TaxTMI 
TaxTMI 
2002 (3) TMI 829
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Court would like to state at the outset how the Court 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 noteholders quarterly interest till maturity of the notes in the year 2005. However, since Essar di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 memorandum is published and circulated to potential investors (i.e., potential noteholders). The offering memorandum w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 appearance on a register maintained by the Deposit Trust Company ('DTC'), a New York corporation, and on a predetermined date (the "reco....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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, if noteholder A and noteholder B both hold an account with the custodian Barings, they can trade notes without there being any change....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 petitioners acquired these notes 6.1 Essar had issued notes in July, 1994, which matured on 15-7-1999 ("old notes"). It had executed a trust deed wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 representative of the financial advisor as proxy to act for it at the meeting in which the extraordinary resolution was considered and irrevocably direct such representative to vote in favour of the extraordinary resolution at the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 with the first payment due on 31-10-2000, and thereafter every three months. Pursuant to the aforesaid terms of the new notes and the exchange offer, Essar paid the interest as accrued on 31-1-2001, on the principal amount in respect of the Series ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....illion 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 and that it is just and equitable that the respondent-company be compulsorily wound-up. 8. Pleadings after Notice 8.1 In response to the notice issued by this Court, the respondent has filed affidavit in reply dated 26-12-2001, raising a preliminary objection about maintainability of the petitions on various grounds including....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eel 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 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. Preliminary contention No. 1 - The petitioners are not noteholders. 11.1 It is vehemently submitted by Mr. Sundaram that the petitioners themselves have come out with a case in the petitions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 annexure I (page 314 of the paper book). However, all that the respondent-company has stated in the reply to para 11 of the petition is that the contents thereof are a mere explanation of the concept of floating rate notes and, therefore, deserve no comments from the respondent-company. This means that the respondent-company has not disputed the explanation given by the petitioners about the concept of floating rate notes which itself contemplates that a global note is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 have right to get the interest on the principal on the due date and the holding of such persons is in dematerialized form. Hence, in the case of a global note, there is no such register containing the names of noteholders, unlike the register of noteholders in the case of individual definitive notes. 13. Having heard the learned counsel for the parties, it appears to the Court that there is no substance in the contention urged on behalf of the respondent-company that the petiti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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 portion of the global note. BIL is an account holder with Clearstream which gets its portion of the note and the petitioners have an account with BIL. The certificate dated 3-5-2001 (page 314), issued by Clearstream reads as under : "Certificate of Deposit in Clearstream Banking 011791662 USD FLR Essar Steel Ltd. (A) (Regs) 00-2005 USY 2297LAA27. Series A Notes 011791972 USD FLR Essar Steel Ltd. (B) (Regs) 00-2005 USY2297LABOO Series B Notes Dear Madam....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 with a properly completed and validly executed letter of election (or a facsimile thereof) or ATOP election, and any other required documents. Tenders of old notes pursuant to any of the procedures described above and acceptance thereof by the company will constitute a binding agreement between the company and the tendering and consenting noteholder of such old notes, upon the terms and subject to the conditions of this exchange offer and consent solicitatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any 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 as contemplated by the Companies Act read with the Securities Contracts (Regulation) Act, 1956. 18. It was submitted by Mr. Chagla for the respondent-company that section 439 provides as to who can present a petition for winding up. The petitioners claim to be the holders of debentures referred to in sub-section (2) of section 439. Section 2(12) defines 'debenture' as under: "(12) 'debenture' includes debenture stock, bonds and any other securities of a co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (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 'debenture' as explained in the following decisions : (i) Levy v. Abercorris Slate & Slab Co. [1888] 37 Ch.D. 260; (ii) Laxman Bharmaji v. Emperor [1946] 16 Comp. Cas. 31 (Bom.); (iii) CIT v. Cochin Refineries Ltd. [1983] 142 ITR 441, 446, 447 (Ker.). 20. Having heard the learned counsel for the parties, it appears that while Parliament did incorporate the definition of 'securities' under the SCRA into the Companies Act, one that definition is taken as written with ink and pen in the Companies Act, no furth....