Gujarat High Court
Gramercy Emerging Market Fund vs Essar Steel Limited on 20 March, 2002
Equivalent citations: [2002]111COMPCAS1(GUJ)
Author: M.S. Shah
Bench: M.S. Shah
JUDGMENT M.S. Shah, J.
1. These three company petitions are filed by fifteen different companies incorporated under the laws of the State of Delaware in the United States of America or under the laws of the British Virgin Islands or under the law of the Cayman Islands. The petitions are under the provisions of Sections 433, 434 and 439 of the Companies Act, 1956 (hereinafter referred to as "the Act" or "the Companies Act") for winding up Essar Steel Ltd., a company registered under the Act and having its registered office at Surat within the territorial jurisdiction of this court. This judgment only deals with the preliminary objections raised on behalf of the respondent-company against the maintainability of these petitions.
2. Though not customary, looking to the length of the judgment, the court would like to state at the outset how the court has proceeded :
Para 3 Basic facts Para 4 Preliminary contentions enumerated Para 5 Nature of the floating rate notes Para 6 How the petitioners acquired these notes Para 7 Cause of action pleaded by petitioners Para 8 Pleadings after notice Para 10 Preliminary contentions Discussion Paras 11 to 17 Preliminary contention No. IPetitioners are not noteholders Paras 18 to 23 Preliminary contention No. 2 Petitioners are not debenture holders Paras 24 to 32 Preliminary contention No. 3 Petitioners are not creditors Paras 33 to 45 Preliminary contention No. 4 Enforceability Paras 27 to 29, 48 Trustee is a necessary parry Para 49 Conclusions Paras 50, 51 Orders BASIC FACTS :
3. The petitioners claim to be the beneficial owners of floating rate notes (FRNs or notes) issued by Essar Steel Ltd. ("the respondent-company" or "Essar"). The petitioners claim that under the said notes, Essar was required to pay the petitioners along with other noteholders quarterly interest till maturity of the notes in the year 2005. However, since Essar did not pay any interest which accrued due after January 31, 2001, and since defaults have accrued as declared by the trustee of the noteholders, the petitioners are entitled to get the entire principal amount along with interest on the said notes as per the figures given in the petitions, which are not disputed by the respondent-company. The amounts come to US $ 42.77 million as principal amount and US $ 3.48 million as interest aggregating to US $ 46.25 million. The petitioners, therefore, gave statutory notices dated April 12/16, 2001, to Essar. As the notices are not complied with, the petitioners have filed the present petitions for winding up.
PRELIMINARY CONTENTIONS ENUMERATED :
4. In response to the notice issued by this court in each petition, the respondent-company has appeared and in the affidavit in reply, a preliminary objection has been raised that these petitions are not maintainable under Section 439 of the Companies Act. The preliminary objection comprises the following contentions :
(i) The petitioners are not noteholders.
(ii) Even if the petitioners are noteholders, they are not debenture holders or holders of any security as contemplated by the Companies Act read with the Securities Contracts (Regulation) Act, 1956.
(iii) In any case, the petitioners are not creditors under Section 439(1)(b) of the Companies Act, as the petitioners cannot give a valid discharge but only the trustee can give a valid discharge. Hence, only the trustee is a creditor of the respondent-company.
(iv) Even if the petitioners are creditors, they do not have any enforceable claim in view of Clause (6), condition No. 13 in the terms and conditions of the note providing for enforceability of the claims only through the trustee.
NATURE OF THE FLOATING RATE NOTES :
5.0 Since the submissions have been made at length on the nature of the note and whether it is a debenture or any other security as contemplated by the relevant statutory provisions, it is necessary to refer to the background note submitted by Mr. P. Chidambaram, learned counsel for the petitioners from which the following are the relevant extracts :
5.1 General background :
In the United States and Europe, there were traditionally only two methods of raising outside funds to finance a start up or non-rated company's activities--ordinary borrowing from banks or other single lenders and issuing equity. Starting in the United States in the 1980's, a third, more flexible method of raising such funds emerged--the issue of bonds, or notes. The interest rates attached to such notes keeps fluctuating in accordance with a particular benchmark rate (very often the London Inter-Bank Offer Rate--LIBOR). Hence; these notes are known as floating rate notes or FRNs.
5.2 The role of the trustee :
Raising finance through an issue of notes is usually co-ordinated with the involvement of investment banks and a trustee acting on behalf of the noteholders. There are a number of advantages with using a trustee to represent noteholders, the main one being that the trustee can simplify the administration of large numbers of individual noteholders. The mechanism of appointing the trustee is simply through a process of negotiation between the issuer and the potential trustee followed by the execution of a trust deed, which outlines the rights and obligations of each party thereto.
5.3 Getting the noteholder on board :
Once the issuer and the trustee have reached agreement and signed the trust deed, an offering memorandum is published and circulated to potential investors (i.e., potential noteholders). The offering memorandum will contain the principal trust deed clauses (so that the potential investor has an insight into the nature of the relationship between the parties involved), some background information about the issuer and its business, and the terms pursuant to which the notes are issued. The potential investors subscribe for notes of a particular value. When the notes are allocated, potential investors who subscribed for the notes will be allocated either the full amount requested, or a part thereof (depending on whether the demand for the notes was greater than the number available). An agreement is established, because an offer (by way of the offering memorandum) has taken place and acceptance (by way of subscribing for the notes) has occurred. For the purposes of this memorandum, those investors allocated a nominal amount under the notes will be referred to as "noteholders", 5.4 The nature of notes--Individual definitive notes or a global note :
Notes in the physical form can be issued individually (i.e., as a "definitive note") or can be issued in the form of one note, representing the total debt obligation of the issuer (as a "global note").
5.5 Notes in individual definitive form :
(A) If the notes are issued in definitive form, each person who has a holding in the notes (i.e., each noteholder) will receive a physical note specifying the principal amount of notes held and the name of the noteholder. Title to the notes passes only upon due registration on a register of noteholders. Only the duly registered noteholder is entitled to payment of interest on the amount represented by the note.
(These notes can also be treated as debenture stock as explained in Guide to the Companies Act by A. Ramaiya, 15th edition. Vol. I, page 34, under the title "meaning of debenture stock".) (B) Transfer of notes in definitive form Notes can be transferred upon surrender of the definitive note together with the form of transfer endorsed on it, duly completed and executed, at the office of the transfer agent (as appointed by the issuer). If only part of a holding of notes is transferred, a new definitive note representing the balance of the holding not sold by the transferor will be issued, as well as a new definitive note representing the amount of notes purchased. As stated above, title to the definitive notes passes only upon due registration by the Registrar. This process is effected in much the same way that shares in a company held in certificated form would be transferred.
(C) Payment of interest where notes are held in definitive form Interest will always be calculated in respect of a certain period (usually three months) and generally falls due to be paid on the last day of such period.
The paying agent will, on a predetermined date for each interest period, determine the rate of interest and calculate the amount of interest payable on each note for the relevant interest period. The paying agent then notifies the trustee, the principal paying agent, the Registrar, the transfer agents and any stock exchange on which the notes are listed, as well as notifying the noteholders.
The interest is paid by the issuer, via the principal paying agent, in a manner (i.e., cheque or direct transfer) as determined by the notes. The amount is transferred by the paying agent into an account held by the noteholder. The persons qualifying for interest payment are noteholders--the condition for payment being appearance on a register maintained by the Deposit Trust Company ("DTC"), a New York corporation, and on a predetermined date (the "record date"). The noteholder applies to the principal paying agent specifying an account into which the due interest payment is to be paid, and the requisite amount is transferred on the due date.
5.6 Notes in global form :
(A) If a note is issued in the form of a global note, it represents all the notes on offer under that particular issue, i.e., the total debt obligations of the issuer.
Increasingly, notes are issued in global form and are deposited by the issuer with the Deposit Trust Company (or a nominee of the Deposit Trust Company). In the case of Essar, though it was possible in certain limited circumstances to obtain notes in definitive form (page 120), the specified manner in which the notes are held is in global form, which means that no physical note needs to pass to a purchaser to effect a transfer of notes.
(B) Transfer mechanism when the notes are in global form The transfer occurs not through a system of "registration", but by way of book entry in accounts maintained by the Deposit Trust Company. The illustrative example with reference to a chart (which is annexed to this order as annexure I) in the context of the Essar notes in global form is as under :
The issuer (i.e., Essar Steel) deposits the global note with a custodian for the Deposit Trust Company. The Deposit Trust Company participants all have accounts with the Deposit Trust Company. Certain of these Deposit Trust Company participants hold an interest in the global note for Euroclear and Clearstream and if any of their account holders are custodians or noteholders, these Deposit Trust Company participants (including Euroclear and Clearstream) will inform the Deposit Trust Company and the Deposit Trust Company will allocate the requisite interest value (or balance in relation to the global note) to their accounts.
For example, if Euroclear, by way of accounts held by various custodians holds a total principal value of US $ 100m in the notes, the Deposit Trust Company will show a credit in the account of the Deposit Trust Company participant (holding on behalf of Euroclear) of US $ 100m. The Deposit Trust Company does not know on whose behalf the Deposit Trust Company participant, or Euroclear for that matter, holds the interest in the notes.
Euroclear in turn will have accounts in the name of either noteholders or custodians (who are either noteholders in their own right or hold as Sub-custodians), and will allocate the interest in the notes accordingly amongst its relevant account holders.
For example, if Barings as custodian holds US $ 50m principal value notes, Solomon Smith (as custodian) holds US $ 30m, and Bear (as custodian) holds US $ 20m, Euroclear will credit their accounts accordingly.
Each custodian may in turn hold accounts for either Sub-custodians or noteholders and will have an entry in those accounts with the requisite amounts held.
In this chain, each entity is only aware of the interest held by its direct account holders. This means that the issuer does not necessarily know who the custodians or the noteholders are. As far as the issuer is concerned, there is one global note which has been deposited (in the Essar issue) with a custodian for the Deposit Trust Company.
This also means, that any noteholders who have the same custodian can trade notes without there being any change in the amount of the principal value of notes represented in the account of the custodian. For example, if noteholder A and noteholder B both hold an account with the custodian Barings, they can trade notes without there being any change in Barings' account status with Euroclear. Consequently, Euroclear would not be aware of the transfer of the holding from noteholder A to noteholder B. But if noteholder A (holding an account with custodian Barings) wants to transfer notes to noteholder Z (which holds an account with custodian Solomon Smith), the custodians' respective account holdings with Euroclear will be affected. In this instance, noteholder A informs Barings, which informs Euroclear of the transfer. Euroclear debits Barings' account and credits Solomon Smith's account. Barings debits noteholder A's account. Solomon Smith credits noteholder Z's account. The transaction is complete.
(C) Payment of interest Interest is calculated as explained above in relation to definitive notes. Payment of interest occurs in a similar way to the transfer of notes.
Using Essar as an example, the issuer will pay to the paying agent, who in turn will pay to the Deposit Trust Company the requisite amount of interest due as calculated by the paying agent. The Deposit Trust Company will allocate to the accounts of its Deposit Trust Company participants the funds equivalent to their interest in the relevant issue.
The Deposit Trust Company participant who has an account holding notes on behalf of Euroclear with principal value of US $ 100m will credit the account of Euroclear with the interest amount received from the Deposit Trust Company calculated in respect of that principal value.
