|
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 1
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
EO.J.APPEAL No. 21 of 3902
1. ESSAR STEEL LIMITED
HAZIRA,
SURAT,
GUJARAT 394270.
........Petitioners
EVERSUSF
1. GRAMERCY EMERGING MARKET FUND
C/O. WALKERS, ATTORNEYS AT LAW
WALKERS HOUSE, PO BOX 26565,
GRAND CAYMAN, CAYMAN ISLANDS,
CAYMAN, CAYMAN ISLANDS.
2. TORRY GLOBAL L.P.
C/O. TORRY ASSOCIATES, LLC,
ATTN. GRAMERCY ADVISORS LLC,
545, STEAMBOAT ROAD,
GREENWICH, CT 06830-7112.USA
3. LR INVESTMENTS, LLC
C/O.GRAMERCY ADVISOR LLC, 545
STEAMBOAT ROAD, GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA.
4. GRAMERCY GLOBAL RECOVERY FUND LLC
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
5. GRAMERCY CAPITAL RECOVERY FUND
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
6. JPELICAN LLC
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
7. PTRACY LLC
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 2
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
8. PBROW AA LLC
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
9. LMC RECOVERY FUND LLC
C/O.GRAMERCY ADVISOR LLC,
545, STEAMBOAT ROAD,GREENWICH,
CT 06830-7112, UNITED STATE
OF AMERICA
........Respondents
EAPPEARANCE ON RECORDF
NANAVATI ASSOCIATES for Petitioner no. 1
MR MIHIR H JOSHI for Respondent no. 1-9
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
O.J.APPEAL No 21 of 2002
in
COMPANY PETITION No 215 of 2001
with
CIVIL APPLICATION No 90 of 2002
AND
O.J.APPEAL NO. 22 of 2002
in
COMPANY PETITION NO. 216 of 2001
with
CIVIL APPLICATION NO. 91 of 2002
For Approval and Signature:
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 3
Hon'ble MR.JUSTICE R.K.ABICHANDANI
and
Hon'ble MR.JUSTICE KUNDAN SINGH
============================================================
1. Whether Reporters of Local Papers may be allowed : YES
to see the judgements?
2. To be referred to the Reporter or not? : YES
3. Whether Their Lordships wish to see the fair copy : NO
of the judgement?
4. Whether this case involves a substantial question : NO
of law as to the interpretation of the Constitution
of India, 1950 of any Order made thereunder?
5. Whether it is to be circulated to the concerned : NO
Magistrate/Magistrates,Judge/Judges,Tribunal/Tribunals?
--------------------------------------------------------------
ESSAR STEEL LIMITED
Versus
GRAMERCY EMERGING MARKET FUND
--------------------------------------------------------------
Appearance:
MR. C. ARYAMA SUNDARAM, SR. ADVOCATE WITH
MS. SURANYA AIYAR AND MS. ASHA MAHANT, ADVOCATES
FOR NANAVATI ASSOCIATES FOR THE PETITIONERS
MR. P. CHIDAMBARAM, SR. ADVOCATE WITH MR. MIHIR JOSHI,
ADVOCATE FOR THE RESPONDENTS
--------------------------------------------------------------
CORAM : MR.JUSTICE R.K.ABICHANDANI
and
MR.JUSTICE KUNDAN SINGH
Date of decision: 17/10/2002
ORAL JUDGEMENT
(Per : MR.JUSTICE R.K.ABICHANDANI for the Court)
1. These two appeals are directed against the common
order of the learned Single Judge made on 20th March 2002
rejecting the preliminary objection against the
maintainability of the Company Petitions, by holding that
the respondents - original petitioners were the creditors
and therefore, entitled to present the petitions and
simultaneously directing that the Trustee should be
joined as a party to these petitions. These two appeals
have been heard finally at the request of both the sides.
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 4
2. Both the appeals involve common points and have
been argued together. Both the Company Petitions also
involve common factual background and identical prayers.
There were three Company Petitions heard together in
which the common order was made. When these appeals were
being heard, it was pointed out that the Company Petition
No. 240 of 2001 was already withdrawn and in this view
of the matter, the learned Senior Counsel for the
appellant stated that since the Company Petition No. 240
of 2001 was withdrawn, he wanted to withdraw O.J. Appeal
No. 23 of 2002 which was also placed along with these
appeals. Accordingly, O.J. Appeal No. 23 of 2002 was
dismissed as withdrawn by our order dated 24-9-2002 made
in that appeal.
3. The facts relevant for the purpose of the present
appeals are in a narrow compass.
3.1 The respondents - original petitioners
(hereinafter referred to as "the petitioners") claimed to
be the creditors by virtue of being beneficial owners of
the Global Notes which were offered in exchange for the
earlier Global Notes by the appellant Company
(hereinafter referred to as "the Company"). The
petitioners have prayed for winding up of the Company on
the ground that it was unable to pay its debts, and that
it was just and equitable in the circumstances mentioned
in the petition to compulsorily wind it up. The
petitions were presented after issuing notice of demand
on 12th / 16th April 2001 in respect of the dues of the
petitioners and after the Company failed to pay its debts
within the stipulated period.
3.2 Earlier, the Company had issued Floating Rate
Notes (which were a type of Promissory Notes as stated in
the petition) in the form of Global Notes. The FRNs
matured on July 15, 1999 and since there were defaults
committed in paying the dues in connection with those
Notes the Company came out with an offer of New Notes.
The New Notes were also Global Notes being in "Series "A"
Floating Rate Unsecured Notes due 2005" and "Series "B"
Floating Rate Unsecured Notes due 2005". It also issued
"Amended and Restated Unsecured Notes due 2005", with
which we are not concerned. The New Notes thus took form
of Global Notes in substitution for the issue of
definitive notes after the exchange was completed on 15th
September 2001 pursuant to the Letter of Consent given by
the Old Note holders. As per the arrangement usual with
such issues, the Trustees were appointed for the New
Notes under separate Trust Deeds in respect of Series "A"
and Series "B" having similar terms and conditions.
3.3 The interest was payable quarterly to the
beneficial owners on their respective entitlement in the
Global Notes. There was also arrangement to pay interest
which was due under the Old Notes to the New Note holders
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 5
described as "extraordinary interest". The dates for
payment of such interest were fixed. The first payment
of interest which was due on October 31, 2000 for the
period from August to October was made by the Company to
those who were having entitlement in the Global Notes
including the petitioners. Similarly, interest which was
due on 31st January 2001 for the period from November
2000 to January 2001 was also paid to the respective
beneficial owners on their proportionate entitlement in
the Global Notes. There were, however, committed
defaults in respect of the "extraordinary interest" which
had become payable on 31st January 2001. According to
the petitioners, in view of the defaults having been
committed as described in Condition 9(a) of the New
Notes, the Trustee notified the Company by its letter
dated 15th February 2001 that an event of default had
occurred as a result of its failure to pay "extraordinary
interest" in full. The trustee also stated that if the
amount was not paid by the close of business on February
22, 2001, the notice would be served that the New Notes
were due and payable for the principal amount together
with all accrued but unpaid interest. The Company,
however, did not make any payment and thereupon, the
Trustee served a notice by its letter dated February 23,
2001 under Condition No. 9(a) of the New Notes whereby
the New Notes were made immediately due and payable at
their principal amount together with accrued interest.
Since the Company did not respond, the respondents
original petitioners served demand notices on the Company
in accordance with section 434(1)(a) of the Companies
Act, 1956 and the present petitions were filed seeking
compulsory winding up of the Company and appointment of
the official liquidator.
4. Before the learned Company Judge, a preliminary
objection was raised against the maintainability of the
Company Petitions on behalf of the Company on four
grounds, as mentioned in paragraphs 4 and 10 of the
impugned order, and these are reproduced hereunder for
the sake of convenience :
"(1) The petitioners are not Noteholders.
(2) Even 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.
(3) In any case, the petitioners are not
creditors under section 439(1)(b) of the
Companies Act, 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.
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 6
(4) 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."
5. The case of the Company, as per its reply, is
that the petitioners are not the creditors of the
Company, and that they have no locus standi to file the
petitions. According to the Company, from a plain
reading of clause 13 of the Terms and Conditions of the
Note, it was apparent that any legal proceeding, if at
all, against the Company can be initiated by the Trustee
alone and that individual Noteholders do not have any
locus to file the petition, as stated in paragraph 5 of
the affidavit-in-reply. According to the Company, the
notice purported to have been sent under section 434 of
the said Act (Annexure "C" to the petition) was sent by
certain Noteholders in their individual name and the
present petition has been filed by these Noteholders in
their individual names and not in the name of the
Trustee, as envisaged by the Trust Deed. In paragraph 6
of the affidavit-in-reply, it is submitted by the Company
that the Trustees are necessary party to this petition,
since the Notes were governed by the Trust Deed and the
Trustee was empowered to receive all the moneys in
respect of the Notes or any other amounts payable by the
issuer Company. It is stated that the Trustees ought to
have been joined as necessary party and that the presence
of the Trustee is essential to decide the petitions.
According to the Company, the petitioners have wrongly
invoked the jurisdiction of this Court to harass and
coerce the Company though there is an equally efficacious
remedy available to the petitioners to recover their
dues. The case of the Company is that its present
inability to service its creditors in full is arising out
of a steep fall in the selling prices in HRC both in the
domestic as well as in the external markets and
consequent temporary mismatch in cash flow. In paragraph
40 of the affidavit-in-reply, it has been stated that the
Company has always acted in a bonafide manner and that
despite depressed markets, the Company has made several
payments to Noteholders which have been admitted by the
petitioners in the present petitions.
6. The learned Company Judge, keeping in mind the
nature of the Global Notes and type of interests that
these beneficial owners had in those Notes and all other
relevant material which was placed before His Lordship
negatived the preliminary objection holding that: the
petitioners were Noteholders in as much as the Company
had recognised the concept of New Beneficial Owners of
the debts representing the amounts which they had in
their respective accounts; that the covenants made by the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 7
Issuer Company to the Trustee are for the benefit of the
trustee as well as the Noteholders according to their
respective interest; that it made no difference whether
or not the respondent Company knew about the names and
debt amounts of individual Noteholders like the
petitioners, because, the very nature of the Global Notes
did not require such details should be made known to the
Company; that in the letter dated 19-2-2002, the Trustee
had not contended that the petitioners were not
Noteholders or that they could not give a valid discharge
to the Company; that the petitioners as debenture holders
were creditors of the Company, and that in an action by a
debenture holder against the Company, the trustee is a
necessary party and therefore, should be so joined; that
once the mechanism under Condition 13 of the Notes was
followed, the creditor can exercise its right of
presenting a winding up petition; and that Condition 13
will not affect the maintainability of the winding up
petitions in context of the locus standi of the
petitioners, as the conditions specified in sections
433(a), 434 and 439 (1)(b) and 439(2) are satisfied, and
overruled the four preliminary contentions while holding
that the Trustee was a necessary party to the
proceedings. The said order has been challenged before
us.
