2014 (4) TMI 1314 - HC - Companies Law

IT company's CDR scheme approved over winding up proceedings under section 433(e) protecting 3500 jobs

Deutsche Trustee Company Ltd. Versus Tulip Telecom Ltd.

The Delhi HC refused to stay a CDR scheme for an IT infrastructure company facing winding up proceedings under section 433(e) of the Companies Act. The ... Seeking winding up of TTL on the ground of inability to pay its debts - whether there is any justification for staying the CDR Scheme, which is yet to be given effect to pursuant to the undertaking given to this court on behalf of TTL on 16-9-2013? - section 433(e) of the Companies Act - HELD THAT:- The implementation of the CDR scheme cannot be stayed. That will not be in the interests of the company or the various stake holders; nor would it be in the interest of the bondholders. It is strongly contended that the argument that the success of the CDR scheme would be beneficial to the petitioner and therefore the petitioner should not try to block it is unacceptable because the CDR scheme, even if it is implemented, appears to be only for the benefit of the secured creditors. But what this contention overlooks is that the bondholders are unsecured creditors, whereas the CDR lenders are all secured creditors. The bondholders will not be justified in claiming that the company should be willy-nilly wound up just because their dues have not been paid, even when steps for revival of the company are afoot. It is in this context necessary to recapitulate that it is the duty of the Company Court to welcome revival rather than affirm the death of the company. The respondent-company is an IT infrastructure company providing core infrastructure and essential services. It employs about 3500 workmen on whom some 20,000 lives are dependent. Staying the CDR scheme at this juncture would practicably amount to winding up of the company which step has to be taken only as a last resort. The legislative thinking on this aspect can also be gleaned from the provisions of the Companies Act, 2013 which is yet to come in force fully, though many of its provisions have been notified. Section 253 of that Act provides that the Company or 50% in value of its secured creditors may file an application before the Company Law Tribunal for a determination that the company be declared sick and for stay of the winding up proceedings to facilitate revival. Section 256 provides for appointment of an interim administrator to consider whether it is possible to revive and rehabilitate a sick company on the basis of the draft scheme, if any, filed along with the application for revival and rehabilitation filed under section 254(1) by a secured creditor or the company itself. Thus the legislative thinking also appears to be to revive and rehabilitate the company if possible and save it from liquidation. This is legislative recognition of the judicial decisions. There will be no stay of the CDR scheme and the company is at liberty to implement the same forthwith. The undertaking given to this Court on 16.09.2013 stands discharged - though there can be a pooling of the securities, any sale of a pooled security shall be subject to the orders passed by this Court and prior approval of such sale shall be taken from this Court. Application disposed off. Issues Involved:1. Non-redemption of Foreign Currency Convertible Bonds (FCCBs) by the respondent-company.2. The filing of a winding-up petition due to the company's inability to pay its debts.3. The implementation of a Corporate Debt Restructuring (CDR) Scheme.4. Concerns regarding the pooling of securities and induction of further security within the CDR scheme.5. The interests and rights of unsecured creditors, particularly bondholders, in the context of the CDR scheme.6. The discretionary power of the Company Court in admitting winding-up petitions and staying the CDR scheme.Detailed Analysis:1. Non-redemption of FCCBs:The respondent-company, TTL, issued FCCBs amounting to USD 150 million, which were to be redeemed at 144.56% of the principal amount on maturity. However, on the maturity date, TTL failed to redeem USD 97 million worth of bonds. Despite assurances to stock exchanges and a statutory demand notice sent by the petitioner, TTL did not fulfill its redemption obligations, leading to the filing of a winding-up petition.2. Filing of Winding-up Petition:The petitioner filed a winding-up petition under Section 433(e) of the Companies Act, 1956, on the grounds of TTL's inability to pay its debts. The petition was accompanied by an application to restrain TTL from modifying any security interest granted to CDR lenders. The petition also sought to address the non-payment issue and aimed to protect the bondholders' interests.3. Implementation of CDR Scheme:TTL obtained approval for a CDR Scheme, which was challenged by the petitioner. The petitioner argued that the CDR scheme favored secured creditors and could potentially deplete assets available for unsecured creditors like bondholders. The petitioner sought a stay on the CDR scheme, emphasizing that it was not a statutory scheme and did not bind unsecured creditors.4. Concerns Regarding Pooling of Securities and Induction of Further Security:The petitioner raised significant concerns about the CDR scheme's provision for pooling securities and inducting further security in the form of shares from Tulip Data Centre Pvt. Ltd., a wholly-owned subsidiary of TTL. The petitioner argued that this could diminish the asset base available to meet the bondholders' claims. The respondent countered that the pooling arrangement did not prejudice unsecured creditors and that the value of the shares was not as high as claimed by the petitioner.5. Interests and Rights of Unsecured Creditors:The petitioner, representing unsecured creditors, contended that the CDR scheme did not adequately address their interests. The petitioner objected to the scheme's terms, which seemed to cap the liability towards FCCBs without lawful authority. The petitioner argued that the scheme was biased towards secured creditors and did not consider the rights of unsecured creditors.6. Discretionary Power of the Company Court:The court emphasized its discretionary power in deciding whether to admit a winding-up petition and whether to stay the CDR scheme. The court noted that the CDR scheme aimed at reviving the company and should be given a chance unless there were strong reasons to stay it. The court also highlighted the importance of balancing the interests of all stakeholders, including creditors, workmen, and the public, while considering the company's revival potential.Conclusion:The court decided not to stay the CDR scheme, allowing its implementation to proceed, subject to certain conditions. The court directed that any sale of pooled securities or shares of Tulip Data Centre Pvt. Ltd. would require prior court approval to protect the bondholders' interests. The court underscored the need to prioritize the company's revival over its liquidation, aligning with legislative intent to rehabilitate financially distressed companies.