TMI Blog1986 (8) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed that the first defendant company should be permanently restrained from issuing any debentures pursuant to the letter of offer dated May 5, 1986. He has also prayed that the first defendant company should be ordered to repay all application monies received by the first defendant company in respect of the proposed new debenture issue. The plaintiff has sought various other reliefs as set out in the plaint. The present notice of motion is taken out by the plaintiff for an injunction to restrain the first defendant company from directly or indirectly using the application monies received so far pursuant to the letter of offer dated May 5, 1986, and to restrain the first defendant company from allotting and/or issuing the new debentures pursuant to this letter of offer. The notice of motion also prays that the first defendant company should be restrained from creating any mortgage and/or charge on the fixed assets of the first defendant company as set out therein. The plaintiff holds 17 debentures of the value of Rs. 100 each in the first series of debentures which were issued by the first defendant company in August, 1979. He also holds nine debentures of Rs. 100 each in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such terms and conditions as shall deem expedient to them, any breach by the company of any of the covenants contained in the said trust deed. Under clause 66, the trustees shall not be liable for any default or omission or delay in performing or exercising any of the powers of trusts contained in the said deed of trust unless the trustees shall have been previously, by notice in writing, requested to exercise such powers, trusts or acts by the holder of at least one-half of the debentures for the time being outstanding. The clause further provides that the trustees shall not be bound to exercise such powers until sufficient moneys have been provided by the debenture-holders for any costs or expenses which the trustees may incur. Under the said deed of trust, the trustees have been given various powers which pertain to taking possession of mortgaged security or to have a receiver appointed for the protection of the said security under various circumstances which are set out in the trust deed. Debentures which were initially issued under the said debenture trust deed were, thereafter, reissued in 1979, and were secured under the provisions of a supplemental deed of trust dated A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the said further debentures of Rs. 1,00,00,000 (rupees one crore) and/or raise further loans ranking pari passu with the existing debentures issued by the company: provided that: ( i )the net aggregate written down value of the fixed assets of the company forming part of the mortgage security hereunder shall be at least 166% of the value of the debentures issued and outstanding and any such further issue of debentures and the outstanding debentures/ICICI foreign currency loans/GBL deferred payment guarantees ranking pari passu secured by the aforesaid mortgaged premises; ( ii )the average profit of the company after charging interest on loans for working capital and all expenses of working and management including maintenance and repairs but before charging interest on outstanding debentures/ICICI foreign currency loans/GBL deferred payment guarantees, depreciation, development rebate, reserves and taxes for the three accounting years for which accounts have been audited last preceding the date of any such further issue, and sufficient to cover at least twice the amount required to pay the aggregate of one year's interest on the amount of outstanding existing debentu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er referred to as "the profits cover"). The debenture certificates which have been issued are in forms which are annexed to these debenture trust deeds. The debenture certificates state that the first defendant company will on the dates specified therein pay to the registered holders on presentation of such certificates the amount set out therein. The certificates also state that the company will, during the continuance of security, pay to the registered holders interest as set out therein. The certificates further state that "the debenture is issued subject to the provisions of the above-mentioned trust securities whereby all remedies for the recovery of the principal monies and interest secured by the debentures are vested in the trustees on behalf of the debenture-holders and it is accordingly expressly stipulated that the debenture shall operate only according to the tenor thereof". The third series of debentures which rank pari passu , inter alia, with the first series of debentures are issued pursuant to the letter of offer dated February 28, 1983. They are secured by a debenture trust deed dated January 15, 1985, as a result of which the first defendant company has crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies (Central Government) General Rules and Forms, 1965, as amended and prevailing from time to time". Debenture certificates which are issued under this debenture trust deed are substantially in the same form as the earlier debenture certificates. It is the contention of the first defendant company that the covenants under these various debenture trust deeds which require the first defendant company to maintain a certain ratio between its fixed assets and the value of debentures as also between its profits and interest to be paid on these debentures, are covenants which are entered into between the first defendant company and the trustees. There are no such covenants between the company and any of the debenture-holders. The first defendant company, therefore, contends that a debenture-holder by himself or on behalf of the entire class of debenture-holders cannot maintain the present action which is an action for enforcement of these covenants. Now, the rights of a debenture-holder and the obligations which the company has towards its debenture-holders, depend essentially upon the terms of the agreement between the company and its debenture-holders as also between the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, In re [1879] 11 Ch 372 was distinguished. Looking to the covenants contained in the debenture certificate, the holder of the debenture in that case to whom interest was overdue was held entitled to petition for the winding-up of the company. Nearer home, in the case of Bachharaj Factories Ltd. v. Hirjee Mills Ltd. [1955] 25 Comp Cas 227 , a Division Bench of this court distinguished the case of Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch 446 and held that in the case before the Division Bench, there were debentures and not stock certificates. The debentures contained a personal covenant by the mills to pay to the debenture-holders. Hence the circumstances which prevailed upon the court in Dunderland Iron Ore Co. Ltd., In re [1909] 1 Ch 446 were not present in the case before them and the debenture-holder was entitled to present a winding-up petition as a creditor of the company. In view of the express provision now contained in section 439 of the Companies Act, 1956, there can be no doubt that a debenture-holder is a creditor of the company for the purpose of presenting a winding-up petition. In a later case of this High Court in Sholapur Spg. and Wvg. Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut in the debenture trust deeds) and the interest payable by the company, are meant to ensure that proper securities are available for realisation of dues of the debenture-holders under the debenture certificates. The debenture-holders are, therefore, beneficiaries under the trust deeds. In these circumstances, although the remedy to enforce these securities may vest in the trustees, the debenture-holders, as beneficiaries, would be entitled to enforce covenants which are for their benefit although they may not be directly parties to the covenants. The right of a beneficiary under a trust to enforce contracts which are for his benefit is recognised under our law. In the case of M. C. Chacko v. State Bank of Travancore, AIR 1970 SC 504, the Supreme Court has observed as follows (at page 508): "...It has, however, been recognised that where a trust is created by a 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 riot a party to the contract, his rights are equitable and not contractual. The Judicial Committee applied that rule to an Indian case Khwaja Muhammad Khan v. Husaini Begum [1910] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company will either provide an additional cover acceptable to the trustees or will forthwith redeem such number of debentures whose nominal values would be enough to adjust the margin. There is some dispute between the parties as to whether this margin of 40% has been subsequently reduced or not. I will come to that a little later. Under the third series of debentures, the trust deed requires that the aggregate written down value of the fixed assets shall be one and a half times the value of the debentures issued and outstanding, the specified loans ranking pari passu and proposed debentures. Mr. Cooper, learned counsel for the plaintiff, has assumed for the purpose of the motion that the ratio between fixed assets and the aggregate value of debentures, loans and proposed debentures is as set out in the third series and not the slightly higher ratio as laid down in the first series. In order to ascertain the written down value of the fixed assets of the company and the nominal value of its outstanding debentures and other loans which rank pari passu , both the parties rely upon schedule 3 to the annual report of the first defendant company for the year 1984-85, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds showing full particulars including quantitative details and situation of the fixed assets, except that the item-wise depreciation written off to date has not been recorded. It seems that the company possesses old assets and there has been some difficulty in recording item-wise depreciation. The auditors have, therefore, stated that the major portion of assets has been physically verified by the management and to their knowledge there are no serious discrepancies of verification. This note of the auditors does not in any way indicate that the depreciated value which is shown in schedule 5 is in any manner inflated or is not a correct depreciated value. The plaintiff had asked for inspection of the first defendant company's fixed assets register and two ledger accounts in order to ascertain whether the depreciated value of fixed assets as shown is its correct value and whether there has been any increase in the value of fixed assets by bringing in of more machinery and so on. The company has refused to give such inspection on the ground that these are probing enquiries and a debenture-holder is not entitled to inspect these documents. Prima facie, there seems to be some substanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is the amount calculated with reference to written down value of the assets as shown by the books of the company at the end of the financial year at the rate specified for the assets by the Indian Income-tax Act and the rules made thereunder for the time being in force as normal depreciation including therein extra and multiple shift alowances but not including various other items, with which we are not concerned. Under the relevant Income-tax Rules it is not mandatory for a company to claim depreciation for extra shift working. The first defendant company has not claimed depreciation for extra shift working in its income-tax return. The company has, therefore, not claimed such depreciation in its balance-sheet and profit and loss account also. The contention of the plaintiff that it is mandatory for the company to claim such depreciation does not appear to be correct. It is true that the Institute of Chartered Accountants of India has recommended that such depreciation should be claimed. It has also recommended that where such depreciation has not been claimed, attention should be drawn to this fact. Beyond this, there does not appear to be any mandatory provision of law under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a booklet brought out by the Research Committee of the Institute of Chartered Accountants of India. In para 17.25, "it is recommended that the expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, may be capitalised as an indirect element of the construction cost. However, the expenditure incurred over a prolonged guarantee period during which the plant is commercially operated cannot be capitalised and must be treated as revenue expenditure". In para 17.26, it is stated that "it is extremely important to fix a specific date representing the date when the plant has been completed, set up and is recognised as being ready for commercial production. For this purpose, the term 'commercial production' refers to production in commercially feasible quantities and in a commercially practicable manner".. The plaintiff has contended with some justification that at least by April, 1985, the first defendant company's DMT plant was ready for commercial production. In this connection, they rely upon the statement made by the chairman of the first defendant company on March 27, 1985, to the effect that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the first defendant company, on allocation of this amount, an amount approximating Rs. 34 crores will go towards the value of fixed assets of the first defendant company while the balance amount will be shown as current assets. I need not examine the reasons for not allocating this expenditure as on September 30, 1985. It is possible, as contended by the plaintiff, that if the expenditure had been allocated in the balance-sheet as on