/2022 INSC 0728/ I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 1 of 9 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPEALATE JURISDICTION I. A. NO. 53453 OF 202 2 IN CIVIL APPEAL NO S. 498 -501 OF 2021 FRANKLIN TEMPLETON TRUSTEE SERVICES PRIVATE LIMITED AND ANOTHER ... APPELLANTS VERSUS AMRUTA GARG AND OTHERS ETC. ... RESPONDENTS O R D E R SANJIV KHANNA , J. This Court, vide order dated 03 rd August 2022 , dismissed the aforesaid application filed on behalf of the Foundation of Independent Financial Advisors ,1 while stating that the reasons for such dismissal would follow. The order further directed that Rs. 684 ,00,00,000/ - (Rupees Six Hundred and Eighty Four C rores ) be distributed to the unitholders . As a corollary, the stay granted by us vide order dated 12 th April 202 2, while issuing notice in the application therein , also stood vacated. By the present order, we provide the reasons for dismissal of the captioned application. 1 For short, ‘FIFA’ I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 2 of 9 2. FIFA claims that independent financial advisors/ m utual fund distributors are entitled to payment of commission agreed between them and Franklin Templ eton Asset Management (India) P rivate Limited , which are in the nature of recurring expenses as per Regulation 52 of the S ecurity and Exchange Board of India (Mutual Fund s) Regulation s, 1996 2. Our attention is drawn to sub -clause (i) of Regulation 52(4)(b) , which states that ‘recurring expenses ’ encompass marketing and selling expenses , including agents ’ commission, if any . T he circular issued by Security and E xc hange Board of India 3 dated 2 2nd October 2018 , while referring to R egulation 52 , states that the asset m anagement companies/ m utual funds shall adopt a full trail model of com mission in all scheme s, without payment of any upfront commission or upfronting of any trail commission, directly or indirectly. Upfronting of trail co mmission is allowed only in case of inflows through Systematic Investment Plans . 3. At the outset , we must state that FIFA is claiming commission for the period from 23 rd April 2020 and up to 17th March 2021. The commission/ service charges payable prior to 23 rd April 2020 are not 2 For short, “Regulations ” 3 For short, “SEBI” I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 3 of 9 subject matter of the present application. 23 rd April 2020 is relevant as it is the date of publication of notices under Regulation 39(3)(b) . Accordingly, on and from the said date , the trustee s/asset m anagement company cease d to carry on business in respect of the six scheme s so wound up . In our opinion, Regulation 52 , which relates to a nd permits deduction of expenses including commission payable to the distributor , is applicable when the scheme is in operation , and not post the decision of the trustees i n terms of Regulation 39(2) (a) read with Regulation 39(3) , when, upon publication of notice s, the ceasure mandate of R egulation 40 is triggered . On and from the date of publication of notice s under Regulation 39 (3) (b), the trustees/ asset m anagement company cannot carry on business activities, create or cancel units and issue or redeem units of the scheme. It would be a different matter if the unitholders do not approve the winding up of the scheme , which is not a fact in the present case , as the unitholders have consented to the win ding up of the six S cheme s in accordance with Regulation 18(15) (c) . 4. If we are to accept the contention of FIFA , the necessary sequitur is to also acknowledge and accept that the asse t m anagement company , even post the publication of notices under Regulat ion 39(3)(b) , would be entitled to fee s and expenses mentioned and I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 4 of 9 covered by Regulation 52 , as per the terms and quantum specified in sub -regulation 6 to Regulation 5 2. Sub -clause (c) to Regulation 52(6) specifies the percentage of total expenses o f the scheme which is allowable, vary ing from 2.5% to 1.75% of the daily net assets. This , in our opinion , would not be a correct interpretation and lead to anomalies and tribulation with adverse consequences for the suffering unitholders, and undo the emb argo directing the ceasure of business. Regulations 40 and 52 need to be read harmonio usly. W hen read together , Regulation 52, authorising and specifying the limit of the fees and expenses payable to the asset m anagement company , would apply only when the scheme is in operation , and not after publication of the notice under Clause (b) to sub -regulation 3 to Regulation 39 resulting in ceasure of any business activities in respect of the scheme to be wound up . 5. Regulation 41 , which deals with the procedur e and manner of winding up , appli es once the notice under Regulation 39(3)(b) is published and the unitholders ’ approv al under Regulation 18(15)(c) of the Regulation s is received . W e are not required to interpret sub - regulati on 1 to Regulation 41 , as we have already interpret ed it in our earlier order dated 14 th July 2021 read with the order dated 12 th February 2021. However, FIFA claims that they would be entitled I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 5 of 9 to payment of commission under clause (b) to sub -regulation 2 to R egulation 41 wh ich , for the sake of convenience , is quoted below : “41. (1) …. (2)(a) …. (b) The proceeds of sale realised under clause (a), shall be first utilised towards discharge of such liabilities as are due and payable under the scheme and after making appropriate provision for meeting the expenses connected with such winding up, the balance shall be paid to the unitholders in proportion to their respective interest in the assets of the scheme as on the date when the decision for winding up was taken. (3 ) …. (4) ….” W e would conce de that , in the given case , some of the recurring expe nses mentioned in clause (b) to R egulation 52(4) like audit fee, insurance premium, cost of statutory advertisements , etc. , would be covered and would satisfy the requirement of clause (b) to R egulation 41(2) . However, if and only when they fall under and meet the requirement of the expenses connected with the winding up can they be allowed under Regulation 41(2)(b). Such expe nses are allowed not because of cl ause (b) to R egulation 52(4) , but because the expenses incurred would satisfy the requirement of being connected with such winding up under Regulation 41(2)(b) . Commission payable to the m utual fund distributers is certainly not an expense connected with the winding up of the scheme. I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 6 of 9 6. In the aforesaid background, FIFA ha s claimed that the commission payment due to the m utual fund distributors on and from 23 rd April 2020 is an amount ‘due and payable under the scheme ’, as it is an amount or payment that had accrued before the publication of notices under Regulation 39(2)(b) , but was not paid as it was payable in future . C ommission paya ble to m utual fund distributors is in the nature of trail , and therefore , is payment due for the services rendered to the unitholders prior to the winding up . Th is argument is farfetched and fal la cious. 7. In our order dated 14 th July 2021 , we have explained that the expression ‘due and payable’ has to be interpreted with reference to the context in which the words appear. In the context of the R egulations in question, we have held that the expression refers to the present liabilities which may be pa ya ble in pr aesenti or in futur o. There must be an existing obligation to pay though the appointed date of payment may not have arrive d. Any liability which is not due and payable , in facts and in law, would not be covered by the expression ‘due and payable’ .4 Clause (b) to R egulation 52(4) refers to recurring expenses , that is , expenses which will recur from time to time. It does not refer to one -time payment which is deferred. 4 See paragraph 78 in the judgment reported as (2021 ) 9 SCC 606 I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 7 of 9 The recurring liability is not a present liability , but an obligation which , on satisfaction of certain conditions, may accrue in future. The right to claim commission may not accrue and become due a nd payable. Distributor commission, as a recurring liability, is not payable if the unitholder (s) redeem the unit. Winding up of the scheme entails similar effect s and consequences. 8. As noticed above, it is the asset m anagement com pany which is entitled to charge fees and expenses in terms of sub -regulation s (1) and (2) of Regulation 52. The m utual fund dis tributors are not entitled to direct payment from the unitholders. Payment to the distributors is made by the asset management compa ny, from the amount that they deduct as a recurring expense in terms of Regulation 52 (4)(b) . On and after publication of the winding up notice in terms of Regulation 39(3)( b), the trustees and the asset m anagement company cannot claim any payment on account of recurring expenses under c lause (b) to sub - regulation (4) to Regulation 52. That being the position , as held above, the claim of FIFA has to be rejected. If the amount cannot be due and payable to the principal , the claim of the agent or a third party , in view of the Regulations, must also fail. I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 8 of 9 9. The claim of FIFA , on the basis of the C ircular dated 22 nd October 2018 , which has been referred to above , is equally misconceived and untenable . The Circular dated 2 2nd October 2018 bars the asset m anagement compan y from making upfront payment or upfronting of any trail commission , except in case of inflows through Systematic Investment P lan s. It is also stipulated that, when the Systematic Investment P lan is discontinued for a period for which commission is paid , the commission amount has to be recovered on pro rata basis from the distributor. As a deduction, it follows that on publication of notices in terms of Regul ation 39(3) (b), the business of the mutual fund comes to a stop and therefore, on and from that date the trail commission is not payable , as the scheme is to be wo und up and the money is to be collected and paid to the unitholders , in terms of and as per the mandate of Regulation 41 . Even if a distributor render s some services to the unitholders after publ ication of the notice under Regulat ion 39(3)(b), it would not entitle him to claim an amount from the asset management company . The C ircular dated 22 nd October 2018 cannot override the R egulation s. T he C ircular does not inten d to do so . It has been issue d to bring about transparency in expenses, reduce portfolio churning and mi s-selling in mutual fund scheme s. The intent behind specifying total expense ratio and the performance disclosure for I.A. No. 534 53 /2022 in C.A. No s.498 -501/2021 Page 9 of 9 m utual funds is to bring greater transparency in expenses and to not confer any right on the m utual fund distributors to claim expenses under clause (b) to Regulation 41(2) , which pertains to the procedure and manner of winding up. 10. Franklin Templ eton Trustee Service s Private Limited and Franklin Templeton Ass et Management (India) Private Limited have filed an affidavit before us stating that they have borne liquidation expenses amount ing to approximately Rs. 40 ,00,00,000/ - (Rupees Forty C rores ) towards various services such as liquidator ’s fee, disbursement expen ses, fee s for the e-voting platform and the scrutinizer for voting results, etc . It is stated by them that this amount is not intended t o be charge d to the six Scheme s in the interest of the unitholders of the Scheme s. We have taken the said statement on record. 11. For the aforesaid reasons, the application IA No. 534 53 /2022 filed by FIFA is dismissed , w ithout any orders as to costs. … ...................................J. (S. ABDUL NAZEER ) ......................................J. (SANJIV KHANNA ) NEW DELHI; AUGUST 12 , 20 22.