IDBI Trusteeship Can Sell Zee Entertainment’s Pledged Shares, Says Delhi High Court

The Delhi High Court has dismissed a petition filed by three Essel Group entities seeking to restrain IDBI Trusteeship Services from selling pledged shares of Zee Entertainment and Dish TV. The shares were pledged against debentures, which matured in May, worth Rs 425 crores issued by Essel Infraprojects to Franklin Templeton Asset Management.

This comes after IDBI Trusteeship - the debenture trustee appointed by Franklin Templeton - sent a pledge invocation notice and sought to sell the shares to recover the outstanding principle and redemption premium aggregating to Rs 616 crore. It sought to expedite the sale due to a fall in the security cover caused by the slumping share price of Zee Entertainment and Dish TV.

Three Essel Group entities moved court seeking to restrain IDBI Trusteeship from acting on the pledge invocation notice and selling the shares in the open market till the disposal of the case or conclusion of arbitration proceedings contemplated in the debenture trust deed.

It argued that the domino effect of default in the financial markets post 2018 and collapse in equity markets due to Covid-19 caused a slump in the share price. Being a pledgee, IDBI Trustee must act in a good faith and any attempt by it to sell the shares  at this time would be prejudicial to the shareholders.

A bench comprising Justice V Kameswar Rao observed that in case of a pledge, an absolute discretion lies with the ‘pawnee’ and the court cannot substitute that discretion. As such, IDBI Trusteeship’s discretion cannot be challenged, the court said, while denying relief to the Essel Group entities.

Subhash Chandra-led Essel Group has been facing several headwinds in the last few years prompting lenders and debenture holders to move court. Last week, the Bombay High Court ruled in favour of the Essel Group, while dismissing Yes Bank’s application seeking enforcement of a letter of comfort as a guarantee.

What Essel Entities Argued ?

Harish Salve, senior counsel for the Essel Group entities and Parag Tripathi made the following arguments seeking a restraining order against IDBI Trusteeship:

• It is a settled position in law that financial institutions must act in good faith and owe a duty to stakeholders. The RBI and SEBI have extended a moratorium and provided compliance relaxations, which indicated a ‘regulatory leaning’.
• Essel Group entities must be allowed to sell shares via private placement which can help in generating higher returns, while an open market share sale by IDBI Trusteeship would harm unit holders of Franklin Templeton.
• The Bombay High Court had restrained IDBI Trusteeship from selling pledged shares of Future Retail on similar grounds, which was also affirmed by the Supreme Court. As a result, the Delhi High Court must restrain the debenture trustee from selling the shares.
• The Essel group entities were entitled to similar reliefs as were granted by the Delhi High Court in the Anant Raj Industries case, Shakuntala Education case and Bombay High Court’s decision in the Transcon Iconica case.

IDBI Trusteeship’s Counter

Neeraj Kishan Kaul, counsel for IDBI Trusteeship and Birendra Saraf opposed Essel Group’s plea on the following grounds:

• A pledgee has an unfettered discretion under law to retain pledged shares and bring a suit for recovery. Thus, it was not bound to participate in any earlier sale of shares initiated by the Essel Group and could sell at its discretion.
• Default in repayment of debentures by Essel Infraprojects had no co-relation with Covid-19 outbreak.
• Invocation of pledge by IDBI Trusteeship is as per a pledgee's right under section 176 of the Indian Contract Act, 1872 which provides it with discretion to initiate a sale. It had an absolute discretion to sell shares to anyone and at any price.
• And lastly, any injunction against the sale would be detrimental to the unit holders of Franklin Templeton and cause a slump in their net asset value.

Court’s Decision

The Delhi High Court observed that the Essel Group entities did not challenge the rights of IDBI Trusteeship as a ‘pawnee’ under the Indian Contract Act.

It denied them the benefit of Bombay High Court’s decision by observing that the Future Retail order was passed immediately after the imposition of the lockdown. Further, the debenture trustee in that case tried disposing the shares despite an adequate security cover.

Finally, the court observed that IDBI Trusteeship was well within its right to enforce the pledge and any direction by the court to postpone the invocation could go against the intention of the parties to the debenture contract.