September 30, 1985, although the value of the fixed assets of the company would have substantially increased, it is also likely that its profits would have been substantially reduced on account of a large amount being allocated for revenue expenditure. But, for the purpose of calculating the value of fixed assets cover of the first defendant company, one cannot ignore the fact that the fixed assets of around Rs. 34 crores in addition to 112 crores of rupees are available to the first defendant company. If this amount is taken into account, there is adequate cover of fixed assets amounting to Rs. 146 crores (approx.) for the debentures outstanding, the specified loans and the proposed debentures amounting in all to Rs. 81 crores. Under the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defendant company should have twice this amount as its average yearly profits to be calculated as set out in the covenant. As per exhibit I to the plaint where net average profit of the first defendant company has been calculated, the average profit for the last three years comes to Rs. 1,074.64 lakhs per year. This amount includes profit derived from the sale of capital assets of the company also. According to the plaintiff, such profit should be excluded from calculation though I do not see any reason for excluding such profit. But one has also to take into account the fact that this average profit may be reduced after the allocation of unallocated expenditure, although this is denied by the first defendant company. Prima facie, there does not seem to be an adequate profits cover. In fact, Mr. Jethmalani, learned counsel for the first defendant company, did not even urge seriously that the company had the requisite profits cover. In this connection, it was argued by Mr. Jethmalani, learned counsel for the company, that in the third series of debentures, the covenant in question only requires the company to ensure that the average of profits are sufficient as far as possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Glynn v. Margatson and Co. [1893] AC 351 at page 357, the House of Lords was required to consider a bill of lading which contained a clause that the ship was bound for Liverpool, with liberty to proceed to and stay at any port or ports in any station in the Mediterranean, Levant, Black Sea or Adriatic or on the coasts of Africa, Spain, Portugal, France, Great Britain and Ireland, for the purpose of delivering coals, cargo, or passengers or for any other purpose whatsoever. The ship left Malaga for a port on the east coast of Spain and out of her course for Liverpool. The appellants had shipped cargo of oranges for Liverpool which was damaged as a result of delay. In construing this clause, the House of Lords held that in construing a document one must in the first instance look at the whole instrument and not one part of the agreement. Looking at the whole of the instrument and seeing what one must regard, as its main purpose, one must reject words, indeed the whole provision, if they are inconsistent with what one assumes to be the main purpose of the contract; and the House of Lords held that the appellant was entitled to damages. The covenant in question in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to rank pari passu with or subject to the charges already created or to be created in favour of the company's bankers and/ or the financial institutions and/or trustees of the existing debenture-holders from time to time as the case may be) together with the power to take over the management of the business and concern of the company in certain events, to or in favour of the agents and trustees for the holders of 800,000 ( eight lakhs ) , 15% secured redeemable non-convertible debentures of the face value of Rs.100 each to be issued by the company in order to secure their redemption together with interest, compound interest, costs, charges, commitment charges, wherever applicable, premium on prepayment or on redemption, if applicable, and all other monies due or payable by the company in respect thereof or any part thereof". (underlining mine). The second resolution is to the following effect: "RESOLVED FURTHER that consent be and is hereby accorded to the board of directors mortgaging and/or charging all or any part of the immovable properties of the company wheresoever situate, present and future of every nature and kind whatsoever and/or creating a floating char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has become entitled to borrow further amounts so long as it complies with these two conditions and nothing more. By virtue of this resolution, therefore, the debenture-holders of the first series of debentures have given up the covenant requiring the company to provide a profit cover. Since it was a covenant for the benefit of the debenture holders, the debenture-holders could waive that benefit. The debenture trust deed also gave an express power to the debenture-holders to modify this covenant. Therefore, by virtue of this special resolution which is passed in accordance with the provisions of the sixth schedule to the original trust deed, the debenture-holders of the first series cannot now insist on a profit cover. This resolution was passed unanimously at the meeting of the first series of debenture-holders. 70% of the total debenture-holders by value were present at the said meeting and they all agreed to the said two resolutions. The resolution is, therefore, binding on all the debenture-holders of the first series including the plaintiff. In respect of the third series of debentures, however, there is no provision under the debenture trust deed for any modification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the proposed debentures. Not being allowed to issue the debentures would cause serious prejudice both to the company and to the persons who have subscribed to the new series. The risk of any damage to the plaintiff is minimal. But the present notice of motion substantially affects the outcome of the suit. Hence, I do not propose to decide the motion on the basis of balance of convenience. The first defendant company has also submitted that the present application is a mala fide application made on behalf of its trade rivals in order to bring the working of the first defendant company into difficulty. It has urged this ground also to resist the application of the plaintiff for a detailed inspection of the company's records. The company has considered this attempt at inspection as an attempt by its trade rivals to obtain information regarding the company's plant and machinery. In support, the first defendant company has relied upon a spate of articles and newspaper reports recently appearing where allegations have been made against the first defendant company and its chairman. There does appear to be some basis for this apprehension. It is somewhat unusual for a debenture-holde ..... 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