2005 (5) TMI 328 - SC - Indian Laws

Compromise and arrangement - Held that - Appeal dismissed. The Appellants herein having failed to establish that they could hold the entire scheme to ransom so as to stall the proceedings as a result whereof the majority of debenture holders would be deprived, the purpose or object motivating the Appellants to advance such a huge amount to the Respondent against issue of debentures is a matter of little or of no concern to the Respondent-company or other debenture holders. A special or a new right cannot be found in favour of the Appellants in the agreement when it creates none. The scheme applies equally to all debenture holders and as such the Appellants cannot be treated as a separate class. Once the Respondent-Company prima facie showed that the scheme is fair and reasonable and also that the requisite majority of the debenture holders recorded their decision in its favour, the court in absence of any unforeseen unjustness or unreasonableness therein ought not to reject the same.

Issues Involved:
1. Validity and enforceability of Clause 7.5 of the agreement.
2. Applicability of Section 28 of the Indian Contract Act.
3. Interpretation of the Common Subscription Agreement and Debenture Trust Deed.
4. Rights and obligations of debenture holders under the restructuring scheme.
5. Jurisdiction and scope of the Company Court under Section 391 of the Companies Act.

Detailed Analysis:

1. Validity and Enforceability of Clause 7.5 of the Agreement:
The appellants contended that Clause 7.5, being a negative covenant, required the respondent to obtain consent from all debenture holders before filing an application under Section 391 of the Companies Act. The court, however, examined the clause in the context of the entire agreement and the Debenture Trust Deed, concluding that the clause did not confer an absolute veto power to any single debenture holder. The court emphasized that commercial documents must be construed reasonably and in a manner that makes them workable, highlighting that the majority principle in corporate democracy should prevail over individual veto rights.

2. Applicability of Section 28 of the Indian Contract Act:
The appellants argued that Clause 7.5 was not hit by Section 28 of the Indian Contract Act, which deals with agreements in restraint of legal proceedings. The court proceeded on the premise that Clause 7.5 is valid and not hit by Section 28, focusing instead on the interpretation of the clause within the broader context of the agreement and the Debenture Trust Deed.

3. Interpretation of the Common Subscription Agreement and Debenture Trust Deed:
The court analyzed the Common Subscription Agreement and the Debenture Trust Deed, noting that both documents must be read together to understand the rights and obligations of the parties. The agreement specified that debenture holders were to be treated pari passu, without any preference or priority. The court found that the use of different expressions in the agreement, such as "debenture-holders/trustees" and "any or all of debenture holders," indicated that the majority decision should prevail, and no single debenture holder could unilaterally veto a restructuring scheme.

4. Rights and Obligations of Debenture Holders under the Restructuring Scheme:
The court highlighted that the restructuring scheme, proposed under Section 391 of the Companies Act, required the approval of the majority of creditors. In this case, the majority of debenture holders, representing three-fourths in value, had approved the scheme. The court emphasized that the appellants, holding only 10% of the total investment, could not claim a preferential right or priority over other debenture holders. The scheme was found to be fair, just, and reasonable, and the court upheld the principle of corporate democracy.

5. Jurisdiction and Scope of the Company Court under Section 391 of the Companies Act:
The court reiterated the broad contours of the Company Court's jurisdiction under Section 391, emphasizing that the court must ensure that the scheme is fair, just, and reasonable and does not contravene public policy or statutory provisions. The court found that the Company Judge had acted within his jurisdiction in sanctioning the restructuring scheme, which had been approved by the requisite majority of debenture holders. The court dismissed the appeal, affirming the High Court's decision to accept the scheme.

Conclusion:
The Supreme Court dismissed the appeal, upholding the restructuring scheme approved by the majority of debenture holders. The court emphasized the principles of corporate democracy, the reasonable interpretation of commercial documents, and the jurisdiction of the Company Court under Section 391 of the Companies Act. The appellants' contentions regarding Clause 7.5 and the applicability of Section 28 of the Indian Contract Act were rejected, and the scheme was found to be fair, just, and reasonable.

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