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TMI Blog2010 (8) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... Jaisry Mani, Manilal Kher and Ambalal for the Petitioner. D.D. Madon, Chetan Kapadia and Ms. Sabeena Mahadik for the Respondent. ORDER 1. This is a petition for winding up of the respondent-company on the ground that it is unable to pay its debts. 2. The Petitioner had granted various facilities to the respondent even prior to 14-9-2007. By a letter dated 14-9-2007 addressed to the respondent the petitioner conveyed its intention to continue and to amend the facilities sanctioned earlier subject to the terms and conditions stated therein. The respondent endorsed its consent to the same. The letter sanctioned various facilities. The present petition is concerned with "Facility 3" mentioned therein. It was a revolving facility to enable the respondent to hedge foreign currency exposure to the extent of Rs. 7,50,00,000. In view of the defence taken on the ground that the facility is illegal and contrary to public policy it is necessary to note only a few aspects thereof. 3. One of the covenants/conditions is that the derivatives/forward contract would be booked only against a request letter from the respondent detailing the amount and currency in which the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so made various representations to the petitioner which are significant in view of the defence now taken to the legality of the transaction. The respondent represented that it was acting for its own account and has full power and authority and has taken all necessary steps to enable it lawfully to enter into and perform every forward contract stated therein. The respondent agreed that wherever extension of forward contracts is sought from the petitioner or are rolled over they shall be cancelled and rebooked at the current rate of exchange. The difference between the contract rate and the rate at which the contract is cancelled shall be recovered from/paid to the respondent at the time of extension. Such a request for extension should be made on or before the maturity date of the contract. Annexed to each of the declarations is a schedule containing the particulars of the facility. 4. Pursuant to the above facilities and in accordance therewith the Respondent entered into two forward contract transactions with the Petitioner dated 20-2-2008 and 17-3-2008. The respondent executed the forward contract booking confirmation notes. It is not necessary to furnish details of the quant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts due by it to various other lenders and the steps contemplated by it to overcome the crisis. The respondent requested the petitioner for a speedy appraisal of the proposed restructuring scheme and the subsequent approval and implementation thereof. 9. The petitioner by its advocates a letter dated 5-4-2010 addressed a statutory notice. According to the petitioner of sum of Rs. 2,24,07,265 with interest thereon at 13 per cent and from 9-2-2009 was due and payable by the Respondent to it. 10. Mr. Madon, the learned senior counsel appearing on behalf of the respondent, submitted that the transactions are illegal, contrary to public policy and, therefore, void. He, however, made no attempt to elaborate this contention except to state that the transactions constituted a wager and were therefore contrary to section 23 of the Indian Contract Act. He stated that there were similar matters pending before various courts all over the country and that therefore this company petition ought to be dismissed and the Petitioner ought to be relegated to a civil suit where this aspect of the matter could be more appropriately decided. 11. Mr. Madon, however, did not furnish any de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... east one of the parties to the transaction is the Bank, a scheduled bank, or such other agency falling under the regulatory purview of the Bank under the Act, the Banking Regulation Act, 1949 (10 of 1949), the Foreign Exchange Management Act, 1999 (42 of 1999), or any other Act or instrument having the force of law, as may be specified by the Bank from time to time. (2) Transactions in such derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of sub-section (1) were in force at all material times." 15. There is no dispute that the petitioner falls within the ambit of section 45V. The question then is whether the transactions between the parties were in such derivatives as were specified by the Reserve Bank of India. If they were then in view of one of the parties thereto, namely the petitioner, falling within the purview of section 45V the transaction would be valid. 16. The Master Circular on Risk Management and Inter-Banking Dealings consolidates the existing instructions on the subject at one place. The same lists the circulars/notifications. It is issued with a sunset clause of one-year but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India A. Forward Contract. (1) A person resident in India may enter into a forward contract with an authorized dealer in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued thereunder, subject to following terms and conditions." 19. There is no dispute that the transactions entered into by the respondent are those for which the sale and/or purchase of foreign exchange is permitted under the Foreign Exchange Management Act, 1999. In the statement of disclosure the respondent stated that it had the legal capacity to enter into derivative transactions by the regulations and laws applicable to this country. The respondent agreed to undertake only such derivative transactions as are permitted by the laws of India by which it is governed including the RBI guidelines. The company agreed before undertaking the transactions that it had considered the regulatory approval that may be needed. The respondent has not stated anywhere that it has made any misrepresentations to the petitioner regarding its entitlement to ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The assessment note deals with various aspects of the Respondent in considerable detail. It states that the respondent is a reputable company in the diamond industry; that it was able to grow consistently over a period of about 30 years; that it had various advantages such as a captive market as it had been routing about 50 per cent of its exports to units controlled by the family members of the promoters of the respondent as a result of which it did not have to separately market its products and that as a result of all the exports being routed through these units the respondent s business track record was highly satisfactory and the amounts due by the respondents in the past were not alarming. The note also recognises that during the financial year 2008-09 due to the appreciation in the South-East Asian currencies vis-a-vis the USD and the fall in demand due to global recession, the overseas trading offices were unable to recover their dues from the buyers resulting in a near halt of realisation for the respondent. The note further states that this has been the trend in the diamond industry. It is for these reasons that the amounts due by the respondent to the various banks a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els. Despite erosion in its NWC, the company has estimated to generate profits at PBIT level right from financial year 2009-10. The loss at PBT level is only because of the higher interest costs on account of rupee finance as against cheaper dollar finance earlier availed by the company. The company s operations are expected to generate profits from the financial year 2010-11. Considering the magnitude of the loss (Rs. 90.62 crores during financial year 2008-09) and the overdue short-term obligations of the company, we propose to carve out a Working Capital Term Loan (WCT L) Rs. 200.00 crores repayable over a period of 30 months from the irregular portion. The company has offered collateral security of Rs. 101 crores (50.50 per cent) for the proposed WCT L of Rs. 200 crores. The promoters have already infused funds to the tune of Rs. 74.46 crores by way of increase in share capital and a share premium to stem the erosion in NWC during the current year and agreed to bring in another Rs. 110 crores in the current and next fiscal in a phased manner. To enable the company to run its business operations smoothly and tide over the present financial crisis, the regular FBWC limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is everything to be gained by the same. There is nothing to be lost especially at the instance of the Petitioner who is unsecured creditor. 29. I will presume in the respondents favour that what is stated in the assessment note is correct. Mr. Madon did not indicate that the contents of the assessment note are either inaccurate or outdated. The respondent s case itself is that even the enormous outstandings of the consortium of banks and financial institutions of over Rs. 800 crores will be repaid commencing only a short time hereafter. This is clear for instance from the respondents advice to the consortium that it has no bad debts and that all the receivables would be realised within the stipulated period of 365 days. This period of 365 days gets over next month. The amounts shown as outstanding are from the respondent s family/associate concerns themselves. Presumably therefore the representations of the respondent contained in the assessment note are accurate. 30. I appreciate that it may be difficult for the Respondent to start repaying its dues whether of the Petitioner or of the members of the consortium, immediately thereafter. If what is stated in the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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