Delhi High Court
Citibank, N.A vs Moser Baer India Ltd on 17 July, 2013
Author: R.V. Easwar
Bench: R.V. Easwar
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 3rd & 12th July, 2013
% Date of Decision: 17th July, 2013
+ CO.PET. 558/2012 & CO.APPL.2301/2012
CITIBANK, N.A ..... Petitioner
Through Mr Rajiv Nayyar, Sr. Adv. with Mr
Arun Kathpalia, Mr Shankh Sengupta and Mr
Sandeep Das, Advs.
versus
MOSER BAER INDIA LTD ..... Respondent
Through Mr Mukul Rahotgi, Sr. Adv. with Mr
Sandeep Sethi, Sr. Adv. with Ms Ruchi
Agnihotri and Mr Jai Mohan, Adv.
+ CO.APPL.1115/2013 (APPLICATION BY WORKERS/
EMPLOYEES THROUGH LAXMAN DAS & ORS.) IN
CO.PET. 558/2012
CITIBANK,N.A ..... Petitioner
Through Mr Rajiv Nayyar, Sr. Adv. with Mr
Shankh Sengupta, Mr Sandeep Das, Mr
Sampath and Ms Padmaja Kaul, Advs.
versus
MOSER BAER INDIA LTD ..... Respondent
Through Ms Ruchi Agnihotri and Ms Shreya,
Advs.
Mr Sachin Datta and Mr Vineet Tayal, Advs.
for applicants
CORAM:
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.:
CO.PET. 558/2012 & CO.APPL.2301/2012 The facts, very briefly, are that a sum equivalent of close to Indian Rs.863 crores are due by the respondent-company viz., Moser Baer CO. PET. 558/2012 Page 1 of 21 (hereinafter referred to as "the company" or "the respondent-company") on bonds issued to various bondholders in June, 2007. These were zero- coupon Tranche A and Tranche B convertible bonds for USD 75,000,000 which were to be redeemed on 21-6-2012 at 135.07% of the principal amount and 139.39% respectively. At the time of the issue of the bonds, Citibank, N.A., a company incorporated in New York, USA (hereinafter referred to as "the petitioner") was appointed the trustee for the bondholders under a trust deed. The company defaulted in redeeming the bonds on the due date. Notices sent in June/September, 2012 by the company for restructuring the bonds were later cancelled. The bonds remained to be redeemed, and remain so till date.
2. In September, 2012 the petitioner sent a statutory notice to the company under sec.434 of the Companies Act, 1956 (hereinafter referred to as "the Act") calling upon it to repay the outstanding amount on the bonds within three weeks. The notice was duly served. A reply was sent to the petitioner on 15-10-2012; there was an exchange of correspondence but nothing worthwhile transpired, except that the meeting with the bondholders was postponed.
3. It is in the above circumstances that the petitioner filed the present company petition in this court. After the initial formal orders, an order was passed by this court (Indermeet Kaur, J.,) on 13-12-2012 restraining CO. PET. 558/2012 Page 2 of 21 the company and its agents/officer/servants from transferring or alienating any of its assets, divisions, businesses and those of its subsidiaries or creating any third party interests therein. At the time of the passing of the order, the court was apprised of the fact that there were no prospects of settlement and that the Corporate Debt Restructuring (CDR) Scheme which was put in place would only infuse an amount of Rs.150 crores into the company with a possible Rs.40 crores to be kept aside for the benefit of the petitioner, which, according to the petitioner, was inadequate to meet the bond-liability of about Rs.688 crores and would not even be sufficient to meet the interest liability.
4. An appeal was preferred by the company against the order passed on 13-12-2012 by this court before the Division Bench in Co.Appeal No. 114/2012. The main contention of the company (appellant in the appeal) was that the CDR scheme would be beneficial not only to the company but also to the bondholders who will be protected if the scheme is allowed to go on and that under the scheme the company would be required to create additional charge on its assets which would not be possible in view of the order of restraint passed on 13-12-2012. It was submitted that unless the company signs the agreement under the CDR scheme its secured creditors/lenders would no longer be bound by the concessions already granted but may also declare the account of the CO. PET. 558/2012 Page 3 of 21 company as a „Non Performing Asset‟ (NPA) and also initiate proceedings for the winding up of the company.