The same process will be repeated down the chain--Euroclear will credit the accounts of the custodians and noteholders, the custodians will credit the Sub-custodians and noteholders holding accounts with them and the Sub-custodians will allocate the requisite funds to the noteholders who in turn hold accounts with them.
5.7 Advantages of issuing notes for the issuer :
(i) the issuer can expect to receive the full subscription monies on the issue date ;
(ii) notes can tap a much broader investment base ;
(iii) the notes are generally unsecured ;
(iv) they are usually issued for a longer time period (generally 7 to 10 years);
(v) they can provide for the possibility of having deferred interest and/ or principal payments ; and
(vi) they involve less onerous financial covenants than are usually seen with mainstream bank debt and "evergreen" warranties do not exist.
The financial covenants generally give greater flexibility to the issuer and are mostly confined to preventing the issuer from leveraging itself beyond a certain level. For example, high yield issues usually have covenants which restrict the issuer's ability to :
(a) incur additional debt, usually measured as a multiple of cash flow ;
(b) distribute its assets to shareholders ; and
(c) effect a change of control of the business, or sell key assets or subsidiaries.
In addition, cash instruments usually contain covenants or events of default specifically tailored to reflect the issuer's particular business.
5.8 Disadvantages of issuing notes :
(i) interest rates are generally higher than interest payable for bank debt;
(ii) waivers and amendments to covenants are more difficult to obtain;
(iii) the due diligence process and disclosure requirements can be onerous and expensive for US registration purposes (because the securities rules and regulations are very stringent in the US) ; and
(iv) note issues are much more difficult to restructure.
6.0 HOW THE PETITIONERS ACQUIRED THESE NOTES :
6.1 Essar had issued notes in July, 1994, which matured on July 15, 1999 (the "old notes"). It had executed a trust deed with Chase Manhattan Trustees Limited as the trustee (the "trustee"). When the old notes matured, Essar failed to repay amounts outstanding and due. Following a period of negotiations, Essar, by an exchange offer and consent solicitation dated July 24, 2000 (hereinafter referred to as "the exchange offer"), offered to exchange the old notes worth US $ 250 million for the following categories of notes (for convenience, figures given in the nearest millions) :
(i) US $ 167.5 million series A : Floating rate unsecured notes due 2005 ("Series A Notes") ;
(ii) US $ 78 million series B : Floating rate unsecured notes due 2005 ("Series B Notes") (the series A notes together with series B notes are referred to as the "new notes");
US $ 4.5 million : Amended and restated unsecured notes due 2005 ("Amended and restated notes").
The offer was for new notes in the form of global notes. Individual definitive notes were offered only in certain limited circumstances (page 120) with which we are not concerned in these petitions. But the documents on record being the entire exchange offer compilation, the same pertain to all categories of notes in the definitive form and also in the global form.
6.2 At this stage, it will be convenient to give the break-up of the 240 page compilation containing the offer of exchange of the FRNs (due 2005) for the outstanding US $ 250 million old notes (due 1999) (pages Nos. 75 to 130 in Company Petition No. 216 of 2001) accompanied by the following annexures :
Annexure I Consent and letter of election and proxy 131-142 Annexure IIA Trust deed for FRNs due 2005 Series A 143-165 Schedule 1 to trust deed Form of individual definitive note 166-168 Terms and conditions of the notes 169-185 Schedule 2 to trust deed Global note-Series A 186-187 Terms and conditions of the notes (stating "terms and conditions of the notes, identical to the terms and conditions to be inserted on the individual definitive notes will be inserted") 189 Schedule 3 to trust deed 191-197 Provisions for meetings of noteholders Annexure IIB Trust deed for FRNs due 2005-Series B with similar Schedules 1 to 3 198-253 Annexure III Text of extraordinary resolution for accepting the offer of new notes (due 2005) for the old notes (due 1994) 254-256 Annexure IV Trust deed for amended and restated notes with Schedules thereto 257-313 In view of the fact that the trust deed and Schedules thereto for the new notes in Series B are similar to those for the new notes in Series A, for the purposes of these petitions, reference will be required to be made only to the offer (pages 75 to 130), Annexure II-A-Trust deed (pages 143 to 165), Schedule 2 thereto (pages 186 to 189) read with Schedule 1 (pages 169 to 185) and Schedule 3 thereto (pages 191 to 197).
6.3 Under the exchange offer, noteholders were invited to elect to receive any combination of the new notes by delivering a properly executed letter of election to the Deposit Trust Company directly (or to the Deposit Trust Company through whomever the noteholder in question held its interest). To accept the exchange offer, the noteholder was to name a representative of the financial advisor as proxy to act for it at the meeting in which the extraordinary resolution was considered and irrevocably direct such representative to vote in favour of the extraordinary resolution at the relevant meeting. The noteholder was also to irrevocably tender its old notes for cancellation upon receipt of the new notes.
The required level of consent for passing the extraordinary resolution was 75 per cent, of all noteholders holding old notes.
6.4 The required level of consent was achieved at the relevant meeting, and pursuant to the exchange offer, the exchange of the old notes for the new notes and the amended and restated notes was completed on September 15, 2000. The new notes took the form of one global note in substitution for the issue of definitive notes. Any noteholder who did not vote in favour (or at all) for the exchange offer or did not attend the meeting, had the old notes amended and restated and now called new amended and restated notes. None of the petitioners hold any such notes of this last category (iii).
6.5 Trustee Chase Manhattan (now merged into JP Morgan) was appointed as the trustee for the new notes, executed separate trust deed with Essar in respect of each of the Series A notes, Series B notes and amended and restated notes. The respondent-company does not dispute that the documents produced on the record of these petitions are the same as were executed by the trustee with Essar.
6.6 As to how they became noteholders under the global note, the petitioner's case is that the new notes held by each of the petitioning noteholders were acquired under the terms of the exchange offer and subsequently in "over the counter" transfers with other institutions or investment funds that were noteholders. These purchases were settled through the Deposit Trust Company, Euroclear and Qearstream systems, as described above in relation to global note transfers (i.e., para. 5.6(B) quoted hereinabove).
6.7 An illustration of a more detailed account of the facts may be given by referring to para. 12(E) and (F) of memorandum of petition in Company Petition No. 216 of 2001, wherein it is stated as under :
"(E) Dexia Banque Internationale a Luxembourg S. A. (BIL), as an account holder with Clearstream, currently holds new notes as specified in paragraphs L and M below, for the benefit of the petitioners through its accounts with Clearstream.
(F) In its capacity as account holder, BIL holds on behalf of petitioner No. 1 US $ 3 million principal amount of Series A notes and US $ 3 million principal amount of Series B notes in account 87277 with Clearstream. BIL also hold on behalf of petitioner No. 2 US $ 3 million principal amount of Series A notes in account 84039 with Clearstream. This is confirmed by Clearstream in its letter dated May 3, 2001, a copy of which is annexed as Annexure I to the petition."
7.0 CAUSE OF ACTION PLEADED BY PETITIONERS :
7.1 Interest payments on the notes The defining characteristic of FRNs is that they have a floating interest rate attached to them. The interest paid on FRNs fluctuates in accordance with a variable benchmark rate. As per the terms of the exchange offer, the Series A notes bore interest from August 1, 2000, at the London Inter-Bank Offer Rate ("LIBOR") plus 350 basis points, payable quarterly in arrears with the first payment due on October 31, 2000, and thereafter every three months. Similarly as per the terms of the exchange offer, the Series B notes bore interest from August 1, 2000, at LIBOR plus 400 points, payable quarterly in arrears with the first payment due on October 31, 2000, and thereafter every three months. Pursuant to the aforesaid terms of the new notes and the exchange offer, Essar paid the interest as accrued on January 31, 2001, on the principal amount in respect of the Series A and Series B notes.
7.2 Defaults in payments According to the petitioners, in addition to the regular quarterly interest payments, Essar was also obliged to pay on January 31, 2001, an extraordinary interest payment equal to US $ 48.60 per US $ 1,000 outstanding principal amount of Series A and similarly an extraordinary interest payment equal to US $ 51.10 per US $ 1,000 outstanding principal amount of Series B notes. According to the petitioners, instead of paying the said extraordinary interest due and payable as per the terms of the offer, Essar paid a much lower amount as per the following particulars, in so far as petitioner No. 1 of Company Petition No. 216 of 2001 (Spinnaker Global Emerging Markets Funds Limited) is concerned :
Extraordinary interest payable Extraordinary interest paid In US $ In US $ (Decimals ignored) Series A notes 145,800 4,731 Series B notes 153,300 4,974 Similar defaults are alleged in respect of the other petitioners. Thereafter also, Essar failed to make payments of interest payable quarterly after January 31, 2001.
7.3 Notice of default and the statutory notices under Section 434 of the Companies Act.
Hence, by letter dated February 15, 2001 (annexure J page 315), the trustee informed Essar that an event of default had occurred as a result of the failure to pay the extraordinary interest payment in full and that if the extraordinary interest payment was not paid in full by February 22, 2001, a notice would be served that the notes were due and payable at their principal amount together with all accrued interest. On account of non-compliance with that notice, the trustee by way of a letter dated February 23, 2001 (annexure J, page 317), served the notice under condition No. 9(a) of the new notes whereby the new notes were immediately due and payable on the principal amount together with all accrued unpaid interest. Since Essar did not comply with the aforesaid notice also, the petitioners served notices dated April 12/16, 2001, on Essar under Section 434(1)(a) of the Companies Act seeking payment of the principal amount, outstanding extraordinary interest payment and interest accruing from January 31, 2001, to April 11, 2001. The sums due and payable by Essar to each of the petitioners of Company Petition No. 216 of 2001, as on April 11, 2001, is stated to be as under :
Petitioner No. 1 US $ 6,395,866 inclusive of principal sum of US $ 6 million Petitioner No. 2 US $ 3, 192,846 inclusive of principal sum of US $ 3 million The petitioners have then also referred to the subsequent development about the meetings being held by Essar for alleged restructuring. Grievances are also made about the short notice for such meetings and the apprehension that Essar will not be able to formulate an effective restructuring proposal in relation to its debt obligations. The petitioners have also expressed an apprehension that even if the restructuring proposals are presented, the petitioners do not consider that their interests or the interests of the other noteholders would be adequately addressed by Essar in any such restructuring. The petitioners have, therefore, invoked the provisions of Section 433 read with Section 434 of the Companies Act on the ground that the respondent-company Essar is unable to pay its debts and that it is just and equitable that the respondent-company be compulsorily wound up.
8.0 PLEADINGS AFTER NOTICE :
8.1 In response to the notice issued by this court, the respondent has filed affidavit in reply dated December 26, 2001, raising a preliminary objection about maintainability of the petitions on various grounds including the contention that the petitioners are not creditors within the meaning of Section 439(1)(b) of the Companies Act and that otherwise also the petitioners do not have an enforceable right.
8.2 Alternatively, averments are also made about the financial position of the respondent-company and the stressful conditions of the market. The respondent-company has three segment lenders (1) secured lenders--IDBI, ICICI and other public financial institutions, (2) secured working capital lenders consisting of Indian banks, and (3) unsecured lenders like the present petitioners as well as Bank of America and UBS Bank, Switzerland. The respondent-company is currently working out a package of measures to meet its obligations to all the groups of lenders on a revised and a fair basis to be consensually arrived at. The lenders have formed a Steering Committee of 11 members out of the lenders themselves, which includes two nominees of the FRN holders. The respondent-company is thus making a bona fide effort to find a method to meet its obligations and any orders made at this stage in the present petitions would defeat this process and jeopardize the position of all the lenders.