7. The learned Senior Counsel appearing for the
appellant contended that the petitioners were not
Noteholders. The holders of the Note are only those in
whose names the Notes are registered. He pointed out
that the Notes are registered in the names of the
nominees of the Depository Trust Company (DTC).
According to him, these are Global Notes in a definitive
form of the type not usually found in this part of the
world. Such Note is deposited with the DTC and
registered in the name of its nominee and therefore,
there cannot be any holder other than the nominee in
whose name the Note is registered. He further argued
that even if the petitioners are to be treated as
Noteholders, they are not holders of "debentures" or
holders of "any securities" as contemplated by the said
Act read with the provisions of the Securities Contracts
(Regulation) Act, 1956 (hereinafter referred to as "SCR
Act" for short). He then argued that the petitioners are
not creditors under section 439(1)(b) of the said Act,
because, they cannot give a valid discharge and only the
Trustee can give a valid discharge. Therefore, the
Trustee alone would be a creditor of the company. He
then contended that even if the petitioners are to be
treated as creditors, they have no enforceable claim
under the terms and conditions of the Notes and the Trust
Deed which terms and conditions could be enforced only
through the Trustee. He submitted that sections
439(1)(b) and 439(2) are mutually exclusive, and section
439(1)(b) does not apply to "debenture" which would be
governed by section 439(2). It was further contended
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 8
that right under section 433 read with section 439 of the
Act is a right of action which pre-supposes existence of
a cause of action. If cause of action does not arise,
there can be no question of any conflict between the
provisions of the said Act and the bar imposed under the
terms of the Trust Deed against initiating legal
proceedings. It was submitted that a term of contract
barring any person other than the Trustee from bringing
an action can not be said to be in conflict with the
provisions of the Companies Act. Moreover, whether a
person is a creditor or not should be judged by the
English Law since the documents are governed by the
English Law as per the stipulations contained therein.
It was submitted that the security would have to be
proceeded as a whole and no fiction of holder can be
created, because, trading is in the interest of rewards
of a specific security and not in the security itself.
It is submitted that if the Note is a debenture, the
question of its being any other security can never arise.
7.1 In support of his submissions, the learned Senior
Counsel relied upon the following decisions :
[a] The decision of the Court of Appeal Virgin
Islands, in Civil Appeal No. 3 of 2001 rendered
on June 21, 2001, was cited to point out that the
Court repelled the contention that the trustee
could not present a winding up petition, holding
that, in view of the relevant provisions of law
reproduced in paragraph 8 of the judgement, the
powers and options of the trustee included the
right in it to petition the Court to wind up the
Company on the basis of an undisputed debt. In
paragraph 10 of the judgement, the Court accepted
the submission of the Counsel that the
Noteholders themselves, had no right of
enforcement of the payment of monies due from the
appellant under the Notes and the Indenture, and
they did not interact with the company since such
interaction was for the respondent as trustee.
It will be noticed from the provisions of section
6.7 of the Act with which the Court was
concerned, as reproduced in paragraph 8 of the
judgement that, while providing in respect of
suits for enforcement, it was specifically laid
down that "in case an event of default has
occurred, has not been waived and is continued,
the trustee may in its discretion proceed to
protect and enforce the rights vested in it by
this Indenture by such appropriate judicial
proceedings as the trustee shall deem most
effectual to protect and enforce any such right,
either at law or in equity or in bankruptcy or
otherwise .......". Dealing with "Limitation of
suits by Noteholders", section 6.9 was provided
that "No Holder of any Note shall have any right
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 9
by virtue or by availing of any provision of
these Indenture to institute any action or
proceedings at law or in equity or in bankruptcy
or otherwise.......". The decision, therefore,
was rendered in context of the provisions of law
which prevented the Noteholders from bringing
about bankruptcy proceedings and enabled only the
trustee to file them.
[b] The decision of the Federal Court of Arbitration
in Interchase Corporation Limited, rendered on
10th September 1993, reported in (1993)44 FCR
501, was cited to point out that it was held in
paragraph 27 of the judgement that, as between
the company, the trustee and the Noteholders, it
was only the trustee who had any entitlement at
law to make any claim on the company for payment
of moneys due by it by way of principal and
interest in respect of the Notes. It was that,
it was the trustee itself rather than the
Noteholder who was the company's creditor within
the meaning of the term in section 473(3)(b)(i)
of the Corporations Law Reform Act, 1992. That
was a provision providing for remuneration of a
liquidator by way of percentage or otherwise
providing that if there was no committee of
inspection or liquidator and the committee of
inspection fail to agree, the remuneration would
be as may be determined by a resolution passed at
a meeting of the creditors by a majority of the
creditors present and voting. The Court acceded
to the request on behalf of the liquidator that
the notice of motion be amended to include a
claim for a declaration that the provisions of
section 473(3)(b)(i) for determining the
liquidator's remuneration had been sufficiently
complied with and adjourned the matter for
further hearing of the motion to enable service
of the material to be effected on the trustee.
[c] The decision of the Supreme Court in Rajahmundry
Electric Supply Corporation Ltd. v. A.
Nageshfswara Rao, reported in AIR 1956 SC 213 was
cited for the proposition that validity of a
provision must be judged on the facts as they
were at the time of its presentation. According
to the learned Senior Counsel, since the Trustee
was not a party respondent to the petition nor
had he presented the petition as a creditor, the
defect in the petitions could not be cured by
directing the Trustees to be impleaded as parties
-respondents.
[d] The decision of the Supreme Court in Harinagar
Sugar Mills Co. Ltd. v. M.W.Pradhan, reported
in 36 Company Cases 426 (SC) was cited for the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 10
proposition that, unless the court receiver was a
creditor by assignment or otherwise to whom the
company is indebted, he cannot maintain an
application under section 439 of the Indian
Companies Act. The Supreme Court held that, in
terms of clause (d) of Rule 1 of Order XL of the
Code of Civil Procedure, a receiver could file a
petition for winding up of a debtor company for
realisation of the properties, movable and
immovable, including debts, of which he was
appointed as receiver. It was held that if for
the proper and effective management of the estate
of which the receiver was appointed, the court
thought it fit to confer power on him to take
steps for the winding up of the debtor company,
the court could give necessary directions in that
regard, under Order XL, Rule 1(d). It was
further held that the receiver was a creditor
within the meaning of section 439(1)(b) of the
Companies Act, 1956, and was, therefore,
competent to maintain the petition for winding up
of the company.
[e] The decision of the Supreme Court in Kudkanjee
Timmarsa Pai v. Kanjarpane Subha Rao, reported
in AIR 1928 Madras 256 was cited for the
proposition that the manager with respect to the
transaction of security must be regarded in law
only as a trustee and proper course would be a
suit for the enforcement of a trust against the
trustee or for the administration of the trust.
In that case, defaulting subscriber of "kuri
chit" had executed security in favour of the
management. It was held that higher bidder was
not entitled to enforce security against
defaulter but manager must sue for enforcement of
a trust.
[f] The decision of the Supreme Court in M/s Howrah
Trading Co. Ltd. v. Commissioner of Income
Tax, reported in AIR 1959 SC 775 was cited for
the proposition that the Company recognises no
person except one whose name is on the register
of members, upon whom alone calls for unpaid
capital can be made and to whom only the dividend
declared by the company is legally payable. It
was held that, between the transferor and the
transferee, certain equities arise even on the
execution and handing over of "a blank transfer",
and among these equities is the right of the
transferee to claim the dividend declared and
paid to the transferor who is treated as a
trustee on behalf of the transferee. These
equities, however, do not touch the company, and
no claim by the transferee whose name is not in
the register of members can be made against the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 11
company, if the transferor retains the money in
his own hands and fails to pay it to him.
[g] The decision of the Supreme Court in M.C.Chacko
v. The State Bank of Travancore, reported in AIR
1970 SC 504 was cited to point out that, it was
held by the Supreme Court that, a person not a
party to a contract cannot, subject to certain
well recognised exceptions, enforce the terms of
the contract. The Supreme Court held that the
recognised exceptions are that beneficiaries
under the terms of the contract or where the
contract is a part of the family arrangement may
enforce the covenant. In paragraph 9 of the
judgement, the Supreme Court held that, it must
be taken as well settled that except in the case
of a beneficiary under a Trust created by a
contract or in the case of a family arrangement,
no right can be enforced by a person who is not a
party to the contract.
[h] In re Dunderland Iron Ore Company, Limited,
reported in (1909) 1 Chancery Division 446 was
cited for the proposition that the debenture
stockholders whose interest was in arrear were
not creditors and were not entitled to present a
winding up petition as creditors. It was
contended; "They are not debenture - holders.
They are debenture stock holders, ......". It
was held that there was no covenant by the
company with them and the convent in the trust
deed was between the company and the trustees.
There was no covenant in the stock certificate,
and there was no statement therein beyond a copy
of the conditions contained in Schedule 1 of the
trust deed. It was held that the debentures
stock holders, although cestuis que trust, are
not creditors of the company, and they had no
direct contract with the company and were not
entitled to present a winding up petition. The
Court observed, "It is not a case in which there
is any negotiable security or any coupons
issued".
[i] In re Uruguay Central and Hygueritas Railway
Company of Monte Video, reported in (1879) Vol.XI
Chancery Division 372, was cited for the
proposition that, the bond with which the Court
was concerned, did not make the holder a creditor
either at law or in equity. In that case, a
Limited Company had issued Mortgage Bonds in
order to raise money and by the deed, it
covenanted with the trustees that all the bonds
should rank pari passu, and that every bond
should entitle the holder to a fully paid up
ordinary share in the company as a "bonus share";
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 12
that the company would pay to the trustees the
interest on the bonds, and also an annual sum by
way of sinking fund for the discharge of the
bonds, and that the bond debt, interest, and
sinking fund should be a charge on the railway.
The Court held that it was not prepared to hold
that this form of document, this bond, makes the
person who holds the bond, or who holds a coupon,
a creditor either at law or in equity.
[j] The decision of the Supreme Court in State of
Kerala v. V.R. Kalliyanikutty, reported in
(1999) 3 SCC 657 for the proposition that an
amount "due" normally refers to an amount which
the creditor has a right to recover.
[k] The decision of the Supreme Court in Shah Babulal
Khimji v. Jayaben D. Kania, reported in AIR
1981 SC 1786 was cited to point out that,
whenever a Tril Judge decides a controversy which
affects valuable rights of one of the parties, it
must be treated to be a judgement within the
meaning of Clause 15 of the Letters Patent.
Accordingly to the learned Senior Counsel,
important issues came to be decided under the
impugned order and therefore, the appeal would
lie against it.