5. The Division Bench, which disposed of the appeal by order dated 20-12-2012, rejected the doubts expressed by the petitioner herein (respondent in the appeal) regarding the viability of the CDR scheme and observed that the RBI would not have approved the scheme without being satisfied as to its viability and the possibility of the revival of the company. It agreed with the contention of the company that the restraint order should not be allowed to come in the way of the CDR scheme and the attempted revival of the business of the company. Eventually, it passed the following order (Paragraph 7):
"7. We accordingly modify the interim order dated 13 th December, 2012 by permitting the appellant Company to execute the Master Restructuring Agreement under the CDR process aforesaid and on the terms as disclosed in the memorandum of appeal, though with a clarification that the additional/new encumbrances created by the appellant Company under the CDR process shall be without prejudice to the rights of the respondent and subject to further orders that may be passed by the learned Company Judge. On request of the senior counsel for the respondent it is further ordered that the parties to the agreement shall not claim any equities.
In view of the above, the appeal stands disposed of."
6. The Special Leave Petition (Civil) No.7919/2013 filed by the petitioner against the above order of the Division Bench was rejected by the Supreme Court by order dated 4.3.2013.
CO. PET. 558/2012 Page 4 of 21
7. The company petition was thereafter taken up for hearing by this court. The petitioner was allowed to file a rejoinder to the reply of the company.
8. The principal contentions advanced on behalf of the petitioner are as under:
(a) The debt is admitted by the respondent-company and therefore the petition ought to be admitted, as held by a learned Single Judge of this Court (T.P.S. Chawla, J, as he then was) in Bipla Chemical Industries v Shree Keshariya Investment Ltd. (1977) 47 Com.Cas. 211;
(b) It is also admitted that there is "present inability" to repay the debt, thus satisfying the requirements of sections 433(e) and 434(1)(c) of the Act, in as much as even granting that a CDR Scheme is in place, still that will hardly leave anything for the unsecured creditors such as the petitioner, as the amount to be infused into the company under the Scheme is only Rs. 150 crores which would be woefully inadequate to meet even the interest liability on the bonds.
(c) In the above circumstances, the respondent-company has no right to be heard at the time of the admission of the petition and that if at all it is to be heard, it may be heard after admission and before the winding-up order is passed.
CO. PET. 558/2012 Page 5 of 21
9. The contentions of the respondent-company are that: (a) the CDR scheme has been implemented and a revival process has been started and the Master Agreement has been signed and therefore unless the company is allowed time to work the revival scheme, it would not be in a position to start repaying its debts; (b) the order of the Division Bench (supra) is in its favour and even the restraint order has been set aside permitting the implementation of the CDR Scheme; (c) the winding-up proceedings, if permitted, would upset the entire process and render the Scheme nugatory; (d) the citation to be published in the papers would carry a stigma against the company, again rendering all the attempts to revive the company futile and (e) in any event, the court‟s power to order winding- up being discretionary, as is evident from the use of the word "may" in the opening part of section 433 of the Act, this is eminently a case where the court should exercise its discretion against the continuation of the winding-up proceedings. It is further submitted that the liability to the petitioner in respect of the bonds is admitted, but the mere fulfilment of the statutory conditions precedent under section 433 of the Act cannot take away the court‟s discretion and having regard to the CDR Scheme it is in the interest of the petitioner itself that it should be allowed to continue and the respondent-company must be given a chance to revive its business, ensuring repayment of the bond-liability. My attention was also drawn to the proviso to section 448(1) which states that "before CO. PET. 558/2012 Page 6 of 21 appointing the Official Liquidator, the court may give due regard to the views or opinion of the secured creditors and workmen" as also the provisions of section 557, read with those of section 441(2), which empowers the court to ascertain the wishes of the creditors generally in all matters relating to winding up. These arguments were sought to be supplemented by reference to judgments of the Supreme Court in (i) National Textile Workers' Union & ors. V P.R. Ramakrishnan & Ors. (1983) 1 SCC 228, (ii) Madhusudan Gordhandas & Co vs. Madhu Woollen Industries Pvt. Ltd. (1971) 3 SCC 682 and (iii) Pradeshiya Industrial & Investment Corporation of UP (1994) 3 SCC 348.