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 acknowledgement of a debt, the promise to return it, they may form a series bearing consecutive numbers and all the holders get an equal chance to partake in the annual distribution of prizes out of the net interest realised by the company. There may be a mortgage debenture or a simple debenture which does not create any charge on any of the assets of the company. In Cochin Refineries Ltd.'s case (supra), a Division Bench of the Kerala High Court defined it as under (page 447) : "A debenture is certainly a document which either creates a debt or ackn....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 trust deed and the conditions of the note, it is submitted that only a trustee can give a valid discharge and, therefore, only the trustee is a creditor who can file a winding up petition under section 439(1)(b). In support of the aforesaid contention, strong reliance is placed on the decision of the Apex Court in Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan, Court Receiver [1966] 36 Comp. Cas. 426 , wherein the Supreme Court held that creditor means a person to whom a debt is payable; if the debtor pays him the debt, the debtor must get the full disch....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 prevented debenture holders from suing the company on the ground that they had no privity of contract with the company. Sub-section (2) of section 439 makes the debenture holder a creditor by the very deeming provision contained in sub-section (2). Therefore, there will be no question of examining whether the petitioners will get complete discharge or not. 25.3 Strong reliance is placed on the following decisions in support of the petitioners' submissions : (i) Bachharaj Factories Ltd. v. Hirjee Mills Ltd. [1955] 25 Comp. Cas. 227 (Bom.); (ii) Sholapur Spg. & Wvg. Co. Ltd. In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 the relevant noteholders under the conditions. The trustee will hold the benefit of this convent and the other covenants of the issuer under this trust deed on trust for itself and the noteholders according to their respective interests." [Emphasis supplied] 27. Having heard the learned counsel for the parties, it appears to the court that sub-section (2) of section 439 refers both to the holder of any debenture as well as to the trustee as creditors within the meaning of section 439(1)(b). Parliament intended to enlarge the class of persons who can present a winding up petition. By enacting the provisions of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rovisions 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 had received more assistance from Mr. Buckley in his argument as to the rights of a person under a deed to which he is not a party, than he has given me; but in the absence of any authority I am not prepared to hold that this form of document, this bond, makes the person who holds the bond, or who holds the coupon, a creditor either at law or in equity". [Emphasis supplied] Mr. Buckley's arguments for the petitioners are to be found on page 379 of the report : "If the respondents' contention is right, a bondholder cannot get paid, or sue for his debt, without the instrumentality of the trustees; but it cannot have been th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....& 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 direct covenant between the respondent-company and the noteholders. Still, however, the respondent's argument cannot be accepted for two reasons. In the first place, tenders of old notes (due 1999) pursuant to the procedure prescribed in the exchange offer and the acceptance thereof by the company constituted a binding agreement between the company and the old noteholders upon the terms and subject to the conditions of the exchange offer and consent solicitation. This aspect with the relevant quotation from page 115 of the paper book, has already been pointed out in para 16 of this judgment. Secondly, even if that agreement is to b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndian 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 question and held that in view of the statutory provisions in India, there is statutory assignment of debts in favour of the receiver and, therefore, the question examined under the English law whether the receiver has the right to sue for debts transferred to him by voluntary assignment does not arise. The Apex Court held that whether the assignment is statutory or voluntary, the receiver has a right to sue for the debts and to file a winding up petition. 30.5 Mr. Sundaram also placed strong reliance on the decision of the Apex Court in Howrah Trading Co. Ltd.'s case (supra), which was a case under the Income-tax Act. The controversy there arose in the following co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ehalf 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." In view of the above clause, it makes no difference whether or not the respondent-company knows about the names and debt amounts of individual noteholders like the petitioners because the very nature of the global note does not require such details to be made known to the respondent-company. 31. Another important aspect which is required to be noticed at this stage is that the trustee has invoked clause 9 and declared the event of default on account of the non-payment of interest after 31-1-2001. After the filing of the present winding up petitions, the respondent-company addressed letter dated 5-2-2002, to the trustee making grievance against the petitioners....
