National Consumer Disputes Redressal
Central Bank Of India vs Tadepalli Padmaja And Ors. on 4 July, 2008
ORDER
M.B. Shah, J. (President)
1. These revision petitions are filed against the orders passed by various State Commissions.
2. The first question which is raised is - whether any complaint under the Consumer Protection Act, 1986 (the Act) would be maintainable against a paid debenture-trustee for the failure of the Company in payment of periodical interest and/or the redemption amount.
3. The obvious answer is - prima facie, if there is any deficiency in rendering service by the paid trustee in the discharge of its duties, the trustee would be liable for such deficiency and can be proceeded against under the Act.
4. However, the main question involved in these petitions is in which circumstances the debenture trustee would be liable to reimburse the debenture holders for failure of the issuer - company to pay the periodical interest and/or for the redemption amount on the due date?
5. Answer to the question would depend upon the findings whether there is any deficiency in service on the part of the trustee in discharge of its fiduciary duties as trustee as contemplated by statutory provisions. It has to protect the interests of the debenture-holders at all times and on noticing any default by the company, it has to take appropriate timely corrective action. A professional corporate trustee is liable for breach of trust if loss is caused to the debenture holders because of negligence on the part of the trustee to exercise special care and skill which it professes to have.
Facts
6. As the question of law raised in all these revision petitions is similar, we take the facts mentioned in revision petition No. 1299 of 2003, wherein Synergy Financial Exchange Ltd., a Non-Banking Financial Company (NBFC) is the Company, which had issued the debentures and the Central Bank of India is the Trustee.
7. Pursuant to the January 23, 1995 decision of its Board of Directors, the Company made a rights issue of 15.90 crore non-convertible, transferable and transmittable debentures (NCDs) of Rs. 100/- each, carrying 15% interest per annum, to finance its growing infrastructural requirements. The Companys predominant earning came from hire purchase of vehicles and plant and machinery. It also leased out assets, did merchant banking, was a dealer on the Over the Counter Exchange of India and an RBI authorized money - changer.
8. For the issue of the debentures, a trust deed was executed by the Company with the Central Bank of India as the Debenture Trustee, with Financial Covenants and Conditions as set out in the Fifth Schedule thereof. The said conditions were agreed to be binding upon the Company and the Trustee and also for the benefit and protection of the interests of the debenture holders.
9. As per Clause (6) of the Financial Covenants, the Company was required to pay all amounts of principal and interest due under the debenture by crossed account payee cheques or bank drafts drawn on a scheduled bank situated at Mumbai. It was agreed and undertaken to redeem the debentures in full at the expiry of three years from the date of allotment, which was March 23, 1996.
10. It was also agreed that the Company was required to pay interest at the rate of 15% p.a. on the debentures, subject to TDS, on June 30th and December 31st each year. Failure to pay the interest on the due dates (June 30 and December 31) each year during the period March 23, 1996 to March 23, 1999 would result in levy of compound interest at the same rate over and above the rate of interest of 15% per annum. All such compound interest was a charge secured by the debentures.
11. In case of default in redemption of the debentures the Company would pay liquidated damages of a further two per cent interest per annum for the period and the amount of the default, upon the footing of compound interest aforementioned, and such compound interest would also be a charge secured by the debentures.
Conditions for Financial Safety of Debentures
i) The financial safety of the debentures was to be ensured by the Company and the Trustee as follows:
a) A Debenture Redemption Reserve was required to be created by transferring to it suitable amounts in accordance with the provisions of Section N of the Securities and Exchange Board of India [SEBI] (Disclosure & Investor Protection) Guidelines, as in force from time to time. This was to be ensured by virtue of the duty, The company shall submit to the Trustee a Certificate duly certified by the auditors certifying that the company has transferred a suitable sum to the debenture redemption reserve at the end of each financial year.
b) During the currency of the debentures, the Company was required to maintain a minimum security cover of 1.33 times on its securities to be offered for the debentures. If at any point of time the security cover was reduced below 1.33 times as aforesaid, the Company was required to offer additional securities to maintain the required security cover, to the satisfaction of the Trustee.