10. In its rejoinder to the above contentions, the petitioner controverts them on the following submissions: (a) the position of a disputed debt, which is not the present case, is different and hence the judgment in Madhu Woollen Industries (supra) does not apply; (b) Form No.48 read with Rules 24 and 99 do not contemplate any opposition from any person to the petition for winding-up before an order is made for publication of the citation in the newspapers, and that stage has not reached in the present case and hence any objection from the respondent-company at this stage is premature; (c) the plight of the unsecured creditors, such as the petitioner, cannot be refused to be taken note of by the company; (d) the respondent-company is paying interest to others, and dividend to its CO. PET. 558/2012 Page 7 of 21 shareholders, whereas no interest was paid to the bondholders for the past 6 years and (e) the provisions of section 557 come into operation post- admission of the winding-up petition and not at this stage.
11. In support of the above contentions, reliance was placed on three judgments of the Bombay High Court in (i) BNY Corporate Trustee Services Ltd. v Wockhardt Limited (dated 11-3-2011, S.C. Dharmadhikari, J.,) (ii) Sublime Agro Ltd. v Indage Vintners Limited (dated 19-3-2010, S.J. Kathawalla, J.,) and (iii) Bharat Petroleum Corporation Ltd v National Organic Chemical Industries (dated 18-11- 2003, D.Y. Chandrachud, J.,) and it was pointed out that these were also cases where CDR schemes were put in place under the supervision of the RBI, and nevertheless it was held that it was no bar to the winding-up proceedings against the defaulting company at the instance of the unsecured creditors.
12. In so far as the position that the winding-up of a company is a matter of discretion of the court and the court is not bound to pass an order for the winding-up in certain circumstances is concerned, it was pointed out on behalf of the petitioner that it is open, even after the petition is admitted, to the company to show reasons as to why it should not be wound-up and that there is no impediment to the discretion being exercised even after the petition is admitted and the citation is published. CO. PET. 558/2012 Page 8 of 21
13. In my humble view, the following broad issues arise in the present proceedings: (a) Is the respondent-company entitled to be heard at the stage of admission of the company petition? (b) If yes, is it open to it to raise the plea that the petition be not admitted in view of the CDR Scheme put in place under the supervision of the RBI and the attempts to revive the company?
14. I should have thought that the first question posed above is concluded when the respondent-company was heard by the learned company judge (Indermeet Kaur, J.,) before passing the order of restraint on 13-12-2012. It was an order passed after hearing both the sides. The respondent even preferred an appeal to the Division Bench where no objection to its right was taken by the petitioner. The Special Leave Petition against the order of the Division Bench was also dismissed. It appears to me therefore that the objection has come at a somewhat late stage.
15. Be that as it may, I do not see how it can be determined by the company court that the company sought to be wound-up is "unable to pay its debts" within the meaning of clause (e) of section 433 of the Act unless it is heard at the admission stage. This is fortified by the use of the word "may" - denoting a discretion vested in the court - in the opening part of the section, as contrasted with the use of the word "shall" in the CO. PET. 558/2012 Page 9 of 21 proviso to clause (h) which does not confer any discretion on the court where the winding-up petition is presented by the Government (Central or State) on the ground that the company has acted against the interests of the sovereignty and integrity of the country, security of the State, public order etc. Moreover, the judgment of the learned Single Judge of this court (T.P.S. Chawla, J., as he then was) in Bipla Chemical Industries (supra) seems to me to be in favour of the view that the company sought to be wound-up shall be heard at the admission stage. There, the question was whether creditors who were inclined to oppose the winding-up were entitled to be heard at the stage of the admission of the petition. It was held that their interests, at that stage, were not likely to be prejudicially affected and therefore they were not as of right entitled to be heard at the admission stage. There was no dispute as to the entitlement of the company sought to be wound-up to be heard at the admission stage. The fact that in the judgment of D.Y. Chandrachud, J., (supra), the judgment of T.P.S. Chawla, J., was dissented from does not trouble me for the simple reason that the dissent was limited to the point as to whether the creditors were entitled, at the admission stage, to be heard and oppose the winding-up petition. Chandrachud, J., (supra) was not dealing with the right of the company sought to be wound-up to appear and oppose the petition even at the admission stage.