8. The learned Senior Counsel appearing for the
respondents - original petitioners raised a preliminary
objection against the maintainability of these appeals
contending that an appeal cannot lie under section 483 of
the said Act against the impugned order, because, it is
not an appealable order. It was submitted that when no
appeal can be filed against the order of admission of a
winding up petition, it cannot lie at this anterior
stage. The impugned order according to him does not
affect any right of the petitioners and being of
procedural nature only, no appeal would lie against it.
The learned Senior Counsel, supporting the reasoning of
the learned Single Judge in overruling the four
preliminary contentions which were raised on behalf of
the Company, argued that the petitioners were creditors
within the meaning of section 439(1)(b) of the said Act.
Though the Global Note was in the name of the nominee of
the DTC, trading was done in the Notes and portions or
entitlements of the Notes by persons owning them whose
names were recorded in the records of the DTC, its
participants, clearing system and account holders and the
principal as well as interest was payable to such
investors like the petitioners who were the beneficial
owners of the Note in proportion to their interest in the
Note. It was argued that all these Global Notes in the
Series "A" and "B" were issued by the Company in the
exchange offer, having defaulted in discharging its debts
under the similar earlier Global Notes, and, consent
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 13
letters of the beneficial owners i.e. the investors of
the Old Notes were solicited and New Notes were issued.
Under the terms and conditions of payment, the name of
each beneficial owner of a particular nominal amount of
the Note was to be shown in the records and payments of
principal and interest on such Note were required to be
credited in the accounts of the respective beneficial
owners. It was submitted that neither the nominee of the
DTC, or the DTC nor the Trustee invested any amount in
the Notes and the Global Note was owned by the investors
i.e. the beneficial owners to the extent of their
respective share or entitlement as reflected in the
records. The Trust Deed was executed for the benefit of
these investors who were to be paid the principal and
interest by the issuer company as per the arrangement
made by it. In fact, these petitioners were indeed paid
interest which fell due on 31st October 2000 and 31st
January January 2001. There was, however, default
committed in paying the "extraordinary interest" which
was the default interest of the previous Global Note
entitlements of the petitioners and the Trustee had
issued event of default and demand notices to the
company. The petitioners were therefore creditors being
the beneficial owners entitled to the amounts due in
respect of the interest held by them in the Notes. It
was, in the alternative, argued that the Note was a
security which would be a debenture under section 439(2)
read with section 2(12) of the said Act and therefore,
the petitioners being holders of right and interest in
such security, which was included in the meaning of
debenture, were, in any event, deemed to be creditors for
the purpose of section 439(1)(b) and could therefore
present the winding up petitions as the creditors of the
Company. It was then argued that a winding up petition
was outside the purview of any contractual arrangement
between the Company and the Trustee and could be
presented by the petitioners as creditors being the
beneficial owners of interest in the Notes, since the
restrictions under clause 6 of the Trust Deed and clause
13 of the Terms & Conditions of the Notes was only in
respect of the enforcement of the Terms & Conditions of
the Trust Deed and the Notes, and, the enforcement clause
did not refer to any winding up proceedings. The nature
of the winding up petition was entirely different from an
action to enforce the terms & conditions of the Trust
Deed and the Notes, argued the learned Senior Counsel.
It was submitted that a winding up proceeding was a
proceeding in rem, and not in personam like a recovery
proceeding filed on the basis of terms and conditions of
the Trust Deed and the Notes. Referring to the
correspondence on record between the Company and the
Trustee and the lawyer of the petitioners as well as the
various paragraphs of the reply filed by the Company, it
was argued by the learned Senior Counsel that the Issuer
company had described the petitioners as Noteholders.
Even the Trustee was required to call a meeting of the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 14
"Noteholders" under clause 12 of the Conditions
incorporated in the Notes. Since the entitlement of the
petitioners and other investors in the Global Notes were
held in book-entry ownership form electronically
maintained, it was holding of interest in the Global Note
in a dematerialized form and in that sense, the
petitioners were holders of Global Notes in demat forms
entitled to transfer such interest, argued the learned
Senior Counsel.
8.1 In support of his contentions, the learned Senior
Counsel placed reliance on the following decisions :
[a] The decision in Shankarlal Aggarwala v.
Shankarlal Poddar, reported in 35 Company Cases 1
was cited to point out that, it was held by the
Supreme Court that an order made in the winding
up of a company by a Single Judge of the High
Court to be appealable under section 202 of the
Indian Companies Act, 1913 (which corresponded to
section 483 of the said Act), it was not
necessary that it must satisfy the requirements
of clause 15 of the Letters Patent, that it
should a "judgement" within the meaning of that
clause. In that case, the Court was concerned
with the order of confirmation of sale in course
of administration where a company was ordered by
the High Court to be wound up. The Company Judge
had passed the order confirming the same, but the
Division Bench in appeal set aside the order
directing the liquidator to re-sell the property.
The Supreme Court held that the order of the
Company Judge was, in the circumstances of the
case, a judicial order and not an administrative
order and was, therefore, not inherently
incapable of being brought up in appeal.
[b] The decision of the Madhya Pradesh High Court in
Achal Alloys v. Uco Bank, reported in (1996)
Comp. LJ 287 (MP) was cited to point out that,
it was held in paragraph 11 of the judgement,
that it was not necessary to decide the question
of tenability of the appeal under section 483 of
the Act, because, the order under challenge was
one of admission, and the matter was still to be
heard and decided by the Company Judge and the
merits of the matter were yet to be examined.
The Court observing that there was no order or
decision concerning the matter of winding up of
the company one way or the other and the order
did not prejudice the appellant.
[c] The decision of the Karnataka High Court in
Miland Exports Pvt. Ltd. v. A.V.
Venkatanarayana, reported in (1995) Vol.83
Company Cases 585, in which the Court observed
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 15
that the words "any order" in section 483 of the
Act shall have to be understood as an order which
affects the rights of the person who invokes the
appellate jurisdiction of the Court. Unless the
right of a party is affected, the question of
invoking the appellate jurisdiction would not
arise. It was held that, in the context of
section 483 and the procedure prescribed for
advertisement of a Company Petition after
admission, an order admitting the petition could
be construed as an order governing procedural
matters only. This observation was made on the
basis of the decision of the Supreme Court in
National Conduit's case (1967) 37 Company Cases
786, pointing out that even after the petitioner
was admitted, it was open to the company to move
the court that the petition shall not be
advertised.
[d] The decision of the Bombay High Court in
Bachharaj Factories Ltd. v. Hirjee Mills Ltd.,
reported in (1955) 25 Company Cases 227 was cited
for the proposition that a secured creditor or
debenture stock holder to whom the company was
indebted in a sum presently due can demand
payment of his debt, and if default be made can
present a petition and obtain an order for
winding up of the company and this remedy he was
entitled to pursue whether he was a registered
holder of a debenture or the holder of a
debenture to bearer. The Court negatived the
objection that the only privity that existed with
regard to the petitioners' claim was between the
company and the debenture trustees and therefore,
the petitioners were not the creditors of the
company and they cannot maintain the petition.
(See pages 248 and 249 of the report).
[e] The decision of the Bombay High Court in Solapur
Spinning & Weaving Co. Ltd. In Re, reported in
(1965) 35 Company Cases 165 was cited for the
proposition that section 439 (2) of the said Act
confer unconditional absolute right on all
debenture holders to file application for winding
up as creditors of the company. In condition
No.9 of the Trust Deed which was being considered
by the Court, it was provided that all remedies
for the recovery of the principal money and
interest secured by the debentures were
exclusively vested in the trustees on behalf of
the debenture holders. The Court considered the
decision in Dundarland Iron Ore Co. Ltd., but
held that, under the provisions of sub-section
(2) of section 439, the contention of the
petitioner that the petitioner was not entitled
to maintain the petition on the basis of that
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 16
decision, was liable to be negatived.
[f] The decision of the Calcutta High Court in
Calcutta Safe Deposit Co. Ltd. v. Ranjit
Mathurdas Sampat, reported in (1971) 41 Company
Cases 1063 was referred for pointing out that it
was held that the definition of the word
"creditors" had undergone a radical change so as
to include therein a secured creditor and
debenture holders and that such a creditor had a
right to present a winding up petition under
section 439(2). The Court, after considering the
decisions in Bachharaj Factories Ltd. (supra),
Dundarland (supra) and other cases, held that, a
special right has been given to debenture holders
and they should be deemed to be the creditors
within the meaning of clause (b) of sub-section
(1) of section 439 of the Companies Act in view
of the new definition of the words "creditors"
introduced in the said Act of 1956. It was held
that the debenture holders had a right to present
the petition for winding up as recognised by the
statute.
[g] The decision of the Bombay High Court in
Narottamdas Trikamdas Toparani v. Bombay Dyeing
& Manufacturing Co. Ltd., reported in (1990) 68
Company Cases 300 was cited to point out that the
High Court, after elaborately considering the
decisions of the Chancery Division in Dunderland
(supra), Uruguay Central & Hygueritas Railway Co.
of Monte Video (supra), held that there were
number of cases where the English Courts had
construed debenture holder as a creditor of the
company whereever there had been such a direct
convenant between the company and the debenture
holder. It was held that, in case of Bachharaj
Factories Ltd. (supra), a Division Bench of the
Bombay High Court had distinguished the case of
Dundarland (supra), and held that, in the case
before the Division Bench, there were debentures
and not stock certificates and that the
debentures contained a personal convenant by the
mills to pay the debenture holders. The Court
held that, in view of the express provision now
contained in section 439(2), there can be no
doubt that a debenture holder is a creditor of
the Company for the purpose of presenting a
winding up petition.
[h] The decision of the Madras High Court in Hind
Mercantile Corporation P. Ltd. v. J.H. Rayner
& Co. Ltd., reported in (1971) 41 Company Cases
548, was cited to point out that the question for
decision in a company petition was not a matter
that had arisen out of or under the contract and
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 17
that the point for decision in a company petition
is whether the company was unable to pay the
debt, which question cannot be decided by an
arbitrator by virtue of the arbitration clause in
the agreement. It was held that the company
petition was, therefore, not liable to be stayed.
[i] The decision in ITC Agro Tech Ltd. v. Asha Agro
Industries Ltd., reported in (1998) 4 C.L.J. 18
was cited for the proposition that the right to
file a winding up petition statutorily conferred
cannot be obliterated by an agreement between the
parties.
[j] The decision of the Supreme Court in Haryana
Telecom Ltd. v. Sterlite Industries India Ltd.,
reported in (1999) 5 SCC 688 was cited to point
out that the Supreme Court held that the claim in
a petition for winding up is not for money. The
petition filed under the said Act would be to the
effect that the company has become commercially
insolvent and therefore, should be wound up, and
that the power to order winding up of a Company
is contained under the Companies Act and is
conferred on the Court. It was held that an
arbitrator, notwithstanding any agreement between
the parties, would have no jurisdiction to order
winding up of a company.