12. Admittedly, in the present case, the Company failed to pay the interest or the redemption amount as agreed.
13. Hence, the debenture holders filed complaints in various District Forums. Finally, the State Commissions of Andhra Pradesh, Delhi and West Bengal dismissed the appeals filed by the Central Bank of India and held that that the said Bank (Petitioner herein) was liable, as the Debenture Trustee, to reimburse the complainants for the default of the Company.
14. Against the orders passed by the State Commissions, the Central Bank of India has filed these Revision Petitions.
Submissions
15. The learned Counsel, Mr. Rustom Pardiwala appearing for the Petitioner, Central Bank of India, submitted that:
(i) The complainants/debenture holders are not consumers. For this purpose, he has relied on the decision of by the Apex Court in R. D. Goyal and Anr. v. Reliance Industries Ltd. .
(ii) The duty of the Trustee in such case would end as soon as the Trustee filed a suit for recovery of the debenture amounts from the Company. After filing the suit against the Company on the basis of the Mortgage Deed executed by it, no further proceedings under the Act are maintainable. For this purpose, he relies on the decision of this Commission in ICICI Bank v. Savitri Pisipati and Ors.
(iii) The provisions of Sub-section (3) of Section 117B of the Companies Act, 1956 laying down the duties of the Trustees would not be applicable because that amendment came into force only on 13.12.2000 and in the present case, the winding up proceedings of the Company started in the year 1999. Before this, the Petitioner Bank had already filed a suit in the Madras High Court for recovering the amount payable to the debenture-holders.
(iv) In the memo of Revision Petition, the Bank has also contended:
The petitioners say and submit that this Revision raises an important legal issue, viz., the liability of a Trustee vis a vis a Debenture Policy Holder with whom a Trustee does not have any privity of contract and for which Trustee has received no monies by way of subscription or otherwise given by the Debenture Holders. I. ...Whether the Complainants (Debenture Holders) are Consumers
16. On the basis of above-said submissions we would first decide whether the complaint is maintainable. The learned Counsel, Mr. Pardiwala submitted that the order passed by the State Commissions and the District Forums are erroneous because the debenture holders cannot be considered to be consumers vis a vis the Petitioner Bank within the meaning of Section 2(1)(d) of the Act and, therefore, the complaints are not maintainable.
17. In our view, this submission is without any substance. In terms of the Banking Regulation Act, 1949, the Central Bank agreed to act as the Debenture Trustee in these cases for the benefit of the debenture holders and to protect their interests on receipt of fees. It is not disputed that for such service by the Bank, the agreed fee has been paid. Thus, the Petitioner is a service provider for a consideration. Section 2(1)(d)(ii) of the Act would cover such a situation, because the services of the Petitioner Bank were hired or availed of for the benefit of the debenture holders. Thus, the debenture holders are consumers within the meaning of Section 2(1)(d)(ii) of the Act. Hence, a complaint against the Petitioner is maintainable in case there is deficiency in service rendered by the Petitioner as the Debenture Trustee.
18. For this purpose, it would be sufficient to refer the definitions of the words consumer and service in Section 2(1)(d)(ii) and Section 2(1)(o) which are as under:
2(1)(d)(ii) - hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial.
2(1)(o) - "service" means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.
19. Further, the word deficiency is defined in Section (2)(1)(g) which is as under:
2(1)(g) "deficiency" means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.
20. This would mean that if there is any fault, imperfection in the nature and manner of performance of duty which is required to be maintained by or under any law for the time being in force, it would be deficiency in service.
21. Therefore, the aforesaid Section leave no doubt that for deficiency in service by a paid trustee, complaint is maintaible.
