Foundry 1 a claim for

damages for breach of contract is not a claim for a sum presently due and

payable and the claimant is not entitled to recover the amount of such claim

unless the claim is proved. It was also submitted that plaintiffs have made a

disclosure to the Stock Exchange on 7th February 2019 that 21.05 Crores of

shares of RPL for an aggregate amount of Rs.263.77 Crores has been sold by

7 parties of which only 4 were defendant nos.1 to 4. Counsel submitted that

defendant nos.1 to 4 had sold only about 5.97 Crores of shares and

therefore, the balance of approximately over 15 Crores of shares of RPL

1. (1974) 2 SCC 231

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have been sold by the three other parties. Counsel submitted that this also

would indicate that plaintiffs' allegation that it was defendants who caused

a flutter and crash in the market and hammered the price of RPL down is

incorrect. A copy of the communication from plaintiffs to Stock Exchanges

and RPL was also tendered across the bar and copy given to plaintiffs. This

communication was not disputed.

12 Shri Joshi relying upon a judgment of a Single Judge of Delhi

High Court in Tendril Financial Services Pvt. Ltd. and Ors. V/s. Namedi

Leasing and Finance Limited and Ors.2 also submitted that in pledged

shares held in demat form, there is no place for a prior notice under Section

176, in the scheme of regulation 58 of the Securities and Exchange Board of

India (Depositories and Participants) Regulations, 1996.

13 What triggered the sale was the events of default by plaintiffs

and plaintiffs doing nothing to correct the situation and perform its

obligations under the agreement. Clause 11 of the Debenture Trust Deed

provided for events of default by plaintiffs. One such event of default is

under Clause 11.19, i.e., downgrade in credit rating of RPL. Clause 11.19

provided that if the credit rating of RPL granted by ICRA is downgraded

below BBB, it would amount to an event of default. The event of default

under Clause 11.19 falls under the definition of Category A event of default

as defined in the Debenture Trust Deed. On the happening of Category A

2. 2018 SCC Online Del 8142

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event of default, as provided in Clause 3.4 (a) of the Debenture Trust Deed,

then the interest shall accrue on the outstanding debt from the due

date/date of the occurrence of Category A event of default up to the date of

actual payment at a rate which is 2% per annum over and above the interest

of 10% p.a., which is defined in the Debenture Trust Deed. By a public

announcement dated 3rd August 2018, ICRA revised the long term ratings of

RPL from BBB to BB (negative). Therefore, defendant no.5, by a letter dated

14th August 2018 put plaintiffs on notice about this downgrading and

informed plaintiffs that it is liable to pay default interest at 2% p.a. in

addition to the agreed rate of 10% p.a. interest. By the said notice,

defendant no.5 also reserved all the rights and remedies in addition to

Clause 3.4 of the Debenture Trust Deed, under the transaction documents

including the right to have plaintiffs redeem all the outstanding debentures

in full and repay the debt, including the entire outstanding amount on the

debentures alongwith payment of interest, default interest, the redemption

premium etc.

14 Clause 11.23 (g) of the Debenture Trust Deed also provided for

another event of default and that is, if there is a fall in the Closing Price (as

adjusted for any relevant corporate actions, including but not limited to

stock splits, bonus issues and merges, but excluding dividend declarations)

of either of the RPL shares or the RCOM shares by 40% (Forty Percent) from

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the respective Closing Price of the RPL shares or the RCOM shares, as on the

Deemed Date of Allotment.

15 On 9th October 2018, defendant no.5 informed plaintiffs that

there has been a fall in the closing price on 8 th October 2018 of RPL shares

by 40% from the deemed date of allotment of 9th October 2017, thereby

triggering an event of default as per clause 11.23(g) of the Debenture Trust

Deed. Under clause 11.27 of the Debenture Trust Deed, upon occurrence of

an event of default, the Trustee may, in its discretion or upon request in

writing of the Debenture Holders of an amount representing not less than

66.66% in value of the nominal amount of the Debentures for the time

being outstanding, by a notice in writing to the company, (i) require the

company to mandatorily redeem the debentures and repay the principal

amount on the debentures, alongwith accrued but unpaid interest,

redemption premium, etc., (ii) enforce any security towards repayment of

the debt or inter alia, (iii) take such other actions, or exercise such rights, as

the Trustee may deem fit, under transaction documents or applicable law.

