TMI Blog2002 (3) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... rt has proceeded : Para 3 Basic facts Para 4 Preliminary contentions enumerated Para 5 Nature of the floating rate notes Para 6 How the petitioners acquired these notes Para 7 Cause of action pleaded by petitioners Para 8 Pleadings after notice Para 10 Preliminary contentions Discussion Paras 11 to 17 Preliminary contention No. 1 - Petitioners are not noteholders Paras 18 to 23 Preliminary contention No. 2 - Petitioners are not debenture holders Paras 24 to 32 Preliminary contention No. 3 - Petitioners are not creditors Paras 33 to 45 Preliminary contention No. 4 - Enforceability Paras 27 to 29, 48 Trustee is a necessary party Para 49 Conclusions Paras 50, 51 Orders Basic facts 3. The petitioners claim to be the beneficial owners of floating rate notes (FRNs or notes) issued by Essar Steel Ltd. ( the respondent-company or Essar ). The petitioners claim that under the said notes, Essar was required to pay the petitioners along with other not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities ordinary borrowing from banks or other single lenders and issuing equity. Starting in the United States in the 1980 s, a third, more flexible method of raising such funds emerged the issued of bonds, or notes. The interest rates attached to such notes keep fluctuating in accordance with a particular benchmark rate (very often the London Inter-Bank Offer Rate LIBOR). Hence, these notes are known as floating rate notes or FRNs. 5.2 The role of the trustee : Raising finance through an issue of notes is usually co-ordinated with the involvement of investment banks and a trustee acting on behalf of the noteholders. There are a number of advantages with using a trustee to represent noteholders, the main one being that the trustee can simplify the administration of large numbers of individual noteholders. The mechanism of appointing the trustee is simply through a process of negotiation between the issuer and the potential trustee followed by the execution of a trust deed, which outlines the rights and obligations of each party thereto. 5.3 Getting the noteholder on board : Once the issuer and the trustee have reached agreement and signed the trust deed, an offering m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of notes purchased. As stated above, title to the definitive notes passes only upon due registration by the Registrar. This process is effected in much the same way that shares in a company held in certificated form would be transferred. (C)Payment of interest where notes are held in definitive form : Interest will always be calculated in respect of a certain period (usually three months) and generally falls due to be paid on the last day of such period. The paying agent will, on a predetermined date for each interest period, determine the rate of interest and calculate the amount of interest payable on each note for the relevant interest period. The paying agent then notifies the trustee, the principal paying agent, the registrar, the transfer agents and any stock exchange on which the notes are listed, as well as notifying the noteholders. The interest is paid by the issuer, via the principal paying agent, in a manner ( i.e., cheque or direct transfer) as determined by the notes. The amount is transferred by the paying agent into an account held by the noteholder. The persons qualifying for interest payment are noteholders the condition for payment being app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notes. Euroclear in turn will have accounts in the name of either noteholders or custodian (who are either noteholders in their own right or hold as sub-custodians), and will allocate the interest in the notes accordingly amongst its relevant account holders. For example, if Barings as custodian holds US $ 50m principal value notes, Solomon Smith (as custodian) holds US $ 30m, and Bear (as custodian) holds US $ 20m, Euroclear will credit their accounts accordingly. Each custodian may in turn hold accounts for either sub-custodians or noteholders and will have an entry in those accounts with the requisite amounts held. In this chain, each entity is only aware of the interest held by its direct account holders. This means that the issuer does not necessarily know who the custodians or the noteholders are. As far as the issuer is concerned, there is one global note which has been deposited (in the Essar issue) with a custodian for the Deposit Trust Company. This also means, that any noteholders who have the same custodian can trade notes without there being any change in the amount of the principal value of notes represented in the account of the custodian. For example, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovenants than are usually seen with mainstream bank debt and "evergreen" warranties do not exist. The financial covenants generally give greater flexibility to the issuer and are mostly confined to preventing the issuer from leveraging itself beyond a certain level. For example, high yield issues usually have covenants which restrict the issuer s ability to : ( a )incur additional debt, usually measured as a multiple of cash flow; ( b )distribute its assets to shareholders; and ( c )effect a change of control of the business, or sell key assets or subsidiaries. In addition, cash instruments usually contain covenants or events of default specifically tailored to reflect the issuer s particular business. 