22. In view of the above discussion, it is not necessary for us to refer to the decisions in R. D. Goyal and Anr. v. Reliance Industries Ltd. , wherein the Apex Court held as under:
In view of the provisions contained in Section 36-A of the MRTP Act, an inquiry proceeding can be initiated when an element of unfair trade practice arises in the matter of promoting sale, or use of any goods. Shares are not goods. Till the shares are actually issued, the question of the company having issued debentures as transferable property would not arise and thus shares before their allotment would not come into existence and cannot be regarded as goods. Debentures would also not come within the purview of the definition of stock.
(Emphasis supplied)
23. The underlined portion of the aforesaid judgment would clearly establish that the dispute in the aforesaid case before the Apex Court and that in the present case are entirely different. In that case, the Court held that before issuance of shares, the question of the company having issued debentures as transferable property would not arise and, therefore, before allotment, the same cannot be regarded as goods. In the present case, the debentures were non-convertible and hence there was no question of their being converted into shares after prior or subsequent issue and allotment of shares, if any, by the company concerned.
24. Moreover, the role of the Petitioner here was that of a Debenture Trustee which is clearly that of a service provider to the debenture holders the service of safeguarding the financial interests of the debenture holders at all times till their full redemption by the Company issuing the debentures This was a paid service by the Company on behalf of the debenture holders, in order to ensure that the debenture holders would have sufficient satisfaction and confidence before they actually applied and paid for allotment of the debentures. Hence, the Bank was a service provider and if there is deficiency in rendering service, a consumer complaint under the Act is maintainable.
25. Hence, the contention that the complaints by the debenture holders in this case are not maintainable under the Act is without any substance.
II. Law with regard to duties of Debenture Trustee
(a) At the outset, it is to be stated that the Debenture Trustee, Central Bank of India, stood in a fiduciary relationship with the debenture holders to secure their debentures in terms of the trust deed.
The fiduciary relationship of a cestui que trust with the beneficiary is well established. The general principle of all trusts, as stated in Vol. 48, para. 501, page 343, 4th Edition of Halsburys Laws of England, reads as under:
Meaning of Trust -
The trustee holds the property or must exercise his rights of property in a fiduciary capacity, and stands in a fiduciary relationship to the beneficiary....
Further, in the same Volume in para. 841, page 554, it has been stated:
Trustees duty to comply with terms of trust.
A trustee must strictly conform to and carry out the terms of the trust so far as they are for the time being in force.... And, at page 557, para 846 Trustees duty to use diligence and prudence.
A trustee must execute the trust with reasonable diligence, and conduct its affairs in the same manner as an ordinary prudent man of business would conduct his own affairs, but beyond this he is not bound to adopt further precautions. A higher duty of care is due from a trust corporation or similar body which carries on specialized business of trust management and a professional corporate trustee is liable for breach of trust if loss is caused to the trust fund through neglect to exercise special care and skill which it professes to have.
(b) Indian Trusts Act, 1982 Section 14 of the Indian Trusts Act, 1982, specifically provides that a trustee is bound to deal with trust property as carefully as a man of ordinary prudence would deal with such property.
Obligation of a trustee cannot be abrogated or minimized by a covenant (Re: AIR 1940 Cal 337).
(c) Sections 119(1) and 117B of the Companies Act, 1956 Keeping in view the aforesaid general principles, we would now refer to Section 119(1) of the Companies Act, 1956 which reads as under:
119. Liability of trustees for debenture holders. (1) Subject to the provisions of this section, any provision contained in a trust deed for securing an issue of debentures, or on any contract with the holders of debentures secured by a trust deed, shall be void insofar as it would have the effect of exempting a trustee thereof from, or indemnifying him against, liability for breach of trust, where he fails to show the degree of care and diligence required of him as trustee, having regard to the provisions of the trust deed conferring on him any powers, authorities or discretions.