[k] The decision in Re North Bucks Furniture
Depositories Ltd. Ch.D. (May 1, 1939), All
England Reports Annoted Volume II 49, was cited
for the proposition that under section 170 of the
Companies Act, 1929 which provided for
application to court for winding up of the
company to be petitioned by creditor(s); a local
authority which was in a position to recover
rates was a creditor within the meaning of that
section, and therefore entitled to present the
petition. In the process, the Chancery Division
held that the section did not say that nobody
shall petition unless he has a right to sue, but
a person, to have the right to petition, must be
a creditor - not necessarily a creditor, who can
recover his debt by action, but a creditor.
[l] The decision in Levy v. Abercorrias Slate & Slab
Company, reported in (1887) 37 Ch.D. 260 was
cited to point out that a debenture means a
document which either creates a debt or
acknowledges it, and any document which fulfills
either of these conditions is a debenture as
opined by Chitty, J.
[m] The decision in reported in Laxman Bharmaji v.
Emperor, AIR 1946 BOM. 18 was cited for the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 18
proposition that, in determining what is or is
not a debenture within section 2(1) of the
Companies Act, 1913, the Court is not bound to
hold that an instrument is a debenture, because,
it is called a debenture by the company issuing
it, nor to hold that it is not a debenture,
because, it is not so called by the company. The
court must look at the substance of the
instrument itself, and, without the assistance of
any precise legal definition, form the best
opinion it can whether the instrument is or is
not a debenture. It was held that a document
which either creates a debt or acknowledges it
and is one of a series may be dealt with as a
debenture. A creation of a charge over the
assets of the company issuing the debenture,
though usual, is not an essential requisite of a
debenture. On the facts before it, the Court
held that the main features, in its opinion,
showed that the Patron Bonds were debentures and
the fact that all the holders get an equal chance
to partake in the annual distribution of prizes
out of the net interest released by the company.
[n] The decision of the Kerala High Court in
Commissioner of Income Tax, Kerala v. Cochin
Refineries Ltd. reported in 1982 T.L.R. 1981,
was cited, again, on the question as to what is a
debenture. The Court was concerned with loan
agreements and posing a question for its
consideration; "Are the loans in the real terms
debentures?", the Court held that the said Act in
section 2(12) gives an inclusive definition and
debenture includes debenture stock, bonds and any
other securities of a company, whether
constituting a charge on the assets of the
company or not. It was stated that the same is
the meaning given in the English Companies Act,
1948. After considering the opinions of Lindley,
J. in British India etc. Co. v. I.R.C.,
reported in (1881) 7 Q.B.D. 165, and Chitty, J.
in Levy (supra), the Court held that a debenture
is certainly a debenture which either creates a
debt or acknowledges.
[o] The decision of the Chancery Division, In Re
Woods Estate, reported in (1886) 31 Ch.D. 607
was cited on the aspect of incorporation by
reference and it was pointed out that the Court
of Appeal held, "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, is to write those sections into the
new Act just as if they had been actually written
in it with the pen, or printed in it, and, the
moment you have those clauses in the later Act,
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 19
you have no occasion to refer to the former Act
at all".
[p] The decision in Shamrao Parulekar v. District
Magistrate, Thana, reported in AIR 1952 SC 324
was cited for the proposition that when a
subsequent Act amends an earlier one in such a
way as to incorporate itself, or a part of
itself, into the earlier, then the earlier Act
must thereafter be read and construed in such a
way that there is no need to refer to the
amending Act at all.
[q] The decision of the Supreme Court in Mahindra &
Mahindra Ltd. v. Union of India, reported in
(1979) 2 SCC 529 was referred to for the
proposition that the effect of incorporation is
as if the provisions incorporated were written
out in the incorporating statute and were a part
of it. The Court observed that legislation by
incorporation is a common legislative device
employed by the legislature, where the
legislature for convenience of drafting,
incorporates provisions from an existing statute
by reference to that statute instead of setting
out for itself at length the provisions which it
desires to adopt. It was held that, "Once the
incorporation is made, the provision incorporated
becomes an integral part of the statute in which
it is transposed and thereafter, there is no need
to refer to the statute from which the
incorporation is made and any subsequent
amendment made in it has no effect on the
incorporation statute".
[r] The decision of the Supreme Court in Onkarlal
Nandlal v. State of Rajasthan reported in (1985)
4 SCC 404 was referred to point out that the
opinion of Lord Esher, M.R. in In Re Wood's
Estate that 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, is to write those sections into
the new Act just as if they had been actually
written in it with the pen, or printed in it was
approvingly referred. The Supreme Court
interpreted Explanation II to sub-section (o) of
section 2 of the Rajasthan Sales Tax Act, 1954 as
if sub-section (2) of section 4 of the Central
Sales Tax Act was written out verbatim in the
Explanation, holding that, once sub-section (2)
of section 4 is written out in the Explanation,
there was no occasion or need to refer to the
Central Act from which this incorporation was
made or to its purpose or context.
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 20
[s] The decision in Voltas Ltd. v. Union of India
and others, reported in 1995 (supp) (2) SCC 498
was cited for the proposition that, a deeming
provision should given its full effect. It was
held that legislature by a statute may create a
legal fiction that something should be deemed to
have been done which in fact and truth has not
been done, but even the Court has to give full
effect to such statutory fiction after examining
and ascertaining as to for what purpose and
between what parties such statutory fiction has
been resorted to. On the strength of this
decision, it was contended that even if the
Noteholders were not to be treated as holders of
debentures under sub-section (2) of section 439,
the question as to whether they were creditors
under section 439(1)(b) was germane to the issue
of the maintainability of the petition.
[t] The decision of the Supreme Court in Pankaj Mehra
v. State of Maharashtra, reported in (2000) 2
SCC 756 was cited for the proposition that
enforceability of a debt due from a company is
not to be tested on the touchstone of the
modality or the procedure provided for its
realisation or recovery.
[u] The decision of the Supreme Court in Rishabh Agro
Industries Ltd. v. P.N.B. Capital Services
Ltd., reported in (2000) 5 SCC 515 was cited to
point out that, in paragraph 11 of the judgement,
the Supreme Court had observed that winding up
order passed under the Companies Act is not the
culmination of the proceedings pending before the
Company Judge but is in effect the commencement
of the process.
[v] The decision of Achal Alloys v. Uco Bank
reported in (1996) 1 Comp.L.J. 287 (MP) was
cited to point out that it was held in a case
where the order under challenge was one of
admission that merits of the matter were yet to
be examined and there was no order of decision
concerning the matter of winding up of the
company one way or the other, and therefore, the
order did not prejudice the appellant. The Court
found that the appeal under section 483 of the
Act was devoid of substance. That was a case
where the appeals were preferred at an
interlocutory stage.
9. Raising the preliminary objection against the
maintainability of the appeals, the learned Senior
Counsel for the respondents - petitioners contended that
when an order of admission is considered to be merely a
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 21
procedural order which did not affect the rights of the
parties, a fortiori, order made at a stage prior to that
cannot affect the rights of the parties. No appeal,
therefore, lies against the impugned order of the learned
Company Judge under section 483 of the said Act. It will
be noticed that the proposition that order admitting a
winding up petition could be construed to be as an order
governing procedural matter only, does not flow from the
decision of the Supreme court in National Conduits (P)
Ltd. v. S.S.Arora, reported in 37 Company Cases 786, as
seems to have been assumed by the Karnataka High Court in
Miland Exports Pvt. Ltd. (supra) which held that in the
context of Section 483 and the procedure prescribed for
advertisement of a company petition after admission, an
order admitting a petition could be construed as an order
governing procedural matters only and that is why the
Supreme Court has also, in National Conduit's case
(supra) pointed out that even after the petition is
admitted, it is open to the company to move the court
that the petition shall not be advertised.
9.1 In fact, the Supreme Court in Hind Overseas Pvt.
Ltd. v. Raghunath Prasad, Jhunjhunwalla, reported in
AIR 1976 SC 565, in paragraph 34 of its judgement,
observed that, "Even admission of a petition which will
lead to advertisement of the winding up proceedings is
likely to cause immense injury to the company if
ultimately the application has to be dismissed."
9.2 In Cotton Corporation of India Ltd. v. United
Industrial Bank Ltd., reported in 55 Company Cases 423,
the Supreme Court observed at page 440 that, "Therefore,
the power is conferred on the judge before whom the
petition comes up for admission to issue pre-admission
notice to the company so that the company is not taken
unawares, and may appear and point out to the judge that
the petitioner is actuated by an ulterior motive and
presentation of the petition is a device to pressurise
the company to submit to an unjust claim.
9.3 In Pradeshiya Industrial and Investment
Corporation of Uttar Pradesh v. North India Petro
Chemical Ltd., reported in (1994) 79 Company Cases 835,
the Company Court had after notice and hearing, ordered
admission of petition for winding up filed against the
appellant company, but postponed advertisement. The
Division Bench dismissed the appeal by the company,
challenging the admission. On further appeal by special
leave, the Supreme Court held that, the two basic
requirements for a petition under section 433 (e) were,
(i) there should be a debt, and (ii) the Company must be
unable to pay such debt, and that if either of these
requirements were absent, the petition was liable to be
dismissed as the case for admission was not made out. It
was also held that an order of admission, even without an
order for advertisement is fraught with serious
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 22
consequences to the company. As the two requirements
were not made out in that case, the Supreme Court
interfered by allowing the appeal and set aside the order
of admission and dismissed the company petition.
9.4 The Karnataka High Court in Greenhills Exports
(P) Ltd. v. Coffee Board, reported in (2001) 106
Company Cases 391, has held that if the petitioner in the
company petition fails to make out, prima facie,
existence of a "debt" and inability to pay such debt, the
petition should be rejected; and if admitted, the order
admitting the petition can be reversed in appeal. In
Airwings Pvt. Ltd. v. Viktoria Air Cargo GmbH,
reported in (1995) 84 Company Cases 688, the Division
Bench of the Karnataka High Court observed that the
exercise of arriving at a prima facie finding on the
points enumerated earlier at a preliminary stage before
admitting and advertising the petition must be undertaken
after considering the rival versions of the petitioning
creditor and the company and they would be purely
tentative and prima facie findings which can be
re-examined, if the need arises, in greater detail at the
stage of trial of the company petition before passing the
final order of winding up, if any, and after hearing the
rival parties including the parties that might have
appeared at the stage of trial pursuant to the
advertisement. It was held that prima facie nature of
the summary inquiry before admission or even after
admission and before advertisement would be for arriving
at findings on the aforesaid points.