5.8 Disadvantages of issuing notes : ( i )interest rates are generally higher than interest payable for bank debt; ( ii )waivers and amendments to covenants are more difficult to obtain; ( iii )the due diligence process and disclosure requirements can be onerous and expensive for US registration purposes (because the securities rules and regulations are very stringent in the US); and ( iv )note issues are much more difficult to restructure. 6. How the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs of noteholders 191 - 197 Annexure IIB Trust deed for FRNs due 2005 - Series B with similar Schedules 1 to 3 198 - 253 Annexure III Text of extraordinary resolution for accepting the offer of new notes (due 2005) for the old notes (due 1994) 254 - 256 Annexure IV Trust deed for amended and restated notes with Schedules thereto 257 - 313 In view of the fact that the trust deed and Schedules thereto for the new notes in Series B are similar to those for the new notes in Series A, for the purposes of these petitions, reference will be required to be made only to the offer (pages 75 to 130), Annexure IIA - Trust deed (pages 143 to 165), Schedule 2 thereto (pages 186 to 189) read with Schedule 1 (pages 169 to 185) and Schedule 3 thereto (pages 191 to 197). 6.3 Under the exchange offer, noteholders were invited to elect to receive any combination of the new notes by delivering a properly executed letter of election to the Deposit Trust Company directly (or to the Deposit Trust Company through whomever the noteholder in question held its interest). To accept the exchange offer, the noteholder was to name a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough its accounts with Clearstream. (F) In its capacity as account holder, BIL holds on behalf of petitioner No. 1 US $ 3 million principal amount of Series A notes and US $ 3 million principal amount of Series B notes in account 87277 with Clearstream. BIL also holds on behalf of petitioner No. 2 US $ 3 million principal amount of Series A notes in account 84039 with Clearstream. This is confirmed by Clearstream in its letter dated 3-5-2001, a copy of which is annexed as Annexure I to the petition." 7. Cause of action pleaded by petitioners 7.1 Interest payments on the notes - The defining characteristic of FRNs is that they have a floating interest rate attached to them. The interest paid on FRNs fluctuates in accordance with a variable benchmark rate. As per the terms of the exchange offer, the Series A notes bore interest from 1-8-2000, at the London Inter-Bank Offer Rate ("LIBOR") plus 350 basis points, payable quarterly in arrears with the first payment due on 31-10-2000, and thereafter every three months. Similarly as per the terms of the exchange offer, the Series B notes bore interest from 1-8-2000, at LIBOR plus 400 points, payable quarterly in arrears wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding extraordinary interest payment and interest accruing from 31-1-2001 to 11-4-2001. The sum due and payable by Essar to each of the petitioners of Company Petition No. 216 of 2001, as on 11-4-2001, is stated to be as under: Petitioner No. 1 US $ 6,395,866 inclusive of principal sum of US $ 6 million Petitioner No. 2 US $ 3,192,846 inclusive of principal sum of US $ 3 million. The petitioners have then also referred to the subsequent development about the meetings being held by Essar for alleged restructuring. Grievances are also made about the short notice for such meetings and the apprehension that Essar will not be able to formulate an effective restructuring proposal in relation to its debt obligations. The petitioners have also expressed an apprehension that even if the restructuring proposals are presented, the petitioners do not consider that their interest or the interests of the other noteholders would be adequately addressed by Essar in any such restructuring. The petitioners have, therefore, invoked the provisions of section 433 read with section 434 on the ground that the respondent-company Essar is unable to pay its debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners in the FRNs is less than 17 per cent of the total value of the FRNs. It is submitted that the petitioners alleged collective holding of the FRNs forms a miniscule proportion of the entire FRNs and other debts of the respondent-company. 9. Mr. Iqbal Chagla and Mr. C.A. Sundaram, the learned counsel for the respondent-company Essar Steel Ltd. and Mr. P. Chidambaram, the learned counsel for the petitioners have been heard at length on three different dates only on the question of preliminary contentions urged on behalf of the respondent-company. 10. To recapitulate, the preliminary contentions are as under ( i )The petitioners are not noteholders. ( ii )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. ( iii )In any case, the petitioners are not creditors under section 439(1)( b ), as the petitioners cannot give a valid discharge but only the trustee can give a valid discharge. Hence, only the trustee is a creditor of the respondent-company. ( iv )Even if the petitioners are creditors, they do not have any enfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t-company as well as the record to show that the petitioners are noteholders and the respondent-company itself has recognised the petitioners as noteholders. 