In addition, we would refer to Section 117B(3), which provides as under:
117B. Appointment of debenture trustees and duties of debenture trustees.(1) (2)
(3) In particular, and without prejudice to the generality of the foregoing functions, a debenture trustee may take such steps as he may deem fit
(a) to ensure that the assets of the company issuing debentures and each of the guarantors are sufficient to discharge the principal amount at all times;
No doubt, the aforesaid sub-section came into force w.e.f. March, 2000, but it is a reiteration of the general principles applicable to trustees.
In any case, Sub-section (1) of Section 119 specifically provides that a trustee would be liable for breach of trust, in case he fails to take and to have so taken the degree of care and diligence required of him as a trustee, having regard to the provisions of the trust deed conferring on him any power, authority or discretions. This section enacts a statutory provision making void all clauses in a trust deed exempting the trustee from such liability.
(d) Securities and Exchange Board of India (SEBI) Regulations In additikon to the above provisions, SEBI has laid down the duties of a debenture trustee under Regulation 15 of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. The relevant part is as under:
15. (1) It shall be the duty of every debenture trustee to:
(a) ;
(b) inspect books of accounts, records, registers of the body corporate and the trust property to the extent necessary for discharging his obligations;
(c) ;
(d) enforce security in the interest of the debenture holders;
(e) do such acts as are necessary in the event the security becomes enforceable;
(f) carry out such acts as are necessary for the protection of the debenture holders and to do all things necessary in order to resolve the grievances of the debenture holders;
(g) ensure that the -
(i) ;
(ii) ;
(iii) interest warrants for interest due on the debentures have been dispatched to the debenture holders on or before the due dates;
(iv) debenture holders have been paid the monies due to them on the date of redemption of the debentures;
(h) exercise due diligence to ascertain whether or not the assets of the body corporate which are available by way of security or otherwise are sufficient or are likely to be or become sufficient to discharge the claims of debenture holders as and when they become due;
(i) ;
(j) to take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice;
(k) ;
(l) ;
(m)
(n) communicate to the debenture holders on half yearly basis the compliance of the terms of the issue by the body corporate, defaults, if any, in payment of interest or redemption of debentures and action taken therefore.
26. In addition, the SEBI (Debenture Trustees) Regulations, 1993 provide a Code of Conduct for the debentures trustees, as contemplated under Regulation 16. This Code (Schedule III), inter alia, states, as under:
3. A debenture trustee shall fulfill its obligation in a prompt, ethical and professional manner.
4. A debenture trustee shall at all times exercise due diligence, ensure proper care and exercise independent professional judgment.
5. A debenture trustee shall take all reasonable steps to establish the true and full identity of each of its clients, and of each clients financial situation and maintain record of the same.
6. A debenture trustee shall ensure that any change in registration status/any penal action taken by Board or any material change in financial position which may adversely affect the interests of clients/debenture holders is promptly informed to the clients and any business remaining outstanding is transferred to another registered intermediary in accordance with any instructions of the affected clients.
15. A debenture trustee shall ensure that adequate disclosures are made to the debenture holders, in a comprehensible and timely manner so as to enable them to make a balanced and informed decision.
16. A debenture trustee shall endeavor to ensure that-
a. inquiries from debenture holders are adequately dealt with;
b. grievances of debenture holders are redressed in a timely and appropriate manner;
c. where a complaint is not remedied promptly, the debenture-holder is advised of any further steps, which may be available to the debenture holder under the regulatory system.
27. The aforesaid statutory provisions leave no doubt that debenture trustees are required to exercise due diligence and see that the Company, which has issued debentures and for which they have become trustee, has sufficient funds/property for repayment of the redemption amounts of the debentures and for payment of interest thereon on the due date(s). If the debenture trustee failed to discharge his duties as contemplated under the Act or the SEBI Regulations, then there would be deficiency in service, for that debenture trustee would be liable.
