Dish TV EGM: Bombay High Court Upholds Yes Bank's Right To Vote

Can't accept argument that security in Yes Bank's name should count for nothing but so much waste paper & be entirely notional: HC

<div class="paragraphs"><p>The Bombay High Court.&nbsp;(Photo: BQ Prime)</p></div>
The Bombay High Court. (Photo: BQ Prime)

The Bombay High Court Thursday upheld Yes Bank Ltd.'s right to vote at Dish TV Ltd.'s extraordinary general meeting on June 24.

World Crest Advisors LLP—the promoter entity of Dish TV—was seeking a relief that the bank’s vote must not be allowed. Yes Bank had on Monday morning voted on the resolutions, including reappointment of Jawahar Goel as managing director; Anil Dua as a whole-time director; and Rajagopal Venkateish as a non-executive independent director.

The high court held that World Crest's argument that Yes Bank cannot exercise voting rights will lead to an unviable and thoroughly inequitable situation. "What we are asked to infer is that the recording of Catalyst's name as the beneficial owner resulted it in having certain severely curtailed rights as a shareholder or member. We find it difficult to accept this proposition."

"Those rights which Catalyst or its nominee Yes Bank is now exercising can be brought to an end if World Crest's exercises its right to redeem," the court said. "It seems to us that World Crest's case however long on legal arguments, is remarkably short on any equitable principle."

World Crest refuses to redeem a pledge. The law is clear that without Catalyst's express approval, it cannot force the sale of the security. Yet at the same time, it now wants to contend that the security should count for nothing but so much waste paper and be entirely notional. Catalyst cannot be compelled to sell. World Crest will not redeem. In the meantime, Catalyst can do nothing. Once an entity is shown as a beneficial owner [of shares], it is so for all purposes.
Bombay High Court

The court also dismissed World Crest's interpretation of the Supreme Court's recent ruling in the PTC Financial case.

The Supreme Court's ruling in PTC Financial does not, as World Crest would have it, create a new or subsidiary class of company members or shareholders. The argument by World Crest is one that leads to the creation of a distinct class of beneficial owners, i.e. shareholders with significantly diminished rights because they are pledgees, the high court noted.

In our view, on the equitable consideration and balance of convenience, World Crest has made out no case whatsoever. We find it impossible to find fault with the decision of the single bench.
Bombay High Court

The high court’s division bench of Justices Gautam Patel and Madhav Jamdar was hearing the case after World Crest was denied interim relief by the single judge bench of Justice AK Menon.

Arguing for World Crest, Senior Advocate Navroz Seervai had made two key points:

Yes Bank Has No Locus

The pledge deed was entered into between Catalyst Trusteeship Ltd., World Crest and several Essel Group companies. Yes Bank is neither a pledgee, nor a nominee of Catalyst as per the pledge deed. And so, the transfer of Dish TV’s shares by Catalyst to Yes Bank is ex facie illegal, Seervai said.

To recap, Yes Bank had extended loans to several Essel Group entities who defaulted on their payments. In August last year, Catalyst Trusteeship invoked the pledge for the benefit of Yes Bank. Post which, 44,53,48,990 equity shares—representing 24.19% of Dish TV—were transferred from Catalyst’s demat account to that of Yes Bank.

I am not able to understand the argument that Catalyst continues as a pledgee but for voting, Yes Bank has become the nominee. The contract law on pledge does not contemplate a nominee. There is no power in the pledge deed to merely transfer shares to Yes Bank. Such a transfer constitutes a conversion, which you can’t do as per Supreme Court ruling in PTC Financial.
World Crest's Counsel

In this case, the apex court had ruled that pledge is not discharged or satisfied either in full or in part until the sale of shares happens. And that the pledgor—entity which has given shares as security—would have the right to redeem until shares are sold to a third party.

This redemption can happen only from the pledgee [in this case Catalyst] and from no other, Seervai argued.

Only Right Catalyst Had Was To Sell

Relying on PTC Financial, Seervai argued that the only right a pledgee [in this case Catalyst] has 'is to sell'. It does not allow a 'transfer'. Further, the law does not give the pledgee general rights like voting,

In any case, in the facts of this case, since Catalyst now no longer holds these shares, it doesn’t have the right the vote anyway, Seervai said.

Beneficial Owner Has The Right To Vote: Yes Bank

Yes Bank’s Counsel Darius Khambata responded by saying that so far, there have been eight attempts to deny the lender its right to vote. And that there has been no attempt so far any effort to redeem the shares of which Yes Bank is now a beneficial owner.

Khambata also argued against World Crest’s interpretation of PTC Financial judgment of the apex court.

The PTC judgment does not create a new class of beneficial owners. This ruling has in fact observations protecting all contractual rights. It doesn’t say a beneficial owner has restricted rights pursuant to creation of pledge. PTC never had to consider the question of rights.
Yes Bank’s Counsel

It’s well-settled that the Contract Act is not a complete code and nothing prevents parties from entering into rights and obligations provided they are not inconsistent with contract law.

Khambata made this argument to underscore the point that under the pledge deed, parties can contractually agree to give up rights, which is the case here.

When World Crest the law doesn’t permit a nominee, they are falling into the same trap. The law does not have to permit a nominee as long as it does not prohibit. It does not contemplate a nominee - no difficulty.
Yes Bank’s Counsel

"One you are a beneficial owner, you have the right to vote until my name is removed," Khambata said.

The Bombay High Court's detailed order will be available on Monday.