TaxTMI 
TaxTMI 
2014 (4) TMI 766
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....nolex's purchases are also on credit, often for up to as much as year from the supply date. The raw material price is pegged (in US dollars) at the time the order is placed. Since Finolex makes actual payment at a later date, the rupee amount it uses in payment depends on the USD/INR exchange rates. At the same time, Finolex's domestic sale prices do not fluctuate in tandem with currency exchange rate differentials. This requires Finolex to hedge or otherwise protect itself against foreign currency fluctuation risks. 3. That Finolex's transactional volumes are very high is undisputed. Finolex is a public limited listed company. Its shares trade on both the Bombay Stock Exchange and the National Stock Exchange. It has a market capitalization of just under Rs.1000 crores. It is the largest manufacturer of PVC pipes in India, and the second largest manufacturer of PVC resin. In 2011, it had over 170,000 share holders, a turnover of Rs.1,650 crores, a net profit of Rs.132 crores and a gross block of Rs.1600 crores. With over 1000 employees, it had (in 2011) reserves of over Rs.450 crores, fixed assets worth over Rs.1500 crores, a net worth of nearly Rs.600 crores and book value fixed ....
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....the contract's maturity. 6. Mr. DeVitre, learned senior counsel for Finolex, disputes this formulation of the case. He raises several defences, including that this is a wagering contract, and hence illegal, and that it is contrary to statutory and regulatory requirements and so on, defences that are not, he says, yet decided, though Mr. Tulzapurkar says otherwise. More fundamentally, on facts, he questions whether the present transaction did or did not get knocked out and when. He points to the fact that, admittedly, the Japanese Yen did cross the barrier level mark specified in this particular transaction. That is not in dispute. What Deutsche Bank says is that the barrier event occurred before the contract was executed; the time of execution, and the reason it was executed at that time and not earlier are matters that on Deutsche Bank's own showing are dependent on it proving certain 'oral instructions' it claims to have received from Finolex, and which Finolex denies. The entire edifice of Deutsche Bank's claim is built on, and only on this; viz., that it is accepted by both parties that there were oral instructions from Finolex to Deutsche Bank to execute the transaction only ....
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....f a better phrase - the deceptive tang and exotic fruitiness (Mr. DeVitre says "toxicity") of the two later offerings. 9. In mid-2007, Finolex apprehended that the Indian rupee would significantly weaken against the US dollar. It needed to limit its exposure to a foreign currency exchange rate differential. According to Finolex, Deutsche Bank predicted a strengthening dollar. It invited Finolex to enter into a "USD/JPY target profit forward transaction", a cross-currency swap in dollars and Japanese Yen. A term sheet was signed on 6th August 2007. The trade date was 6th August 2007, and the 'deal' had a life of two years, till 5th August 2009. The deal envisaged something called a 'strike rate' for the Japanese Yen and specified different strike rates over a time spread of the first four weeks, the next five weeks and so on, over a 104-week horizon. The transaction would end or get knocked out if one of two events occurred: the target profit of 9900 FX points was achieved or if the USD/JPY rate crossed 1:118.70 (one US Dollar to 118.70 Japanese Yen) at any time from the trade date. 10. This deal got 'knocked out' or terminated the very next day, 7th August 2007 even before formal....
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....e. Finolex claims that the barrier event, the Japanese Yen's spot rate, occurred on that very day: it traded over 119.30 on 9th August 2007, and the second deal thus got knocked out on the very date of the contract. This, Finolex says, was a matter that was actively kept from it by Deutsche Bank. Finolex did not track the movement of Yen, but relied on Deutsche Bank to inform it, as it was obliged to do, and as it had done in the past. On 24th August 2007, Deutsche Bank sent Finolex confirmation documents, which Finolex says it signed in good faith. Not only did Deutsche Bank not inform Finolex of the first-day-knock-out, it allowed Finolex to twice restructure the deal by lowering the knock-out levels, and this required Finolex to pay two tranches of nearly Rs.7 crores. 15. Finolex claims that it was not till June or July 2009 that it realized the 'true' nature of the 9th August 2007 transaction. On 30th July 2009, it brought suit in the court of the Civil Judge, Senior Division, Pune inter alia seeking a refund of all amounts it had paid till then under that transaction and impeaching the entire transaction. A month later, on 24th August 2009, Deutsche Bank filed an Original App....
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....tructuring to RBI was of 16th April 2009. That means that for three years, not a short time by any measure, Finolex had no complaint whatever about the second deal, the transaction that is the subject matter of this petition. It is only after RBI refused permission that Finolex for the first time, on 17th June 2009, barely two months before the maturity of the second (and twice restructured) transaction questioned the nature of the product, Deutsche Bank's conduct and how Finolex's liability arose. Deutsche Bank replied to Finolex on 29th June 2009 stating its position, and it was only then that Finolex launched its Regular Civil Suit No. 1240 of 2009 on 30th July 2009 assailing the entire transaction. 18. Finolex's submission that the second transaction was knocked out before it even began is entirely without substance, according to Mr. Tulzapurkar. The transaction was entered into after 4:30 pm on 9th August 2007. The Japanese Yen never crossed the barrier event mark at any time after that day, though it did so earlier that day, before the parties entered into the transaction. What Finolex posits, Mr. Tulzapurkar says, is some sort of anticipatory knock-out, and this is based on....