16 Clause 3.1 (c) of Schedule 7 of the Debenture Trust Deed also

provides that if there is a fall in the closing price of either of the RPL shares

or the RCOM shares by 40% as on the deemed date of allotment, additional

security interest shall be created in favour of defendant no.5 for the benefit

of defendant nos.1 to 4 and to the satisfaction of defendant no.5, within

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such time as may be agreed between plaintiffs and defendant no.5 such that

the security cover ratio is restored to atleast the required security cover

ratio. Therefore, as there was a fall in the closing price on 8 th October 2018

of RPL shares by 40%, defendant no.5 by its letter dated 9 th October 2018

informed plaintiffs that the event of default has occurred and reserved all its

rights and remedies under the transaction documents, including to take

actions in respect of the entire outstanding amount on the debentures and

asked for further collateral in terms of clause 3.1(c) of Schedule 7 of the

Debenture Trust Deed. Defendant no.5 also reserved its rights to pursue any

legal remedy or right provided under applicable law.

17 Thereafter, on 10th October 2018, defendant no.5 issued notice

to plaintiffs that two event of defaults have occurred, i.e., the share price of

RPL has fallen by 40% and the credit rating of RPL has been downgraded to

from ICRA BB (negative)/ICRA A4.

By a letter dated 30th October 2018, defendant no.5 called upon

plaintiffs to pay the default interest at the rate of 2% in addition to the

interest payable and also informed plaintiffs that any amount paid towards

interest will be first appropriated towards default interest.

On 1st November 2018, defendant no.5 called upon plaintiffs to

immediately pay the default interest at 2% p.a. compounded monthly till the

date of payment.

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Admittedly, there is no reply even sent by plaintiffs to any of

these communications, forget suggesting any course corrections.

18 According to Shri Chinoy right from August 2018 parties have

been in discussion. That is neither here nor there. Shri Chinoy submitted

that the ICRA downgrading has been contested by plaintiffs. There is no

such averments in the plaint nor is there any document to show that there

was a challenge to the downgrading by ICRA. I have to note that Shri Joshi

appearing for defendant no.2 tendered an extract of rating action issued by

ICRA on 19th November 2018 for RPL in which it is stated that ICRA has

moved the rating of RPL to the "ISSUER NOT CO-OPERATING" category

due to non-submission of monthly "No Default Statement (NDS)". ICRA has

been, it is stated, consistently following up with RPL for obtaining the

monthly NDS and had also placed the ratings under review due to non

submission of NDS in the month of October2018, but still RPL's

management has remained non-co-operative. ICRA advised the lenders,

investors and other market participants to exercise appropriate caution

while using ICRA's rating as ICRA was unable to validate whether RPL has

been able to meet its debt servicing obligations in a timely manner. This I

was told was a public document and available in ICRA's website.

19 Shri Chinoy admitted that the default interest of 2% has not

been paid by plaintiffs. Shri Chinoy also admitted that plaintiffs have not

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restored the security cover ratio to the required security cover ratio despite

being informed as far back as on 9 th October 2018 that there is a fall in the

closing price of the pledge shares by 40%. At the same time, Shri Chinoy

stated that till date of filing the suit plaintiffs have regularly serviced both

the debentures by paying interest thereon in a timely manner. In my view,

this does not help because debenture holders as per the contract and as

stated in the communication dated 30th October 2018 from defendant no.5

could appropriate the interest paid first against default interest of 2% p.a.

Therefore, in my view, once that is done, then there is a shortfall in the

regular interest paid and plaintiffs cannot say they have been servicing both

the debentures by paying interest in a timely manner.

20 On inadequate notice before selling, Shri Chinoy submitted that

though Clause 7.1 (c) of the Debenture Trust Deed provided that only one

business day notice has to be given before the pledgors takes a decision to

do what is permissible under the said clause, one day notice is not a

reasonable notice as required under Section 176 of the Contract Act. Shri

Chinoy submitted that as held in The Official Assignee of Bombay V/s.

Madholal Singhu and Ors.3 no party can waive a notice to be given under

Section 176. Shri Chinoy submitted that even though the clause provides for

one day notice, it amounts to waiver.

3. 1946 ILR Page 1


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21                   It is rather strange that such an argument is made by plaintiffs.

