Administrator of the Specified Undertaking of the Unit Trust of India v. Garware Polyster Ltd, (SC) BS82962
SUPREME COURT OF INDIA

Before:- B.P. Singh and S.B. Sinha, JJ.

Civil Appeal No. 3196 of 2005 arising out of SLP (civil) No. 20174. D/d. 9.5.2005.

Administrator of the Specified Undertaking of the Unit Trust of India - Appellant

Versus

Garware Polyster Ltd. - Respondent

For the Appellants :- Dr. Rajeev Dhawan, Sr. Advocate, Ms. Shubhr Kapur and Sanjay Kapur, Advocates.

For the Respondent :- Soli J, Sorabjee, Sr. Advocate, Bhargava v. Desai, Nikhil Sakhardande and Sanjeev Kr. Singh, Advocates.

A. Companies Act, 1956, Sections 391 and 393 - Company - Compromise - Losses suffered by company - Debenture holder and company arrived at compromise - Restructuring scheme formulated to clear liabilities - Consent of debenture holder not necessary for filing compromises by company and creditor holder - Company filed application under section 391 - Single debenture holder cannot oppose application by using veto or claim preference for realisation of due over other debenture holders.

[Paras 31 to 38]

B. Commercial document - Construction of - Commercial documents must be construed in a manner as are under stood in commercial parlance - A commercial document must be read reasonably - It must be construed in such a manner so that it is made workable.

[Para 29]

Cases Referred :-

Andhra Bank v. Official Liquidator, 2005 CLC 531 : 2005 (3) Scale 178.

Sardar Amarjit Singh Kalra v. Pramod Gupta (Smt), (2003) 3 SCC 272.

Nutan Kumar v. IInd Additional District Judge, 2002 All LJ 2516 : (2002) 8 SCC 31.

Re. Hawk Insurance Co. Ltd., (2001) 2 BCLC 480.

Delta International Ld. v. Shyam Sundar Ganeriwalla, (1999) 4 SCC 545.

Kempe v. Ambassador Insurance Co., (1998)1 BCLC 234.

National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co., (1997) 4 SCC 366.

Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997)1 SCC 579.

Food Corporation of India v. New India Assurance Co. Ltd., (1994) 3 SCC 324.

A. B. C. Laminart Pvt. Ltd. v. A. P. Agencies, Salem, (1989) 2 SCC 163.

Smt. Rajbir Kaur v. S. Chokesiri and Co., (1989) 1 SCC 19.

Nanakram v. Kundalrai, (1986) 3 SCC 83.

M. G. Brothers Lorry Service v. Prasad Textiles, (1983) 3 SCC 61.

Moti Ram v. State of Madh. Pra., 1978 Cri LJ 1703.

Delhi Development Authority v. Durga Chand Kaushish, (1973) 2 SCC 825.

Lachoo Mal v. Radhey Shyam, (1971) 1 SCC 619.

J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd., (1969) 2 SCR 866.

Massachusetts B 4 and Insurance Co. v. United States, (1956) 352 US 128 : 1 Law Ed 2d 189.

JUDGMENT

S.B. Sinha, J. - Leave granted.

2. The Respondent herein is a company registered under the Companies Act, 1956, and engaged in the manufacture of polyester film; 50% of which production used to be exported to United States of America, United Kingdom, Europe, Far East, Middle East, Japan, New Zealand etc. Having regard to the adoption of liberalization policy by the Government of India, the Company intended to become globally competitive and went for a massive expansion in the year 1996. The scheme of the said expansion was financed by obtaining term loans and issuance of debentures by various financial institutions including the Appellant No.2 herein. For various reasons, including imposition of European Union Levelled Anti Dumping Duties, the Respondent suffered a cumulative loss of Rs. 228.58 crores by March 2001. In the said circumstance, the Respondent approached the Industrial Development Bank of India with a request for a restructuring package to clear its liabilities. A restructuring proposal was mooted; wherefor two meetings were held in March 2001 and October 2001 wherein the Unit Trust of India (UTI) participated. All the debenture holders upon due deliberations agreed to the said proposal of restructuring package except the Appellants herein. It is not in dispute that pursuant to or in furtherance of the said restructuring package, the Respondent herein paid a sum of Rs. 64.44 crores to various financial institutions between the period 1-10-2001 and 15-1-2003 in the following terms :

Sr.No. Institution Principal in (Rs. Crores) Deferred Interest Total
1. IDBI 15.5% PPD 99.50 43.70 143.20
2. IDBI 16% NCD 2.18 0.87 3.05
3. ICICI ZCD 6.00 1.95 7.95
4. UTI 16% NCD 9.80 3.92 13.72
5. UTI 18.5% PPS 4.00 1.85 5.85
6. LIC 18.5% PPD 10.00 3.41 13.41
7. GIC 18.5% PPD 1.75 0.81 2.56
8. NEW INDIA 18.5% PPD 1.75 0.81 2.56
9. NATIONAL 18.5% PPD 1.05 0.49 1.54
10. OIC 18.5% PPD 1.05 0.49 1.54
11. UTI 18.5% PPD 1.40 0.65 2.05
Total 197.43