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....compromised. 22. Mr. Tulzapurkar also relies on the decision of another learned single Judge of this Court in ICICI Bank Ltd v Sundaram Multi Pap Ltd., [2010] 153 Com Cas 424 (Bom) where, in relation to transactions similar to the ones in question in this petition, the submissions that the transactions were void and illegal were repelled. 23. The elaborate discussion in ICICI Bank Ltd v Emcure Pharmaceuticals Ltd. Company Petition No.431 of 2010, decided on 9th December 2011, per S.C. Dharmadhikari, J. by a learned single Judge of this Court addresses a wide range of issues in a matter that, prima-facie, is very close to the one at hand. S.C. Dharmadhikari, J. noted and repelled the arguments on illegality and fraud6 holding that in a winding up petition, there is no question of the court investigating allegations of fraud. If there is one, it is for the company to establish in civil proceedings with proper pleadings and proof. "It is too late in the day for the respondent to urge that there were no underlying transactions which expose them to risks of foreign currency and, therefore, to hedge such risks that the derivatives were undertaken," said the Emcure court; and this is one ....
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....reached the barrier event the very next day, and Deutsche Bank paid Finolex about Rs.1.2 crores. The documents for both transactions were executed only after 9th August 2007, the date of the second transaction. One of Deutsche Bank's contractual obligations, Mr. DeVitre says, was to inform Finolex in writing if the barrier event was breached on any date, including the trade date. If it is shown that Deutsche Bank did not so inform Finolex, and also shown that the barrier event was breached, then two consequences must follow: the deal is knocked out, and Finolex has no liability to Deutsche Bank. 27. Much of Mr. DeVitre's argument centres around the Term Sheet signed on 9th August 2007. Before I consider that document, I should, perhaps, outline the nature of the transaction as I understand it. This is an extremely evolved derivative product, a variant on an over-the-counter (OTC) cross currency swap. In a normal, or standard, cross currency swap, the parties exchange equal principal amounts (this principal exchange is notional). At a defined maturity, these notional principals are swapped in the two currencies. The 'target profit forward' deals operate differently. Here, there is ....
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....er is achieved; or (2) the USD/JPY trades at or above 118.70 at any time from the trade date. (h) There is then a provision called the "USDJPY_Fix", and it reads thus: The bid side of the USD/JPY foreign exchange rate, expressed as JPY per USD 1.00, as determined by the Calculation Agent with reference to Reuters page TKFE at 3:00 pm Tokyo time on each Fixing Date. If the rate is not available, it will be determined by the Calculation Agent acting in good faith and in a commercially reasonable manner. 29. Mr. DeVitre then draws attention to the confirmation sheet for the 9th August 2007 transaction at Exhibit "F" to the petition. But for the knock-out or barrier rate and the dates, the terms are otherwise materially the same. Here the knock-out level was JPY 119.30 per USD at 3:00 pm Tokyo time (as opposed to JPY 118.70 per USD in the previous 6th August 2007 transaction). The "Calculation Agent" is defined to be Deutsche Bank, and "Party B" is Finolex. Clause 5 of the Confirmation Sheet specifies the Knock Out Provisions: 5. Knock Out Provisions: (i) If the Spot Rate is, on any Fixing Date, from and including the Trade Date to and including 06 August 2009 greater than or equa....
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....ust 2007 Transaction being commercial transaction involving international currencies (USD and JPY) was entered into and had come into effect at a specific time. The 9th August 2007 Transaction was never knocked out from and after the 9th August 2007 was entered into on 9th August 2007, as subsequent to the entering of the 9th August 2007 Transaction and till the expiry date of the 9th August 2007, i.e., 6th August 2009, the Barrier Event (being JPY to USD reaching 119.30) stipulated in the Confirmation for the 9th August Transaction was never reached/touched. The Petitioner states that under the 5th August 2007 Transaction the Petitioner had intimated the Company on the occurrence of the Barrier Event and the Petitioner has paid INR 12,114,000/- (Indian Rupees Twelve Million One Hundred and Fourteen Thousand Only) to the Company and the Company has received the sum of Rs. 12,114.000/- (Indian Rupees Twelve Million One Hundred and Fourteen Thousand Only). Hence, the Petitioner has never withheld any information nor has been without disclosing the occurrence of any barrier event to the Company. Even in respect of the 9th August Transaction and confirmed by Confirmation for the 9th Au....
