Rahul Dilip Shah v. The Catalyst Trusteeship Limited & Ors.

13. In support of the application, learned senior counsel for the plaintiff has begun by urging that even though the plaintiff had pledged his 26% shares in the defendant no. 3 company to the defendant no. 2 as a condition for the loan advanced to it, any right in respect of those pledged shares can be claimed by the defendant nos. 1 & 2 only upon a default in the repayment of the loan. He submits that it is an admitted case of the defendants that after the mutually agreed terms of restructuring the defendant no. 3 can no longer be treated as in default of repayment of the loan as on date and therefore, the defendant nos. 1 & 2 cannot exercise any right over these pledged shares at this stage.

14. He submits that even though the defendant no. 1 under the directions of defendant no. 2 had invoked the pledged shares on 04.02.2022, the position has since changed as the defendant no. 3 is no longer a defaulter as on date and therefore, the voting rights in these pledged shares which were till now being exercised by defendant no. 1 ought to be restored to the plaintiff. For this purpose, he also draws my attention to the amended Term Sheet prepared in January 2023, which was a pre-condition for execution of the third amendment to the DTD to contend that it was one of the key representations and warranties in this Term Sheet that except for the ‘Event of Default’ leading to the restructuring of the loan and which had since been cured, no other ‘Event of Default’ had occurred or was continuing on the said date. He submits that a similar condition was incorporated in the third amendment deed wherein it was specifically recorded that the interim moratorium 01.08.2021 to 31.06.2022, had been agreed upon between the parties, during which period non-payment of debenture amount or interest was not to be considered as a default. It is therefore contended that as on date there is no existing ‘Event of Default’.

15. Mr. Dholakia next submits that the entire scheme of arrangement is a fraud being played on the shareholders of the defendant no. 3 as the defendants, in connivance with each other, have now sought to put the fair value of the defendant no. 3 company at only Rs. 53.[2] lakhs. He submits that this will cause grave loss to the plaintiff who has a substantial interest in defendant no. 3 but is now being prevented from exercising his voting rights only because of the illegal invocation of his 26% shares by the defendant NO. 1 on 04.02. 2022, which invocation is liable to be automatically revoked on account of the loan account of the defendant no. 3 having been regularized with effect from 01.08.2022. He submits that if the defendants succeed in hiving off the entire E Business Solutions Division of the defendant no.3 to Nova, by simultaneously declaring Nova to be a company independent of defendant no.,[3] the suit filed by the plaintiff will become infructuous, as even if the plaintiff succeeds before this Court, as against the value of his shares of about 2 crores, he will receive a petty amount of Rs. 12 to 13lakhs towards the value of his shares.

16. He also places reliance on the decision of the Apex Court in Vistara ITCL (India) ltd and ors vs. Dinkar Venkatasubramanian and Ors(2023) 7 SCC 324 to contend that the defendant no. 1 despite having invoked the pledged share of which the plaintiff continues to be the owner, cannot claim any rights in the said shares. He, therefore, submits that it is only the plaintiff who ought to be granted the liberty to exercise voting rights qua these 26% shares which have till date admittedly not been put to sale by the defendants 1 & 2.

17. On the other hand, learned counsel for the defendant nos. 1 & 2 vehemently oppose the application and submits that the entire premise of the present application is incorrect. By drawing my attention to the schedule VI to the DTD which describes the ‘Events of Default’, Mr. Aggarwal, learned counsel for defendant no. 1 submits that despite the loan account of defendant no. 3 having been regularized as on date, the plaintiff continues to be a defaulter as per clause 16(a) and 15(g) of the schedule. He submits that the ‘Events of Default’ include a situation where the promoter seized to be a Director in the company as also a situation where the pledgor is declared a wilful defaulter by any bank. In the present case, the plaintiff has not only been declared a wilful defaulter by Yes Bank but on his own showing, he is no longer a Director in defendant no. 3. This in itself, he contends, is sufficient to show that the ‘Events of Default’ continue and the plaintiff as on date is a defaulter and therefore, his plea that the invocation of the pledged shares by defendant no. 1 is liable to be revoked, is wholly misconceived. Furthermore, the reliance of the petitioner on the amended term sheet issued in January, 2023 is also misplaced as the said term sheet was only preparatory document for issuance of a potential amendment to the DTD and it is only the terms of the third amendment deed dated 24.04.2023, which governed the parties. He submits that the said agreement clearly records that the restructuring of the loan advanced to defendant no.3 was subject to the continued pledge of the shares of the plaintiff as also of Nova.