10. Section 483 of the Act provides for appeals from
any order made, or decision given, in the matter of the
winding up of a company. The expression "in the matter
of the winding up of a Company" is wide enough to include
a decision on the aspect of maintainability of a winding
up petition taken by the Company Judge by rejecting the
preliminary objection and, in the process, judicially
determining the issues having bearing on the aspect of
maintainability. The question of maintainability of a
winding up petition goes to the very root of the matter
and would not be a mere procedural aspect. The order of
the learned Single judge is a judicial order as
distinguished from a mere administrative order. The
preliminary objection against the maintainability of the
appeal on the ground of want of locus standi has a
bearing on the jurisdiction of the Court to hear the
matter at the behest of the petitioning creditors. The
objectors say that the Court cannot hear it at the
instance of this petitioner and when the Court rejecting
the objection holds that it will hear the petition as it
is maintainable at the instance of the petitioner, it
assumes exercise of its jurisdiction by judicially
determining the locus standi of the petitioner. If the
petitioner had no locus, it could not have proceeded to
exercise its jurisdiction. Therefore, if in appeal it is
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 23
held that the petitioner did not have locus to invoke the
jurisdiction, the proceedings before the Company Judge
cannot be continued. These are substantial aspects
having bearing on the rights of the parties and the power
of the Court to proceed with the case. A decision on
maintainability of the petition is, therefore, not a mere
administrative or procedural order, but a substantive
decision judicially made, holding that the court can
exercise its jurisdiction at the instance of the
petitioning creditors. The legal status of the
petitioner from the point of view of his statutory
empowerment to present the petition under section 439
(1)(b) is conclusively decided by negativing the
preliminary objection and that judicial order can
therefore be examined by the appellate Court under
section 483 of the Act. The contention that since the
stage of admission of the petition has not yet come and
the decision on maintainability was anterior in point of
time, and therefore, if admission order is not appealable
(as was assumed), a fortiori, the order anterior in time
cannot be appealable overlooks the fact that the
appealability of a judicial order or decision cannot be
made to depend on the chronology of time in which the
order is made or decision given, but would be determined
on the basis of nature of the order or the decision. The
impugned order finally decides the question whether the
petitioners are authorized under section 439(1)(b) and
439(2) of the Act to invoke the winding up powers of the
court by presenting these petitions and the appellants
cannot be precluded from demonstrating before the
appellate forum that the petitions cannot be proceeded
with by the Company Court as its jurisdiction is not
invoked by a person entitled to invoke it under section
439. The preliminary objection against the
maintainability of the appeal is, therefore, misconceived
and cannot be accepted.
11. The winding up petitions have been presented on
the ground that the company is unable to pay its debts
and that it is just and equitable that the company is
wound up. The petitioner claiming to be the creditors on
the ground that they were entitled to receive payment of
the principal amount, outstanding interest payment and
interest accrued from 31-1-2001 to 11-4-2001 in respect
of the Floating Rate Unsecured Notes called upon the
company to make payment of their dues in terms of the
Notes in 21 days from the date of the notice of demand,
failing which it would initiate legal proceedings for
recovery of the amount including a winding up proceeding
under the said Act. According to the petitioners, event
of default was declared by the trustees of the Notes, who
served notice on 23-2-2001 on the company stating that
Notes were due and payable by the company for their full
principal amounts together with the unpaid accrued
interest. While the petitioners thus claim to be
creditors entitled to file a winding up petition, the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 24
company has questioned the maintainability of the
petition on the ground that they are not creditors within
the meaning of section 439(1)(b) of the Act.
11.1 The petitioners in their notices of 12 / 16th
April 2001 described themselves as creditors of the
Company who were entitled to interest payments and
extraordinary interest payment due in respect of the
Notes and gave details of the amounts due by the company
to the creditors calling upon it to pay the same as per
the notice of demand, in 21 days. By letter dated 24th
April 2001, the company called upon the petitioners'
lawyer to give satisfactory evidence to show their
individual status as creditors and the basis on which the
claim was made by each of them in relevant amount. By
letter dated 5-5-2001, the lawyer of the petitioners sent
material to prove the status of the petitioners as
creditors of the company. Thereafter, by letter dated
11th June 2001, the Company wrote to the petitioners'
lawyer that the petitioners "are Noteholders and their
rights are defined by the Deed of Trust dated September
15, 2000 and the terms of the Notes in question. If
there is any "creditor", it is the trustee". The Company
took up the stand that it cannot recognise the
petitioners as its creditors and that the only creditor
recognised by it in relation to the Notes was the Trustee
-Chase Manhattam Trustee Ltd., who alone could receive
payment and give a valid discharge. It will be noticed
that the company admitted in its correspondence that the
petitioners were Noteholders while disputing them to be
the creditors.
11.2 Under section 439(1)(b), any creditor including a
contingent or prospective creditor can present a petition
for the winding up of a company subject to the provisions
of section 439. The creditor of a company, in its
ordinary parlance, would mean a person to whom the
company is owing money and by section 439(1)(b), the
meaning is extended to contingent and prospective
creditors. "Contingent Creditor" means a creditor in
respect of a debt which will only become due in the event
which may or may not occur. "Prospective Creditor" would
mean a creditor in respect of a debt which will certainly
become due in future, either on some date which has
already been determined or on some date determinable by
reference to future events.
12. The question is whether the petitioners who have
beneficial interest in the Notes can be said to be
creditors. In order to judge whether the petitioners are
creditors or not, it would be relevant to refer to the
nature of their rights created by issuance of the Notes.
12.1 The Company offered to issue New Notes in the
exchange offer which it solicited in exchange of the Old
Notes which were also held in form of Global Notes and
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 25
were deposited with a custodian and registered in the
name of a nominee of the DTC. The participants of DTC
held interest in the Old Notes as shown in the record of
the DTC, Certain DTC participants held Old Notes for the
benefit of Euroclear System, or Clearstream Banking.
Each person who was the beneficial owner of a particular
amount of the DTC Global Notes as shown in the record of
the DTC participants, or a Clearing system, or their
respective account holders, was required to convey its
voting instructions directly or through the DTC
participants or account holders through whom they held
their interest in the Old Notes, to the DTC participants
or Euroclear or Clearstream in accordance with their
procedures.
12.2 The Company declared its intention to have the
New Notes issue in registered form, without coupon. It
was declared that such New Notes "will be represented by
interest in Global Registered Notes (the New DTC
Restricted Global Notes), deposited with a custodian for
and registered in the name of a nominee for DTC." It was
declared that "Beneficial interests in the new DTC Global
Notes will be shown on and transfers thereof will be
effected only through, records maintained by the DTC and
its direct and indirect participants, including
depositories for Euroclear and Clearstream". Thus, the
New Notes were to be represented by interests in the
Global Notes. Under the arrangement, the Global Notes
were to be registered in the name of the nominee of the
DTC while the New Note Holders of interests in such Notes
were to be shown in the relevant records. The nominee of
DTC or DTC or the Trustee, thus, at the instance of the
issuer company handled the Global Notes in which the New
noteholders had their respective entitlements to the
extent of their interests in such Global Notes. The
Company also declared that it will reasonably endeavour
to have the New Notes listed on the Luxemburg Stock
Exchange to make them eligible to be cleared through the
clearing system and to make them eligible for trading in
the PORTRAL of the National Association of Securities
Dealers Inc. Each person who was the "owner of a
particular amount of the Old Notes, as shown on the
record of the DTC or the DTC participants, or a Clearing
System or their respective account holders", was entitled
only to attend and vote at the meeting though such
beneficial owners were not to be Noteholders for the
purpose of the meeting. New Notes were to be issued only
in denomination of US $ 1000 and integral multiples
thereof.
12.3 As per the arrangement, the new DTC Global Notes
were to be deposited with the custodian for DTC and
registered in the name of the nominee of the DTC and the
custodian with whom the new DTC Global Notes are
deposited and DTC would electronically record the
principal amount of the New Notes held within the DTC
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 26
system. The participants of the DTC were to hold
interest in the New notes as shown in the records of the
DTC. Certain DTC participants were to hold New Notes for
the benefit of Euroclear and Clearstream. It was
declared that, "Each person (a New Beneficial Owner) who
is the owner of a particular nominal amount of the New
Notes, will be shown in the records of the DTC or the DTC
participants or a Clearing System (i.e. Euroclear or
Clearstream or both as per the Glossary attached for the
purpose of the Exchange Offer and Consent Solicitation)
or their respective account holders.
12.4 As per the mode of payments, the payments of the
principal of and interest on each new DTC Global Notes
registered in the name of DTC's nominee was to be made to
or to the order of the nominee as the registered owner of
such Note. It was declared that the Company expected
that the nominee, upon receipt of any such payment, "will
immediately credit DTC participants accounts with
payments in the amounts proportionate to their respective
New Beneficial Owners of the principal amount of the
relevant new DTC Global Notes as shown on the records of
DTC or the Nominee".
12.5 Transfers of Interest in the new DTC Global Notes
with DTC, Euroclear and Clearstream could be made in
accordance with the usual rules and operating procedures
of the relevant system. Transfers may be made at any
time upon request to any Transfer Agent (as defined in
the Trust Deed) by the holder of an interest in the new
DTC Unrestricted Global Note to a transferee who wishes
to take delivery of such interest through a new DTC
restricted Global Note. It was mentioned that "Transfers
at any time by a holder of an interest in a new DTC
Restricted Global Note to a transferree who takes
delivery of such interest through a new DTC Unrestricted
Global Note will be made only upon delivery to any
Transfer Agent of a certificate giving details of the
account at Euroclear or Clearstream, as the case may be,
and DTC to be credited and debited respectively with an
interest in such new DTC Global Notes". DTC a limited
purpose trust company, was created to hold securities for
its participants and facilitate the clearance and
settlement of security transactions between the
participants through electronic book-entry changes in the
accounts of its participants, thereby eliminating the
need for physical movement of certificates. Participants
included securities brokers and dealers, banks, trust
companies, clearing corporations etc. as declared under
the head of "Transfer of Notes" in the exchange offer
documents.
12.6 The terms of the exchange offer were treated as
part of the Letter of Election which was required to be
executed by the Noteholders. The word "Noteholder" for
the purpose of the exchange offer was defined in the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 27
glossary attached for the exchange offer to mean, a
direct or beneficial holder of one or more Old Notes.
13. As per the terms and conditions of the Notes,
"the Noteholders are entitled to the benefit of and are
bound by, and are deemed to have notice of, all the
provisions of the Trust Deed and are deemed to have
notice of those applicable to them of the Agency
Agreement". Title to the Notes passed by and upon
registration in the Register, and, in the conditions of
Notes, expression "Noteholder" and "holder" meant the
person in whose name the Note was registered in the
Register and the holder of any Note was to be treated as
its absolute owner (except as otherwise required by law),
for all purposes. Notes could be transferred in whole or
in part and all transfers of Notes and entries on the
Register were to be made subject to the detailed
regulations concerning transfer of Notes, scheduled to
the Agency Agreement. The Notes constituted (subject to
the condition 4 regarding negative pledge) Unsecured
obligations of the issuer. Interest payments dates were
mentioned in the Notes. Condition No.7(a) prescribed the
method of payment under which it was provided that;
"Interest on Notes will be paid to the persons shown on
the Register at the close of business on the 15th day
before the due date for the payment of interest". As
noted above, each person (a New Beneficial Owner) who is
the owner of a particular nominal amount of the New Notes
was to be shown in the record of the DTC or the DTC
participants or a clearing system or their respective
account holders. The beneficial owners of particular
nominal amounts of the New Note were thus entitled to the
payments made in proportion to their interest in the
Note.
