TMI Blog2005 (5) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. - CIVIL APPEAL NO. 3196 OF 2005 - - - Dated:- 9-5-2005 - B.P. SINGH AND S.B. SINHA, JJ. Dr. Rajeev Dhawan, Ms. Shubhr Kapur and Sanjay Kapur for the Appellant. Soli J. Sorabjee, Bhargava V. Desai, Nimish Pandya, Ms. Kamala N. Pandya, Nikhil Sakhardande and Sanjeev Kr. Singh for the Respondent. JUDGMENT S.B. Sinha, J. - Leave granted. The Respondent herein is a company registered under the Companies Act, 1956, and engaged in the manufacture of polyester film; 50 per cent of which production used to be exported to United States of America, United Kingdom, Europe, Far East, Middle East, Japan, New Zealand etc. Having regard to the adoption of liberalization policy by the Government of India, the Company intended to become globally competitive and went for a massive expansion in the year 1996. The scheme of the said expansion was financed by obtaining term loans and issuance of debentures by various financial institutions including the Appellant No. 2 herein. For various reasons, including imposition of European Union Levelled Anti Dumping Duties, the Respondent suffered a cumulative loss of Rs. 228.58 crores by March 2001. In the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing package will be paid on Net Present Value (NPV) basis in 12 quarterly instalments commencing from 1-4-2002." 2. On or about 19-6-1997, a Common Subscription Agreement was entered into by and between the Respondent and the debenture holders; the relevant clauses whereof are as under: "1.1 Wherever used in this Agreement, unless the context otherwise requires the following terms shall have the following meanings: ( a )****** ( b )****** ( c )"Debenture holders" means LIC, UTI, GIC, NIC, NIA, OIC and UTI or the holders of the Debentures for the time being deriving their title to the Debentures. 2. Company s request for financial assistance. The Company has approached the Debenture holders for financial assistance to the company for long-term capital requirements and the Debenture holders have agreed to advance financial assistance in the form of subscription to 18.5%, 21,00,000 non-convertible. Privately placed debentures of Rs. 100 each to the extent mentioned below: Name of Debenture holders Letter No. Date Amount in lakhs UTI DOI/2945/G-76/96-97 400 Dt. 23-4-1997 LIC INV: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders, subject to the statutory guidelines as may be applicable for the purpose, revise/postpone the redemption of the debentures or any party thereof outstanding for the time being or any instalment of redemption of the said debentures or any part thereof upon such terms and conditions as may be decided. If for any reason the amount of the Debenture finally subscribed for by the debenture holders is less than the amount of the debentures agreed to be subscribed the instalment(s) of redemption will be reduced proportionately but will however be payable on the due date as specified. 3.9 Debenture certificate. The Company shall issue debenture certificate/s to the debenture holder/s after making necessary compliance to the provisions of section 113(1) of the Companies Act, 1956 read with the Companies (Issues of Share Certificate) Rules, 1960. 7.5 Negative covenants. Unless the debenture holders/trustees shall otherwise agree, the Company shall not: ( a ) Dividend - Declare and/or pay any dividend to any of its shareholders, whether equity or preference, during any financial year unless the company has paid to the debenture holders the instalments of principal, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be veried, modified or abrogated in accordance with the Articles of Association of the Company and the Act and with the consent of the holders of the debentures by a Special Resolution passed at the meeting of the Debenture holders, provided that nothing in such resolution shall be operative against the Company where such resolution modifies or varies the terms and conditions governing the Debenture if the same are not acceptable to the Company. The Fourth Schedule Above Referred to Form of Debenture Certificate ****** The Fifth Schedule Above Referred to Provisions for the Meeting of the Debenture holders 22. A meeting of the Debenture holders shall, inter alia, have the following powers exercisable in the manner hereinafter specified in Clause 23 hereof: ****** ( ii )Power to sanction any compromise or arrangement proposed to be made between the Company and the Debenture holders. ( iv )Power to assent to any scheme for reconstruction or amalgamation of or by the Company whether by sale or transfer of assets under any power in the Company s Memorandum of Association or otherwise under the Act or provisions of any law. 23. The powers set out in Clause 22 her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Debentures ("the Debenture holders") in accordance with the provisions of the Trust Deed. The Debenture holders are entitled to the benefit of and are bound by and are deemed to have notice of all the provisions of the Trust Deed. All rights and remedies of the Debenture holders against the Company in respect of arising out of or incidental to the Debenture shall be exercisable by the Debenture holders only though the Trustees. The Debentures are issued subject to and with the benefit of the Financial Covenants and Conditions endorsed hereon which shall be binding on the Company and the Debenture holders and all persons claiming by, through or under any of them and shall enure for the benefit of the Trustees and all persons claiming by, through or under them. The Company hereby agrees and undertakes to duly and punctually pay, observe and perform the Financial Covenants and Conditions endorsed hereon." 5. It is accepted that the total sums invested by the Financial institutions in the aforementioned debentures is to the tune of Rs. 197.43 crores whereas UTI invested a sum of Rs. 19.57 crores i.e., only about 10 per cent of the total investment. 6. The Respondent he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was issued declaring the Respondent Company as "Relief Undertaking" and thereby directing that any right, privilege, obligation or liability accrued before 6-8-2001 would be suspended and any remedy for enforcement thereof shall also be suspended and all proceedings relating thereto before any court, Tribunal, officer or authority shall be stayed. Such moratorium was extended by notifications dated 6-2-2002, 5-2-2003; and February 2004 for a period of one year commencing from 6-2-2004 to 5-2-2005. 