18. Mr. Aggarwal next contends that even under the SPA the voting rights rightly vest in defendant no. 1 since 04.02.2022 which rights have been regularly exercised by the said defendant without any objection from the plaintiff. By drawing my attention to para 2.3.[1] of the SPA, he submits that it only until the occurrence of an ‘Event of Default’ that the plaintiff was entitled to exercise voting rights. However, once the ‘Event of Default’ occurred, it is the defendant no. 1 who in terms of clause 2.5.[1] (c) of the SPA entitled to exercise the voting rights. Further, he places reliance on clause 17.1, 17.2.[2] to 17.2.[4] and submits that the obligations arising out of the DTD and SPA will continue till the account is finally settled. He submits that once it is an admitted position that the loan account of defendant no. 3 has only been restructured and not finally settled, the accrued rights of defendant no. 1 to deal with these shares as if it were the outright owner thereof would continue. He therefore, prays that the application be dismissed.

19. Having noted the rival submissions of the parties and the admitted positions, what emerges is that the defendant nos. 1 & 2 do not deny that the loan extended to defendant no. 3 has been restructured. Their claim, however, is that this would not imply that the default, on the part of the plaintiff, does not continue to exist. It has, therefore, been contended on behalf of these defendants that as long as the events of default continue, their right to deal with the shares as if they are the owners thereof is in terms of the SPA would remain unbridled. In order to appreciate, this plea of the defendants, it would apposite to note clauses (h)&(j) of clause 16 of the Schedule IV to the DTD, which defines ‘Events of Default’ in the following manner:

20. As noted hereinabove, the primary contention of learned senior counsel for the plaintiff is that the ‘Event of Default’ which had led to the invocation of the plaintiff’s pledged shares by defendant no.1 on 04.02.2022 already stands cured and, therefore, there is no existing ‘Event of Default’ which could entitle the defendant no.1 to exercise the voting rights qua these shares. For this purpose, the plaintiff has relied not only on the admitted position of the defendant nos.[1] & 2 that the loan advanced to defendant no.3 stands restructured but has also drawn my attention to the Amended Term Sheet as also to clause 2.[7] of the third amendment deed to the DTD. Though this plea of the plaintiff appears to be attractive on the first blush, this submission of learned senior counsel for the plaintiff has to be considered in the light of other clauses of the agreement entered into between the parties, more especially the manner in which the parties had themselves agreed to define the term ‘Events of Default’.

21. In my view, when the parties had themselves agreed in clause 16 (h) & (j) of Schedule IV to the DTD that an ‘Event of Default’ would also encompass a situation where a person does not remain a Director of the Company as also a situation where he is declared as a wilful defaulter, the plaintiff’s plea that there is no existing ‘Event of Default’ has to be rejected. Once the plaintiff admits that he is no longer a Director in the defendant no.3 Company, this act in itself would, in my considered view, amount to an ‘Event of Default’ in terms of clause 16 (j) of the DTD noted hereinabove. The plaintiff has also not denied, that as urged by the defendants, he has been declared a wilful defaulter by Yes Bank Limited. This factual position would also fall within the ambit of the term ‘Events of Default’ as prescribed in clause 16 (h) of the Schedule IV to the DTD. In the light of these specific provisions of the DTD, the plaintiff cannot be permitted to urge that the ‘‘Event of Default’’, which had occurred in February, 2022, stands cured on account of the restructuring of the loan advance to defendant no. 3. As has rightly been urged by the learned counsel for the defendant nos.[1] & 2, the ‘Events of Default’ envisaged under the DTD would not mean only the default in paying the debenture amount and/or interest but would also include other events as well, including the events set down in Clauses (a) to (j) of clause 16 of the Schedule IV. The rights of the plaintiff have to be governed by these specific terms of the DTD as it is on the terms of this DTD dated 07.08.2017 that the plaintiff had pledged his shares. The plaintiff would therefore be bound by the terms of this DTD as also the SPA executed in 2017 and cannot urge this Court to hold that there is no ‘Event of Default’ as on date. Once, as per terms of the DTD, the ‘Events of Defaults’ are continuing, this Court cannot merely on account of the restructuring of the loan hold that the ‘Event of Default’ stands cured.