8.3 Rejoinder-affidavit dated January 17, 2002, came to be filed on behalf of the petitioners controverting the contentions raised in the reply affidavit and the picture sought to be painted about restructuring process.
8.4 Surrejoinder-affidavit dated February 19, 2002, has been filed on behalf of the respondent-company and one more affidavit dated March 19, 2002, has also been filed on behalf of the respondent-company wherein the respondent-company has made an attempt to point out the difficulties which the steel industry is going through all over the world. In the said affidavit, the company has also contended that the collective alleged holding of the petitioners in these three petitions forms less than 4 per cent, of the total debt, the collective alleged debt of the noteholders is less than 10 per cent, of the unsecured foreign currency debt and the collective alleged holding of the petitioners in the FRNs is less than 17 per cent, of the total value of the FRNs. It is submitted that the petitioners' alleged collective holding of the FRNs forms a miniscule proportion of the entire FRNs and other debts of the respondent-company.
9. Mr. Iqbal Chagla and Mr. C.A. Sundaram, learned counsel for the respondent-company--Essar Steel Ltd. and Mr. P. Chidambaram, learned counsel for the petitioners have been heard at length on three different dates only on the question of preliminary contentions urged on behalf of the respondent-company.
10. TO RECAPITULATE, THE PRELIMINARY CONTENTIONS ARE AS UNDER :
(i) The petitioners are not noteholders.
(ii) Even if the petitioners are noteholders, they are not debenture holders or holders of any security as contemplated by the Companies Act read with the Securities Contracts (Regulation) Act, 1956.
(iii) In any case, the petitioners are not creditors under Section 439(1)(b) of the Companies Act, as the petitioners cannot give a valid discharge but only the trustee can give a valid discharge. Hence, only the trustee is a creditor of the respondent-company.
(iv) Even if the petitioners are creditors, they do not have any enforceable claim in view of Clause (6), condition No. 13 in the terms and conditions of the note providing for enforceability of the claims only through the trustee.
Preliminary contention No. 1-- The petitioners are not noteholders.
11.1 It is vehemently submitted by Mr. Sundaram that the petitioners themselves have come out with a case in the petitions that the petitioners beneficially own series A notes and series B notes. Sub-paras. (M) and (N) of para. 12 of the petition read as under :
"(M) The Series A notes which the petitioners beneficially own are set forth hereunder :
Petitioner No. Company name Series A notes $ US
1.
Spinnaker Global Emerging Marketing Fund Ltd.
3 million
2. Spinnaker Global Opportunity Fund Ltd.
3 million (N) The series B notes which the petitioners beneficially own are set forth hereunder :
Petitioner No. Company name Series A notes $ US
1.
Spinnaker Global Emerging Marketing Fund Ltd.
3million
2. Spinnaker Global Opportunity Fund Ltd.
Nil."
It is the petitioners' own case that BIL, who is an account holder with Clearstream, currently holds new notes for the benefit of the petitioners through its Clearstream account (para. 12(E) and (F) --quoted in para. 6.7 above).
It is, therefore, submitted that the petitioners being mere beneficial owners of the notes do not have any legal right to file a winding up petition. Strong reliance is also placed on the provisions of Section 153 of the Companies Act in support of the proposition that the Companies Act does not recognise the concept of trust and beneficial interest :
"153. Trusts not to be entered on register.--No notice of any trust, express, implied or constructive, shall be entered on the register of members or of debenture holders."
11.2 It is further submitted that the Form of Deposit Trust Company global notes--Series A as well as Series B held by the Depository Trust Company--provides for a register in respect of the definitive global note and since it is not the petitioners' case that their names are entered in the register, the petitioners cannot claim to be noteholders.
12. In reply, Mr. Chidambaram, learned counsel for the petitioners has relied on the reply affidavit filed on behalf of the respondent-company as well as the record to show that the petitioners are noteholders and the respondent-company itself has recognised the petitioners as noteholders.
12.1 In para. 7 of the reply affidavit dated December 26, 2001 (page 360), the respondent-company has stated that "pending the reply to the trustee's notice, certain noteholders including the petitioners through their Indian advocates served a demand notice dated April 12, 2001." In para. 40 of the reply also (page 370), it is stated that "I deny that even if such a restructuring proposal were presented, the petitioners' interests as well as the interest of the other noteholders would not be adequately addressed by the respondent-company. On the contrary, I say that two nominees on the Steering Committee adequately represent the noteholders. The Steering Committee comprises 8 to 9 members, out of whom two nominees shall be representing the interest of the noteholders, therefore, the question of the noteholders' interest not being protected does not arise."
In paras. 11 and 12 of the petition, the petitioners had definitely stated that BIL holds the notes on account of the petitioners and the letter of Qearstream is also produced at annexure I (page 314 of the paper book). However, all that the respondent-company has stated in the reply to para. 11 of the petition is that the contents thereof are a mere explanation of the concept of floating rate notes and, therefore, deserve no comments from the respondent-company. This means that the respondent-company has not disputed the explanation given by the petitioners about the concept of floating rate notes which itself contemplates that a global note is held by only one person and others subscribe to a portion of the same in a dematerialized form.
Similarly, in para. 20 of the counter affidavit in reply to para. 12(A) to (H) of the petition, the respondent-company has merely stated that the contents thereof are a matter of fact and shall be dealt with by the respondent-company at the appropriate time.
12.2 The respondent-company has also stated in para. 21 of the reply that some interest payments were made to the petitioners and other noteholders.
12.3 Under the exchange offer, the old notes were exchanged for new notes after the old notes were collected by the respondent-company from the petitioners pursuant to an extraordinary resolution at the meeting to which the petitioners were invited.
12.4 As per the respondent-company's own case the Steering Committee has two representatives of noteholders and the petitioners' representatives were also invited at the meetings held on September 11, 2001, and October 15, 2001 (pages 406 to 419).
12.5 Reliance is also placed on the following documents :
(i) Clearstream's letter dated May 3, 2001 (page 314) ;
(ii) Respondent-company's counsel's letter dated June 11, 2001 (page 74);
(iii) Minutes of the meetings of the holders of the respondent-company held on September 11, 2001 at Essar House which minutes were sent to the trustees.
Reference is also made to the letter dated September 10, 2001 from Cad-walader wherein the petitioners were identified as noteholders in Schedule I to the said letter and by which Mr. Abhishek Sexena of Hazarika Prasad Jaitly (Trilegal) was invited to attend the meeting on behalf of the petitioners. Mr. Abhishek Sexena was permitted to attend the meeting, but in the minutes of the meeting of the lenders of the respondent-company held on September 11, 2001, his name is shown as a representative of the trustees of JP Morgan Trustee and depository for FRN. It is submitted that if the petitioners were not noteholders of FRNs, Mr. Sexena would not have been permitted to attend the meeting of lenders as Mr. Sexena was not authorized by any other party to attend the said meeting.
12.6 Mr. Chidambaram alternatively submitted that even if the petitioners are treated as beneficial owners of the notes, there are several decisions taking the view that the beneficial owner can also sue or file winding up petitions. Strong reliance is placed on the decision of the Bombay High Court in Narotamdas Trikamdas Toprani v. Bombay Dyeing and Manufacturing Co. Ltd. [1990] 68 Comp Cas 300 in support of the submission that the right of a beneficiary under a trust to enforce contracts which are for his benefit is recognized under our law. In the said decision, reliance was placed on the observations made by the Supreme Court in M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504, laying down the principle that the basis of the Rule permitting the beneficiary to enforce the rights under the contract is that though the beneficiary is not a party to the contract, his rights are equitable and, therefore, enforceable.
12.7 In the case of a global note, there is only one registered holder. The others have right to get the interest on the principal on the due date and the holding of such persons is in dematerialized form. Hence, in the case of a global note, there is no such register containing the names of noteholders, unlike the register of noteholders in the case of individual definitive notes.
13. Having heard learned counsel for the parties, it appears to the court that there is no substance in the contention urged on behalf of the respondent-company that the petitioners are not noteholders. As per the concept of the floating rate notes, there are two kinds of notes one is in the definitive form where there are individual notes which can be obtained in physical form from the issuer or from the secondary market. On the other hand, there is a global note under which the note is issued by the issuer in favour of only one party which is Cede and Co. in this case. The note in the instant case (relied upon by both the sides) (page 186 of the draft circulated with the exchange offer) reads as under :
"ESSAR STEEL LIMITED U. S. $........
Floating rate unsecured notes due 2005--Series A The note or notes in respect of which this individual definitive global note is issued are in registered form and form part of a series designated as specified in the title (the 'notes') of Essar Steel Limited (the 'issuer') and constituted under the trust deed referred to on the reverse thereof. The notes are subject to, and have the benefit of, that trust deed and the terms and conditions (the 'conditions') endorsed hereon.
The issuer hereby certifies that Cede and Co. is, at the date hereof, entered in the register in respect of this definitive global note as the holder of notes in the original principal amount of U.S. $ [.....] ([.....] United States dollars) and, after the date hereof, such other principal amount as is shown in the register on such date in respect of such holder in respect of this definitive global note. Unless this definitive global note is presented by an authorised representative of the Depository Trust Company, a New York corporation ('DTC), to the issuer or its agent for registration of transfer, exchange or payment, and any definitive note issued is registered in the name of Cede and Co. or in such other name as is requested by an authorised representative of Deposit Trust Company (and any payment is made to Cede and Co. or to such other entity as is requested by an authorised representative of Deposit Trust Company), any transfer, pledge or other use hereof or value or otherwise by or to any person is wrongful inasmuch as the registered owner hereof, Cede and Co., has an interest therein.
This definitive global note is evidence of entitlement only. Title to the notes passes only on due registration on the register and only the duly registered holder is entitled to payments on the notes in respect of which this definitive global note is issued.
This definitive global note shall not be valid for any purpose until authenticated by or on behalf of the Registrar.
Essar Steel Limited."
14. It is thus clear that the global note is issued to only one person, i.e., Cede and Co. As the undisputed chart annexed to this judgment at annexure I indicates, it is from the Depository Trust Company that the other persons can purchase a portion of the global notes. The chain is as under :
From the issuer-Essar to Deposit Trust Company (Depository Trust Corporation)--Cede and Co. is the Deposit Trust Company participant. From Cede and Co., Clearstream, Euroclear and others get their portion of the global note. BIL is an account holder with Clearstream which gets its portion of the note and the petitioners have an account with BIL.
The certificate dated May 3, 2001 (page 314), issued by Clearstream reads as under :
"CERTIFICATE OF DEPOSIT IN CLEARSTREAM BANKING 011791662 USD FLR ESSAR STEEL LTD. (A) (REGS) 00-2005 USY 2297LAA27.
SERIES A NOTES 011791972 USD FLR ESSAR STEEL LTD. (B) (REGS) 00-2005 USY2297LABOO SERIES B NOTES Dear Madam :
Clearstream Banking, an international clearing and settlement bank with its head office in Luxembourg, hereby certifies that BIL-Spinnaker Global Emerging Markets Fund is holding in its account 87277 with Clearstream Banking a principal amount of USD 3,000,000.00 of the Series A note and a principal amount of USD 3,000,000.00 of the Series B notes.