13.1 As per Condition 8 (Taxation) of the Notes, all
payments of principal and interest in respect of the
Notes were to be made free and clear of and without
withholding or deduction for, any taxes or governmental
charges etc. unless such withholding or deduction was
required by law, in which event additional amounts were
to be paid by issuer company matching the withheld or
deducted amounts except to a holder or to a third party
on behalf of a holder, who is liable to such taxes by
reason of his some connection with India other than the
mere holding of the Note. Clause 8(b) contemplated
indemnity in respect of claim for taxes on transfer and
sale of any Notes "or any beneficial interest therein"
outside India by a person who is not a resident nor
ordinary resident in India.
14. As per the terms of the Trust Deed, the
transferee was to hold the benefit of the "covenant to
pay" (clause 2.2) and other covenants of the issuer
company under the Trust Deed on trust "for itself and the
Noteholders according to their respective interests".
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 28
Under clause 3.1 of the Trust Deed, the Notes were to be
issued in the name of a nominee for the Depository Trust
Company. The Issuer company was to indemnify the company
and the Noteholders from and against all taxes paid by
any of them in connection with any action taken by the
trustee, or as the case may be, the Noteholders to
enforce the obligations of the issuer company under the
Trust Deed or the Notes. Declaration of trust was made
in clause 5 of the Trust Deed as per which if the Trustee
holds any moneys which represent principal or interest in
respect of the Notes in respect of which claims have been
prescribed, the Trustee will hold money on the trusts
declared in this clause. All moneys received in respect
of the Notes or amounts payable under the Trust Deed were
to be held by the Trustee on trust to apply them (subject
to the accumulation clause 5.2) despite any appropriation
of all or a part of them by the Issuer company; first, in
payment of costs, charges, expenses and liabilities
incurred by the trustee including his remuneration in
carrying out its functions; secondly, in payment of any
amounts in respect of the Notes pari passu and rateably
and, thirdly, in payment of any balance to the Issuer
company for itself. Clause 8.1 of the deed, inter alia,
contemplated accrual of remuneration to the Trustee from
the date of withholding or refusal until payment to a
Noteholder of moneys due in respect of any Note which was
improperly withheld. Clause 9.16 provided that, so long
as any DTC Global Note is held on behalf of a clearing
system, in considering the interest of Noteholders the
Trustee may have regard to any information provided to it
by such clearing system or its operator as to the
identity either individual or by category of its account
holders or participants with entitlements to any such DTC
Global Note and may consider such interests as if such
account holders or participants were the holders thereof.
The Trust Deed thus clearly recognised the interests of
account holders or participants having entitlements to a
DTC Global Note by treating them as if they were the
holders of the Note.
15. The above provisions of the exchange offer and
solicitation of consent, the Trust Deed and the Notes
clearly bring to fore that though the Global Notes were
to be issued in the name of the nominee of the DTC, the
proceeds of these Notes came from the investors who by
virtue of the nature of a Global Note could own
particular nominal amounts of the New Note to the extent
of their investments. The persons who owned such
entitlements were the beneficial owners of the Note and
the names of such persons who were beneficial owners were
to be entered in the records of the DTC, DTC participants
or clearing system or their respective account holders.
The payment of and interest on each New Note registered
in the name of the nominee of the DTC was to be
immediately credited to their accounts in the amounts
proportionate to their respective beneficial ownership,
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 29
as per the standing instructions and customary practices
applicable to securities held for the accounts of
customers registered in the names of nominees for such
customers. The petitioners were thus to receive the
principal amounts and interests relatable to the
particular nominal amounts of Notes of which they were
the beneficial owners as per the records of the DTC, DTC
participants or a Clearing System or their respective
account holders. When DTC Global Note is held on behalf
of a clearing system, the Trustee in considering the
interest of Noteholders, the account holders or
participants with entitlements to such Note, may consider
such interests as if they were the holders of the Notes,
as per clause 9.16 of the Trust Deed. The interest
amount due on the Notes was to be paid to the respective
persons shown in the Register as per clause 7 of the
conditions of the Notes and the entitlements in Notes
were transferable. The incident of tax deduction at
source was on the holder or a third party of a holder who
had connection with India other than mere holding of the
Note as per clause 8 of the taxation and not on the
Trustee. The device of issuing a Global Note with a view
to offer transferable entitlements in portions of the
value of such Note and to provide for the DTC who will in
the name of its nominee keep the Global Note, and the
Trustee to oversee the transactions taking place from
time to time as the Registrar during the period that it
was operative and to decide upon the events of default as
also to apply the moneys, were all the arrangements made
by the Issuer company to facilitate raising of finances
for itself from the investors while keeping such
investors as third parties to this arrangement made with
the DTC and the Trustee. Non-recognition of the
beneficial owners, having entitlement in the Global Note
of particular amounts as per their respective
investments, as creditors would open up a door to defraud
the investors, should the company issuing the Notes and
its creature the Trustee who is on its pay roll line up
on one side and choke up a process warranted for recovery
of the dues or even a winding up proceeding that may be
warranted against the company at the instance of such
creditor beneficiaries and on just and equitable grounds.
The right of the beneficial owners, who had invested in
the Global Notes to recover the amounts when due from the
issuer company who ultimately was, under its arrangement,
bound to pay, cannot be thwarted by the issuer company by
creating intermediaries to arrange the management of the
Global Notes for its convenience.
16. The doctrine of privity of contract is subject to
many exceptions and it has long been settled that where
"A" makes a promise to "B" for the benefit of "C", the
promise can be enforced by "C" against "A" if "B" has
constituted himself trustee of "A's" promise for "C".
(See para 19.065 Chapter 19 at page 998 Chitty on
Contracts, Volume I, 28th Edition). Two consequences
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 30
generally flow from a finding that there is a trust in
favour of a third party. First, the third party is
entitled to sue the promisor for the money which the
promisor had promised to pay to which it is beneficially
entitled. But, such third party must join the promisee
as a party to the action since otherwise, the promisor
might be sued a second time by the promisee. This rule
as to joinder of parties exists for the benefit of the
promisor and he can waive it. Secondly, since the third
party is beneficially entitled to the money, the promisee
has no right to such money. (See para 19.070 Chitty on
Contracts, Volume I, 28th Edition). In the present case,
the third party beneficial owners could therefore sue the
Company (promisor) and the Trustee (promisee) to recover
the money to which they were beneficially entitled as
persons on record to whom the payments of principal and
interest that had accrued in proportion to their
entitlements in the Global Note was to be made through
the medium of the trust. A clause in a contract for the
promissor to pay the proceeds of the third party is
enforceable by the third party, where the payment is
intended to satisfy a present or future liability of the
promisee to the third party. The third party in such
situation is traditionally referred to as "creditor
beneficiary" and has been accorded full rights to sue
under the original contract. (See D & H Distributing Co.
v. The United States, decided on December 12, 1996 by
the United States Court of Appeals for the Federal
Circuit 96 - 5063).
16.1 As a general rule, one may not sue on a contract
to which he is not a party unless the contract was made
for his benefit. In contracts entered into for the
benefit of persons other than the parties, there can be
mainly three types of third party beneficiaries; first,
where the performance of the promisee will constitute a
gift to the beneficiary, the beneficiary is a
"donee-beneficiary". Second, if no purpose to make a
gift appears from the terms of the contract and the
performance of it will satisfy an actual or supposed
asserted duty of the promisee to the beneficiary, the
beneficiary is a creditor beneficiary. Third, in all
other cases, the beneficiary is deemed to be incidental
beneficiary. A donee or creditor beneficiary has a right
to enforce contracts made by others for his benefit.
Incidental beneficiaries do not have that right.
16.2 Even though the trust deed was executed between
the Issuer company and the Trustee, the investors like
the petitioners, who are creditor - beneficiaries, though
third parties to the Trust Deed, can enforce their claim
both against the promisor and the promisee i.e. the
Issuer company and the Trustee in view of the contract
being entered into between them for their benefit by
offering them transferable entitlements in the Global
Notes being the securities in which the persons were
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 31
lured to invest for returns. There is no compelling
reason of principle or policy which should preclude such
creditor - beneficiaries from enforcing their rights when
the Trustee fails to safeguard their interests.
16.3 The terms of contract between the Issuer company
and the Trustee clearly demonstrate that the parties
intended to benefit the third party investors like the
petitioners. In other words, there were third party
beneficiaries of the contract between the Issuer company
and the Trustee in respect of the Global Notes which were
the subject matter of that contract. It appears from the
terms of the contract between the Company and the Trustee
that the performance of it would satisfy an actual or
supposedly asserted duty of the promisee i.e. the
Trustee to the beneficiary and therefore, the beneficial
owners were the creditor-beneficiaries. A
creditor-beneficiary has the right to enforce contracts
made by others for his benefit. The creditor -
beneficiaries are intended beneficiaries of the contract
and not mere incidental beneficiaries. The terms and
conditions of the Trust Deed and the Global Notes covered
by it showed a clear intent to have the contract operate
for the benefit of the third party investors. Not only
the "intent to benefit" test, but also "the duty owed"
test are both satisfied since the contracting parties
intended to benefit the third party investors in the
Global Notes and the performance of the promisor i.e.
the company would otherwise discharge a duty owed to such
third party beneficial owners. If the promisors
performance will satisfy a legal duty that the promisee
owes a third party, the third party is a creditor
beneficiary and may enforce the contract against the
promisee and the promisor. It is not even necessary that
the contract, in the present case, the Trust Deed,
identify or refer to the intended beneficiary by name.
The creditor beneficiary may recover if he can show that
he is one of a class of persons for whose benefit the
contract was made. Thus, if payment was released by the
Issuer Company as stipulated in the conditions of the
Global Notes and the Trust Deed, that performance would
have discharged the trustee's obligation.
16.4 It will be significant to note that the term
"creditor(s)" in section 439(1)(b), is used in context of
a person's right as a creditor and not in context of any
remedy for enforcement of that right or its realisation.
Existence of a person's right as a creditor will not
necessarily depend upon his remedy to enforce it which
may be hedged or eclipsed for the time being. It is not
unknown to law that creditors remedies are often
suspended as a relief to an undertaking or to nourish a
sick one to health. The creditors' rights, however, do
not get extinguished. Section 439(1)(b) lays down that,
a person should be creditor for being able to petition.