12.1 In para 7 of the reply affidavit dated 26-12-2001 (page 360), the respondent-company has stated that "pending the reply to the trustee s notice, certain noteholders including the petitioners through their Indian advocates served a demand notice dated 12-4-2001." In para 40 of the reply also (page 370), it is stated that "I deny that even if such a restructuring proposal were presented, the petitioners interests as well as the interest of the other noteholders would not be adequately addressed by the respondent-company. On the contrary, I say that two nominees on the Steering Committee adequately represent the noteholders. The Steering Committee comprises 8 to 9 members, out of whom two nominees shall be representing the interest of the noteholders, therefore, the question of the noteholders interest not being protected does not arise." In paras 11 and 12 of the petition, the petitioners had definitely stated that BIL holds the notes on account of the petitioners and the letter of Clearstream is also produced at an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oteholders of FRNs, Mr. Sexena would not have been permitted to attend the meeting of lenders as MR. Sexena was not authorized by any other party to attend the said meeting. 12.6 Mr. Chidambaram alternatively submitted that even if the petitioners are treated as beneficial owners of the notes, there are several decisions taking the view that the beneficial owner can also sue or file winding-up petitions. Strong reliance is placed on the decision of the Bombay High Court in Narotamdas Trikamdas Toprani v. Bombay Dyeing Mfg. Co. Ltd. [1990] 68 Comp. Cas. 300 in support of the submission that the right of a beneficiary under a trust to enforce contracts which are for his benefit is recognized under our law. In the said decision, reliance was placed on the observations made by the Supreme Court in M.C. Chacko v. State Bank of Travancore AIR 1970 SC 504, laying down the principle that the basis of the rule permitting the beneficiary to enforce the rights under the contract is that though the beneficiary is not a party to the contract, his rights are equitable and, therefore, enforceable. 12.7 In the case of a global note, there is only one registered holder. The others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such other entity as is requested by an authorised representative of Deposit Trust Company), any transfer, pledge or other use hereof or value or otherwise by or to any person is wrongful inasmuch as the registered owner hereof, Cede and Co., has an interest therein. This definitive global note is evidence of entitlement only. Title to the notes passes only on due registration on the register and only the duly registered holder is entitled to payments on the notes in respect of which this definitive global note is issued. This definitive global note shall note be valid for any purpose until authenticated by or on behalf of the Registrar. Essar Steel Limited." [Emphasis supplied] 14. It is thus clear that the global note is issued to only one person, i.e. , Cede and Co. As the undisputed chart annexed to this judgment at Annexure-I indicates, it is from the Depository Trust Company that the other persons can purchase a portion of the global notes. The chain is as under : From the issuer-Essar to Deposit Trust Company (Depository Trust Corporation) - Cede and Co. is the Deposit Trust Company participant. From Cede and Co., Clearstream, Euroclear and others get their po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of global note states (page 189) as under : "Terms and conditions of the notes, identical to the terms and conditions to be inserted on the individual definitive notes will be inserted." The beneficial holders of the global note can be at 3, 4 or 5 levels below the trustee because they are allowed to participate in the global note as account holders or through account holders or through sub-custodians and, therefore, those beneficial holders will not be given notes in the physical form but they are permitted to have a share of the global note in dematerialised form. 16. The respondent-company has not disputed that a part of the petitioners holding is in lieu of old notes (due 1999). When the respondent-company offered to exchange new notes (due 2005) for the old notes (due 1999), the exchange offer contained the following clause : "Notwithstanding any other provision of this exchange offer and consent solicitation, delivery of the new notes for old notes tendered and accepted for exchange pursuant to the exchange offer will occur only after confirmation of book-entry transfer of such tendered old notes into the depository s account at Deposit Trust Company, together w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly credit Deposit Trust Company participants accounts with payments in amounts proportionate to their respective new beneficial owners of the principal amount of the relevant new Deposit Trust Company global notes as shown on the record of Deposit Trust Company or the nominee. The company also expects that payments by Deposit Trust Company participants to new beneficial owners of such new Deposit Trust Company global note held through such Deposit Trust Company participants will be governed by standing instructions and customary practices." [Emphasis supplied] 17. In view of the above material on record and the detailed explanation given in para 5.6 of this judgment, it has to be held that the petitioners are noteholders inasmuch as the respondent-company itself has recognised the concept of new beneficial owners of the debts representing the amounts which they have in their respective accounts as stated in para 12 of the respective petitions. The first preliminary contention raised on behalf of the