CO. PET. 558/2012 Page 10 of 21
16. The more serious objection, however, is to the plea that the discretion should be exercised in favour of the respondent-company, by refusing to admit the petition for winding-up in the light of the attempts made to revive the company‟s business under the CDR Scheme and the infusion of further funds by the consortium of banks. In the judgment of the learned Single Judge of this court (supra), it has been held, on this aspect, that at the admission stage, "as soon as a prima facie case for winding up was made out, the petition ought to be admitted" and that "in contrast, at the hearing, all the facts proved would have to be taken into account for deciding what was the best order to make having regard to all the circumstances of the case". A distinction has thus been made, as pointed out on behalf of the petitioner, between the admission stage and the later stage after citation is published and before proceeding to make a winding-up order; it is at that later stage that all arguments on the merits of the rehabilitation or revival scheme can be addressed and heard and a decision can be taken as to whether the discretion to order winding-up may be exercised or not on the basis of the well-settled parameters as applied to the facts brought out. That was also a case of a revival effort on the part of the company sought to be wound-up which took the plea that it had applied for loans for a substantial amount and accordingly sought for an adjournment for four months; interestingly, it did not choose to plead that the petition should be dismissed. The position is not so vague in the CO. PET. 558/2012 Page 11 of 21 present case as in that case where this court found that the loan applications had been rejected and that the whole position was quite uncertain and there was no existing scheme for paying the creditors; in fact, counsel had even stated that if the loans were not forthcoming there would be no option but to submit to the winding-up petition. In the present case, however, it is not in dispute that there exists a CDR Scheme led by a consortium of banks, to whom an amount of Rs.2000 crores (app.) is outstanding, which have infused a further amount of Rs.150 crores, out of which Rs.40 crores can be set apart for the bond-holders. The banks have also agreed to a moratorium on their dues for a period of 18 months ending in April, 2014. The workforce of about 4000 is kept intact. Nevertheless, at the stage of admission, the company court is in no position to - and there are no manageable standards for indulging in such an exercise - take a decision as to the prospects of the company in the immediate or short-term future, even accepting that a CDR Scheme is afoot and efforts are on for the revival of the company with the infusion of further funds. I cannot however help observing - it is only a prima facie observation - that considering the quantum of further funds to be infused, as juxtaposed with the amount due to the secured creditors (the banks) and as further compared with the liability of around Rs.863 crores due to the bond-holders, and even taking note of the moratorium, it seems to me to be not a case where the discretion of this court not to order CO. PET. 558/2012 Page 12 of 21 winding-up can be exercised at the stage of admission. I must here quote, with respect, the very pertinent observations of Chawla, J., (as he then was) in Bipla Chemical Industries (supra):
"Furthermore, even supposing that the company has sufficient assets to pay its debts, that is cold comfort to its creditors. It was said in In re Focus Advertising Pvt. Ltd. (1974) 44 Comp Cas 567 (Bom.), that once it is established that a debt, regarding which there is no bona fide dispute, is owning to a creditor despite statutory notice of demand, he is entitled to a winding-up order "and the court will not listen to a defence on the part of the company that it is not commercially insolvent or that its financial position is not such as to be unable to pay its debts". Here, counsel for the company conceded that the amounts claimed by the petitioning creditors and also by the creditors opposed to the winding-up were in fact due, though there were disputes regarding some small items. It is also apparent from the allegations made by the petitioning creditors, that most of the amounts claimed by them have been due for over a year.
No attempt was made to pay them either in whole or in part despite notices of demand. Hence, the petitioning creditors would seem to be entitled to a winding-up order without having to show anything more.
I appreciate that on hearing a winding-up petition, the court may instead of making an order for winding up the company, make any of the other orders contemplated by section 443 of the Companies Act. It may even "adjourn the hearing conditionally or unconditionally". I accept that many considerations which would be relevant at the hearing of a winding-up petition may also have some part to play at the admission stage. But, I think, that the approach at the admission stage would be rather different than that at the hearing. At the admission stage, I would have thought, that as soon as a prima facie case for winding up was made out, the petition ought to be admitted. In contrast, at the hearing, all the facts proved would have to be taken into account for deciding what was the best order to make having regard to all the circumstances of the case."