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....e is also no explanation for this, nor an explanation as to how the Yen could have crossed the entry-level mark at 4:30 pm IST (about 8:00 pm Tokyo time), given that the transaction is linked to a Tokyobased reporting index and the spot rate for every Fixing Date is pegged to 3:00 pm Tokyo time. There is, thus, an inherent contradiction in paragraph 8(aa) of the petition. 35. All of this, of course, hinges on the oral instructions Deutsche Bank claims to have received from Finolex. This is a position Deutsche Bank maintains even in subsequent correspondence (for instance, its advocates' letter dated 11th February 2011 to Finolex's advocates, Exhibit "C" to the affidavit in reply). 36. Mr. DeVitre is, I believe, correct in pointing out that there is a major dispute about a fundamental issue: is it the trade time or the trade date that is material? Clause 5(i) of the Confirmation Sheet of 24th August 2007, the Knock Out Provision, speaks of a "Fixing Date from and including the Trade Date. The Term Sheet, however, that preceded the Confirmation Sheet by several days, speaks of a termination condition "from the Trade Date." Mr. Tulzapurkar's argument that the trade date cannot inclu....
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....on the trade date itself. The Respondent has obtained the record available on the official website of the Bank of Japan from which it is apparent that the Japanese Yen traded over and above the knock out rate as agreed under the terms sheet dated August 9, 2007. The Respondent thus says that the transaction had got knocked out on the trade date itself and the Petitioner had illegally and fraudulently induced the Respondent from entering into two re-structured deals and had thereby fraudulently induced the Respondent to pay a sum of Rs.13,48,67,600/- in two tranches of Rs.6,75,34,800/and Rs.6,73,32,800/- dated 25th March, 2008 and 14th May, 2008, respectively." 39. A portion of paragraph 4 of the affidavit in reply says: "Despite the aforesaid request by the letter dated January 20, 2011, the Advocates for the Petitioner have not fixed a mutually convenient date and time to grant inspection of the documents referred to and relied upon by the Petitioner and instead addressed letter dated 11 February, 2011 alleging oral instructions etc as evident therefrom." 40. These alleged oral instructions are disputed. Perhaps by necessary implication but nonetheless effectively the assertion....
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....nal Application before the Debt Recovery Tribunal, there is evidentiary material of this telephone conversations and emails and, in particular, of Finolex specifying an entry point, and if the Term Sheet or Confirmation Sheet are supposed to affirm or confirm these, then one might reasonably expect to see these specifics properly reflected in the signed documentation: an endorsement, perhaps, of the specified entry level, or a confirmation that the document was not to be executed till a certain event happened. There is simply no such evidence. 43. What Deutsche Bank seeks is, I think, a mechanism by which it can altogether circumvent the discharge of its probative burden before the Debt Recovery Tribunal. There, given its pleadings, it will need to prove all its many averments and statements and disclose the documents on which it has placed reliance. Here, in the Company Petition, it excludes all mention of these particulars - not just "oral instructions" but telephone conversations and emails - and seeks, instead, to rely only on a forensic argument as to the quality of the pleadings. The consequences are grave. If Deutsche Bank fails to establish two crucial facts, viz., that th....
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....st 2007 did the parties enter into the contract? What was the rate of the Japanese Yen to the US Dollar at that time? How did the Japanese Yen move against the US Dollar through that day? When did it strike the so-called entry level of ¥118.55? Who at Finolex informed whom at Deutsche Bank to wait for the USD/JPY rate to reach this level, and when? What reason was given for this request? What could be the possible explanation? Why is this very specific instruction not noted in the term sheet or the confirmation sheet? At the very least, it ought to have been noted on the former, for that was executed on 9th August 2007 itself. When was the time of 4:30 pm fixed for execution and by whom, given that it was, presumably, possible to enter into this transaction at any time after 11:30 am (3:00 pm Tokyo time), the relevant contractually specified time? 45. None of these questions can be answered in this petition. Every one of them demands evidence. These questions on their own cannot be said to be an insubstantial defence or a dispute, nor one that is purely sham, illusory or speculative. The Company Court cannot hold a trial. It can only decide whether there are grounds of substan....
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....ut of hand, these are factors that must weigh with a court of equity. They cannot be ignored altogether, as Mr. Tulzapurkar would have me do. Where, independently of a reference to a company's finances, it is found that there is a genuine dispute, and where the defence is not merely that the company is able to pay, the commercial solvency of the company is certainly a material circumstance to be considered. 48. I must, in conclusion, return to this Court's decision in Viral Filaments. There is no equivalence between a proceeding in the Debt Recovery Tribunal under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 and a winding up petition under Sections 433 and 434 of the Companies Act, 1956. This does not and cannot mean that a company court, in exercise of its equitable jurisdiction, must, only because of the pendency of a proceeding in the other forum, proceed on the a priori assumption that the debt claimed is undisputed. Viral Filaments relies on the Supreme Court decision in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.: [1999] 97 Comp Cas 683 (SC) : (1999) 5 SCC 688 The claim in a petition for winding up is not for money. The petition filed ....