When the contract was entered into, plaintiffs found one business day notice

to be reasonable. Clause 7.1(c) says "after giving a written notice of, (one)

business day to the pledgors (which each pledgor acknowledges and agrees

to be reasonable notice under applicable law)". Therefore, plaintiffs have

acknowledged that one business day notice was reasonable notice under

applicable law and Section 176 says reasonable notice has to be given.

Therefore, stand of plaintiffs smacks of deceit. Plaintiffs attempt is to

mislead. At no point after occurrence of events of default, did plaintiffs

(when according to Shri Chinoy plaintiffs were in discussion with

defendants) ask for increasing the notice period. Plaintiffs don't pay default

interest, don't top up the security ratio, don't even tell defendants how they

are going to make good, don't even reply to letters from plaintiffs and now

take a mendacious stand that notice period in the contract was not

reasonable. It is not plaintiffs case that plaintiffs were co-erced or forced

fraudulently made to sign the contract. Plaintiffs are not illiterate or a small

party. It is settled law that when a person signs a document, there is a

presumption, unless there is proof of force or fraud, that he has read the

document properly and understood it and only then he has affixed his

signatures thereon. Otherwise no signature on a document can ever be

accepted. In Grasim Industries Ltd. & Anr. V/s. Agarwal Steel 4 the Apex

4. (2010) 1 SCC 83

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Court observed "..... In particular, businessmen, being careful people (since

their money is involved) would have ordinarily read and understood a

document before signing it. Hence the presumption would be even stronger in

their case". There is no allegation of force or fraud in this case. Hence it is

difficult to accept the contention of plaintiffs. Plaintiffs are part of Reliance

ADAG Group and have access to expert legal team.

22 The pledged security are shares in flagship companies of

Reliance ADAG Group and traded freely in the stock market. Stock market,

it is common knowledge, is a place where prices can vary from minute to

minute on a trading day. A small incident can trigger a market to collapse

and it is unpredictable and speculative. It is for this reason "1 (one) business

day notice" has been provided for and it was acknowledged by plaintiffs as

reasonable. If one considers Exhibit "A" to the plaint, the price of RPL was

Rs.33.75 on 8th August 2018 and on 4th February 2019 it was Rs.17.20 per

share, almost 50% fall.

Therefore, this stand of plaintiffs cannot be accepted.

23 On Shri Chinoy's submissions that the shares were pledged to

defendant no.5, whereas defendant nos.1 to 4 sold the shares on

5th February 2019 and late in the evening defendant no.5 sold the shares to

defendant nos.1 to 4 and that was not permissible under the contract and

the attempt was to bring down the price during the day by defendant nos.1

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to 4 and to purchase the shares at a lower price from defendant no.5 later in

the day, Shri Kapadia and Shri Dwarkadas stated that defendant no.5 did

not sell any of the shares to defendant nos.1 to 4 but instead transferred

those shares. Counsel stated that defendants will provide to plaintiffs every

detail of sale price, and how the amount realised has been applied.

24 On Shri Chinoy's submissions that the sale by defendants on

one day of about 5.97 Crores shares was not a prudent decision and

defendants should have sold it in a structured manner so that there was no

glut in the market and prices would not have crashed and hence, defendants

ignored its fiduciary obligations to realise fair value for the pledged shares

and there was a erosion of Rs.274 Crores in the market value, in my view,

there was no such duty and in any event, no such duty was breached. It is

settled law that no pledgor can decide when and how a pledgee should

exercise its right to sell. Section 176 makes it clear that it is the discretion of

the pledgee to sell the pledged goods (shares in this case) in case the

pledgor makes default and if the pledgee exercises that discretion or does

not exercise that discretion, no blame can be put on the pledgee. What is

required is if pledgee decides to exercise its discretion to sell, it has to give

reasonable notice of sale to pledgors. In this case, defendants have given

reasonable notice as observed earlier. I find support in National Securities

Clearing Corporation Ltd. V/s. Prime Broking Company (India) Ltd. 5

5. Unreported judgment dated 28th June 2016 in Company Petition No.3 of 2015

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Paragraph 23 and 24 of the said judgment read as under :