CO. PET. 558/2012 Page 13 of 21
17. There seems to be a clear line of difference between cases where there are substantial arguable issues in favour of the company sought to be wound-up even on the question whether the debt is due and cases where the merits of the revival scheme are projected as a defence and an appeal is made to the conscience of the company court to exercise the discretion not to order winding-up. Pradeshiya Industrial and Investment Corporation of UP (supra) decided by the Supreme Court is a case which exemplifies the first category. There, there were certain questions of law raised in defence of the plea against the winding-up under section 433(e):
that the promoters‟ agreement was cancelled, which aspect was not taken note of by the company court, that the appellant before the court which was sought to be wound-up was not a debtor at all as it was a financial institution which aspect was also not considered and that the claim was the subject matter of arbitration proceedings, which had also been overlooked by the company court. It was in these circumstances that the Supreme Court held that the defence of the company was a "substantial one and not mere moonshine". In this background, the reliance placed by the counsel for the respondent-company on the sentence (at page 356 of the report) to the effect that the courts below failed to note that the admission of a winding-up petition is fraught with serious consequences for the company sought to be wound-up cannot be read in isolation, but should be read and understood having regard to the strong defence put up CO. PET. 558/2012 Page 14 of 21 by the company which was found to be substantial and with strong legal basis.
18. Madhusudan Gordhandas & Co (supra) laid down general propositions as to when an order of winding-up will not be made. First, in a case where the defence to the debt-claim is a substantial one; second, where there is opposition to the winding-up by the creditors. Reliance however was placed on behalf of the respondent-company on the observation at page 639 of the report to the effect that where the winding- up order would not benefit the creditor who has filed the petition or the creditors generally, it cannot be made. The suggestion is that if the respondent-company is wound-up, that would be to the prejudice of the bond-holders who are unsecured creditors and would rank way below the secured and preferential creditors, whereas if the company is not wound- up they would at least stand a chance of getting something out of the dues to them. The difficulty coming in the way of an unreserved acceptance of this argument is the absence of any objective standards or yardsticks to judge the effectiveness of the CDR Scheme and the revival attempts. Beyond a point, it is not possible for the company court to evaluate with precision the merits and demerits of the options available to the petitioner. Even for exercising the discretion one way or the other, it is necessary for the court to have before it certain objective yardsticks with CO. PET. 558/2012 Page 15 of 21 which to measure the merits and demerits of the revival scheme. That is not, however, to question the bona fide of the respondent-company in its attempts to revive. At the same time, the fact remains that the CDR Scheme has been evolved only for the benefit of the secured creditors (i.e., the banks) and the unsecured creditors like the petitioner have been left out. The earlier attempts to persuade the respondent-company to take the bond-holders on board in the revival attempts somehow did not fructify. The meetings with the bond-holders did not take place. Interest remains unpaid for more than six years. As earlier noted, the amount infused by the consortium of banks is only Rs. 150 crores, in addition to the moratorium on the Rs. 2000 crores debt to them which will expire in April, 2014. What will happen thereafter is a matter of speculation. The amount outstanding today to the bond-holders is stated to be around Rs. 863 crores. Given this scenario, one cannot possibly fault the petitioner if it took the decision, as trustee for the bond-holders, to seek winding-up of the respondent-company. The trustee has to undoubtedly act for the benefit of the bond-holders. If it has taken a decision - even assuming that it is imprudent or insensitive - that alone cannot persuade the court to exercise the discretion in favour of the respondent-company at the stage of admission.
CO. PET. 558/2012 Page 16 of 21
19. National Textile Workers‟ Union and Ors v P.R. Ramakrishnan & ors. (supra), cited on behalf of the respondent-company, deals with the rights of the workmen and employees of the company sought to be wound-up, to be heard in the proceedings relating to the winding-up petition. I do not think it necessary to deal with the decision since it does not touch the point with which I am confronted. I would however refer to the judgment when I dispose of the application filed by the workmen of the respondent-company.