22. In this regard, reference may be made to a recent decision in Maharashtra State Electricity Distribution Company Ltd vs. Maharashtra Electricity Regulation Commission and Ors (2022) 4 SCC 657, wherein the Apex Court reiterated the settled legal position that the Court cannot rewrite a contract mutually executed between the parties. The relevant extract of the said decision as contained in para 178 reads as under:-

23. In the light of the aforesaid, there can be no doubt about the fact that despite the loan account of defendant no.3 having been regularised as on date, the question whether an ‘‘Event of Default’’ continues to exist has to be seen in the context of the definition of the said term as set out under clause 16 of Schedule IV of the DTD, which defines ‘Events of Default’. Once it is evident that the case of the plaintiff clearly falls within sub clause (j) & (h) of clause 16 of the Schedule IV to the DTD, this Court has no other option, but to hold that an ‘‘Event of Default’’ continues in accordance with the terms and conditions agreed between the parties. The plaintiff is, therefore, bound by the terms of clause 16 of the DTD and cannot be permitted to urge that the ‘‘Event of Default’’ must be confined to a default in payment of the loan amount/debenture interest by defendant no.3. I am, therefore, unable to agree with the plaintiff that the ‘‘Event of Default’’ is not continuing as on date.

24. It is the case of the defendant nos.[1] & 2 that having invoked the shares pledged by the plaintiff, they are entitled to exercise all rights including voting rights as were available to the plaintiff, for which purpose reliance has been placed on clauses 2.3.1, 2.5.1(c), 17.1, 17.2.2, 17.2.[3] and 17.2.[4] of the SPA. It would, therefore, be useful to first note, clause 2.3.[1] of the SPA, which reads as under:- “2.[3] Voting Rights 2.3.[1] Subject to Section 2.3.[2] below, on and after the Effective Date but until the occurrence of an ‘Event of Default’, the Pledger shall be entitled to exercise any and all voting and other consequential rights pertaining to the Pledged Shares except the right to sell, transfer, assign, or encumber the Pledged Shares and for all or any part thereof for any purpose not in violation of or inconsistent with any of the terms of this Agreement or the Debenture Documents provided that the Pledger agrees that he will not vote in any manner which contravenes the terms and provisions of this Agreement and the Debenture Documents or which would give rise to an ‘Event of Default’, and will not vote in favour of any resolution which would have the effect of altering the rights of the Finance Parties hereunder or under the Debenture Documents or the terms of the Pledged Shares or any rights attached to the Pledged Shares in any way. All such rights of the Pledger to vote shall cease forthwith upon the occurrence of an ‘Event of Default’ and the provisions of Section 2.[5] of this Agreement shall apply. After the occurrence of an ‘Event of Default’, the Pledgor hereby irrevocably authorizes the Debenture Trustee to attend any general meeting of members or meeting of any class of members or meeting of creditors of the Pledgor, exercise the voting rights in respect of the Pledged Shares in any manner as the Debenture Trustee may deem fit, or take any other action in terms of the Applicable Law at any time as the lawfully constituted attorney of the Pledger. To enable the Debenture Trustee to exercise voting rights as aforesaid, the Pledgor shall on the Effective Date register this Agreement with the Pledger with the instructions that as and when any intimation is received from the Majority Debenture Holders in this behalf, the Debenture Trustee should be permitted to attend and exercise the voting rights in respect of the Pledged Shares on any matter at any meeting of the members of the Pledgor. The Pledgor shall also for forward copies of the notices of the meeting to the Finance Parties and the Debenture Trustee as and when such notices are issued to the shareholders. The Pledgor shall execute and deliver to the Finance Parties all proxies and such other instruments as the Debenture Trustee may require for exercising such voting and other rights.” (emphasis supplied)

