2011 (3) TMI 1559 - HC - Companies Law

Winding-up petition admitted against company, court rejects challenges to trustee's authority

The court admitted the winding-up petition filed by a trustee against the respondent company, finding the company commercially insolvent and the Corporate ... Maintainability of winding up petition by a debenture trustee - deeming fiction treating trustee as creditor under section 439(2) - company deemed unable to pay its debts - section 434(1)(a) - bona fide dispute as bar to winding up - corporate debt restructuring (CDR) scheme not a bar to admissionMaintainability of winding up petition by a debenture trustee - deeming fiction treating trustee as creditor under section 439(2) - Whether the petitioner-trustee had locus to present the winding up petition on behalf of bondholders - HELD THAT: - The court held that the terms of the trust deed (notably clauses including 2.2, 11.13, 11.19 and related provisions) and the offer documents demonstrate that the trustee was appointed and vested with enforceable rights to receive payment and to act for bondholders. The trust deed contemplated payment to the order of the trustee and conferred powers on the trustee to determine events of default and to take steps, subject to indemnity and other limitations. The deeming provision of section 439(2), which treats a trustee for holders of debentures as a creditor for purpose of presenting a winding up petition, must be given effect. The court rejected the respondent's contention that the trustee lacked authority because bondholders are absolute owners of bonds or because the trustee is not a debenture trustee in a narrow sense. The court observed that the respondent itself treated the petitioner as an unsecured creditor in the proceedings and that the trust deed did not and could not override the statutory right of creditors to present winding up petitions. Accordingly the objection to locus was found to be without substance and the petitioner was held entitled to present the petition. [Paras 55, 56, 57, 58, 59]The petitioner-trustee had locus to present the winding up petition and the maintainability objection on this ground fails.Company deemed unable to pay its debts - section 434(1)(a) - bona fide dispute as bar to winding up - corporate debt restructuring (CDR) scheme not a bar to admission - Whether the petition should be admitted on the merits at the admission stage (i.e., whether there was a bona fide dispute or other reason to refuse admission, including the effect of the CDR scheme) - HELD THAT: - Applying the Supreme Court's guidance in IBA Health (India) Pvt. Ltd. the court examined whether there was a bona fide and substantial dispute as to liability such as would preclude admission. The court found no genuine dispute as to liability: the company had repeatedly admitted liquidity difficulties, applied for CDR, and did not pay the matured/accelerated amounts. The CDR proposal and participation of some creditors did not, by itself, constitute a bona fide defence to the petition or a bar to admission; a proposal to restructure or postpone payment is not equivalent to a discharge of the debt and the law does not compel a creditor to join a voluntary CDR scheme. The court also observed that some creditors may have joined the CDR and funds may have been infused, but that did not constitute a substantive defence or preclude admission where the claim stands admitted and the petitioner declined the scheme. On the material before the court at the admission stage, a prima facie case under section 433(e)/434(1)(a) could be raised and refusal to admit merely because a CDR scheme existed was not warranted. [Paras 60, 61, 62, 63, 64]The petition was prima facie maintainable on merits and is admitted; the existence or pendency of the CDR scheme did not bar admission and no bona fide dispute preventing admission was shown.Final Conclusion: The High Court held that the petitioner, as trustee for bondholders, had locus to present the winding up petition and, applying the settled principles on bona fide dispute and insolvency, found no sufficient defence or bar (including the CDR proposal) to refuse admission; the company petition was admitted and directions were given for advertisement and further steps. Issues Involved:1. Winding up of the respondent company.2. Debt restructuring and Corporate Debt Restructuring (CDR) scheme.3. Petitioner's locus standi to file the winding-up petition.4. Applicability of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 (FEMA Regulations).5. Allegations of commercial insolvency and inability to pay debts.6. Validity and enforceability of the trust deed and bond terms.7. Discrimination and fairness in the CDR scheme.Detailed Analysis:1. Winding up of the Respondent Company:The petitioner, a company incorporated in England and Wales, sought the winding up of the respondent company, Wockhardt Ltd., alleging that the respondent was indebted to the petitioner in the sum of US $142,214,060. The petition was based on the respondent's failure to redeem US $110,000,000 Zero Convertible Bonds issued in 2004, which were due for redemption on October 25, 2009, at 129.578% of their principal amount.2. Debt Restructuring and Corporate Debt Restructuring (CDR) Scheme:The respondent had applied for debt restructuring through the CDR cell in India, claiming financial difficulties due to the global economic downturn. The petitioner argued that the CDR scheme was not feasible for satisfying its claim and alleged that the respondent was employing delaying tactics. The respondent contended that the CDR scheme was approved by a majority of its creditors and was in the best interest of all stakeholders, including creditors, shareholders, and employees.3. Petitioner's Locus Standi to File the Winding-Up Petition:The respondent challenged the petitioner's authority to file the winding-up petition, arguing that only individual bondholders could do so. The court, however, found that the petitioner, as a trustee under the trust deed, had the right to file the petition. The trust deed stipulated that the trustee would hold the benefit of the covenants in trust for the bondholders, and the petitioner was recognized as an unsecured creditor entitled to file the petition under sections 439(1)(b) and 439(2) of the Companies Act, 1956.4. Applicability of FEMA Regulations:The respondent argued that the petitioner's claim based on early redemption of FCCBs was illegal under the FEMA Regulations, which required a maturity period of at least five years. The court found that early redemption was permissible with prior approval from the Reserve Bank of India (RBI), and the respondent had not taken steps towards payment of the early redemption amount. Thus, the FEMA Regulations did not bar the petitioner's claim.5. Allegations of Commercial Insolvency and Inability to Pay Debts:The petitioner alleged that the respondent was commercially insolvent and unable to pay its debts, as evidenced by its failure to redeem the bonds and its application for debt restructuring. The respondent admitted to facing liquidity issues but argued that it was a viable entity with substantial business operations and assets. The court found that the respondent's inability to pay the bondholders the maturity amount or any part thereof indicated commercial insolvency.6. Validity and Enforceability of the Trust Deed and Bond Terms:The court examined the trust deed and bond terms, finding that the petitioner had the authority to act as a trustee and enforce the terms of the bonds. The trust deed included clauses that allowed the trustee to determine events of default and take necessary actions, including filing a winding-up petition. The respondent's argument that the petitioner lacked authority was rejected based on the clear stipulations in the trust deed.7. Discrimination and Fairness in the CDR Scheme:The petitioner argued that the CDR scheme was discriminatory and did not treat bondholders equally with other creditors. The court noted that the petitioner and bondholders were not bound by the CDR scheme and had not been adequately involved in its formulation. The respondent's failure to secure the petitioner's consent for the CDR scheme and the lack of transparency in its implementation supported the petitioner's claims of discrimination.Conclusion:The court admitted the winding-up petition, finding that the petitioner had the authority to file it as a trustee, the respondent was commercially insolvent, and the CDR scheme did not provide a feasible solution for the petitioner's claims. The court directed that the petition be advertised and allowed the petitioner to apply for the appointment of a provisional liquidator.