respondent-company is, therefore rejected. Preliminary contention No. 2 : Even if the petitioners are noteholders they are not debenture holders or holders of any security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into the definition of securities under the Companies Act and thereafter no reference is required to be made about the interpretation of the definition of securities under the SCRA because as per the settled rules of interpretation one the Legislature has incorporated the definition under one Act into the definition under another Act, no further reference is required to be made to the former Act. In support of the said proposition, strong reliance is placed on the following decisions : ( i ) Wood s Estate, In re [1886] 31 Ch. D. 607, 615 (CA); ( ii ) Shamrao V. Parulekar v. District Magistrate AIR 1952 SC 324, 326; ( iii ) Mahindra Mahindra Ltd. v. Union of India [1979] 49 Comp. Cas. 419 ; ( iv ) Onkarlal Nandlal v. State of Rajasthan [1985] 4 SCC 404, 414, 415. 19.2 As against the view taken by the Bombay High Court, the Calcutta High Court in B.K. Holdings (P.) Ltd. v. Prem Chand Jute Mills [1983] 53 Comp. Cas. 367; has taken the view that marketable securities are not necessarily securities which are capable of being sold and purchased at stock exchanges. 19.3 It is further submitted the FRNs in question fall within the definition of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchanges in India. We are concerned only which the scope and ambit of the expressions debenture and securities for the limited purpose of a winding up petition under sections 433 and 434 read with section 439. 22. The expression debenture by itself is not defined in any statutary provision except the one contained in section 2( 12 ). Since that definition is not self-explanatory, one has to turn to the judicial pronouncements explaining the meaning of the expression debenture . In Levy s case ( supra ) debenture has been defined as a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture . In Laxman Bharmaji s case ( supra ) the Division Bench of the Bombay High Court adopted the meaning given by Chitty, J. In the aforesaid decision, the Division Bench has held that for determining what is and is not a debenture, we are no 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. We must look at the substance of the instrument itself. Debentures are the acknow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omised to return the amounts governed by the global note at the maturity date in 2005 and it also promised to pay interest thereon on quarterly basis. All the ingredients of a debenture are, therefore, fully satisfied and there is no reason why the notes cannot be treated as debentures as contemplated by the provisions of sub-section (2) of section 439. The second preliminary objection must, therefore, fail. 24. Preliminary contention No. 3 In any case, the petitioners are not creditors as the petitioners cannot give a valid discharge. 24.1 Mr. Sundaram for the respondent has vehemently submitted that even if the petitioners are noteholders and even if the notes are treated as debentures, still the petitioners cannot be considered to be creditors within the meaning of section 439(1)( b ). Sub-section (2) of section 439 does not automatically elevate the debenture holder to the status of a creditor under section 439(1)( b ) unless the debenture holder is a creditor in his own right. Only that person can be treated as a creditor under section 439(1)( b ) who can give a valid discharge to the company from whom the amount is claimed. On the basis of the clauses in the tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the trustee and by notice in writing to the issuer require it to make all subsequent payments in respect of the notes to or to the order of the trustee and not to the principal paying agent. It is submitted that in the instant case there is no direct covenant between the respondent and the so-called noteholders as the payment of principal as well as interest is to be made to the trustee or through their paying agent and not directly to the noteholders. 25. On the other hand, Mr. Chidambaram, the learned counsel for the petitioners has made the following submissions: 25.1 Reference is made to the averments made in (page 372) the reply affidavit that the interest has been paid to the petitioners and other noteholders. Apart from that the very concept of the global note is that the note is issued in favour of one person, but the others are the beneficial owners of the respective portions purchased by them and, therefore, condition No. 7 also contemplates receipt of the interest by the noteholders. 25.2 The very important object of insertion of sub-section (2) in section 439 was to remove the obstacles placed by the old decisions of the Chancery Division which pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .00 a.m. (New York city time) on any date when the notes or any of them become due to be redeemed unconditionally pay to or to the order of the trustee in New York city in U.S. dollars in immediately available funds the principal amount of the notes becoming due for redemption on that date and will (subject to the conditions) until such payment (both before and after judgment) unconditionally so pay to or to the order of the trustee interest on the principal amount of the notes outstanding as set out in the conditions subject to clause 2.5 provided that (1) payment of any sum due in respect of the notes made to the principal paying