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: 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. 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 When these appeals were being heard, it was pointed out that the Company Petition No. 240 of 2001 was already withdrawn and in this view of the matter, the learned Senior Counsel for the appellant stated that since the Company Petition No. 240 of 2001 was withdrawn, he wanted to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 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. (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 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 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 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 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 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"; 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