IIII (a) Hence, to find out whether the trustee has discharged its duties diligently in this case in the interest of debenture holders, an order was passed on 12th February, 2008, which is as under:
12.2.2008 Heard the learned proxy Counsel for the Petitioner and the learned Counsel for the Respondents.
The issues raised by the learned Counsel (amicus curiae) Mr. Krishan Mahajan for the Respondent are whether the Petitioners have discharged liabilities as trustees.
(1) for non-Banking Financial Companies under the RBI Act;
(2) under the SEBI Guidelines concerning debentures as well as the SEBI Act; and (3) under the Indian Trusts Act wherein the trustees duties have been delineated on the issues of debentures.
He has also enquired as to what the outcome is of the winding up suit that has been filed by the Central Bank of India in 1999.
He adds that a note on the issues has been handed over today to the learned Proxy Counsel for the Petitioner. He further confirms that a copy of the proceedings and a list of documents placed on record have been given to him to be able to assist this Commission.
The learned Proxy Counsel for the Petitioner, however, submits that the main Counsel, Mr. Pardiwala, is unable to come to the Commission today and the required documents and details sought by the learned Amicus Curiae would be produced before the next date of hearing.
It is submitted by the learned Counsel for the Respondent that the case has been pending for long and yet the reliefs prayed for by the respondents have not been granted. In order to decide the matter, not only the issues noted above have to be decided but the Petitioner should also deposit the entire awarded amount in all the cases with the respective Fora. This plea is justified.
We have perused the orders passed by the State Commissions and the District Forums. Both the Fora have decided the case in favour of the Respondents.
Learned Proxy Counsel for the Petitioner submits that to deposit the entire amount is not called for at this stage as the arguing counsel Mr. R.M. Pardiwala is not present today. We notice that Mr. Naqvi has been associated with this case and, hence, it cannot be said that he is not aware of the facts of the case. We direct the Petitioner to first deposit the amounts as per the order of the State Commission within four weeds from today with this Commission. Stand over to 27.3.2008.
The present position of the winding up proceedings before the Official Liquidator, particularly for the amounts finalized in these proceedings to be paid out to the Respondents should also be given to the Counsel for the Respondents one week before the next date of hearing by the Petitioner.
28. It is to be stated that there was total non-compliance of the said order.
(b) Correspondence
29. However, the Bank has produced on record various documents purporting to show that the Bank/Trustee sought from time to time appropriate information from the Company.
30. In any case, to find out whether the Trustee has discharged its duties and functions as required by the Law and the Code, we refer to the steps taken by the Trustee which is a Public Sector Scheduled Bank specializing in the business of trust management and thus a professional corporate trustee. From the correspondence produced by the Bank and referred to hereinafter, it is apparent all that the Trustee did was to merely write letters and, in effect, failed to take any concrete and deterrent action against the Company, as enjoined on it by the Law and the Regulations governing the functions and duties of a Debenture Trustee, despite the latter having repeatedly failed to pay due interest on the debentures or to demonstrate establishment of a statutorily mandated Debenture Redemption Fund and due and timely credits to the said Fund as required under the Trust Deed for redemption of the debentures.
Correspondence of the Trust with the Company
31. The mere letter writing action of the Trustee in this case would be apparent from the long list of letters produced by the Bank and reproduced below more or less verbatim.
(1) Letter dated 18th March, 1998 We are in receipt of copy of your balance sheet and we observe that:
(i) D/E ratio is increased from 3:1 in June, 96 to 4.83:1 in June, 97;
(ii) security coverage ratio falls below 1. The required ASCR is 1:33 in terms of debenture Trust Deed.
(iii) Declining trend in profits.
We draw your attention to provisions of Debenture Trust Deed which stipulates that in case at any point of time the security coverage is reduced below 1:33 times, the Company shall offer further additional securities to maintain the required security cover of 1.33 times, to the satisfaction of the trustees. Hence, you are requested to immediately arrange for additional securities to maintain required level of security cover. Further, we also request you to submit Chartered Accountant Certificate regarding Asset Security Coverage available at present.