agent as provided in the agency agreement shall, to such extent satisfy such obligation except to the extent that there is failure in it subsequent payment to the relevant noteholders under the conditions and (2) a payment made after the due date or pursuant to condition 9 will be deemed to have been made when the full amount due has been received by the principal paying agent or the trustee and notice to that effect has been given to the noteholders (if required under clause 7.9), except to the extent that there is failure in the subsequent payment to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hardship otherwise caused to the beneficiary ( i.e., the debenture holder in such cases). This codification was, however not intended to inflict the avoidable hardship on the company of facing two actions one from the debenture holder and the other from the trustee. The equity requires that hardship to the company to be avoided by requiring the trustee to be joined as a necessary party in an action by a debenture holder against the company. There is nothing in the provisions of section 439 or for that matter in any other provision of the Companies Act which can dissuade the court from reading this principle into the provisions of sub-section (2) of section 439 that in an action by a debenture holder against the company, the trustee is a necessary party; though the converse would not be true, because in an action by the trustee, the trustee sues the company in its own right as a covenanting party. 29. It is also necessary to note that Jessel, Master of the Rolls began the judgment in Uruguay Central Hygueritas Railway Co. of Monte Video s case ( supra ) with the following words : "I am not satisfied that the plaintiff is a creditor. I should have been very glad if I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and the covenants are between the company and trustee. This principle is, therefore, not applicable where there is a direct covenant between the company and the debenture holder. 30. Before concluding the issue, the Court would deal with the submissions made by Mr. Sundaram for the respondent-company and the authorities cited by him. 30.1 Mr. Sundaram would, however, submit that sub-section (2) of section 439 can be invoked only by those debenture holders on whom the trust deed confers any right or only those debenture holders with whom the company has any direct covenant. Mr. Sundaram submitted that in Sholapur Spg. Wvg. Co. Ltd. s case ( supra ) and other cases relied upon by Mr. Chidambaram, there were debenture certificates directly issued by the issuer company to the debenture holders and, therefore, there were direct covenants between the company and the debenture holders. On the other hand, in the instant case, the covenants are only between the issuer company, i.e., the respondent-company on the one hand and the trustee on the other hand without any covenant with the noteholders. The argument may sound attractive, because in the instant case there is no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company for the protection of debenture holders. The instant case falls in the former category and not in the latter category. 30.3 Reliance placed by Mr. Sundaram on the principles laid down in Buckley on the Companies Acts as quoted in Bachharaj Factories Ltd. s case ( supra ) does not carry the case of the respondent-company any further as what was laid down there was the principle of the English law that a debenture holder can present a petition only where there is a direct covenant between the company and the debenture holder. As already indicated above, where the debenture holders are claiming their beneficial rights under a trust, under the Indian law it has already been held that the beneficiaries can take action against the company. 30.4 Mr. Sundaram has heavily relied on the decision in Harinagar Sugar Mills Co. Ltd. s case ( supra ). The question there was whether the receiver was a creditor or not. It was on account of absence of any deeming provision [unlike section 439(2)] which required the Apex Court to consider the question whether the receiver had the right to file a winding up petition. It was in that context that the Apex Court examined the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not the transferee, even if the transferor had transferred the shares before the record date, but the transfer was not registered with the company. The submission overlooks the fact situation in the present case. In Howrah Trading Co. Ltd. s case ( supra ), the transfer of shares was never registered with the company before the record date, hence only the transferor whose name was on the register on the relevant date was entitled to be paid the dividend in his own right as the company knew nothing about the transaction between the transferor and transferee. In the instant case, under the trust deed itself the trustee gets the payments not for itself but on behalf of the noteholders (who have their respective accounts with the concerned sub-custodians or agencies) as on the record date. Clause 2.2 of the trust deed quoted in para 26.2 hereinabove recognises this situation which is, therefore, within the knowledge of the company. The relevant portion of clause 2.2 bears repetition : "The trustee will hold the benefit of this covenant and the other covenants of the issuer under this trust deed on trust for itself and the noteholders according to their respective interests. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e noteholders to take action against the company but has failed to do so within a reasonable time, then only at least 20 per cent of the noteholders can file a petition. Condition No. 13 reads as under : "13. Enforcement. At any time after the notes become due and payable, the trustee may, at its discretion and without further notice, institute such proceedings against the issuer as it may think fit to enforce the terms of the trust deed and the notes, but it need not take any such proceedings unless ( a ) it shall have been so directed by an extraordinary resolution or so requested in writing by noteholders holding at least one-fifth in principal amount of the notes outstanding, and ( b ) it shall have been indemnified to its satisfaction. No noteholder may institute proceedings directly against the issuer unless the trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing." 33.2 The object of issuing a global note to one person and others getting their share in it under the terms and conditions to which they are parties (which contain the aforesaid express condition No. 13), is to ensure that when or if 75 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioners are not seeking to enforce the right under the contract or the trust deed but the petitioners by filing the present petitions are enforcing their statutory rights under the provisions of the Companies Act, i.e., for winding up the respondent-company. In support of the said submission, strong reliance has been placed on the following decisions : ( i ) Hind Mercantile Corpn. (P.) Ltd. v. J.H. Rayner Co. Ltd. [1971] 41 Comp. Cas. 548 (Mad.); ( ii ) ITC Agro Tech Ltd. v. Asha Agro Industries Ltd. [1998] 4 Comp. LJ 18 (All.). On the basis of the aforesaid decisions, it is submitted that the right to file a winding up petition statutorily conferred upon the petitioners cannot be taken away by an agreement between the company and the trustee. The company court has merely to determine whether the debt is due and payable and whether the company has neglected to pay the same and whether the defence taken up by the company is bona fide. 34.2 The objection being raised on behalf of the respondent-company may be available to it in a civil suit for enforcement of the trust deed and the obligations contained therein, but this defence is not available in a windin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are to be found at Annexure H to the petition and for the purpose of the preliminary contention No. 4, we are concerned with clauses 9, 12( a ) and ( d ), 13 and 14 in Schedule 2 (terms and conditions of notes) which read as under : "9. Events of default. If any of the following events occurs the trustee at its discretion may, and if so requested by holders of at least one-fifth in principal amount of the notes then outstanding or if so directed by an extraordinary resolution shall (in each case subject to being indemnified to its satisfaction), give notice to the issuer that the notes are, and they shall immediately become, due and payable at their principal amount together with accrued interest : ( a ) Non-payment : the issuer fails to pay any principal or interest on any of the notes when due; or. . . ." Clause 12 of the conditions provides for the quorum and majority required for passing extraordinary resolutions. The special quorum and majority for such resolutions are meant for special categories of subjects e.g., ( i ) to modify the maturity of the notes or the dates on which interest is payable in respect of the notes; and ( ii ) to reduce or cancel the princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall convene such a meeting or on their failure, such noteholders holding at least ten per cent of the principal amount as aforesaid, shall convene a meeting where there shall be quorum consisting of a clear majority of the notes in value outstanding at that time and by a three-fourths majority of the noteholders in value present at the meeting pass an extraordinary resolution requiring the trustee to issue such a notice of default. B. Enforceability : Thereafter, i.e., after the notes became due and payable upon the notice of event of default before the date of maturity or upon maturity of the notes, if the amounts remain unpaid, whether principal or interest, any of the following courses of action can be adopted : ( i )The trustee may at their discretion and without further notice institute such proceedings against the issuer, as the trustee may think fit to enforce the terms of the trust deed and the notes. ( ii )The trustee shall take the proceedings for enforcing the terms of the trust deed and the notes, if so requested in writing by noteholders holding at least one-fifth in principal amount of the notes outstanding. ( iii )The trustee shall take the proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iss the suit on the ground that the creditor has no presently enforceable claim against the defendant. Similarly, if on the same set of facts, another creditor were to file a winding up petition, on a defence being taken up, the company court would also have to dismiss the winding up petition on the ground that the petitioning-creditor does not have a presently enforceable claim. In both the cases, the question to be considered is whether the creditor has a presently enforceable claim. Similarly, if the creditor were to file a suit for recovery of a time-barred debt or he were to file a winding up petition on the basis of a time-barred debt, the same result would ensue. 