There is no warrant for superimposing any further
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 32
requirement that such creditor must necessarily be a
creditor who has a present right to recover the debt by a
suit. The section does not say that nobody shall
petition unless he has a right to sue. The Chancery
Division in Re North Bucks Furniture Depositories Ltd.
(supra), in context of section 170 of the Companies Act,
1929 (which corresponded to section 439(1)(b) of the
Companies Act, 1956) held that section 170 did not say
that nobody shall petition unless he had a right to sue
but a person to have the right to petition must be a
creditor. The creditors of a company for the purpose of
section 439(1)(b) would ordinarily be those would have
been creditors had the company gone into liquidation i.e.
those having pecuniary claim whether actual or contingent
against the company.
16.5 The case before us presents a clear instance in
which the third parties' interests specifically protected
by the contract between the Issuer Company and the
Trustee in form of the Trust Deed, would be impaired if
these creditor beneficiaries were not accorded right to
obtain relief against the promisor i.e. the Company in
the event of a breach. We hold that the petitioners who
are creditor beneficiaries are creditors within the
meaning of section 439(1)(b) and can present a winding up
petition as creditors.
17. Though the finding that a third party who is
intended beneficiary like a creditor beneficiary is
entitled to enforce the terms of the contract i.e. the
Trust Deed which was entered into for the benefit of the
beneficial owners of the Global Notes and therefore, a
creditor within the meaning of section 439(1)(b) should
be sufficient to uphold the maintainability of the
petition, since the preliminary objection was raised by
the appellants straight under sub-section (2) of section
439, without reference to section 439(1)(b), by
contending that even if the petitioners are Noteholders,
they are not holders of debentures, or holders of "any
securities" as contemplated by section 439(2) read with
section 2(12) and 2(45AA) of the Companies Act read with
section 2(h) of the Securities Contracts (Regulations)
Act, 1956 (SCRA), it would be necessary also to consider
that aspect of the matter especially when the objection
in this vein is reiterated by the learned Senior Counsel
for the appellants before us. The learned Single Judge
has negatived this contention on the ground that the
Notes in the present case fit into the definition of the
expression "debentures" since different persons were
having a share in the Global Notes and the issuer company
had promised to return the amounts covered by the Notes
at their maturity and to pay quarterly interest on the
principal. It was held that all the ingredients of a
debenture were fully satisfied and there was no reason
why the Notes cannot be treated as debentures as
contemplated by sub-section (2) of section 439 of the
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 33
said Act.
17.1 The word "debenture" as defined in section 2(12)
includes debenture stock, bonds and any other securities
of a Company whether constituting a charge on the assets
of the company or not. The word "securities" as defined
by section 2(45AA) of the Act means securities as defined
in clause (h) of section 2 of the SCR Act and includes
hybrids. Under section 2(h)(i) of the SCR Act,
securities include shares, scripts, stocks, bonds,
debentures, debenture stock or other marketable security
of a like nature in or of any incorporated company or
other body corporate. The contention raised on behalf of
the appellant is that, unless a security in question is a
marketable security, it cannot be a debenture and since
the Global Note was not a security marketable in India,
it was not a "debenture" within the meaning of section
2(12) of the said Act. The question that arises for our
consideration, therefore, is whether these Notes issued
by the appellant company fall under the category of
instruments that are securities.
17.2 The fundamental purpose underlying Securities
Acts is to eliminate serious abuses in a largely
unregulated securities market. There is virtually
limitless scope of human ingenuity especially in the
creation of the numerous schemes devised by those who
seek the use of money of others on promise of profits.
The inclusive definition of the term "security" is wide
enough to include within that definition many types of
instruments that might be sold as an investment.
17.3 In order that the interest of investors are
protected, it was decided that SEBI would frame
regulations with regard to collective investments
schemes. It was therefore proposed to amend the
definition of "Securities" so as to include within its
ambit the derivatives and the units or any other
instrument issued by any collective investment scheme to
the investors in such scheme (See Statement of Objects
and Reasons of the SCR Act and the Amendment Act).
17.4 The term "Note" is relatively broad to encompass
instruments having different characteristics depending on
whether issued in a consumer context as a commercial
paper or in some other investment context. If the Notes
are issued in a commercial or consumer context, they will
not be treated as securities while those issued in
investment context would be securities. Whether the Note
is issued in investment context can be ascertained on the
basis of the circumstances surrounding the transactions.
In order to determine whether a transaction involves a
"security", the transaction has to be examined to assess
the motivations that would prompt a reasonable seller and
buyer to enter into it. If the seller's purpose is to
raise money for the general use of a business enterprise
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 34
or to finance substantial investments and the buyer is
interested primarily in the profit the Note is expected
to generate, the instrument is likely to be a "security".
On the other hand, if the Note is exchanged to facilitate
the purchase and sale of a minor asset or consumer good,
or to advance some other commercial or consumer purpose,
such Note cannot be classified as "security". One other
factor to be examined would be whether the Note in
question is an instrument in which there is common
trading for speculation or investment and how is it
viewed by the investing public [See REVES v. ERNST &
YOUNG, 494 U.S. 56 (1990)].
17.5 The new Global Notes were issue by the appellant
company in exchange for the Old Notes in its bid to
pursue a global restructuring plan. This was
necessitated because the company was in payment default
on certain of its obligations due to financial
difficulties as declared in the Exchange Offer documents,
in which it was mentioned: "As a result of its financial
difficulties, the company is seeking global restructuring
of its debt with the goal of lengthening the maturities
of its debt obligations" under sub-head "Financial
Condition" on internal page 7 of the "Summary of Exchange
Offer and Consent Solicitation". Therefore, the new
Notes were issued by the company in context of the
finances of its business. The investors were offered
interest on their investments in the Notes and they could
transfer their entitlements as per the terms and
conditions of the Notes which means, there was a scope of
common trading for speculation and investment in these
Notes. They were obviously not a mere commercial paper
and the raising of finance and investment test is
squarely satisfied from the attributes of these Notes
making them marketable securities and therefore,
"debenture" within the meaning of section 2(12) of the
said Act. Under Section 2 (h)(iii) of the SCR Act of
1956 even rights or interest in securities are included
in the meaning of "securities".
17.6 The contention that the other provisions of the
SCR Act, 1956, controlling and regulating the business of
dealing in securities in the areas notified should be
read alongwith the definition of "securities" which is
incorporated by reference by section 2(45AA) under the
said Act from section 2(h) of the SCR Act of 1956, is
contrary to the elementary canons of construction. When
a definition of a term is incorporated by reference from
another statute, it is deemed to have been "cut and
pasted" in the incorporating statute and that is all.
Thenceforth, it is to be read as if it is a part of the
incorporating statue in the context of its own
provisions. The provisions in which it appears in the
other statute do not accompany it in the incorporating
statute. The definition of securities is to be read as
if enacted in the said Act in the same words as it
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 35
appears in section 2(h) of the SCR Act, 1956. If what
the learned Senior Counsel for the appellant argues is
right that the marketable securities should be marketable
in India, it would amount to reading the other provisions
of the SCR Act 1956 in the Companies Act, though not
meant to be incorporated at all. Moreover, an anomalous
position will arise, because, in the definition of
"debenture" in section 2(12) of the said Act, there will
be debentures, debenture stock, bonds, that are
marketable anywhere but the "other securities" which are
also debentures would be such as can be marketable in
India only. No such dichotomy is warranted by any
process of interpretation. This position clearly emerges
from the decision of the Apex Court in Sham Rav (supra),
Mahindra & Mahindra Ltd. (supra) and M/s Omkar Nand
(supra).
18. As the arguments progressed, the learned Senior
Counsel for the appellant developed a contention that the
concept of English Law reflected in Dundarland (supra)
and Uruguay (supra), that a debenture holder is not a
creditor while the trustee of debenture holders would be,
is required to be kept in mind while reading sub-section
(2) of section 439 and sub-section (2) should be read as
an Explanation to that section 439 (1)(b) so as to mean
that if a person is not a holder of a debenture, he
cannot fall back on section 439(1)(b) to say that he is a
creditor by virtue of being a beneficial owner of an
interest in the debenture. Furthermore, if he is not a
holder of the debenture, he cannot claim to be one by
resort to the definition of "securities" in section
2(h)(iii) of the SCR Act of 1956.
18.1 On a plain reading of section 439(1)(b) and
439(2) of the said Act, it is clear that the provisions
are meant to give a wide meaning to the term "creditor",
who can present a winding up petition. The ambit of
section 439(1)(b) is in no way curtailed by section
439(2), but in fact it is enhanced by making secured
creditors as well as holders of debentures and the
trustees as deemed creditors. The purpose underlying
sub-section (2) of section 439 is to dispel any doubt
against treating them as creditors and add to the range
of sub-section 1(b) of section 439 of persons who are
eligible as creditors authorized to present a winding up
petition. The term "debenture" in sub-section (2) of
section 439 has to carry the meaning assigned to it in
section 2(12) of the said Act and would include "any
securities" which in turn in view of the definition of
"securities" incorporated by reference under section
2(45AA) of the said Act would include interest or right
in securities. Therefore, a holder of a right or
interest in securities would be holder of a debenture
under section 439(2) of the said Act. A holder of
beneficial interest in the security will thus be a deemed
creditor under section 439(2) for the purpose of section
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 36
439(1)(b) of the said Act.
18.2 The learned Senior Counsel heavily leaned on the
ratio of the decisions of the Chancery Division in
Dunderland (supra) and Uruguay (supra) for his contention
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 Trust Deed
and therefore, the company cannot be sued twice over.
The argument one had hoped had been decently interred by
the provision of section 439(2) of the said Act and by
the decision of the Bombay High court in Toprani's case
(supra) and other decisions referred to above, but its
ghost still walks on occasions, and this, it appears, is
one of them. The objection that the company may be sued
twice over by the trustee is wholly inapposite in the
context of a winding up petition which once presented,
there would be no additional burden faced by the Company
as in suits by different persons on the same cause. The
winding up proceedings being the proceedings in rem, it
would turn on an entry to the proceedings for all those
who want their claims to be proved under section 528 of
the Act. There is no question of duplication of
proceedings involved as may be the case when a
beneficiary enforces the claim by way of a suit which
claim the Trustee may also try to enforce. That analogy
simply cannot apply to a winding up proceedings initiated
by any creditor.
18.3 In M.C.Chacko v. The State Bank of Travancore,
reported in AIR 1970 SC 504, the Supreme Court has held
as under :
"It has, however, been recognised that where a
trust is created by contract, a beneficiary may
enforce the rights which the trust so created has
given him. The basis of that rule is that though
he is not a party to the contract, his rights are
equitable and not contractual. The judicial
committee applied that rule to an Indian case
Khwaja Muhammadkhan v. Husaini Begum [(1910) 37
I.A. 150]; (1910 ILR 32 All. 410. .... It
must, therefore, be taken as well settled that,
except in case of a beneficiary under a trust
created by a contract or in the case of a family
arrangement, no right may be enforced by a person
who is not a party to the contract."