You are also aware, we are receiving various complaints from the debenture holders regarding non-receipt of interest payment and other grievances. The copy of the complaints are forwarded to you as and when we receive the same. We advise you to take necessary steps to resolve the same without any further delay. Since SEBI requires the date of number of complaints received, resolved and pending during every quarter and therefore we request you to submit us the same immediately along with C.A. Certificate and point-wise comment to our observation concerning balance sheet.
Please treat this as most urgent and let us have your reply within a week together with details of the additional securities to be charged for securing debentures.
(2) Letter dated 6th April, 1998 Please refer to our various correspondence on the captioned subject.
In this connection, we once again request you to:
(i) forward the address of site where the machineries are leased out by you;
(ii) let us know the position of insurance policies;
(iii) forward us the For, No. 8 and 13 duly registered with ROC, Chennai; and
(iv) follow up with Sub-Registrar, Mumbai for the original trust deed registered by them.
Further, you have informed vide your letter dated 7.6.97 that you are arranging NOC from your Consortium Banks and complete the creation of additional securities in our favour. Please let us know the latest position in this regard.
(3) Letter dated 7th April, 1998 In spite of our letter and subsequent reminders, we have not received reply from your end till date. We once again request you to look into the matter and obtain the Original Trust Deed, duly registered, from us. Further, please forward us the address and insurance details of HP holder at the earliest.
Please treat this as most urgent and do the needful at the earliest.
(4) Letter dated 21st May, 1998 By this letter the Bank requested the Company to submit the details called for in its letter dated 18th March, 1998. (Letter dated 18.3.1998 is reproduced above).
In response to the letters of the Bank quoted above, the Company, by its letter dated 25.6.1998, sent a list of addresses of the sites where the leased machineries were placed and all the vehicles and machineries insured at the time of renewal. It was further stated by the Company that it was following up with the Sub-Registrar, Mumbai to get the original trust deed and immediately on its receipt, it would be forwarded to the Bank.
(5) Thereafter, the Bank, by its letter dated 25th June, 1998, forwarded to the Company the complaints received from the debenture holders and requested it to look into the matter and do the needful at the earliest.
(6) On 27th June, 1998, the Bank sought again the information called for under its letter dated 25th May, 1998, i.e., a detailed and cogent reply on the downgrading of the CRISIL rating of the NCD programme of the Company, redressal of the investors complaints, plan of action for payment of interest due and other items. The letter reads as under:
Please refer to our letter CBI/DEB/98-99/281 dated 25th May, 98, wherein we have advised you to send your detailed and cogent reply on the downgrading, the CRISIL rating of NCD programme of your Company, redressal of investors complaints, plan of action for payment of interest due and other items enumerated in our letter cited above.
We regret to note that, in spite of a lapse of one month, there is no response from your side.
We once again request you to send us your detailed reply for the points raised by us in our letter, as we have to report the same to SEBI.
Please treat this as most urgent and let us hear.
(7) By letter dated 27th June, 1998, the Bank called for information that was sought in its letter dated 18th March, 1998, and 21st May, 1998.
(8) By its letter dated 23rd July, 1998 the Bank again requested the Company to supply the information sought in its letter dated 25th May, 1998, i.e. furnishing documents like (1) Form No. 8 & 13 duly registered with the ROC, Chennai; (2) position of asset security cover; (3) reasons for reduction in profits; and (4) cogent reply on downgrading of CRISIL rating.
(9) Thereafter, by letter dated 18th August, 1998, the Bank asked the Company to submit report on the complaints, as per SEBI Guidelines, on quarterly basis as follows (i.e., quarter ending on March, June, September and December):
(i) No. of complaints received;
(ii) No. of complaints resolved; and
(iii) Reasons for complaints pending/action taken.
The Bank also requested the Company to look into the matter once again and inform the steps taken to resolve the complaints forwarded to the Company.