40. The nature of the winding up proceedings has been well explained by the Karnataka High Court in A.V. Krishna v. Karnataka Leasing Commercial Corpn. Ltd. [1995] 83 Comp. Cas. 764 as under (page 767) : ". . . When a company is sought to be wound up because the company is unable to pay its debts, the cause of action arises as and when the company s commercial insolvency is disclosed or it is realised that the company is commercially insolvent or it is unable to pay its debts. This cause of action can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders in value is less than 20 per cent they can still require the trustee to convene a meeting of the noteholders and on failure of the trustee, 10 per cent noteholders in value can themselves convene a meeting of the noteholders and if the noteholders pass an extraordinary resolution at such meeting directing the trustee to institute proceedings for enforcement of the rights under the trust deed, the trustees are bound to institute the proceedings and if they do not do so within a reasonable time, the noteholders themselves may institute such proceedings. It appears that the rationale of the provision placing a limited restriction on the noteholders directly instituting proceedings against the issuer company is that if the noteholders having 75 per cent or more in value are prepared to modify the dates on which the interest or principal is payable in respect of the notes or cancel interest, they get an opportunity to have an extraordinary meeting of the noteholders convened and then the noteholders as a class will take decision. Of course, if the noteholders having 20 per cent or more of the value require the trustee to institute proceedings for enforcement of the terms of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition No. 13 is followed, the creditor can exercise its right of presenting a winding up petition. 43. The letter dated 19-2-2002, of the trustee only indicates the interpretation which the trustees have placed on the relevant conditions and that interpretation proceeds on the basis that the petition for winding up is not the same thing as the proceedings for enforcement of the trust deed and notes. However, as already pointed out above, whether it is a winding up petition or a suit for recovery of money, condition No. 13 provides that no noteholder may institute proceedings directly against the issuer unless the trustees, having become bound so to proceed, fail to do so within a reasonable time and such failure is continuing. 44. Mr. Sundaram submits that the condition is not challenged and it is not a void condition or could be treated as a condition contrary to public policy because the whole purpose of a global note is to issue one note in favour of one person and others can have their respective shares in that note, but the noteholders are expected and required to act as one entity subject to the exceptions stated in condition No. 13. 45. There seems to be a little ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evance that their request to proceed for instituting the proceedings against the respondent-company has not been heeded to. It is not the case of the petitioners that they hold not less than 20 per cent principal amount of the notes outstanding. The figures given by the respondent-company indicate that the holding of the petitioners in FRNs is 16.98 per cent. March 21, 2001 : 46. At this stage Mr. Abhishek Sexena with Mr. Mihir Joshi, for the petitioners submit that the figures of the holding of the petitioners in the FRNs at less than 20 per cent was given only on 19-3-2002, and, therefore, the petitioners may be granted some time to show that the petitioners holding in the FRNs is more than 20 per cent. 47. Mr. K.S. Nanavati with Mr. Keyur Gandhi, the learned counsel for the respondent-company submit that in view of the fact that the petitioners do not have 20 per cent in value of the notes and in view of the finding being given by the court that the trustee is a necessary party, the petitions are required to be dismissed. 48. It appears to the Court that even if the noteholders were to come with a case that they have 20 per cent holding in the FRNs, the trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding. If the trustee does not support the petitioning-creditors, but the petitioners have holding of 20 per cent or more of the notes in value, the court would proceed to hear the petitioners, the company and the trustee on the merits for deciding whether to admit the petitions. III. But if neither the trustee is ready to support the petitions, nor do the petitioners have holding of 20 per cent of the notes in value, in the context of the nature of the global note which represents a single debt and the object underlying clause No. 13, the court would apply the enforceability clause. ORDERS 50. Since it is only now that it is being held that though the petitioners are creditors and, therefore, the petitions would be maintainable, but the trustee is a necessary party and that in the absence of the trustee the petitions could be dismissed, the petitioners are required to be given an opportunity to rectify this defect and, therefore, some time is required to be given to joint the trustee as a party. After the trustee is joined as a party respondent in these petitions, the court will on the next date of hearing consider the question of applicability of condition No. 13 (e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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