23. Even otherwise, I find, that the law as far as Section 176 is concerned, is quite well settled. The law, as I understand it, is that a pledgor cannot compel a pledgee to exercise the power of sale as a means of discharge or to satisfy the debt. The pledgor's rights are only (i) in case the Pledgee exercised the power of sale, to insist that it should be honestly and properly done and the sale proceeds applied to the debt; (ii) in case the pledgee did not exercise the power of sale, then the Pledgor can redeem the pledge on payment of the debt or such part of it that has remained unpaid; and (iii) in case the sale was improperly exercised, to get damages caused thereby. This proposition of law has been laid down as far back as in the year 1930 in a decision of the Madras High Court in S. L. Ramaswamy Chetty and Another v/s M. S. A.P.L. Palaniappa Chettiar.4 This decision of the Madras High Court has been referred to by the Supreme Court with approval in the case of Vimal Chandra Grover v/s Bank of India.3 In fact, a Division Bench of this Court in the case of State Bank of India v/s Neela A. Naik and another.7 has also taken the same view. Paragraphs 12 to 16 of the said decision read thus:-

"12. We may notice that in the present appeal there are no disputes on facts. The contentions are purely legal. Now we would consider the first contention regarding applicability of Sec. 176 of the Contract Act. Section 176 provides for pawnee's right where pawnor makes default. It inter alia stipulates that on pawnor making default in payment of the debt, at the stipulated time, in respect of which the goods are pledged, the pawnee may bring a suit against the pawnor on the debt and retain the goods pledged as a collateral security; or he may sell the goods pledged, on giving the pawnor reasonable notice of the sale and if the sale proceeds are deficient the pawnor would be liable to pay the balance and if more, the surplus amount shall be paid to the pawnor. The contention of Mr. Nadkarni is that the only effect of aforenoticed clause 6 is that the Bank can dispose of the security without giving any notice to the respondents. It is only a waiver of the stipulation of right of the respondents to a reasonable notice before the Bank decides to appropriate the security. Learned counsel relies upon a decision of the Delhi High Court in Bank of Maharashtra v. Racmann Auto (P) Ltd., AIR 1991 Delhi 278. In the said decision, the question which came up for consideration was whether there was any legal duty cast on the plaintiff-

Bank to take early steps for disposing of the pledged goods. Construing Sec. 176, it was held that the very wording of the section makes it clear that it is the discretion of the pawnee to sell the goods in case the pawnor makes default but if the pawnee does not exercise that discretion no blame can be put on the pawnee and pawnee has the right to bring a suit for recovery of the debt and retain the goods pledged as collateral security. Doubt was also expressed whether a defendant as pawnor could force the pawnee to dispose of the pledged goods without defendant clearing the debt. However, on the facts of the present case, we need not go into this latter aspect on which doubt has been expressed. It has been

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categorically held in the cited decision that it is the discretion of the plaintiff-Bank to have filed the suit for recovery of the debt and retain the pledged goods as collateral security or in the alternative it could resort to selling the pledged goods after giving reasonable notice of sale to the defendants. In that case the plaintiff-Bank had in its wisdom exercised the first option of filing the suit and retaining the collateral security.

13. We are in respectful agreement with the legal proposition propounded in the aforesaid decision and thus there would be no question of judicious or arbitrary exercise of discretion by the Bank as to the time of appropriation of the amount from the collateral security to it in the form of FDRs.

14. In the Gulamhusain Lalji Sajan v. Clara D'souza, AIR 1929 Bombay 471, it was held that in cases of a pledge the creditor has two rights which are concurrent and the right to proceed against the property is not merely accessory to the right to proceed against the debtor personally and on the same lines. Reliance in the said decision was also placed on a Full Bench decision of the Madras and Calcutta High Courts. The same principles were held to be applicable to the cases of hypothecation or mortgage of movable property. Section 176 has been held to be mandatory in the Division Bench decision of this Court in Official Assignee, Bombay v. Madholal Sindhu(AIR 1947 Bom 217).