(10) As there was no satisfactory reply from the Company to the Banks letters referred to above, the Bank sent reminders on (i) 19.8.1998; (ii) 10.9.1998; (iii) 24.9.1998; and (iv) 8.10.1998.
(11) In the letter dated 8th October 1998 it was inter alia stated as under:
Please note we are receiving several complaints regarding non-payment of interest/redemption amount from the debenture holder. The copy of the complaints forwarded to your office as and when we received the same. But, we failed to receive the response from your end till date. The reason for non-compliance of the same is not known.
Thereafter, the Bank forwarded the complaints received from various debenture-holders to the Company.
(12) Letter dated 20th November, 1998 Enclosed, please find the Xerox copy of the complaint received from the debenture holders, Miss C.B. Noronha and Mrs. Annamma Varghese, which is self explanatory.
We once again request you to look into the matter without further delay and do the needful at the earliest.
(13) Similar letters were written on 24.11.1998 and 1.12.1998 to the Company.
(14) In response to these complaints, the Company assured the Bank by its letter dated 2.12.1998 that it would pay the interest to the debentureholders by mid January, 1999.
(15) During 19th December, 1998 to 3rd April, 1999, the Bank demanded the Company to submit the information sought in its previous communications. The Company kept on assuring the Bank that it would send the information and also pay the interest to the debenture holders.
(16) Finally, on 19th April, 1999, the Bank issued a legal notice to the Bank through its Advocates.
(c) From the aforesaid correspondence, it is apparent that the since March, 1998 the Bank Trustee was fully aware that the Company was committing various defaults in payment of interest. The security coverage for the debentures had reduced. However, even in April 1998, the Bank did not know the details of the sites where the machineries leased out by the Company were located. The original Trust Deed was also not received by the Bank till 6th April, 1998.
32. Thereafter, the only action of the Bank was to correspond with the Company but no effective steps were taken to verify the statements of the Company or initiate any action to recover the amount due to be paid by the Company to the debenture holders.
33. All that the learned Counsel for the Bank has submitted is that the Bank has filed a civil suit before the Madras High Court for the mortgaged property; a Liquidator has been appointed by the High Court and as soon as the suit was decided, the amounts recovered would be distributed as per the provisions of the Companies Act, 1956. He, therefore, contended that there is no deficiency in service on the part of the Petitioner Bank.
34. As against this, learned Amicus Curiae has submitted that mere filing of a suit when the Company was to be wound up cannot be considered to be sufficient with regard to the discharge of duties of the Bank as the Debenture Trustee, in view of the Law and the SEBI Regulations.
IV. Findings
35. In our view, the submission made by the Amicus Curiae is required to be accepted. If the Central Bank accepted to be a debenture trustee, it was its duty to first verify, at every relevant stage, the financial position of the Company which issued the debentures and secondly, to ensure that these assets were at all relevant times adequate to meet the financial obligations of the Company to the debenture holders.
36. Most important, the Petitioner ought to have discharged its duty as a professional corporate trustee and if the loss was caused to the debenture holders due to its deficiency in not taking special care and in not exercising its special expertise as a corporate trustee, which it professes, then it is liable for its deficiency in service.
37. Further, we have to state that if there are certain conditions or covenants in the Trust Deed, which abrogate or minimize such duties, those covenants are required to be ignored. That is specifically provided in Section 119(1) of the Companies Act, 1956. It was the duty of the petitioner to verify whether the assets of the company were sufficient to discharge the liability towards the debenture holders.
38. As per the Code of Conduct for the debenture trustees prescribed under the SEBI Regulations, the Petitioner, as a debenture trustee, was required to take all reasonable steps to ascertain and satisfy itself of the true and full identity of the companies for which it undertook to become the debenture trustee and the financial position of each of the companies from the very beginning. It is apparent that this was not done in the present case. In this view of the matter, the impugned orders passed by the State Commissions cannot be said to be in any way illegal or erroneous.