X X X X Extracts X X X X
X X X X Extracts X X X X
....standing, 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 of the noteholders in value are prepared to give time to the issuer company for repaying the debt, a small minority of noteholders is not to be permitted to frustrate the negotiations between the notehold-ers as a class on the one hand and the issuer company on the other hand. As stated in the reply affidavit and the additional affidavit dated 19-3- 2002, the petitioners hold only 4 per cent debt of the respondent-com- pany. The respondent-com-pany is negotiating the restructuring process with the lenders (through a steering committee) who fall in three groups (i) Indian public financial institutions like IDBI, ICICI, etc., (ii) Indian banks who have provided the working capit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 winding up petition filing of which is a statutory right of the petitioners as noteholders. Strong reliance has been placed on the decision of the Apex Court in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 97 Comp. Cas. 683^1; wherein it is laid down that any claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect that the company has become commercially insolvent and, therefore, should be wound up. The power of a company court to order winding up of a company is, therefore, entirely different from the power of the civil court to pass a decree for a definite sum of money. 34.3 The learned counsel has relied on the letter dated 19-2-2002, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... : 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 principal amount of, or interest on or to vary the method of calculating the rate of interest on, the notes. This clause further provides as under : "Any extraordinary resolution duly passed shall be binding on all noteholders (whether or not they were present or represented at the meeting at which such resolution was passed). An extraordinary resolution is defined in the trust deed to mean a resolution passed at a duly convened meeting of noteholders by a majority of at least 75 per cent of the votes cast. 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 proceedings for enforcement of the terms of the trust deed and the notes, if so directed by an extraordinary resolution, i.e., at a meeting with a quorum of more than 50 per cent of the noteholders in value, if the resolution is passed by 75 per cent or more of the noteholders in value present at the meeting. Condition 13, however, does not stop there, but it proceeds to state in unmistakable terms as under : "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." 38. Having carefully considered the rival submissions, the Court finds that there is some substance in the objection raised by Mr. Sundaram but i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 taken advantage of by any one of the creditors or the entire body of creditors. Section 439(1)(b) of the Act clearly discloses this principle which says that an application for the winding up of the company shall be by petition presented by any creditor or creditors, including any contingent or prospective creditor or creditors (other provisions are not necessary here). Thus, the act itself recognises the right of any creditor or creditors to invoke the jurisdiction of the court seeking the winding up of a company by a single petition. The effect of a winding up order is brought out by section 447 which says : 'An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 trust deed and the notes, the trustee will have to institute proceedings within a reasonable time, failing which the noteholders themselves will have a right to institute such proceedings. On the other hand, if the terms of the notes are to be varied, at least 75 per cent of the noteholders in value present at the meeting (with a quorum of at least 75 per cent of the noteholders in value outstanding) will have to pass an extraordinary resolution to that effect. The object of the condition is that noteholders having at least 20 per cent principal amount of the notes outstanding as on the relevant date are permitted to institute proceedings for enforcement after giving a reasonable time to the trustee, or noteholder having at least 10 per cent principal amou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ition 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 snag here. While 20 per cent of the noteholders can certainly require the trustee to institute proceedings against the issuer-company for enforcement of the trust deed and the notes, but if the meeting of the noteholders is convened, an extraordinary resolution asking the trustee to institute such proceedings can be passed only by a special majority, i.e., by 75 per cent or more in value of noteholders passing an extraordinary resolution at the meeting where at least the noteholders with a clear majority in value are present at such meeting. This is the combined reading of conditions 12 and 13 of clause 6 in Schedule 1 to the trust deed read with clauses 5 and 18 in Schedule 3 to the trust deed [provisions for meeting of noteholders to the trust deed (pages 193-196)]. In o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l 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 would be a necessary party to such a petition because in the first place the trustee can confirm whether the petitioning creditors-FRN holders have 20 per cent holding as contemplated by condition No. 13 and also the trustee would be in a position to state whether noteholders holding 75 per cent or more in value of the principal amount of the notes outstanding have decided to modify or are in the process of modifying, the maturity date of the notes or the dates on which the interest is payable in respect of the notes or any other decision of special nature as contemplated by condition No. 12 of the terms and conditions of the offer. Conclusions 49. In view of the above discussion, the court comes to the following conclusions : I.( i)Preliminary contention No. 1 is overrule....