18.4 The term "debenture" in section 2(12) of the said
Act would therefore in our opinion include any securities
of a company including the Global Notes and also rights
or interest in such Global Notes as those of their
petitioners who are the beneficial owners having the
entitlements in portions of the Global Notes which are
securities of the company. We therefore hold that these
petitioners-beneficial owners of interest in these
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 37
securities were debenture holders and are deemed to be
creditors within the meaning of section 439(2) of the Act
and negative the preliminary objection of the appellant
against the maintainability of the petitioner.
19. The contention that the petitioners are precluded
from filing any proceedings including winding up
proceedings is based on clause 13 of the Conditions of
the Notes which reads as under :
"Enforcement :
At anytime after the Notes become due and
payable, the Trustee may, at its discretion and
without further notice, institute such proceeding
against the issuer as it may think fit to enforce
the terms of the Trust Deed and 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 atleast 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."
19.1 The condition 13 of the Note reproduced above
provides that after the Notes become due and payable, the
Trustee has a discretion to institute proceedings against
the Issuer i.e. the Company to enforce the terms of the
Trust Deed and the Notes, but he need not take such
proceedings unless he is directed and is indemnified, as
contemplated by the Trust Deed under clauses 8.4 and 6.1.
Under clause 6.2 of the Trust Deed, the Trustee may
institute legal proceedings against the Issuer Company to
enforce any obligation under the Trust Deed and the
Notes. Clause 8 though dealing with remuneration of the
Trustee contemplates that the payment due under the Notes
is to be made by the Issuer Company to the Noteholder.
19.2 In the present case, the Trustee had already
determined the event of default under clause 9.1.3 by
issuing letter dated 15-2-2001 on the Company, and that
declaration was binding on the company and the
Noteholder. By letter dated 23-2-2001, the Trustee
called upon the company to repay the principal amount
together with the accrued interest. Proof that the
Trustee company has failed to pay a sum due to the holder
in respect of any Note will (unless the contrary be
proved) be sufficient evidence that it has made the same
default as regards all other Notes in respect of which
sums are then due, as stipulated in clause 11.2 of the
Trust Deed. After the Trustee was urged by the company
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 38
by its letter dated 30-4-2001 not to take any further
precipitated action at the behest of the loan Noteholders
who, as mentioned in the letter, had through their Indian
lawyer threatened to commence legal proceedings,
including winding up proceedings, the Trustee on 2-5-2001
informed the company that it "cannot unilaterally agree
to confirm that the notice of default was of no effect"
and left it to the company to call a meeting of
Noteholders for considering its proposal. The Trustee
taking note of the fact that the lawyers acting on behalf
of certain Noteholders i.e. petitioners had threatened
to commence legal proceedings against the company stated;
"We consider this is a matter between ESSAR and
Noteholders". Again by letter dated 19-2-2002, in
response to the company's fax letter of 15-2-2002,
requiring the Trustee to restrain the Noteholders from
proceeding ahead with the legal proceedings initiated by
them against the company (i.e. the present winding up
proceedings) and to intervene on behalf of the company
for stating that, as per the Trust Deeds, the individual
Noteholders i.e. the petitioners do not have any locus
to file winding up petitions against the Company, the
Trustee refused to do so by stating that, enforcements
contemplated by clause 6 of the Trust Deed and Condition
13 of the Note were in relation to the Trust Deed and the
Notes and these petitions were not for such enforcement,
but were for winding up of a company in which the fact
that Notes were due and owing constituted the basis of a
debt on which the petitions were presented. The Trustee
disagreed with the company that there was no privity of
contract between the company and the individual
Noteholders and denied that the Trustee was a creditor.
It was made clear that : "The Trustee does not have the
ability or intention to restrain the Noteholders from
proceeding with the legal proceedings initiated by them
against the company." In the above background, this was a
clear case where the Noteholders were entitled (even on
an assumption that winding up proceeding was one such
proceeding which in fact was not included under condition
13) to prefer the proceedings under the latter part of
condition 13 under which a Noteholder could institute
proceedings directly against the Issuer company when the
Trustee having been bound to so proceed, fails to do so
within a reasonable time and such failure is continuing.
The settlement of a trust creates a right in personam
against the trustee and an equitable right in rem in the
beneficiary. The most fundamental duty owed by the
trustee to the beneficiary of the trustee is a duty of
loyalty. This duty is imposed upon the trustee not
because of any provision in the terms of the trust deed,
but because of the relationship which arises from the
creation of a trust. A private trust requires a
beneficiary definitely ascertained at the time of
creation of the trust or definitely ascertainable within
the period of the rule against perpetuity. This is the
typical trust in which there is both an equitable right
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 39
in rem and an equitable right in personam in the
beneficiary. (See Jurisprudence by Roscoe Pound Volume V
Part 8, the System of Law. pp. 240-241).
19.3 Even if it is assumed that it was the Trustee who
was required to present the winding up petition, the
Trustee clearly was not wanting to do so on the ground
that it was not its job under the terms of the Trust Deed
to file a winding up proceeding. The Trustee was bound
to show a degree of care and diligence required of it as
a Trustee as per clause 10 of the Deed. The Trustee
could not have waived the default unless in its own
opinion, the interest of the Noteholder was not to be
materially prejudiced, as contemplated in clause 11(1) of
the deed. This is why, the Trustee refused to agree in
its letter of 2nd May 2001 to the company's request that
the notice of default from the Trustee should be treated
as of no effect and insisted that the Notes were properly
called due and payable. The Trustee in its letter dated
19-2-2002 has taken a stand that it is not the creditor
and that the winding up proceeding is a matter between
the company and the Noteholders. Therefore, the
Noteholders were perfectly within their rights as
creditors to present the winding up proceedings in which,
according to the Trustee, it had no voice having regard
to the nature of such proceedings which were not merely
for enforcement of the Trust deed and the Notes.
19.4 The nature of a winding up proceeding under
section 439 of the said Act is obviously different from
mere enforcement of payment of the dues under the Note or
Trust Deed. Clause 13 of the conditions of the Notes
does not contain any specific reference to winding up
proceedings which some Trust Deeds or Notes may contain
and rightly so, because, in the context of section 9 of
the said Act, such a condition against the provisions of
the Act by which the creditors are enabled to present a
winding up proceedings would be void. Clause 13 only
refers to the discretion of the Trustee to institute such
proceedings against the Issuer as it may think fit "to
enforce the terms of the Trust Deeds and the Notes". The
subject of winding up of the Issuer company could not
have depended on the conditions of the Trust Deed or the
Notes. In fact, winding up was not a term or condition
of the Trust Deed or Notes. The nature of the
proceedings contemplated by the enforcement clause 13 of
the conditions of Notes was obviously proceedings in
personam for recovery of the dues from the issuer company
under the Trust Deed and Notes which would be principal
and interest and remunerations, expenses and indemnities
for the beneficial owners or the Trustee, as the case may
be. The winding up proceedings under section 439 are not
proceedings for recovery of dues, but are proceedings in
rem based on statutory grounds on which a company may be
wound up by the Court such as, a company being unable to
pay its debts or if the Court is of the opinion that it
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 40
is just and equitable that it should be wound up as
contemplated by clauses (e) and (f) of section 433 of the
said Act. The jurisdiction of the Company Court does not
extend to mere enforcement of the terms of the contract
of the parties to satisfy a claim of a creditor made
under it. The function of a court in a winding up
proceedings is not to decide matters of recovery of a
particular debt owed by the company to any person, but to
examine whether there exists any circumstances on the
basis of which the company is liable to be wound up. The
reliefs granted by a court in a winding up petition are
different from the reliefs in an inter-partes enforcement
action. Therefore, ability to give a valid discharge
test cannot be applied to a creditor beneficiary who is a
creditor within the meaning of section 439(1)(b) and can
knock at the door of the Company Court to draw its
attention to the circumstances that warrant winding up of
the company. The inquiry in the present case will be,
whether there is inability on the part of the company to
pay its debt and / or whether it would be just and
equitable to wind up the company. That has nothing to do
with the question of creditor's ability to give a valid
discharge, because, a creditor who moves the court may
ultimately be offered nothing.
19.5 Above all, no term of agreement can prevail over
the statutory provision enabling the creditor to present
a winding up petition. This clearly follows from the
provision of section 9(b) of the Act which, inter alia,
provides that, save as otherwise expressly provided in
the Act, any provision contained in the agreement or
resolution of the company shall to the extent to which it
is repugnant to the provisions of the Act, become or be
void, as the case may be.
20. The trustee is appointed by the company, is
remunerated and indemnified by it and can even be
replaced as per the terms of the Deed. The Trustee has
to safeguard the interest of the beneficiaries and it was
justified in not acting as a puppet of the company. In
view of what we have said hereinabove , we hold that the
winding up petitions are maintainable at the instance of
the petitioners Noteholders who are beneficial owners,
and, since the interests of other Noteholders may also be
involved, the Trustee would be a proper party to assist
the company court in the proceedings and it was therefore
absolutely correct on the part of the learned Single
Judge to direct the Trustee to be impleaded as a party to
these proceedings. As noted hereinabove, even the
company, has in terms, pleaded that the Trustee was a
necessary party, and, obviously therefore, it cannot
grudge against that direction. However, these petitions
are maintainable even at the instance of the Noteholders
in their own capacity as creditors. It is not even the
Trustee's stand, as is clear from the aforesaid
correspondence, that it did not take the proceedings,
Jan 15 17:49 2003 Order dated 17/10/2002 for OJA/21/2002 Page 41
because, there was no requisite resolution passed by the
Noteholders as contemplated by clause 13. The stand of
the Trustee rightly is that the winding up proceedings
are not contemplated by clause 13 and that the
Noteholders who are the creditor beneficiaries were free
to initiate them since the Notes had become due and
payable by virtue of the Trustee having issued notices to
the company demanding repayment as per the terms and
conditions thereof. Thus, there is no substance in the
preliminary objection that even if the petitioners are
creditors, they do not have an enforceable claim in view
of clause 6 of the trust deed or condition 13 of the
Notes.
21. For the forgoing reasons, we are unable to accept
the contentions raised on behalf of the appellant and
find ourselves in agreement with the impugned decision of
the learned Single Judge overruling all the preliminary
contentions raised on behalf of the appellant. The
appeals are, therefore, dismissed. There shall be no
orders as to costs. The Civil Applications are rejected
and the interim relief stands vacated.
[R.K.ABICHANDANI, J.]
[KUNDAN SINGH, J.]
parmar*
| 
