Supreme Court: In the case relating to winding up of six schemes of the Franklin Templeton Mutual Fund, the bench of SA Nazeer and Sanjiv Khanna*, JJ has, rejecting the objections to poll results, held that the unitholders of the six schemes have given their consent by majority to windup the six schemes.
It held that for the purpose of clause (c) to Regulation 18(15) of the Mutual Fund Regulations, consent of the unitholders would mean consent by majority of the unitholders who have participated in the poll, and not consent of majority of all the unitholders of the scheme.
Key takeaways from the judgment
- Clause (c) to sub-regulation (15) of Regulation 18 per se does not prescribe any quorum or specify the criterion for computing majority or ratio of unitholders required for valid consent for winding up. Clause (b) of Regulation 39(2), on the other hand, specifies that seventy-five per cent of the unitholders of a scheme can pass a resolution that the scheme be wound up.
- When there is choice between two interpretations, we would avoid a ‘construction’ which would reduce the legislation to futility, and should rather accept the ‘construction’ based on the view that draftsmen would legislate only for the purpose of bringing about an effective result. We must strive as far as possible to give meaningful life to enactment or rule and avoid cadaveric consequences. We would neither hesitate in stating the obvious, that modern regulatory enactments bear heavily on commercial matters and, therefore, must be precisely and clearly legislated as to avoid inconvenience, friction and confusion, which may, in addition, have adverse economic consequences.
- Reading prescription of a quorum as majority of the unitholders or ‘consent’ as implying ‘consent by the majority of all unitholders’ in Regulation 18(15)(c) of the Mutual Fund Regulations will not only lead to an absurdity but also an impossibility given the fact that mutual funds have thousands or lakhs of unitholders. Many unitholders due to lack of expertise, commercial understanding, relatively small holding etc. may not like to participate. Consent of majority of all unitholders of the scheme with further prescription that ‘fifty percent of all unitholders’ shall constitute a quorum is clearly a practical impossibility and therefore would be a futile and foreclosed exercise.
- In the case of unitholders, the number is fluctuating and ever changing and, therefore, indefinite. Numbers of unitholders can increase, decrease and change with purchase or redemption. Therefore, in the context of clause (c) of Regulation 18(15), we would not, in the absence of any express stipulation, prescribe a minimum quorum and read the requirement of ‘consent by the majority of the unitholders’ as consent by majority of all the unitholders. On the other hand, it would mean majority of unitholders who exercise their right and vote in support or to reject the proposal to wind up the mutual fund scheme.
- The unitholders who did not exercise their choice/option cannot be counted as either negative or positive votes as either denying or giving consent to the proposal for winding up.
- Mutual funds managed by professional fund managers with advantages of pooling of funds and operational efficiency are the preferred mode of investment for ordinary and common persons. It would be wrong to expect that many amongst these unitholders would have definitive opinion required and necessary voting in a poll on winding up of a mutual fund scheme. Such unitholders, for varied reasons, like lack of understanding and expertise, small holding etc., would prefer to abstain, leaving it to others to decide. Such abstention or refusal to express opinion cannot be construed as either accepting or rejecting the proposals. Keeping in view the object and purpose of the Regulation with the language used therein, a ‘construction’ which would lead to commercial chaos and deadlock cannot be accepted. Therefore, silence on the part of absentee unitholders can neither be taken as an acceptance nor rejection of the proposal.
- The underlying thrust behind Regulation 18(15)(c) is to inform the unitholders of the reason and cause for the winding up of the scheme and to give them an opportunity to accept and give their consent or reject the proposal. It is not to frustrate and make winding up an impossibility.
- The words ‘all’ or ‘entire’ are not incorporated and found in the said Regulation. Thus, consent of the unitholders for the purpose of clause (c) to sub-regulation (15) of Regulation 18 would mean simple majority of the unitholders present and voting.
- Regulation 18(15)(c) mandates and requires consent of the unitholders for winding up, but does not prescribe any mode or manner for taking consent. Therefore, by implication, the Regulation gives option of holding a physical meeting, postal poll or e-poll.
- The objectors to the e-voting results are sixteen in number and, as per details, they hold 20,02,114.041 units in the six schemes of value of Rs. 8,69,28,507.62. In percentage terms, the share of objectors in the total units is merely 0.024% and their share in the total AUM is 0.033%.
- The unitholders were given a chance and option to vote and about 38% of the unitholders in numerical terms and 54% in value terms had exercised their right to give or reject consent to the proposal for winding up. In the absence or need for minimum quorum, which is not provided or stipulated in the Regulations nor mandated under law, the e-voting result cannot be rejected on the ground that 38% of the unitholders in numerical terms and 54% in value terms, even if we do not account for the rejected votes, had participated. This cannot be a ground to reject and ignore the affirmative result consenting to the proposal for winding up of the six mutual fund schemes.
- It is but obvious that the trustees had already taken a decision to wind up the six schemes. Regulation 39(3) requires the trustees to disclose the circumstances leading to winding up of the schemes. The trustees accordingly, in the notice for e-voting and meeting of the unitholders, had furnished their explanation and reason for winding up of the six schemes.
- The unitholders were aware and conscious of the litigation against the winding up, including the procedure. At the same time, many in the general public may not be fully aware of the commercial considerations and niceties relating to mutual funds and debt securities market.
- The notice had also informed the investors that there would be suspension of subscription and redemption post the cut-off time from 23rd April, 2020. All Systematic Investment Plans, Systematic Transfer Plans and Systematic Withdrawal Plans into and from the abovementioned funds stood cancelled post the cut off time from 23rd April, 2020.
- The notice had also furnished information and clarification regarding distribution of monies from the Fund Assets, inter alia stating that following the decision to wind up the six schemes, the trustees would proceed for orderly realization and liquidation of the underlying assets with the objective of preserving value for unitholders. Their endeavour would be to liquidate the portfolio holdings at the earliest opportunity, to enable an equitable exit for all investors in the ‘unprecedented circumstances’. Hence, the notice for e-voting and the contents would not justify annulling the consent given by the unitholders for the winding up of the six schemes.
[Franklin Templeton Trustee Services Private Limited v. Amruta Garg, 2021 SCC OnLine SC 88, decided on 12.02.2021]
