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Supreme Court describes the nature of prospective, retrospective, and retroactive laws

Cause Title : Securities and Exchange Board Of India vs Rajkumar Nagpal & Ors., Civil Appeal No. 5247 of 2022, The Supreme Court Of India

Date of Judgment/Order : August 30, 2022

Corum : Dr. Dhananjaya Y. Chandrachud, Surya Kant & A S Bopanna; J.

Citied: 

  1. Vineeta Sharma v. Rakesh Sharma
  2. State Bank's Staff Union (Madras Circle) v. Union of India
  3. State v. Kalyan Singh
  4. Laxmidas Morarji v. Behrose Darab Madan

Background

Reliance Commercial Finance Limited' issued NCD to various persons. Vistra was the Debenture Trustee. RCFL committed its first default under the Debenture Trust Deeds in March 2019. On 7 June 2019, RBI issued a Circular which provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan' or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an inter creditor agreement. Bank of Baroda and other lenders of RCFL entered into an ICA on 6 July 2019, pursuant to the RBI Circular. The RBI Circular applied to banks and specified categories of lenders. Other investors were outside its purview. SEBI issued a circular on 13 October 2020. The subject was the Standardisation of procedure to be followed by Debenture Trustee(s) in case of  default‘ by issuers of listed debt securities‘. On 11 March 2021, RCFL and Vistra amended the Debenture Trust Deeds by executing a Supplementary Debenture Trust Deed which took note of the SEBI circular. On 15 July 2021, the Resolution Plan submitted by Authum Investment and Infrastructure Limited10 was approved by RCFL‘s lenders. 

Seventeen debenture holders instituted a suit on the Original Side of the Bombay High Court on 1 July 2021 for the protection of their interests with respect to the amounts due to them by RCFL. The debenture holders urged that Vistra, should have taken necessary steps to protect their interests. The debenture holders also alleged that certain funds available with the Bank of Baroda, the second defendant, were distributed amongst creditors without regard to their status as secured‘ or unsecured‘ creditors without their consent and that they had a first charge on the receivables of RCFL. They also stated that RCFL, Bank of Baroda, and Vistra could not seek an ex post facto consent from the debenture holders for either the ICA or the Resolution Plan. They urged that it was mandatory for Vistra to sign the ICA on behalf of the debenture holders before considering the Resolution Plan. They also sought an injunction restraining RCFL, Bank of Baroda, and RBI from implementing the RBI Circular.

SEBI in its affidavit before the High Court submitted that the debenture trustees are obligated to comply with its circular in case of a default committed by an issuer of listed debt securities even though the event of default has taken place prior to the issuance of its circular.

The Single Judge recorded that RCFL and the resolution applicant had agreed to pay the debenture holders sum of Rs. 91,00,000/- representing 29.96% of the total principal outstanding. In return, debenture holder parties to the suit would have to accept the terms of the negotiated settlement in full and final satisfaction of all their claims against the parties and agreed to transfer their debentures in favour of the resolution applicant. In the same order, the Court held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds. The court also held that a mere reference to the SEBI Circular would not override the express terms of any of the Debenture Trust Deeds.

SEBI challenged the order but the Divisional Bench held that the SEBI Circular would not apply retrospectively to defaults committed prior to 13 October 2020. The matter reached the Supreme Court.

Judgment

The Supreme Court opined that the SEBI Circular has retroactive application. Referring to various authoritative writtings, the Supreme Court held that the rule against retrospective construction is not applicable to a statute merely because but its operation is based on events that arose prior to it.

The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events.

The terms  retrospective‘ and retroactive‘ are often used interchangeably. However, their meanings are distinct. 

'Retroactivity' is a term often used by lawyers but rarely defined. On analysis it soon becomes apparent, moreover, that it is used to cover at least two distinct concepts. The first, which may be called 'true retroactivity', consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as 'quasi-retroactivity', occurs when a new rule of law is applied to an act or transaction in the process of completion.The foundation of these concepts is the distinction between completed and pending transactions.

Many decisions of this Court define retroactivity‘ to mean laws which destroy or impair vested rights. In real terms, this is the definition of retrospectivity‘ or true retroactivity‘. Quasi-retroactivity‘ or simply
'retroactivity‘ on the other hand is a law which is applicable to an act or transaction that is still underway. Such an act or transaction has not been completed and is in the process of completion. Retroactive laws also apply where the status or character of a thing or situation arose prior to the passage of the law. Merely because a law operates on certain circumstances which are antecedent to its passing does not mean that it is retrospective.

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