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Franklin Templeton Trustee Services Pvt. Ltd. v. Amruta Garg and Others

Civil Appeal · 2021 INSC 87Decided 12 Feb 2021
Civil Appeal Nos. 498-501 of 2021
Justice S. Abdul Nazeer · Justice Sanjiv Khanna

Background

Franklin Templeton Mutual Fund's trustees decided to wind up six debt schemes (Low Duration Fund, Ultra Short Bond Fund, Short Term Income Plan, Credit Risk Fund, Dynamic Accrual Fund and Income Opportunities Fund) and sought unitholders' consent for winding up, as required under the SEBI Mutual Fund Regulations. A Karnataka High Court Division Bench had ruled that such consent required approval from a majority of all unitholders of each scheme (not just those who voted), and this interpretation was challenged before the Supreme Court by the trustees, asset management company and SEBI, while objecting unitholders defended the High Court's reading. Large sums (over Rs. 17,000 crores in securities) remained to be realised and distributed to investors while the dispute over the validity of the consent process was pending.

Decision Breakdown

The Supreme Court held that for the purpose of Regulation 18(15)(c), "consent of the unitholders" for winding up means consent of a majority of unitholders who actually participated in the poll, not consent of a majority of every unitholder in the scheme, which would make winding up almost impossible to achieve. On that basis, the Court rejected the objections to the poll results and confirmed that unitholders of the six schemes had validly consented to wind up the schemes. The Court, with the parties' consent, had earlier appointed SBI Funds Management Pvt. Ltd. as an independent agency to carry out the liquidation and distribution process, and it directed that payments to unitholders be made in tranches without waiting for every security to be liquidated, while leaving open other disputed questions such as alleged fraud/misfeasance by the fund managers for separate consideration.

Lesson Learnt

When a law requires "unitholder" or "member" consent for a collective decision like winding up a fund, courts will generally interpret that as consent of those who actually vote, not an near-impossible unanimous-or-majority-of-all-members threshold, and in large investor-protection disputes, courts may step in to appoint neutral administrators to protect ordinary investors' money while the underlying legal dispute is resolved.

Official source (sci.gov.in)View Judgment (PDF)

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