We also certify that BIL Spinnaker Global Opportunity Fund is holding in its account 84039 with Clearstream Banking a principal amount of USD 3,000,000.00 of the Series A notes. This certificate is based on the positions which were blocked in our system as of April 12, 2001, and remain blocked up to present, 03 May, 2001.
Yours sincerely, (Sd.) Securities Administrator."
It is not the case of the respondent-company that the petitioner Spinnaker Global Emerging Markets Funds Limited or the petitioner Spinnaker Global Opportunity Fund Limited do not continue to hold their accounts with Clearstream Banking or Clearstream Services after May 3, 2001. Had it been the case of the respondent-company, the petitioners could have been called upon to evidence continuation of their respective accounts with Clearstream Services and Clearstream Banking even after May 3, 2001.
15. The only dispute raised by the respondent-company in this context is about the nature of the rights of the petitioners and it is contended that holding of account with Clearstream does not amount to holding of floating rate notes (FRNs).
As already explained above, in the case of a global note, only one party holds the note and others have their share in that note without getting any note in the physical form but they have their share in the dematerialised note. They are referred to as noteholders, only because common conditions are applied to individual definitive notes (pages 169-185) on the one hand and the global note on the other hand (page 189). At the cost of repetition, the form of global note states (page 189) as under :
"Terms and conditions of the notes, identical to the terms and conditions to be inserted on the individual definitive notes will be inserted."
The beneficial holders of the global note can be at 3, 4 or 5 levels below the trustee because they are allowed to participate in the global note as account holders or through account holders or through Sub-custodians and, therefore, those beneficial holders will not be given notes in the physical form but they are permitted to have a share of the global note in dematerialised form.
16. The respondent-company has not disputed that a part of the petitioners' holding is in lieu of old notes (due 1999). When the respondent-company offered to exchange new notes (due 2005) for the old notes (due 1999), the exchange offer contained the following Clause (page 115) :
"Notwithstanding any other provision of this exchange offer and consent solicitation, delivery of the new notes for old notes tendered and accepted for exchange pursuant to the exchange offer will occur only after confirmation of book-entry transfer of such tendered old notes into the depository's account at Deposit Trust Company, together with a properly completed and validly executed letter of election (or a facsimile thereof) or ATOP election, and any other required documents.
Tenders of old notes pursuant to any of the procedures described above and acceptance thereof by the company will constitute a binding agreement between the company and the tendering and consenting noteholder of such old notes, upon the terms and subject to the conditions of this exchange offer and consent solicitation.
For purposes of the exchange offer, the company will be deemed to have accepted for exchange validly tendered old notes if, as and when the company gives oral or written notice thereof to Deposit Trust Company and the Deposit Trust Company participant through whom the noteholder holds its interest in the old notes."
There is no dispute about the fact that the binding agreement referred to in the offer has been concluded.
Moreover, the following extract from the exchange offer describing the new notes as "book-entry ownership" puts the controversy beyond any doubt that the respondent-company (issuer) itself had recognised the concept of a beneficial owner of a particular nominal amount of the new notes (page 120) :
"The custodian with whom the new Deposit Trust Company global notes are deposited and Deposit Trust Company will electronically record the principal amount of the new unrestricted notes and the new restricted notes, as the case may be, held within the Deposit Trust Company system. Participants of Deposit Trust Company (the 'Deposit Trust Company participants') will hold interest in the new notes as shown on the records of Deposit Trust Company. Certain Deposit Trust Company participants will hold new notes for the benefit of Euroclear and Clearstream. Each person (a 'new beneficial owner') who is the owner of a particular nominal amount of the new notes, will be shown in the records of Deposit Trust Company or the Deposit Trust Company participants, or a clearing system or their respective account holders.
Payments of the principal of, and interest on, each new Deposit Trust Company global note registered in the name of Deposit Trust Company's nominee will be to or to the order of its nominee as the registered owner of such new Deposit Trust Company global note. The company expects that the nominee, upon receipt of any such payment, will immediately credit Deposit Trust Company participants' accounts with payments in amounts proportionate to their respective new beneficial owners of the principal amount of the relevant new Deposit Trust Company global notes as shown on the record of Deposit Trust Company or the nominee. The company also expects that payments by Deposit Trust Company participants to new beneficial owners of such new Deposit Trust Company global note held through such Deposit Trust Company participants will be governed by standing instructions and customary practices."
17. In view of the above material on record and the detailed explanation given in para. 5.6 of this judgment, it has to be held that the petitioners are noteholders inasmuch as the respondent-company itself has recognised the concept of new beneficial owners of the debts representing the amounts which they have in their respective accounts as stated in para. 12 of the respective petitions. The first preliminary contention raised on behalf of the respondent-company is, therefore, rejected.
Preliminary contention No. 2 :
Even if the petitioners are noteholders, they are not debenture holders or holders of any security as contemplated by the Companies Act read with the Securities Contracts (Regulation) Act, 1956.
18. It was submitted by Mr. Chagla for the respondent-company that Section 439 provides as to who can present a petition for winding up. The petitioners claim to be the holders of debentures referred to in Sub-section (2) of Section 439. Section 2(12) defines "debenture" as under :
"2.(12) 'debenture' includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not."
Section 2(45AA) defines "securities" as under :
"2. (45AA) 'securities' means securities as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and includes hybrids."
Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "the SCRA"), defines "securities" as under :
"(h) 'securities' include--
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate ;
(ia) derivative ;
(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes ;
(ii) Government securities ;
(iia) such other instruments as may be declared by the Central Government to be securities ; and
(iii) rights or interests in securities ;"
It was vehemently contended by Mr. Chagla that unless the security in question is a marketable security, it cannot be a debenture within the meaning of the Companies Act and it cannot be a marketable security unless it is permitted to be sold and purchased at any stock exchange in India. In support of this proposition, learned counsel has heavily relied on the following decisions of the Bombay High Court :
(i) The judgment of Hon'ble Mrs. Justice Sujata V. Manohar in Norman J. Hamilton v. Umedbhai S. Patel [1979] 49 Comp Cas 1 (Bom) as confirmed by the Division Bench in Dahiben Umedbhai Patel v. Norman James Hamilton [1985] 57 Comp Cas 700 (Bom) ; and
(ii) The judgment of Hon'ble Mr. Justice B. N. Srikrishna in Brooke Bond India ltd. v. U. B. Limited [1992] 2 Bom CR 429 ; [1994] 79 Comp Cas 346 (Bom).
19. On the other hand, Mr. Chidambaram, learned counsel for the petitioners has submitted that--
19.1 The definition of "securities" given in the SCRA is to be simply incorporated into the definition of "securities" under the Companies Act and thereafter no reference is required to be made about the interpretation of the definition of "securities" under the SCRA because as per the settled rules of interpretation once the Legislature has incorporated the definition under one Act into the definition under another Act, no further reference is required to be made to the former Act. In support of the said proposition, strong reliance is placed on the following decisions :
(i) Wood's Estate, In re [1886] 31 Ch D 607, 615 (CA) ;
(ii) Shamrao V. Parulekar v. District Magistrate, Thana, Bombay, AIR 1952 SC 324, 326 ;
(iii) Mahindra and Mahindra Ltd. v. Union of India [1979] 49 Comp Cas 419 ; [1979] 2 SCC 529, 548 ;
(iv) Onkarlal Nandlal v. State of Rajasthan [1985] 4 SCC 404, 414, 415.
19.2 As against the view taken by the Bombay High Court, the Calcutta High Court in B.K. Holdings (P.) Ltd. v. Prem Chand Jute Mills [1983] 53 Comp Cas 367 ; 84 CWN 876 has taken the view that marketable securities are not necessarily securities which are capable of being sold and purchased at stock exchanges.
19.3 It is further submitted the FRNs in question fall within the definition of "debenture" as explained in the following decisions :
(i) Levy v. Abercorris Slate and Slab Company [1888] 37 Ch D 260, 264 ;
(ii) Laxman Bharmaji v. Emperor [1946] 16 Comp Cas 31 ; AIR 1946 Bom 18, 19 ;
(iii) CIT v. Cochin Refineries Ltd. [1982] Tax. LR 1981, 1984, 1985 ; [1983] 142 ITR 441, 446, 447 (Ker).
20. Having heard learned counsel for the parties, it appears that while Parliament did incorporate the definition of "securities" under the SCRA into the Companies Act, once that definition is taken as written with ink and pen in the Companies Act, no further reference is required to be made to the SCRA. The scope and object of the two Acts are quite different. The SCRA was enacted for regulating the functioning of the stock exchanges and the transfer of instruments, sale and purchase at such stock exchanges. Hence, the expression "marketable securities" under that definition has been interpreted and understood in the context of their marketability at the stock exchanges in India. As per the aforesaid decisions cited by Mr. Chidambaram (para. 19.1), the settled rule of interpretation is as under :
"If a subsequent Act brings into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act just as if they had been actually written in it with the pen, or printed in it, and, the moment you have those clauses in the later Act, you have no occasion to refer to the former Act at all."
This celebrated principle of interpretation regarding the doctrine of incorporation by reference enunciated by the Chancery Division in Wood's Estate, In re [1886] 31 Ch D 607 as far back as in 1886 has been quoted with approval by the Supreme Court in the aforesaid three decisions (citations in para. 19.1 above).
21. In view of the aforesaid decisions, the court finds considerable substance in the submission made by Mr. Chidambaram for the petitioners that once the definition of "securities" as contained in Section 2(h) of the Securities Contracts (Regulation) Act is incorporated in Section 2(12) read with Section 2(45AA) of the Companies Act, while considering the meaning of expression "holder of debenture", there is no occasion to refer to the interpretation of the definition of the term "securities" for the purposes of SCRA which is enacted for the purpose of regulating sale and purchase of securities at stock exchanges in India. We are concerned only with the scope and ambit of the expressions "debenture" and "securities" for the limited purpose of a winding up petition under Sections 433 and 434 read with Section 439 of the Companies Act.
22. The expression "debenture" by itself is not defined in any statutory provision except the one contained in Section 2(12) of the Act. Since that definition is not self-explanatory, one has to turn to the judicial pronouncements explaining the meaning of the expression "debenture". In Levy v. Abercorris Slate and Slab Company [1888] 37 Ch D 260, "debenture" has been defined as a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a "debenture". In Laxman Bharmaji v. Emperor [1946] 16 Comp Cas 31 ; AIR 1946 Bom 18, the Division Bench of the Bombay High Court adopted the meaning given by Chitty J. In the aforesaid decision, the Division Bench has held that for determining what is and is not a debenture, we are not bound to hold that an instrument is a debenture because it is called a debenture by the company issuing it, nor to hold that it is not a debenture because it is not so called by the company. We must look at the substance of the instrument itself. Debentures are the acknowledgment of a debt, the promise to return it, they may form a series bearing consecutive numbers and all the holders get an equal chance to partake in the annual distribution of prizes out of the net interest realised by the company. There may be a mortgage debenture or a simple debenture which does not create any charge on any of the assets of the company.
In CIT v. Cochin Refineries Ltd. [1982] Tax. LR 1981 ; [1983] 142 ITR 441, a Division Bench of the Kerala High Court defined it as under (page 447) :
"A debenture is certainly a document which either creates a debt or acknowledges it. While it may usually be one of a series, it need not necessarily be so."