39. As a Debenture Trustee, the Petitioner a public sector scheduled commercial bank with specialized skills to operate as a Debenture Trustee, ought to have taken a number of steps prescribed under the relevant Act and the SEBI Regulations, 1993.
(i) First, the Trust Deed was required to conform with the set of minimum requirements specified in Schedule IV of the SEBI Regulations. The learned Counsel for the Petitioner has not stated anything before us to establish that this was indeed so. Under Regulation No. 15 (1)(b), the Petitioner should have inspected the books of accounts, records and registers of the Company as well as the property offered as the security cover for the debentures to ensure that the said property was sufficient at all times to the extent necessary for the Company to discharge the obligations. The Trustee should have further taken necessary steps to ensure that this security was enforceable.
(ii) Further, the Trustee was also required to take appropriate measures to protect the interests of the debenture holders as soon as any breach of the Trust Deed or the particular lapse came to its notice.
(iii) It was also mandatory for the Debenture Trustee to either to call or cause the Company to call a meeting of the debenture holders on the happening of any event which constituted a default or which, in the opinion of the Trustee, affected the interests of the debenture holders.
(iv) In addition, as the Debenture Trustee, the Petitioner was required to take all actions specified in Scheduled III (Code of Conduct). In reality, however, all that the Debenture Trustee did was to write letters to the Company it simply failed to take (or refrained from taking, for reasons best known to it) any effective action even after repeated instances of default by the Company in the payment of half-yearly interest on the debentures came to its notice. By its own admission, the Petitioner took no effective steps till long after taking over as the Debenture Trustee, to even ensure that the original version of the Trust Deed was secured and kept in its possession. For long, it took no steps to ascertain even the locations of the Companys assets stated to have been leased/hired out by the Company as part of its regular business activities. Clearly, there was no verification by the Petitioner to ascertain and establish that these assets were actually available at these locations and in good condition, i.e., they were and would continue to remain productive and yield necessary income to the Company so as to enable the latter to discharge its financial liability under the Debenture Trust Deed.
(v) The Petitioner conducted no inspection of either the books of accounts of the Company or the relevant assets pledged by way of security for the debentures, even after it became fully aware that the security coverage ratio under the Debenture Trust Deed had fallen well below the minimum mandate of 1.33 times. Merely writing letters to the Company to point out that the debt equity ratio had risen or the debt service coverage ratio had fallen is altogether a different matter from investigating as to why these actually happened and what ought to be done by the Company immediately as well as over the tenure of the debentures to meet the two primary requirements, namely, the regular payment of half-yearly interest and full redemption of the debentures on maturity.
40. In short, the Petitioner-Bank failed to discharge its fiduciary duty with special care and skill as is expected from professional corporate trustee and had not taken appropriate steps as contemplated under the SEBI Regulations.
41. For the reasons stated above, these Revision Petitions are dismissed. There shall be no order as to costs.
42. Lastly, it is to be stated that the learned Counsel for the Petitioner has argued out the matter on the basis of the facts of Revision Petition No. 1299/2000 pertaining to Synergy Financial & Exchange Ltd. and, therefore, facts of other matters are not dealt with. The DCM Financial Services Ltd. had also issued 9.50% secured redeemable non-convertible debentures and the Petitioner-Central Bank of India became the Debenture Trustee as per Debenture Trust Deed dated 26th November, 1996. The face value of the Debentures was Rs. 1000/-. It has also failed to pay the redemption amount on due date.
43. Considering the finding recorded above, the Registrar of this Commission is directed to send a copy of this Order to the Chairman, SEBI for appropriate action, if thought fit, for the deficiency in discharge of duties by the Central Bank of India Debenture Trustee as prescribed under the SEBI Regulations Code of Conduct.
44. We highly appreciate the assistance rendered by both the amicus curiae, Mr. Krishan Mahajan and Ms. Astha Tyagi. The Registry is directed to pay a sum of Rs. 5,000/- to each of them from the Consumer Legal Aid Account.