15. In view of aforesaid legal position, we are unable to accept the contention that the Bank was obliged to adjust the instalments immediately on amount becoming due from the FDRs. Faced with this position, Mr. Thali, learned counsel for the respondents, contends that Sec. 176 has no applicability since it applies only to goods and the Fixed Deposit Receipts cannot be construed as goods within the meaning of Sec. 176 read with Sec. 2(7) of the Sale of Goods Act. The contention of learned counsel is just stated to be rejected. Clause 6 has to be read in consonance with the interpretation of Sec. 176 of the Act, which means that the respondents agreed to waive notice to them before appropriation of amount by the Bank. The provisions of Sec. 126, 148 and 172 of the Contract Act also do not, in any manner, help the respondents in support of their contention that there is a legal obligation on the appellant to adjust the amount due to it every month out of the Fixed Deposit Receipts. The acceptance of such contention may throw open various questions. We may just make mention of one of it. If adjustment from the amount of instalment of Rs. 2775/- was to be made on default being committed every month in payment thereof, what would happen to the remaining amount of FDR? Would it be kept again in fixed deposit? Would it be kept in a saving account or would it be kept in a suspense account? All this clearly shows that the adjustment as made by learned single Judge cannot be sustained in law.

16. Mr. Thali, learned counsel for the respondents, also contends that the appellant-Bank had earlier appropriated Rs. 9500/- from the Fixed Deposit Receipts and, therefore, it does not how lie in their mouth to

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plead or contend otherwise. We are unable to accept this contention of learned counsel as well. The fact of the said appropriation will not change the legal position that the Bank is not obliged to make appropriations month by month which is the effect of the impunged judgment. It may be noticed that Mr. Nadkarni explains that earlier appropriation of Rs.9500/- was made on the maturity of the Fixed Deposit Receipts."

24. It is therefore clear that a pledgee has the discretion to decide whether he wants to sell the pledge security; when to sell it; and how much of it to sell. The pledgor cannot dictate terms to the pledgee on how he is to exercise his right. If this is the correct position in law, and that is how I understand it, then, I find at least prima facie that the claim for damages on account of the Petitioner failing to sell all 20,00,000 Gitanjali shares between 19th March, 2013 and 27th April, 2013, cannot succeed in law. In fact on a perusal of the Plaint filed in Suit (L) No.939 of 2013, at least to my mind, it is clear that the claim for damages is made on account of the Petitioners' failure to sell all 20,00,000 shares of Gitanjali between the period 19th March, 2013 and 27th April, 2013. It is not the case of the Respondent Company that the sale of the shares of Gitanjali by the Petitioner was conducted in breach of any agreement arrived at between the parties or was done improperly which has given rise to the claim in damages. As laid down in the judgment of the Madras High Court in the case of S. L. Ramaswamy Chetty and Another.4 and which has got approval of the Supreme Court in the case of Vimal Chandra Grover, the claim for damages can be brought by the pledgor against the pledgee only in the event that the pledgee sells the pledged goods and the same are sold improperly. In the facts of the present case the Respondent Company alleges that the Petitioner (who was the pledgee) ought to have sold all 20,00,000 shares and not only 2,97,731 shares of Gitanjali. This to my mind, does not in any way amount to a sale being conducted improperly as contemplated in the aforesaid two judgments. In fact, the grievance of the Respondent Company in the present case is that the Petitioners have acted improperly by not selling all 20,00,000 shares of Gitanjali. As stated earlier, in law, in the absence of an agreement in that regard, the pledgor cannot compel the pledgee to sell the pledge goods to discharge its debt. That is entirely at the discretion of the pledgee. This being the case, I find at least prima facie that the claim for the damages made by the Respondent Company on account of the Petitioner not selling all 20,00,000 shares of Gitanajali between the period 19th March, 2013 to 27 th April, 2013 is unsustainable in law.

25 I do not accept any of the submissions made by Shri Chinoy. I

asked Shri Chinoy what is the breach of contract or which are the provisions

of the agreements that plaintiffs are alleging defendants committed breach.

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Shri Chinoy did not give a clear answer to that except submit that (a) the

period of one business day notice was not reasonable and (b) defendant

nos.1 to 4 could not have sold the shares without having shares in their

account and according to plaintiffs they bought it at lower price from

defendant no.5 and only defendant no.5 could have sold shares.

On reasonableness of notice I have already dealt with it.

On sale by defendant nos.1 to 4, Clause 7.1 of Share Pledge

Agreements is very widely worded. It permits defendants, after giving notice

to plaintiffs, (i) transfer or register any pledged securities in the name of the

Trustee, any debenture holder or any of their respective nominees; (ii)

appropriate the pledged securities in the name of the debenture holders,

their nominees in lieu of any debt; and/or (iii) without any intervention of

Courts, sell or otherwise dispose of any pledged securities and/or the

collateral in such manner, at such times, and for such considerations as the

Trustee in its commercial opinion thinks fit and at its absolute discretion it

may think fit. When the contract was entered into plaintiffs found these

clauses perfect, but now are finding it unacceptable. I find nothing wrong in

what defendants did.