In the facts of that case, Cochin Refineries Ltd., the assessee, was a public limited company which entered into agreements with financiers in the United States called loan and note purchase agreements. According to the agreements, the assessee-company was to authorise issuance and sale of 12 million U.S. dollars as 53/4 secured notes series A and the borrowing of six million U.S. dollars at the same rate but known as secured notes series B. The notes were to be issued and secured by a deed of trust and mortgage between the asses-see-company and the First National City Bank as the trustee and the creditors. The notes would be dated, would mature and would bear interest which shall be payable on such terms and provisions as provided in the mortgage deed. The agreement defined the term "notes" as the note authenticated and delivered under the said indenture, it being intended that the expression shall have the same meaning as "debenture" under the Indian law.
After considering the definition of "debenture" in Section 2(12) of the Companies Act and various authorities, the court held that the notes issued as per the aforesaid agreements were debentures.
23. A perusal of the aforesaid authorities dearly indicates that debentures are an acknowledgment of a debt or promise to return it and to make distribution of interest out of the net income realised by the issuer company. They may or may not create a charge on the properties of the issuer-company. They may or may not form a part of a series. The notes in the instant case fit into this definition of the expression "debentures". As already indicated in paras. 5.6 and 15 hereinabove, there is one global note and there are different persons having a share in it. The issuer company-Essar has promised to return the amounts governed by the global note at the maturity date in 2005 and it also promised to pay interest thereon on quarterly basis. All the ingredients of a debenture are, therefore, fully satisfied and there is no reason why the notes cannot be treated as debentures as contemplated by the provisions of Sub-section (2) of Section 439 of the Act.
The second preliminary objection must, therefore, fail.
24.0 Preliminary contention No. 3 :
In any case, the petitioners are not creditors as the petitioners cannot give a valid discharge.
24.1 Mr. Sundaram for the respondent has vehemently submitted that even if the petitioners are noteholders and even if the notes are treated as debentures, still the petitioners cannot be considered to be creditors within the meaning of Section 439(1)(b) of the Act. Sub-section (2) of Section 439 does not automatically elevate the debenture holder to the status of a creditor under Section 439(1)(b) unless the debenture holder is a creditor in his own right. Only that person can be treated as a creditor under Section 439(1)(b) of the Act who can give a valid discharge to the company from whom the amount is claimed. On the basis of the clauses in the trust deed and the conditions of the note, it is submitted that only a trustee can give a valid discharge and, therefore, only the trustee is a creditor who can file a winding up petition under Section 439(1)(b) of the Act.
In support of the aforesaid contention, strong reliance is placed on the decision of the apex court in Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan, Court Receiver, High Court, Bombay [1966] 36 Comp Cas 426, wherein the Supreme Court held that creditor means a person to whom a debt is payable ; if the debtor pays him the debt, the debtor must get the full discharge. Reliance is also placed on the decision of the apex court in Howrah Trading Co. Ltd. v. CIT [1959] 29 Comp Cas 282 ; AIR 1959 SC 775, and the two decisions of the Chancery Division in Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch D 446, 452 and Uruguay Central and Hygueritas Railway Co. of Monte Video, In re [1879] 11 Ch D 372.
24.2 Mr. Sundaram has also submitted that if there is no covenant between the company and the debenture holder, the debenture holder is not a creditor. Reliance is placed on the decision of the Bombay High Court in Narotamdas Trikamdas Toprani v. Bombay Dyeing and Manufacturing Co. Ltd. [1990] 68 Comp Cas 300 in support of the said contention. Mr. Sundaram has referred to the following clause in the trust deed for the new notes A series and B series (page 149) to lay the foundation for this contention :
"2.2 Covenant to pay.--The issuer will .... on any due date when the notes or any of them become due to be redeemed unconditionally pay to or to the order of the trustee in New York City in U.S. dollars .... the principal amount of the notes becoming due for redemption on that date and will.... until such payment.... unconditionally so pay to or to the order of the trustee interest on the principal amount of the notes ....
2.3 Discharge.-- Subject to Clause 2.4, any payment to be made in respect of the notes by the issuer or the trustee may be made as provided in the conditions and any payment so made will (subject to Clause 2.4) to the extent be a good discharge to the issuer or the trustee, as the case may be."
Clause 2.4 of the trust deed provides that at any time after an event of default of a potential event of default has occurred, the trustee may by notice in writing to the issuer and the agents, require the agents, to act as agents of the trustee to hold all the notes to the order of the trustee and by notice in writing to the issuer require it to make all subsequent payments in respect of the notes to or to the order of the trustee and not to the principal paying agent.
It is submitted that in the instant case there is no direct covenant between the respondent and the so-called noteholders as the payment of principal as well as interest is to be made to the trustee or through their paying agent and not directly to the noteholders.
25. On the other hand, Mr. Chidambaram, learned counsel for the petitioners has made the following submissions :
25.1 Reference is made to the averments made in (page 372) the reply affidavit that the interest has been paid to the petitioners and other noteholders. Apart from that the very concept of the global note is that the note is issued in favour of one person, but the others are the beneficial owners of the respective portions purchased by them and, therefore, condition No. 7 also contemplates receipt of the interest by the noteholders.
25.2 The very important object of insertion of Sub-section (2) in Section 439 was to remove the obstacles placed by the old decisions of the Chancery Division which prevented debenture holders from suing the company on the ground that they had no privity of contract with the company. Sub-section (2) of Section 439 makes the debenture holder a creditor by the very deeming provision contained in Sub-section (2). Therefore, there will be no question of examining whether the petitioners will get complete discharge or not.
25.3 Strong reliance is placed on the following decisions in support of the petitioners' submissions :
(i) Bachharaj Factories Ltd. v. Hirjee Mills Ltd. [1955] 25 Comp Cas 227, 248, 249 (Bom) ;
(ii) Sholapur Spinning and Weaving Co. Ltd., In re [1965] 35 Comp Cas 165, 167, 168 (Bom) ;
(iii) Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat [1971] 41 Comp Cas 1063, 1071, 1073 (Cal).
25.4 Without prejudice to the above submissions, it is submitted that the petitioners can give an effective discharge of the debt owed to the petitioners, because the petitioners will simply transfer the notes held in their accounts in favour of the respondent-company. Once this happens the issuer of the notes and the holder of the notes will be the same person, to the extent of such notes and consequently there will be an effective discharge. Clauses 7.12 and 9.15 (pages 154 and 158 respectively) of the trust deed do contemplate that the issuer can hold its own notes.
26.0 Statutory provisions and clauses in the trust deed.
26.1 Section 439(1)(b) and 439(2) read as under :
"439. Provisions as to applications for winding up.--(1) An application to the court for the winding up of a company shall be by petition presented, subject to the provisions of this section, -- . ....
(b) by any creditor or creditors, including any contingent or prospective creditor or creditors ; or ...
(2) A secured creditor, the holder of any debenture (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of Clause (b) of Sub-section (1)."
26.2 The trust deed for each series of notes has common clauses and the terms and conditions for the individual definitive notes are also incorporated in the terms and conditions of the global notes. Clause 2.2 in the trust deed reads as under :
"2.2 Covenant to pay.--The issuer will by 10.00 a.m. (New York city time) on any date when the notes or any of them become due to be redeemed unconditionally pay to or to the order of the trustee in New York city in U.S. dollars in immediately available funds the principal amount of the notes becoming due for redemption on that date and will (subject to the conditions) until such payment (both before and after judgment) unconditionally so pay to or to the order of the trustee interest on the principal amount of the notes outstanding as set out in the conditions subject to Clause 2.5 provided that (1) payment of any sum due in respect of the notes made to the principal paying agent as provided in the agency agreement shall, to such extent, satisfy such obligation except to the extent that there is failure in its subsequent payment to the relevant noteholders under the conditions and (2) a payment made after the due date or pursuant to condition 9 will be deemed to have been made when the full amount due has been received by the principal paying agent or the trustee and notice to that effect has been given to the noteholders (if required under Clause 7.9), except to the extent that there is failure in the subsequent payment to the relevant noteholders under the conditions. The trustee will hold the benefit of this covenant and the other covenants of the issuer under this trust deed on trust for itself and the noteholders according to their respective interests."
27. Having heard learned counsel for the parties, it appears to the court that Sub-section (2) of Section 439 refers both to the holder of any debenture as well as to the trustee as creditors within the meaning of Section 439(1)(b). Parliament intended to enlarge the class of persons who can present a winding up petition. By enacting the provisions of Sub-section (2) of Section 439 in the Companies Act 1956, Parliament did intend to do away with the hardship caused to the debenture holders by the decisions of the courts of Chancery Division especially the principle laid down in the leading case of Uruguay Central and Hygueritas Railway Co. of Monte Video, In re [1879] 11 Ch D 372 that a debenture holder did not have an immediate right of action for money lent or for money due because the company is liable to pay the trustees under the deed and, therefore, the company cannot be sued twice over. The reasoning of the Chancery Courts was as under :
"Allowing the debenture holder to sue the company would require the company to face two actions, one by the trustees and the other by the holder of the coupon ; it does not appear that it was the intention of the parties which, after all, is the governing rule in deciding questions of equitable debt, to create a debt for which the holder of the coupon could sue directly. Hence, the holder of the coupon (note or debenture) is not a creditor either at law or in equity within the meaning of the Companies Act."
28. While agreeing with the above reasoning that the company need not be made to face two actions, the result could be achieved, without violating any one's sense of justice or without sacrificing interest of any party, by simply evolving the principle that in an action by a debenture holder against the company, the trustee is a necessary party. After all, the provision permitting a debenture holder, (not having any privity of contract with the company) to move an action for the enforcement of his beneficial interest is a mere codification of an equitable principle permitting the beneficiary under a contract to enforce his equitable right. This principle was evolved in order to obviate the hardship otherwise caused to the beneficiary (i.e., the debenture holder in such cases). This codification was, however, not intended to inflict the avoidable hardship on the company of facing two actions one from the debenture holder and the other from the trustee. The equity requires that hardship to the company to be avoided by requiring the trustee to be joined as a necessary party in an action by a debenture holder against the company. There is nothing in the provisions of Section 439 or for that matter in any other provision of the Companies Act which can dissuade the court from reading this principle into the provisions of Sub-section (2) of Section 439 of the Act that in an action by a debenture holder against the company, the trustee is a necessary party ; though the converse would not be true, because in an action by the trustee, the trustee sues the company in its own right as a covenanting party.
29. It is also necessary to note that Jessel, Master of the Rolls began the judgment in Uruguay Central and Hygueritas Railway Co. of Monte Video, In re [1879] 11 Ch D 372 with the following words :
"I am not satisfied that the plaintiff is a creditor. I should have been very glad if I had received more assistance from Mr. Buckley in his argument as to the rights of a person under a deed to which he is not a party, than he has given me ; but in the absence of any authority I am not prepared to hold that this form of document, this bond, makes the person who holds the bond, or who holds the coupon, a creditor either at law or in equity."