20. The judgments of the Bombay High Court, both by two learned Single Judges of that court, cited on behalf of the petitioner-company deal with cases of CDR Scheme and the question whether the implementation of the said Scheme can be used as a bar on the right of the unsecured creditor to file a petition for winding-up. In Sublime Agro Ltd. (supra) Kathawalla, J., held that the scheme is a voluntary scheme which is not binding on the unsecured creditors who "are always at liberty to remain out of the scheme and pursue the winding up proceedings" and that "the Court cannot push back the claims of the unsecured creditors and allow the Company to keep on creating further liabilities so that ultimately what is recovered from the Company upon being wound up is taken away by the secured creditors and the creditors whose claims are to be given priority in law leaving the unsecured creditors high and dry". Quoting CO. PET. 558/2012 Page 17 of 21 Palmer‟s Company Law, Vol.I, it was observed that refusal of the order of winding-up in such a case may rob the unsecured creditors of "what is virtually their only remedy". Dharmadhikari, J., was equally categorical when he observed that the unsecured creditors cannot be made to wait because of the CDR scheme and that the implementation of the Scheme by itself cannot be a ground for refusing to admit the winding-up petition. In that case, some of the bond-holders had chosen to join the scheme, but that was held to be irrelevant. The petitioner, it was held, cannot be forced to join the scheme.
21. The answer to the second question posed in paragraph 13 above therefore has to be in the negative. In fairness to the petitioner, it must be said that it was stated on its behalf that the effectiveness of the CDR Scheme and its impact on the ability of the respondent-company to repay its debts is a matter that can be examined in detail once the petition is admitted. The right of the respondent-company to argue, at that time in the course of the second motion proceedings, on the basis of the Scheme and the financial ability obtaining at that time was not disputed. In these circumstances, the winding-up petition is admitted.
22. It is open to the parties at any point of time in the future and during the pendency of the petition to seek to settle the issues. It is also open to the consortium of banks to examine the feasibility of taking the petitioner, CO. PET. 558/2012 Page 18 of 21 which is an unsecured creditor, on board in the Scheme and to modify or restructure it, after taking the necessary approvals and after ascertaining the views of the petitioner formally. There will be no bar on any such attempts at settlement or arrangement. Both sides are at liberty to take any such steps.
CO.APPL.1115/2013
23. Coming now to the Company application No. 1115/2013 filed by the workmen, it is for impleadment of the workmen in the company petition. They undoubtedly have a right to be heard in view of the Constitution Bench judgment of the Supreme Court in National Textile Workers‟ Union vs P.R. Ramakrishnan and Ors (supra) both before the winding-up petition is admitted and an order for advertisement is made and also after the admission and advertisement is made, until an order is made for winding-up of the company. I have taken note of the claim made on behalf of the workmen that there are about 4000 of them who are bread-winners of their families and if an order of winding-up is made, around 20,000 members of the workmens‟ families will go hungry. For the reasons given by me in the preceding paragraphs, I am unable at the stage of admission to refuse entry to the petitioner to this court. The workmen, however, will have a right to be heard even in the course of the winding-up proceedings, post-admission and advertisement, in terms of CO. PET. 558/2012 Page 19 of 21 the judgment of the Supreme Court (supra) and raise all objections. The application for impleadment of the workmen is allowed.
24. The result of the discussion is this. The winding-up petition is admitted. The workmen are impleaded in the petition for winding-up. Company Application No. 2301/2012 filed by the petitioner for appointment of liquidator is allowed. The official liquidator attached to this court is appointed as the provisional liquidator. He shall take charge of all the assets of the company and prepare an inventory of the same. The directors of the respondent-company are directed to file the details of all the assets, movable and immovable, of the company together with the balance-sheets, profits and loss accounts and bank statements for the past three years.
25. The window for discussion between the parties is however required to be kept open for a reasonable time having regard to the revival attempts. Therefore, the order appointing provisional liquidator is kept in abeyance for a period of 8 (eight) weeks from today to enable modification of the CDR Scheme, in case the consortium of banks are prepared to modify the scheme and take the bond-holders represented by the petitioner aboard and secure their interests; it is also open to the petitioner, if so advised, to approach the propounders of the Scheme in an attempt to resolve the issue.
CO. PET. 558/2012 Page 20 of 21
26. It is further ordered that during the aforesaid period of eight weeks the petitioner or its directors or officers/servants/agents/associates will not communicate or advertise this order to the public at large in any manner.
27. The company petition and the connected applications are disposed of as above.
Dasti under signature of the Court Master.
(R.V. EASWAR) JUDGE JULY 17, 2013 CO. PET. 558/2012 Page 21 of 21