12. Referring to section 28 of the Indian Contract Act, Dr. Dhawan would submit that the said provisions must be read in the light of the definition of consideration as contained in section 2( d ) thereof having regard to the fact that the negative covenants are included as a part of consideration therein and, thereby no absolute bar was created for enforcing the rights of the Respondent under or in respect of the agreement in any ordinary Tribunal. The Respondent, Dr. Dhawan would argue, had no legal right to maintain an application under section 391 of the Companies Act as it was not an ordinary Tribunal. A Company Judge, according to Dr. Dhawan, merely exercises a supervisory ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible in law as by reason thereof one debenture holder would be conferred a power of veto resulting whereof not only in violation of the principle of corporate democracy would be violated, but a change in the integrity of the document would also be brought about. 15. Section 28 of the Indian Contract Act was invoked by the Respondent before the High Court, it was contended only because the Appellants herein raised a contention that by reason of clause 7.5 an absolute bar has been created in moving an application under section 391 of the Companies Act. 16. For the purpose of this case, we shall proceed on the premise that clause 7.5 of the agreement is valid and is not hit by section 28 of the Indian Contract Act. 17. A Common Subscription Agreement was entered into by and between the Respondent herein and all the debenture holders. The debenture holders named therein are collectively referred to by that expression and the expression means the debenture holders specified therein deriving their title to the debenture. The said agreement was entered into having regard to the fact that the Respondent approached all the debenture holders for financial assistance for meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re holders are confined to those who in terms of the agreement are holders of the debentures deriving their title thereto. 23. In terms of clause 10 of the Trust Deed, the rights, privileges and conditions attached to the debentures may be varied, modified or abro-gated only in accordance with the Articles of Association of the Company and the Act and with the consent of the debenture holders by a special resolution passed at the meeting of the debenture holders but in terms of the proviso appended thereto nothing in such resolution shall be operative against the company where such resolution modifies or varies the terms and conditions governing the debentures, if the same are not acceptable to the company. The Trust Deed speaks of such resolution also in terms of clauses 22 and 24 thereof. Clause 25 provides that such a resolution may be adopted by circulation of letter or letters. The provisions of the Trust Deed and in particular clauses 22, 23, 24 and 25 thereof leave no manner of doubt that a resolution has to be passed in the manner laid down therein and/or in terms of the Companies Act. 24. The common subscription agreement is an investment/loan agreement. The provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were the major suppliers of film in the international market as a result whereof they started dumping the materials at cheap prices in Europe, and the levy of anti-dumping/anti- subsidy duties by the European Union as a result whereof sales to European countries came down drastically. 30. The restructuring package was evolved at the instance of the Industrial Development Bank of India which was the largest lender and the trustee upon obtaining a report in that behalf from KPMG, a reputed concern. A scheme envisaged under section 391 of the Companies Act, it is well settled, is a commercial document. 31. Section 391 read with section 393 of the Act postulate that where a compromise or arrangement is proposed between a company and its creditors or any class of them; or between a company and its members or any class of them, the court is required to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme. In the event majority of the creditors representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present or voting either in person o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration. . . ." 34. It is not the case of the Appellants that the learned Company Judge has exceeded his jurisdiction and acted in violation of the said guidelines. Once it is held that the normal rule, namely, the principle of majority in corporate democracy or in other words, governance of the company by majority, is accepted, the Appellants could not be heard to say that they had an absolute right to exercise veto power and thereby scuttle a bona fide attempt to revive a company. Efforts to keep a company from becoming insolvent and even to revive an insolvent corporate have been receiving legislative and executive support, as would be evident from several Parliamentary Act, as for example the Sick Industrial Companies (Special Provisions) Act, 1985 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 35. It is difficult for us to agree with the submission of Dr. Dhawan that clause 7.5 puts a total embargo on the part of the company or other creditors to file a compromise under section 391 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reseen unjustness or unreasonableness therein ought not to reject the same. 39. The Company Judge by reason of the impugned judgment while exercising a supervisory jurisdiction only accepted the scheme. The High Court s decision is not being questioned as unfair. 40. The Respondent in view of the Scheme has no remedy other than approaching the High Court under section 391 of the Companies Act. 41. In Sardar Amarjit Singh Kalra (Dead) by Lrs. v. Smt. Pramod Gupta [2003] 3 SCC 272, this Court stated : ". . . As far as possible, courts must always aim to preserve and protect the rights of the parties and extend help to enforce them rather than deny relief and thereby render the rights themselves otiose, " ubi jusibi remedium " (where there is a right, there is a remedy) being a basic principle of jurisprudence. Such a course would be more conducive and better conform to a fair, reasonable and proper administration of justice." 42. We may at this stage refer to the decisions relied upon by Dr. Dhawan. 43. In the case of Nanakram v. Kundalrai [1986] 3 SCC 83 as also Nutan Kumar the question which arose for consideration was as to whether a lease in violat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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