Mr. Buckley's arguments for the petitioners are to be found on page 379 of the report :
"If the respondents' contention is right, a bondholder cannot get paid, or sue for his debt, without the instrumentality of the trustees ; but it cannot have been the intention that a bondholder should only sue through the trustees ; it must have been intended that he should have a direct security as against the company to whom the money advanced was paid. No authority is to be found in which the rights of a holder of a bond of this kind have been defined, but whatever may be the bondholder's strict rights at law, I submit that in equity the amount secured to him by the bond should be considered as a loan to the company, and that he is, therefore, entitled to be considered a creditor of the company."
In the aforesaid case, therefore, apart from recording its dissatisfaction with inadequate assistance received from learned counsel for the company the Chancery Court did not dismiss the winding up petition on the ground that a coupon holder is not a creditor, the court went on to consider on the merits that the petition by a holder of 600 pound coupon was opposed by the rest of the coupon holders to the amount of 142,700 pounds who had instructed the company's counsel to appear for them as well. It was specifically on this ground "the second ground"--that the Chancery Court exercised its judicial discretion by refusing the order for winding up.
It is, therefore, clear that the possible principle of the coupon or bond holder suing the company and joining the trustee as a necessary party-respondent was neither suggested nor explored. This court, therefore, feels no hesitation in evolving the above principle.
It must, however, be made clear that this principle laying down that the trustee is a necessary party in a winding up petition or any other proceeding taken out by a debenture holder against the company is applicable where there is no direct covenant between the company and the debenture holder and the covenants are between the company and trustee. This principle is, therefore, not applicable where there is a direct covenant between the company and the debenture holder.
30. Before concluding the issue, the court would deal with the submissions made by Mr. Sundaram for the respondent-company and the authorities cited by him.
30.1 Mr. Sundaram would, however, submit that Sub-section (2) of Section 439 can be invoked only by those debenture holders on whom the trust deed confers any right or only those debenture holders with whom the company has any direct covenant. Mr. Sundaram submitted that in Sholapur Spinning and Weaving Co. Ltd., In re [1965] 35 Comp Cas 165 (Bom) and other cases relied upon by Mr. Chidambaram, there were debenture certificates directly issued by the issuer company to the debenture holders and, therefore, there were direct covenants between the company and the debenture holders. On the other hand, in the instant case, the covenants are only between the issuer company, i.e., the respondent-company on the one hand and the trustee on the other hand without any covenant with the noteholders.
The argument may sound attractive, because in the instant case there is no direct covenant between the respondent-company and the noteholders. Still, however, the respondent's argument cannot be accepted for two reasons. In the first place, tenders of old notes (due 1999) pursuant to the procedure prescribed in the exchange offer and the acceptance thereof by the company constituted a binding agreement between the company and the old noteholders upon the terms and subject to the conditions of the exchange offer and consent solicitation. This aspect with the relevant quotation from page 115 of the paper book, has already been pointed out in para, 16 of this judgment.
Secondly, even if that agreement is to be treated only as an agreement for exchange of notes and even if the trust deed and the form of the notes and terms and conditions thereof are to be treated on their own without reference to the exchange offer, Clause 2.2 of the trust deed quoted in para. 26.2 of this judgment makes it clear that the covenants made by the issuer to the trustee are for the benefit of the trustee as well as the noteholders according to their respective interest.
In Narotamdas Trikamdas Toprani v. Bombay Dyeing and Manufacturing Co. Ltd. [1990] 68 Comp Cas 300 (Bom), it has already been held that although the remedy to enforce the securities may vest in the trustees, the debenture holders, as beneficiaries, would be entitled to enforce covenants which are for their benefit although they may not be directly parties to the covenants. The right of a beneficiary under a trust to enforce contracts which are for his benefit is recognised under our law as laid down by the Supreme Court in M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504. In Narotamdas Trikamdas Toprani's case [1990] 68 Comp Cas 300, the Bombay High Court has also held that in view of the express provision now contained in Section 439(2) of the Companies Act, 1956, there can be no doubt that a debenture holder is a creditor of the company for the purpose of presenting a winding up petition.
30.2 Reliance placed by learned counsel for the respondent-company on the same case, i.e., Narotamdas Trikamdas Toprani's case [1990] 68 Comp Cas 300 is misconceived. In the said Bombay case, Hon'ble Mrs. Justice Sujata V. Manohar held that where the debenture holder sues the company or takes steps against the company for recovery of his money claim under the debenture certificate, he is entitled to do so, but the situation is different when the suit is for some other reliefs like maintenance of securities by the company for the protection of debenture holders. The instant case falls in the former category and not in the latter category.
30.3 Reliance placed by Mr. Sundaram on the principles laid down in Buckley on the Companies Acts as quoted in Bachharaj Factories Ltd.'s case [1955] 25 Comp Cas 227 (Bom) does not carry the case of the respondent-company any further as what was laid down there was the principle of the English law that a debenture holder can present a petition only where there is a direct covenant between the company and the debenture holder. As already indicated above, where the debenture holders are claiming their beneficial rights under a trust, under the Indian law it has already been held that the beneficiaries can take action against the company.
30.4 Mr. Sundaram has heavily relied on the decision in Harinagar Sugar Mills Co. Ltd.'s case [1966] 36 Comp Cas 426 (SC). The question there was whether the receiver was a creditor or not. It was on account of absence of any deeming provision (unlike Section 439(2)) which required the apex court to consider the question whether the receiver had the right to file a winding up petition. It was in that context that the apex court examined the question and held that in view of the statutory provisions in India, there is statutory assignment of debts in favour of the receiver and, therefore, the question examined under the English law whether the receiver has the right to sue for debts transferred to him by voluntary assignment does not arise. The apex court held that whether the assignment is statutory or voluntary, the receiver has a right to sue for the debts and to file a winding up petition.
30.5 Mr. Sundaram also placed strong reliance on the decision of the apex court in Howrah Trading Co. Ltd.'s case [1959] 29 Comp Cas 282 ; AIR 1959 SC 775, which was a case under the Income-tax Act The controversy there arose in the following context :
Transfers of shares of a company take place either by a fully executed document where both the transferor and transferee sign the forms or by blank transfers. However, when the question of paying the dividend declared by the company arises, the company recognises no person except one whose name is on the register of members on the record date. If a shareholder had already signed a transfer form before the record date and transferred his shares, but the transfer form duly filled in is not presented before the company before the record date, the company will pay the dividend only to that shareholder whose name is on the register of the company as on the record date and the dividend will not be paid to the transferee. Of course, between the transferor and the transferee, certain equities arise even on the execution and handing over of a blank transfer and among these equities is the right of the transferee to claim the dividend declared and paid by the company to the transferor who is treated as a trustee on behalf of the transferee.
The apex court held that these equities, however, do not touch the company, because only the shareholder whose name is found on the register of members on the record date can give the company a valid discharge. The transferee whose name is not on the register of members cannot make any claim against the company, if the transferor retains the money in his own hands and fails to pay it to the transferee.
Mr. Sundaram invoked this principle in support of his submission that only the trustee can give a valid discharge and not the noteholders, just as only the transferor having his name on the register of members on the record date can give a valid discharge and not the transferee, even if the transferor had transferred the shares before the record date, but the transfer was not registered with the company.
The submission overlooks the fact situation in the present case.
In Howrah Trading Co. Ltd.'s case [1959] 29 Comp Cas 282 ; AIR 1959 SC 775, the transfer of shares was never registered with the company before the record date, hence only the transferor whose name was on the register on the relevant date was entitled to be paid the dividend in his own right as the company knew nothing abut the transaction between the transferor and transferee. In the instant case, under the trust deed itself the trustee gets the payments not for itself but on behalf of the noteholders (who have their respective accounts with the concerned sub-custodians or agencies) as on the record date. Clause 2.2 of the trust deed quoted in para. 26.2 hereinabove recognises this situation which is, therefore, within the knowledge of the company. The relevant portion of Clause 2.2 bears repetition :
"The trustee will hold the benefit of this covenant and the other covenants of the issuer under this trust deed on trust for itself and the noteholders according to their respective interests."
In view of the above clause, it makes no difference whether or not the respondent-company knows about the names and debt amounts of individual noteholders like the petitioners because the very nature of the global note does not require such details to be made known to the respondent-company.
31. Another important aspect which is required to be noticed at this stage is that the trustee has invoked Clause 9 and declared the event of default on account of the non-payment of interest after January 31, 2001. After the filing of the present winding up petitions, the respondent-company addressed letter dated February 5, 2002, to the trustee making grievance against the petitioners having approached this court in disregard of the terms and conditions of the offer under which the global note was issued by the respondent-company. In reply thereto, the trustee-JP Morgan in their letter dated February 19, 2002, have not contended that the petitioners are not noteholders nor have the trustees contended that any payment to the noteholders would not give the respondent-company a valid discharge. If the trustees had stated or contended that the monies should be paid directly to the trustee and not to the noteholders, it would have been a valid defence for the respondent-company to urge that the noteholders did not have a right to give a valid discharge. The aforesaid conduct on the part of the trustee, therefore, supports the petitioners' case that they have a right to give a valid discharge for the debts in question.
32. In view of the above discussion, the third preliminary contention as such fails, but with a clarification that in a petition by a noteholder, against the issuer-company, the trustee is a necessary party.
Preliminary contention No. 4 :
Even if the petitioners are creditors, they do not have any enforceable claim in view of Clause (6), condition No. 13 providing for enforceability of any claim.
33.0 Mr. Sundaram for the respondent-company vehemently submitted as under :
33.1 Even if the petitioners are creditors, the petitioners have no right to present a winding up petition so long as they do not have a presently enforceable right in law. The petitioners are precluded by condition No. 13 of the terms and conditions of the offer from bringing any action against the respondent-company unless they can show that the trustee was required by 20 per cent. of the noteholders to take action against the company but has failed to do so within a reasonable time, then only at least 20 per cent. of the note-sholders can file a petition. Condition No. 13 reads as under :
"13. Enforcement.--At any time after the notes become due and payable, the trustee may, at its discretion and without further notice, institute such proceedings against the issuer as it may think fit to enforce the terms of the trust deed and the notes, but it need not take any such proceedings unless (a) it shall have been so directed by an extraordinary resolution or so requested in writing by noteholders holding at least one-fifth in principal amount of the notes outstanding, and (b) it shall have been indemnified to its satisfaction. No noteholder may institute proceedings directly against the issuer unless the trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing."
33.2 The object of issuing a global note to one person and others getting their share in it under the terms and conditions to which they are parties (which contain the aforesaid express condition No. 13), is to ensure that when or if 75 per cent. of the noteholders in value are prepared to give time to the issuer company for repaying the debt, a small minority of noteholders is not to be permitted to frustrate the negotiations between the noteholders as a class on the one hand and the issuer company on the other hand. As stated in the reply affidavit and the additional affidavit dated March 19, 2002, the petitioners hold only 4 per cent. debt of the respondent-company. The respondent-company is negotiating the restructuring process with the lenders (through a steering committee) who fall in three groups (i) Indian public financial institutions like IDBI, ICICI, etc., (ii) Indian banks who have provided the working capital and (iii) the foreign lenders like the floating rate noteholders and two foreign banks. The petitioners had purchased the notes with open eyes knowing fully well these terms and conditions which preclude the noteholders from instituting proceedings directly against the respondent-company, unless the trustee having been directed by the requisite number of noteholders to do so, fail to institute such proceedings.
33.3 Even if the petitioners are claiming their statutory right, such a statutory right is not available to any person in vacuum. There has to be a fact situation and contractual basis conferring rights and imposing duties on the parties and the right to file a winding up petition does not obliterate these rights and duties which are a part of the contract.
