2023 (2) TMI 187 - MADRAS HIGH COURT

Recovery of debt under NCD issued - Maintainability of plaint - rejection of plaint on the ground that the plaint does not disclose a cause of action and on the ground that the suit appears from the statements in the plaint to be barred by law - whether an application seeking interim relief in the form of interim injunction or provision of security is maintainable in the context of a suit for damages? - HELD THAT:- Both the CRAs did not provide details of the progressively weakening liquidity of DHFL in their reviews. More importantly, they did not take reasonable notice or give reasonable weight to the same and downgrade the ratings on such basis. Instead, they waited until DHFL's collapse became imminent before downgrading the ratings. By so doing, a strong prima facie inference may be drawn that they failed to fulfil their statutory and common law obligation to monitor and review the ratings so as to provide a true and accurate rating. For such reason, they are prima facie liable. Therefore, the CRAs cannot be absolved from liability.

The three firms of auditors (the eight to tenth defendants) endeavoured to absolve themselves of responsibility on the ground that they were not responsible for the financial statements, which were referred to and relied on in the prospectus. While the eighth defendant contended that the financial statements for the financial years 2011-2012 to 2015-2016 were relied upon in the prospectus and that the eighth defendant did not carry out audit during the said period, the ninth defendant contended that the prospectus was issued in the financial year 2016-2017 after the said defendant had resigned. However, the question arises as to whether they owe a duty of care to the plaintiff.

63 Moons became a debenture holder upon subscribing to the debentures floated under the prospectus. In the case of shareholders, whose interest is ordinarily aligned with that of the company, an argument that the company should espouse the cause may be required to be dealt with by a complaining shareholder. As regards debenture holders, the argument that the debenture trustee and not an individual debenture holder should espouse the cause could ordinarily be made. But, here, the plaintiff alleges with prima facie a fair measure of justification that the Debenture Trustee failed to fulfil obligations to debenture holders, including 63 Moons. Therefore, such objection is untenable.

The manner in which DHFL collapsed over the period when the eighth defendant played a critical role as statutory auditor leads to the strong prima facie conclusion that they failed to fulfil their statutory obligations, thereby causing immense losses to investors such as the plaintiff. Therefore, they cannot be absolved from responsibility and liability.

All the defendants who were represented by counsel contended with great vigour that this is an action for unliquidated damages and, therefore, the interim order in force should be discharged and that the defendants should not be called upon to provide security - liability to provide security for the suit claim cannot be apportioned with any degree of accuracy. Nonetheless, by taking into account the role played by the respective defendant, the obligation to provide security is apportioned for interlocutory purposes.

All the applications to reject or return the plaint are dismissed - All the applications to delete a party from the array of parties are dismissed - All the applications for injunction, to vacate the injunction and to provide security are disposed of.