26 It has to be noted that the Debenture Trust Deed states the

Trustee can, after giving a written notice of one business day to the pledgors

(each pledgor acknowledges and agrees to be reasonable notice under

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applicable law), take any of the action as quoted and dealt with earlier.

Plaintiffs while entering into the Debenture Trust Deed found one business

day was reasonable notice. Two event of defaults were communicated to

plaintiffs, one in August 2018 and other on 9 th October 2018 and plaintiffs

have taken no steps to rectify those event of defaults. Plaintiffs have not

even paid the 2% additional interest which plaintiffs were supposed to pay

on RPL shares being downgraded by ICRA. Plaintiffs did not even take any

steps to maintain the security cover ratio. Therefore, it does not lie in the

mouth of plaintiffs to find any fault with defendants. Even today I asked

Shri Chinoy repeatedly as to how plaintiffs proposed to secure defendants.

Shri Chinoy submitted that because of defendants actions, plaintiffs have

suffered a loss of Rs.274 Crores which will be more than the amount owed

to defendant nos.1 to 4 and therefore, the question of plaintiffs making any

payment to defendants does not arise.

27 Even for a moment if I accept plaintiffs arguments that

defendants have not been prudent in selling the shares or defendant nos.1

to 4 could not have sold the shares and taken those shares from defendant

no.5, still plaintiffs will have to prove that plaintiffs have suffered

loss/damages and unless damages are proved and decreed by this Court, as

a claim for damages for breach of contract is not a claim for a sum presently

due and payable, the question of plaintiffs recovering any amount from

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defendants does not arise. Therefore, this cannot be a reason for stopping

defendants from taking further action on the pledged shares, which is still

with them, in accordance with the agreement and applicable law.

28 If I go with what Shri Chinoy submitted on reasonableness of

notice or method of sale of shares, then it would also amount to rewriting

the contract. In my view, defendants have done nothing contrary to the

provisions of the contract and applicable law. Events of default happened in

August 2018 and October 2018. ICRA has also observed that RPL is non

co-operative. Admittedly, the penal interest has not been paid by plaintiffs

and they have not restored the security cover ratio. In the light of this,

defendants cannot be stopped from exercising their rights under the

contract and applicable law. Just because plaintiffs allege that they have

suffered a loss of Rs.274 Crores plus and they are entitled to claim further

damages in the sum of Rs.2734 Crores does not mean that the Court should

prevent defendants from exercising their rights under the contract and

applicable law. It should also be noted that plaintiff no.3 and plaintiff no.4

are equity/investment funds in which general public would have placed

funds for investment. Therefore, grave prejudice will be caused to

defendants and/or their investors, if the relief as prayed for is granted. The

value of pledged shares has plummeted. The balance of convenience also

lies in favour of defendants, particularly, in view of the fact that the

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Chairman of RCOM, which is one of the flagship company and who is also

Charmain of the Reliance ADAG group of companies has made a statement

that RCOM, whose 2% shares are pledged with defendant no.5 to secure the

debentures issued to defendant nos.1 to 4, is filing for bankruptcy.

Shri Dwarkadas said RCOM has already filed for bankruptcy. It is also stated

in the plaint, RCOM is facing insolvency proceedings. In such a situation

plaintiffs, after giving notice as required under the pledge agreements sold

part of the pledged shares. Further, Shri Chinoy had made no submissions

as to what plaintiffs proposed to do for the 2% shares of RCOM pledged

with defendant no.5.

29 In the circumstances, in my view, no case is made out for

granting any ad-interim relief as prayed for. Ad-interim relief rejected.

30 I must hasten to add that these are only prima facie views.

31 Defendants to file affidavit in reply and serve a copy thereof

within three weeks from today. Rejoinder, if any to be filed and copy served

within two weeks thereafter.

32 Notice of motion to be listed for hearing in due course after

eight weeks.

33 Written statement to be filed and copy served within 30 days of

this order being uploaded.

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34                 Suit be placed for case management hearing on 22 nd March

2019.



                                                    (K.R. SHRIRAM, J.)




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