33.4 Just as a creditor cannot present a winding up petition on the basis of a time-barred debt because the debt is not enforceable, similarly the present petitioners do not have any right to present the petitions because the debt is presently not enforceable by them.
In support of the contention that the winding up petition cannot be presented on the basis of a time-barred debt which is not enforceable, learned counsel relied on the following decisions of the Karnataka, Patna and Madras High Courts respectively :
(i) Hariom Firestock Ltd. v. Sunjal Engineering Pvt. Ltd, [1999] 96 Comp Cas 349 ;
(ii) Ferro Alloys Corporation Ltd. v. Rajhans Steel Ltd. [2000] 99 Comp Cas 426 ;
(iii) Vijayalakshmi Art Productions v. Vijaya Productions Pvt. Ltd. [1997] 88 Comp Cas 353.
34. On the other hand, Mr. Chidambaram, learned counsel for the petitioners urged that--
34.1 The petitioners are not seeking to enforce the right under the contract or the trust deed but the petitioners by filing the present petitions are enforcing their statutory rights under the provisions of the Companies Act, i.e., for winding up the respondent-company. In support of the said submission, strong reliance has been placed on the following decisions :
(i) Hind Mercantile Corporation P. Ltd. v. J.H. Rayner and Co. Ltd. [1971] 41 Comp Cas 548 (Mad) ;
(ii) ITC Agro Tech Ltd. v. Asha Agro Industries Ltd. [1998] 4 Comp LJ 18 (All).
On the basis of the aforesaid decisions, it is submitted that the right to file a winding up petition statutorily conferred upon the petitioners cannot be taken away by an agreement between the company and the trustee. The company court has merely to determine whether the debt is due and payable and whether the company has neglected to pay the same and whether the defence taken up by the company is bona fide.
34.2 The objection being raised on behalf of the respondent-company may be available to it in a civil suit for enforcement of the trust deed and the obligations contained therein, but this defence is not available in a winding up petition filing of which is a statutory right of the petitioners as noteholders. Strong reliance has been placed on the decision of the apex court in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 97 Comp Cas 683 ; [1999] 5 SCC 688 wherein it is laid down that any claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect that the company has become commercially insolvent and, therefore, should be wound up. The power of a company court to order winding up of a company is, therefore, entirely different from the power of the civil court to pass a decree for a definite sum of money.
34.3 Learned counsel has relied on the letter dated February 19, 2002, from J. P. Morgan to the advocates of the respondent-company with reference to the present petitions stating that :
"Clause 6, condition 13, this enforcement is only in relation to the trust deed and the notes. The current petition is not concerning the enforcement of the trust deed or the notes. What is being sought is evidence that the notes are due and owing which constitutes the basis of a debt upon which a winding up petition is presented.
The trustee does not agree with your point that there is no privity of contract between the company and the individual noteholders, nor is the trustee a creditor.
The trustee does not have the ability or the intention to restrain the noteholders from proceeding with the legal proceedings initiated by them against the company."
35. In rejoinder, Mr. Sundaram, learned counsel for the respondent-company has submitted that the statutory provisions contained in Section 439(2) are not and were not intended to be in derogation of the rights of the creditors as a class. It is also submitted that the interpretation of the trustee cannot decide the vital legal issues involved in the preliminary contentions.
36. Before examining the rival submissions, it is necessary to have a close look at the two relevant clauses of the terms and conditions of the global note. The back of form of Deposit Trust Company global notes--Series A held by the Depository Trust Company states as under :
"The terms and conditions of the notes, identical to the terms and conditions to be inserted on the individual definitive notes, will be inserted."
These terms and conditions inserted on the individual definitive notes are to be found at annexure H to the petition and for the purpose of the preliminary contention No. 4, we are concerned with Clauses 9, 12(a) and (d), 13 and 14 in Schedule 2 (terms and conditions of notes) which read as under :
"9. Events of default.--If any of the following events occurs the trustee at its discretion may, and if so requested by holders of at least one-fifth in principal amount of the notes then outstanding or if so directed by an extraordinary resolution shall (in each case subject to being indemnified to its satisfaction), give notice to the issuer that the notes are, and they shall immediately become, due and payable at their principal amount together with accrued interest :
(a) Non-payment : the issuer fails to pay any principal or interest on any of the notes when due ; or . . ."
Clause 12 of the conditions provides for the quorum and majority required for passing extraordinary resolutions. The special quorum and majority for such resolutions are meant for special categories of subjects--e.g., (i) to modify the maturity of the notes or the dates on which interest is payable in respect of the notes ; and (ii) to reduce or cancel the principal amount of, or interest on or to vary the method of calculating the rate of interest on, the notes. This clause further provides as under :
"Any extraordinary resolution duly passed shall be binding on all noteholders (whether or not they were present or represented at the meeting at which such resolution was passed). An extraordinary resolution is defined in the trust deed to mean a resolution passed at a duly convened meeting of noteholders by a majority of at least 75 per cent. of the votes cast.
13. Enforcement.--At any time after the notes become due and payable, the trustee may, at its discretion and without further notice, institute such proceedings against the issuer as it may think fit to enforce the terms of the trust deed and the notes, but it need not take any such proceedings unless (a) it shall have been so directed by an extraordinary resolution or so requested in writing by noteholders holding at least one-fifth in principal amount of the notes outstanding, and (b) it shall have been indemnified to its satisfaction. No noteholder may institute proceedings directly against the issuer unless the trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing.
14. Indemnification of the trustee.--The trust deed contains provisions for the indemnification of the trustee and for its relief from responsibility. The trustee and its parent, subsidiaries and affiliates are entitled to enter into business transactions with the issuer and any entity related to the issuer without accounting for any profit."
37. An analysis of the aforesaid conditions reveals the following scheme :
A. Notice of default :
(i) When the issuer fails to pay any principal or interest on any notes when due, the trustee at their discretion may give notice to the issuer that the notes are, and they shall immediately become, due and payable at their principal amount together with accrued interest (hereinafter called the "notice of default").
(ii) If the holders of at least one-fifth in principal amount of the notes then outstanding request the trustees to give such notice of default, the trustees shall give such notice to the issuer.
(iii) If noteholders holding not less than ten per cent. in principal amount of the notes for the time being outstanding request for an extraordinary meeting, the trustee shall convene such a meeting or on their failure, such noteholders holding at least ten per cent. of the principal amount as aforesaid, shall convene a meeting where there shall be quorum consisting of a clear majority of the notes in value outstanding at that time and by a three-fourths majority of the noteholders in value present at the meeting pass an extraordinary resolution requiring the trustee to issue such a notice of default.
B. Enforceability :
Thereafter, i.e., after the notes became due and payable upon the notice of event of default before the date of maturity or upon maturity of the notes, if the amounts remain unpaid, whether principal or interest, any of the following courses of action can be adopted :
(i) The trustee may at their discretion and without further notice institute such proceedings against the issuer, as the trustee may think fit to enforce the terms of the trust deed and the notes.
(ii) The trustee shall take the proceedings for enforcing the terms of the trust deed and the notes, if so requested in writing by noteholders holding at least one-fifth in principal amount of the notes outstanding.
(iii) The trustee shall take the proceedings for enforcement of the terms of the trust deed and the notes, if so directed by an extraordinary resolution, i.e., at a meeting with a quorum of more than 50 per cent. of the noteholders in value, if the resolution is passed by 75 per cent. or more of the noteholders in value present at the meeting.
Condition 13, however, does not stop there, but it proceeds to state in unmistakable terms as under :
"No noteholder may institute proceedings directly against the issuer unless the trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing."
38. Having carefully considered the rival submissions, the court finds that there is some substance in the objection raised by Mr. Sundaram but it cannot be upheld in its entirety. In the first place, it is necessary to appreciate the similarity as Well as the dissimilarity between the proceedings for winding up under the Companies Act and the suit proceedings before the civil court for recovery of money. While it is true that the proceedings are different, the difference lies in the nature of the remedy and not in the nature of the claim. In the civil suit if the plaintiff establishes his case, the civil court will pass a decree for a definite sum of money with interest during pendency of the suit and also after the date of the decree till payment or realisation. On the other hand, in a winding up petition if the petitioner is able to establish the claim, the court after exercising its discretion will admit the petition, advertise it and after giving an opportunity of hearing to all the creditors, and other affected parties, decide whether to wind up the company or not. If the company is ordered to be wound up, the official liquidator will be required to sell all the assets of the company and pay the creditors and workers out of the sale proceeds.
39. However, before the company court can pass an order for winding up or the civil court can pass a decree for a sum of money, the petitioning-creditor or the plaintiff will have to establish his claim. The claim in both the cases arises from a contract. If the debtor has promised to return the money along with interest on cumulative interest basis after a period of five years, and a creditor files a suit for recovery of money after one year from the date of the contract, the civil court would dismiss the suit on the ground that the creditor has no presently enforceable claim against the defendant. Similarly, if on the same set of facts, another creditor were to file a winding up petition, on a defence being taken up, the company court would also have to dismiss the winding up petition on the ground that the petitioning-creditor does not have a presently enforceable claim. In both the cases, the question to be considered is whether the creditor has a presently enforceable claim. Similarly, if the creditor were to file a suit for recovery of a time-barred debt or he were to file a winding up petition on the basis of a time-barred debt, the same result would ensue.
40. The nature of the winding up proceedings has been well explained by the Karnataka High Court in A.V. Krishna v. Karnataka Leasing and Commercial Corporation Ltd. [1995] 83 Comp Cas 764 as under (page 767) :
"When a company is sought to be wound up because the company is unable to pay its debts, the cause of action arises as and when the company's commercial insolvency is disclosed or it is realised that the company is commercially insolvent or it is unable to pay its debts. This cause of action can be taken advantage of by any one of the creditors or the entire body of creditors. Section 439(1)(b) of the Act clearly discloses this principle which says that an application for the winding up of the company shall be by petition presented by any creditor or creditors, including any contingent or prospective creditor or creditors (other provisions are not necessary here). Thus, the Act itself recognises the right of any creditor or creditors to invoke the jurisdiction of the court seeking the winding up of a company by a single petition.
The effect of a winding up order is brought out by Section 447 which says : 'An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory.' Therefore, when a winding up petition is entertained and considered, the order made by the court ultimately would enure to the benefit of all the creditors and contributories. In fact, the procedure contemplated before making such an order includes a mandatory procedure of an advertisement of the company petition so that other creditors or contributories may participate in the proceedings. A petition for winding up under Section 433(e) of the Act certainly is a petition by and on behalf of the class of creditors having regard to the nature of the proceedings and the effect of the ultimate order that may be made by the court."
41. Keeping in mind the above nature of the winding up proceedings, the court has carefully considered that the object of condition No. 13 is that a small minority of the noteholders cannot be permitted to enforce their claim against the issuer company directly. It is not that the majority noteholders can render the minority noteholders remedyless. It appears that even after the notice of event of default is given by the trustee, if the trustees do not on their own discretion take any action to enforce the trust deed, the following remedies are provided to the noteholders :
(i) 20 per cent. noteholders (in value) may require the trustee to take proceedings for enforcement of the rights under the trust deed and if the trustees fail to do so within a reasonable time, the noteholders can themselves institute proceedings against the company.
