9911796707
TMI Blog2002 (3) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... ke 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. 1 - Petitioners 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 party 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 31-1-2001, and since defaults hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or notes. The interest rates attached to such notes keep 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred. (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 pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. How the petitioners acquired these notes 6.1 Essar had issued notes in July, 1994, which matured on 15-7-1999 ("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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be required to be made only to the offer (pages 75 to 130), Annexure IIA - 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1-8-2000, at the London Inter-Bank Offer Rate ("LIBOR") plus 350 basis points, payable quarterly in arrears with the first payment due on 31-10-2000, and thereafter every three months. Similarly as per the terms of the exchange offer, the Series B notes bore interest from 1-8-2000, at LIBOR plus 400 points, payable quarterly in arrears with the first payment due on 31-10-2000, 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 31-1-2001, 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 31-1-2001, 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressed an apprehension that even if the restructuring proposals are presented, the petitioners do not consider that their interest 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 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. Pleadings after Notice 8.1 In response to the notice issued by this Court, the respondent has filed affidavit in reply dated 26-12-2001, 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) 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 capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the Securities Contracts (Regulation) Act, 1956. (iii)In any case, the petitioners are not creditors under section 439(1)(b), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes 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 Clearstream 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 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the 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 Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 3-5-2001 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." [Emphasis supplied] (p. 115) 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 responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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: "(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 : "(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 ('the SCRA'), defines 'securities' as under : (h)'securities' includes-- (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 ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture' as explained in the following decisions : (i) Levy v. Abercorris Slate & Slab Co. [1888] 37 Ch.D. 260; (ii) Laxman Bharmaji v. Emperor [1946] 16 Comp. Cas. 31 (Bom.); (iii) CIT v. Cochin Refineries Ltd. [1983] 142 ITR 441, 446, 447 (Ker.). 20. Having heard the learned counsel for the parties, it appears that while Parliament did incorporate the definition of 'securities' under the SCRA into the Companies Act, one 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 Cochin Refineries Ltd.'s case (supra), 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 5¾ 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 assessee-company and the First National City Bank as the trustee and the creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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 [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 ; 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 & 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's case (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (Bom.); (ii) Sholapur Spg. & Wvg. Co. Ltd. In re [1965] 35 Comp. Cas. 165 (Bom.); (iii) Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat [1971] 41 Comp. Cas. 1063 (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. Statutory provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the noteholders according to their respective interests." [Emphasis supplied] 27. Having heard the 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, 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 & Hygueritas Railway Co. of Monte Video (supra) 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repared 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". [Emphasis supplied] 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 bondholders' 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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's case (supra), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra), 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, cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent-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 31-1-2001. After the filing of the present winding up petitions, the respondent-company addressed letter dated 5-2-2002, 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 19-2-2002, 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 dischar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avit and the additional affidavit dated 19-3- 2002, the petitioners hold only 4 per cent debt of the respondent-com- pany. The respondent-com-pany 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 proceed- ings 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 The learned counsel has relied on the letter dated 19-2-2002, 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 to 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, the learned counsel for the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed 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 anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs 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 proceed-ings for winding up under the 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 affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sdiction 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. . ." [Emphasis supplied] (page 767) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 note 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 case (supra) 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 (supra). It is also true that in ITC Agro Tech Ltd.'s case (supra), the Allahabad High Court has held that the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in value are present at such meeting. This is the combined reading of conditions 12 and 13 of clause 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 per cent 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 per cent 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. But that part of condition No. 13 providing that the trustee at their own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 439(1)(b) and 439(2) are satisfied, and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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