25. From a perusal of the aforesaid clause, it is evident that the parties had agreed that as long as there was no ‘‘Event of Default’’, it was the pledgor, i.e the plaintiff, who alone was entitled to exercise all voting rights and other consequential rights pertaining to the pledged shares, except the right to sell, transfer, assign or encumber these shares. It was further agreed between the parties that after the occurrence of an ‘‘Event of Default’’, the debenture trustee i.e. defendant no.1, would be authorised to exercise voting rights in respect of these pledged shares. In the present case, it is an admitted case of the parties that after the ‘‘Event of Default’’ occurred in February, 2022, the defendant no.1 has, in accordance with clause 2.3.[1] of the SPA, been exercising all voting rights in respect of the shares pledged by the plaintiff. The plaintiff’s plea that the position has now changed and there is no continuing ‘‘Event of Default’’ has already been rejected hereinabove and, therefore, I am unable to appreciate as to how in the light of clause 2.3.1, the plaintiff can be permitted to urge that the defendant no.1 is not entitled to exercise voting rights qua these pledged shares which already stand invoked in February, 2022 itself.

26. I may now also refer to clause 2.5.1(c) of the SPA, which describes the remedies of a debenture trustee upon an ‘‘Event of Default’’. The same reads as under:- “2.[5] Remedies on an ‘Event of Default’ 2.5.[1] (c). to exercise voting rights in respect of all or any part of the Pledged Shares (whether or not transferred in the name of the Debenture Trustee) and otherwise act with respect thereto as though it were the outright owner thereof. The Pledgor shall execute and deliver to the Debenture Trustee all such proxies and other instruments as the Debenture Trustee may request for the purpose of enabling the Debenture Trustee to exercise the voting and other rights in the shareholders' meetings of the Pledgor in accordance with the instructions of the Majority Debenture Holders;” (emphasis supplied)

27. Even this clause of the SPA makes it clear that upon the occurrence of an ‘‘Event of Default’’, the voting rights in respect of all the pledged shares irrespective of whether they stand transferred in the name of the debenture trustee or not, would be exercised only by the debenture trustee as if it were the outright owner thereof. In the present case, once an ‘Event of Default’ had taken place in February, 2022, the defendant no. 1 being the debenture trustee therefore became entitled to exercise the voting rights in respect of shares pledged by the plaintiff. Merely because these pledged shares though already invoked by defendant no. 1 have not yet been sold, would not in my view come in the way of the defendant no. 1 in exercising the voting rights in consonance with clause 2.5.1(c) of the SPA.

28. The plaintiff has further urged that on account of the defendant no. 1 and 2 having executed an amendment to the DTD without his consent, he can no longer be bound by the terms of the pledge which was made on the basis of the DTD as executed on 07.08.2017. His plea thus being that when the very terms and conditions on which the loan was advanced to defendant no. 3 for which purpose he had pledged his shares with defendant no. 2 has itself undergone a sea change, the plaintiff cannot now be bound by the terms of the original pledge. In this regard, he has submitted that the shares which were valued at about Rs.[2] crores in August 2017, when the original DTD was executed, have now been valued at about 12 lakhs. This huge devaluation is only on account of the decision taken by defendant no. 3 in connivance with defendant nos. 1 & 2 to hive off the E-Business Solutions Division of defendant no. 3 to an entirely independent entity Nova.