(ii) If the holding of the noteholders in value is less than 20 per cent. they can still require the trustee to convene a meeting of the noteholders and on failure of the trustee, 10 per cent. noteholders in value can themselves convene a meeting of the noteholders and if the noteholders pass an extraordinary resolution at such meeting directing the trustee to institute proceedings for enforcement of the rights under the trust deed, the trustees are bound to institute the proceedings and if they do not do so within a reasonable time, the noteholders themselves may institute such proceedings.
It appears that the rationale of the provision placing a limited restriction on the noteholders directly instituting proceedings against the issuer company is that if the noteholders having 75 per cent. or more in value are prepared to modify the dates on which the interest or principal is payable in respect of the notes or cancel interest, they get an opportunity to have an extraordinary meeting of the noteholders convened and then the noteholders as a class will take decision. Of course, if the noteholders having 20 per cent. or more of the value require the trustee to institute proceedings for enforcement of the terms of the trust Heed and the notes, the trustee will have to institute proceedings within a reasonable time, failing which the noteholders themselves will have a right to institute such proceedings. On the other hand, if the terms of the notes are to be varied, at least 75 per cent. of the noteholders in value present at the meeting (with a quorum of at least 75 per cent. of the noteholders in value outstanding) will have to pass an extraordinary resolution to that effect. The object of the condition is that noteholders having at least 20 per cent. principal amount of the notes outstanding as on the relevant date are permitted to institute proceedings for enforcement after giving a reasonable time to the trustee, or noteholder having at least 10 per cent. principal amount of the notes are permitted to convene an extraordinary meeting of all the noteholders. During this reasonable period or at the extraordinary meeting, the final decision can be taken by the noteholders as a class, but any decision to vary the terms of the notes can only be taken by not less than 75 per cent. noteholders in value present at the meeting (with a quorum of not less than 75 per cent. of noteholders in value outstanding), which decision will bind all the noteholders.
42. It is true that in Vijayalakshmi Art Productions v. Vijaya Productions Pvt. Ltd. [1997] 88 Comp Cas 353, the Madras High Court has held that winding up proceedings under Section 433 of the Companies Act cannot be the subject matter of an arbitration agreement and that that view is also now confirmed by the apex court in Haryana Telecom Ltd.'s case [1999] 97 Comp Cas 683. It is also true that in ITC Agro Tech ltd.'s case [1998] 4 Comp LJ 18 (All), the Allahabad High Court has held that the right to file a winding up petition cannot be obliterated by an agreement between the parties. The company court has to determine whether debt is due and whether the company is unable to pay the same and whether the defence taken in the winding up petition was bona fide and likely to succeed on a point of law.
However, in the instant case, the defence of the respondent-company is not that condition No. 13 regarding enforceability obliterates or takes away the right of any creditor to file a winding up petition. It is their case that just as a litigant filing a suit against the Government is required to give a notice under Section 80 of the Code of Civil Procedure, once the mechanism under condition No. 13 is followed, the creditor can exercise its right of presenting a winding up petition.
43. The letter dated February 19, 2002, of the trustee only indicates the interpretation which the trustees have placed on the relevant conditions and that interpretation proceeds on the basis that the petition for winding up is not the same thing as the proceedings for enforcement of the trust deed and notes. However, as already pointed out above, whether it is a winding up petition or a suit for recovery of money, condition No. 13 provides that no noteholder may institute proceedings directly against the issuer unless the trustees, having become bound so to proceed, fail to do so within a reasonable time and such failure is continuing.
44. Mr. Sundaram submits that the condition is not challenged and it is not a void condition or could be treated as a condition contrary to public policy because the whole purpose of a global note is to issue one note in favour of one person and others can have their respective shares in that note, but the noteholders are expected and required to act as one entity subject to the exceptions stated in condition No. 13.
45. There seems to be a little snag here. While 20% of the noteholders can certainly require the trustee to institute proceedings against the issuer-company for enforcement of the trust deed and the notes, but if the meeting of the noteholders is convened, an extraordinary resolution asking the trustee to institute such proceedings can be passed only by a special majority, i.e., by 75% or more in value of noteholders passing an extraordinary resolution at the meeting where at least the noteholders with a clear majority in value are present at such meeting. This is the combined reading of conditions 12 and 13 of Clauses 6 in Schedule 1 to the trust deed read with Clauses 5 and 18 in Schedule 3 to the trust deed (provisions for meeting of noteholders to the trust deed (pages 193-196)). In other words, even when all the noteholders are present at a meeting (after the notice of defaults has been issued by the trustee) to consider what action should be taken by the trustee against the issuer which has defaulted in payments, at least 75% in value of the noteholders present and voting will have to pass a resolution for instituting proceedings against the defaulter-issuer. In other words, even 51% of the noteholders in value outstanding will not be able to pass a resolution requiring the trustee to take action. Hence, the right of the creditors as a class to file winding up petition cannot be allowed to be defeated by such a provision in the terms and conditions. This court is of the view that such an onerous condition would be in derogation of the statutory right of the creditors under Sections 433, 434 and 439 of the Companies Act, 1956.
But that part of condition No. 13 providing that the trustee at their own discretion may institute proceedings against the company or that 20 per cent. of the noteholders in value can require the trustee to institute proceedings against the company cannot be said to be in derogation of the statutory right of the noteholders under the aforesaid provisions of the Companies Act, 1956, when one considers the nature of the global note which represents a single debt owed by the company to the global noteholder and to the persons having a share in the same (paras. 5.6(A) and 507(i) of this judgment).
This aspect is, however, not required to be considered at this stage as so far even the noteholders with 20 per cent. holding have not come forward with a grievance that their request to proceed for instituting the proceedings against the respondent-company has not been heeded to. It is not the case of the petitioners that they hold not less than 20 per cent. principal amount of the notes outstanding. The figures given by the respondent-company indicate that the holding bf the petitioners in FRNs is 16.98 per cent.
March 21, 2001 :
46. At this stage Mr. Abhishek Sexena with Mr. Mihir Joshi, for the petitioners submit that the figures of the holding of the petitioners in the FRNs at less than 20 per cent. was given only on March 19, 2002, and, therefore, the petitioners may be granted some time to show that the petitioners' holding in the FRNs is more than 20 per cent.
47. Mr. K. S. Nanavati with Mr. Keyur Gandhi, learned counsel for the respondent-company submit that in view of the fact that the petitioners do not have 20 per cent. in value of the notes and in view of the finding being given by the court that the trustee is a necessary party, the petitions are required to be dismissed.
48. It appears to the court that even if the noteholders were to come with a case that they have 20 per cent. holding in the FRNs, the trustee would be a necessary party to such a petition because in the first place the trustee can confirm whether the petitioning creditors-FRN holders have 20 per cent. holding as contemplated by condition No. 13 and also the trustee would be in a position to state whether noteholders holding 75 per cent. or more in value of the principal amount of the notes outstanding have decided to modify or are in the process of modifying, the maturity date of the notes or the dates on which the interest is payable in respect of the notes or any other decision of special nature as contemplated by condition No. 12 of the terms and conditions of the offer.
CONCLUSIONS :
49. In view of the above discussion, the court comes to the following conclusions :
I. (i) Preliminary contention No. 1 is overruled. It is held that the petitioners are noteholders.
(ii) Preliminary contention No. 2 is also overruled. It is held that the petitioners are debenture holders.
(iii) As regards preliminary contention No. 3, it is held that though the winding up petitions filed by the petitioners as debenture holders are maintainable, the trustee is a necessary party in such proceedings. (It is clarified that this principle that the trustee is a necessary party will not apply where there are direct covenants between the company and the debenture holders).
(iv) Although there is some substance in contention No. 4 urged on behalf of the respondent-company that the provisions of Condition No. 13 cannot be altogether ignored, condition No. 13 will not affect the maintainability of the winding up petitions in the context of the locus standi of the petitioners, as the conditions specified in Sections 433(a), 434 and 439(1)(b) and 439(2) are satisfied, and (as per the discussion in paras. 27 to 29 herein-above), once the trustee is joined as a necessary party-respondent to these petitions between the noteholders and the respondent-company.
II. The court does not hold that the petition is liable to be thrown out in the absence of the petitioners having 20 per cent. notes in value because once the trustee is a necessary party and under condition No. 13, the trustee in its own discretion can institute proceedings against the company ; without driving the trustee to filing a separate petition, the court would like to await the stand of the trustee even if the petitioners do not have 20 per cent. holding. If the trustee does not support the petitioning-creditors, but the petitioners have holding of 20 per cent. or more of the notes in value, the court would proceed to hear the petitioners, the company and the trustee on the merits for deciding whether to admit the petitions.
III. But if neither the trustee is ready to support the petitions, nor do the petitioners have holding of 20 per cent. of the notes in value, in the context of the nature of the global note which represents a single debt and the object underlying Clause No. 13, the court would apply the enforceability clause.
ORDERS
50. Since it is only now that it is being held that though the petitioners are creditors and, therefore, the petitions would be maintainable, but the trustee is a necessary party and that in the absence of the trustee the petitions could be dismissed, the petitioners are required to be given an opportunity to rectify this defect and, therefore, some time is required to be given to join the trustee as a party. After the trustee is joined as a party respondent in these petitions, the court will on the next date of hearing consider the question of applicability of condition No. 13 (enforceability) in light of the stand which may be taken up by the trustee and/or depending on the petitioners' holding in the value of the notes outstanding as indicated above.
51. While overruling the four preliminary contentions raised by the respondent-company/ Essar Steel Limited, the court holds that the trustee for the FRNs (due 2005) Series A and Series B is a necessary party to the present proceedings but since the affidavit containing the figures of holding of the petitioners in the FRNs was served on the petitioners only on the 19, March, and since the finding that the trustee is a necessary party is being rendered only now, the further hearing of this petition is required to be adjourned to April 6, 2002.
S. O. to April 6, 2002.
ANNEXURE I Outline of note issues - Structure ISSUER | DTC FN1 | DTC PARTICIPANT (can also be beneficial holder) FN2 |
----------------------------------------------------
| | |
EUROCLEAR CLEARSTREAM ANY OTHER DTC ACCOUNT HOLDER
| | who could be either
| | BEBEFICIAL HOLDER OR CUSTODIAN
| | |
| | ---------------------
| | | |
EUROCLEAR ACCOUNT HOLDER CLERSTREAM ACCOUNT HOLDER, BENEFICIAL SUB-CUSTODIAN
who could be either who could be either HOLDER |
BEBEFICIAL HOLDER BEBEFICIAL HOLDER |
OR CUSTODLAN FN3 OR CUSTODLAN FN3 |
| | BENEFICIAL HOLDER
---------------- --------------------
| | | |
BENEFICIAL SUB-CUSTODIAN BENEFICIAL SUB-CUSTODIAN
HOLDER | HOLDER |
| |
BENEFICIAL BENEFICIAL
HOLDER HOLDER
FN1 : Euroclear or Clearstram could also be in this position though for the purposes of the Essar-notes DTC (or its custodian) is the entity which holds the global note.
FN2 : Only DTC participants have accounts with DTC. A DTC participant could hold notes for itself.
FN3 : "Custodian" and "DTC participant" will in most cases be an investment bank, i.e., CSFB, Merill Lynch, Deutsche, or Morgan Stanley.