2011 (3) TMI 1559 - HC - Companies Law

Petition for winding up - claims of unsecured creditors - debt through CDR mechanism - trustee is not a creditor - early redemption of Zero Coupon Convertible Bonds - it is apparent that the petition is presented by the petitioner BNY Corporate Trustee Services Ltd. It has pointed out that the claim as stated in the petition arises out of the early redemption of Zero Coupon Convertible Bonds. the company proposed and/or applied for restructuring of its debts and/ or for a composition and/or arrangement with creditors and/or for the benefit of certain creditors to the corporate debt restructuring (CDR) cell in India. The petitioner is filing this petition in its capacity as a trustee for the Bondholders and in discharge of its obligations as a trustee. HELD THAT - In this case, there may be participation of some bondholders in the scheme and they may choose to wait for settlement of their dues but by that itself and without anything more, this court cannot in the garb of refusing to entertain the winding up petition, issue any directive or require the petitioners to wait in queue for settlement of their dues, if the petitioner does not choose to do so. Moreover, it is not the case of respondent that the petitioner has accepted the CDR scheme or has participated in the same. Merely because the company finds that it is feasible and some other creditors may have agreed with that view, does not mean that the petitioner can be directed to join the said scheme or the petition at its instance can be dismissed straightaway. The argument on feasibility of the scheme also need not be gone into nor the objection that the scheme is being implemented by giving preference to some creditors and such preference is fraudulent in nature requires any answer. Once a view is taken that the petition cannot be dismissed merely because the scheme is proposed and is being implemented, then, all other contentions are of assistance to the company. In the result the company petition is admitted.

Issues Involved:
1. Winding up of the respondent company.
2. Debt restructuring and Corporate Debt Restructuring (CDR) scheme.
3. Petitioner's locus standi to file the winding-up petition.
4. Applicability of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 (FEMA Regulations).
5. Allegations of commercial insolvency and inability to pay debts.
6. Validity and enforceability of the trust deed and bond terms.
7. Discrimination and fairness in the CDR scheme.

Detailed Analysis:

1. Winding up of the Respondent Company:
The petitioner, a company incorporated in England and Wales, sought the winding up of the respondent company, Wockhardt Ltd., alleging that the respondent was indebted to the petitioner in the sum of US $142,214,060. The petition was based on the respondent's failure to redeem US $110,000,000 Zero Convertible Bonds issued in 2004, which were due for redemption on October 25, 2009, at 129.578% of their principal amount.

2. Debt Restructuring and Corporate Debt Restructuring (CDR) Scheme:
The respondent had applied for debt restructuring through the CDR cell in India, claiming financial difficulties due to the global economic downturn. The petitioner argued that the CDR scheme was not feasible for satisfying its claim and alleged that the respondent was employing delaying tactics. The respondent contended that the CDR scheme was approved by a majority of its creditors and was in the best interest of all stakeholders, including creditors, shareholders, and employees.

3. Petitioner's Locus Standi to File the Winding-Up Petition:
The respondent challenged the petitioner's authority to file the winding-up petition, arguing that only individual bondholders could do so. The court, however, found that the petitioner, as a trustee under the trust deed, had the right to file the petition. The trust deed stipulated that the trustee would hold the benefit of the covenants in trust for the bondholders, and the petitioner was recognized as an unsecured creditor entitled to file the petition under sections 439(1)(b) and 439(2) of the Companies Act, 1956.

4. Applicability of FEMA Regulations:
The respondent argued that the petitioner's claim based on early redemption of FCCBs was illegal under the FEMA Regulations, which required a maturity period of at least five years. The court found that early redemption was permissible with prior approval from the Reserve Bank of India (RBI), and the respondent had not taken steps towards payment of the early redemption amount. Thus, the FEMA Regulations did not bar the petitioner's claim.

5. Allegations of Commercial Insolvency and Inability to Pay Debts:
The petitioner alleged that the respondent was commercially insolvent and unable to pay its debts, as evidenced by its failure to redeem the bonds and its application for debt restructuring. The respondent admitted to facing liquidity issues but argued that it was a viable entity with substantial business operations and assets. The court found that the respondent's inability to pay the bondholders the maturity amount or any part thereof indicated commercial insolvency.

6. Validity and Enforceability of the Trust Deed and Bond Terms:
The court examined the trust deed and bond terms, finding that the petitioner had the authority to act as a trustee and enforce the terms of the bonds. The trust deed included clauses that allowed the trustee to determine events of default and take necessary actions, including filing a winding-up petition. The respondent's argument that the petitioner lacked authority was rejected based on the clear stipulations in the trust deed.

7. Discrimination and Fairness in the CDR Scheme:
The petitioner argued that the CDR scheme was discriminatory and did not treat bondholders equally with other creditors. The court noted that the petitioner and bondholders were not bound by the CDR scheme and had not been adequately involved in its formulation. The respondent's failure to secure the petitioner's consent for the CDR scheme and the lack of transparency in its implementation supported the petitioner's claims of discrimination.

Conclusion:
The court admitted the winding-up petition, finding that the petitioner had the authority to file it as a trustee, the respondent was commercially insolvent, and the CDR scheme did not provide a feasible solution for the petitioner's claims. The court directed that the petition be advertised and allowed the petitioner to apply for the appointment of a provisional liquidator.

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