29. Though, even this plea of the plaintiff appears to be attractive, but on a closer scrutiny of clauses 17.1, 17.[2] and 17.2.[2] to 17.2.[4] of the SPA on which reliance has been placed by the defendants, it is evident that the actions taken by the defendant nos. 1 & 2 are protected under the clause 17.[2] and will have no effect on the obligations of the plaintiff as a pledgor. For the sake of reference, the aforesaid clauses are being noted herein below: “17.1.The Pledgor agrees that at any time after the occurrence of an ‘Event of Default’, the Finance Parties arid/or the Debenture Trustee shall have the right, upon notice to the Pledger, (subject to the provisions of the Debenture Trust Deed a-nd subject to obtaining the prior instructions of the Majority Debenture Holders) to exercise all the rights, powers and remedies vested in it (whether vested in it by this Agreement or any Debenture Documents or by Applicable Law) for the protection and enforcement of its rights in respect of the Collateral, and the Debenture Trustee (after obtaining such prior instructions of the Majority Debenture Holders) shall be entitled, without limitation, to exercise any or all of the following rights, as often as it deems fit: 17.[2] Protective Clauses The obligations of the Pledgor under this Agreement will not be affected by any act,omission, matter or thing (including whether or not known to the Pledgor) or any act oromission of the Debenture Trustee which would reduce, release or prejudice any of itsobligations under this Agreement or prejudice or diminish those obligations in whole or inpart including: 17.2.[1] any waiver, exercise, omission, compromise, arrangement or settlement with or the granting of any time, concession, consent or indulgence to, the Pledgor under the Debenture Documents; 17.2.[2] any variation in the terms, conditions or manner of disbursement of monies under the Debenture Documents; 17.2.[3] any amendment to the Debenture Documents; 17.2.[4] changes in the obligations of the Pledgor to make payments under the Debenture Documents towards principal, interest, fees and expenses;”

30. In the light of the aforesaid clauses of the SPA, I have no hesitation in holding that the amendment to the DTD executed on 22.04.2023, would not come in the way of exercise of rights which had already accrued in favour of defendant no. 1 upon the occurrence of ‘‘Event of Default’’ in February,

2022. The plaintiff being a pledgor, who is guilty of default as per clauses 16 (j) and (h) of the SPA, cannot be permitted to urge that because his interests are likely to be adversely affected on account of the proposed composite scheme of arrangement, he should be granted the right to vote against this scheme of arrangement in the meeting of equity share holders scheduled on 27.10.2023.

31. Before I conclude, I may also deal with the decision in Vistra ITCL (India) Limited (supra) on which heavy reliance was placed by the plaintiff to contend that during the existence of a pledge, the general rights or ownership rights in the property remain with the pledgor. It has therefore been urged that as the pledged shares are yet to be sold, the pledge continues and therefore, it is the plaintiff only who can exercise the voting rights qua these shares. Having considered the said decision, I find that in the said case, the Court was not dealing with the case like the present one, where the parties had entered into a specific agreement thereby agreeing that the rights which the pledge/ defendant no. 1 had acquired after the occurrence of an ‘Event of Default’ would not be effected by any subsequent event. The plaintiff having voluntarily agreed that once an ‘Event of Default’ occurs, it is the defendant no. 1 which will have the voting rights, cannot be now permitted to urge that these rights continue to vest in him. I may also note that as per the terms of the agreement, on account of the plaintiff having been declared a wilful defaulter by the Yes Bank Limited and his no longer being a Director of defendant no. 3, the ‘Events of Defaults’ in terms of the DTD continue to subsist as on date and therefore, the rights of voting rightfully vest with defendant no. 1.

32. For the aforesaid reasons, I find absolutely no merit in the present application, which is, accordingly, dismissed.

33. A copy of this order be given dasti under the signatures of the Court Master.

34. List on 01.02.2024.

JUDGE OCTOBER 20, 2023 sr/acm/dv