3. On or about 19-6-1997, a Common Subscription Agreement was entered into by and between the Respondent and the debenture-holders; the relevant clauses whereof are as under :

Name of Debenture holders Letter No. and Date Amount in lacs
UTI DOI/2945/G-76/96-97 400
23.4.97
LIC INV:C:KAJ 1000
Dated 21-4-97
GIC INV./97 Dated 23-5-97 175
NIC INVT/UW/DEBS 105
Dated 30-5-97
NIA INV/PM/BUD/72/96 175
Dated 10-6-97
OIC DEPTT. 105
INVESTMENT Dated 30-5-97
UTI HQ:INV:262:97 Dated 140
30-5-97
Total 2100

Rs. in lace at the end

Name of Debenture Holders

4th year from the

5th year date of

6th year allotment

UTI

133.33

133.33

133.34

LIC

333.33

333.33

333.34

GIC

58.33

58.33

58.34

NIC

35.00

35.00

35.00

NIA

58.33

58.33

58.34

OIC

35.00

35.00

35.00

UTI

46.66

46.67

46.67

Total

699.98

699.99

700.03

4. In terms of the Common Subscription Agreement on or about 17-9-1997, a Debenture Trust Deed was created, the relevant clauses whereof are as under :

5. Encumbrances having admittedly been created in favour of the debenture holders including the Appellant No. 2 herein, in respect of the properties of the Respondent herein situated at Chikalthana, Nasik and Waluj in the State of Maharashtra wherefor a legal mortgage by way of Debenture Trust Deed was created on the Debenture Certificate issued to the parties as contained in Annexure R-4 appended to the Counter-Affidavit filed on behalf of the Respondent, the relevant provisions whereof read as under :

6. It is accepted that the total sums invested by the financial institutions in the aforementioned debentures is to the tune of Rs. 197.43 crores whereas UTI invested a sum of Rs. 19.57 crores i.e. only about 10% of the total investment.

7. The Respondent herein having regard to the aforementioned restructuring scheme filed an application before the High Court of Judicature at Bombay in terms of Section 391 of the Companies Act which was marked as Company Petition No. 269 of 2003. In the said proceedings except UTI, all other debenture-holders sanctioned the restructuring package.

8. Before the learned Company Judge, the Appellants herein, inter alia, contended : (1) having regard to clause 7.5 of the agreement, the Respondent is totally precluded from filing the said application before the court without its consent; (2) the Respondent had suppressed material facts in the sense that disclosure to the effect that the Respondent-Company was granted relief under the Bombay Relief Undertakings Act, 1958 had not been made to the said court; (3) the proposed scheme of arrangement is unfair, unreasonable and unjust which no prudent businessman will accept; and (4) UTI being an investment company forms a separate class by itself and, thus, cannot be compared with other financial institutions, as they are only lenders whereas UTI is an investing agency.

9. The learned Company Judge rejected all the contentions raised on behalf of the Appellants herein in terms of its judgment and order dated 1-10-2003. Aggrieved by and dissatisfied therewith, an appeal was preferred by the Appellants herein, which was dismissed by a Division Bench of the said Court by reason of the impugned order dated 12-4-2004.

10. Dr. Rajeev Dhawan, the learned Senior Counsel appearing on behalf of the Appellants, took us through various documents and principally raised the following two contentions in support of this appeal : (i) Clause 7.5 of the agreement having not been found unfair or unconscionable is not hit by Section 28 of the Indian Contract Act, and (ii) The negative covenant as contained in clause 7.5 of the agreement in relation to the matters specified therein is imperative in nature.

11. Dr. Dhawan would urge that clause 7.5 being a consent clause, the Respondent herein could not have taken any action in violation thereof as thereby the entire investment plan of the Appellants would be put to jeopardy.

12. Our attention was drawn to the fact that the Respondent herein obtained moratorium in terms of the provisions of the Bombay Relief Undertakings (Special Provisions) Act, 1958 on 6-8-2001 whereupon a notification was issued declaring the Respondent Company as "Relief Undertaking" and thereby directing that any right, privilege, obligation or liability accrued before 6-8-2001 would be suspended and any remedy for enforcement thereof shall also be suspended and all proceedings relating thereto before any court, tribunal, officer or authority shall be stayed. Such moratorium was extended by notifications dated 6-2-2002, 5-2-2003; and February 2004 for a period of one year commencing from 6-2-2004 to 5-2-2005.

13. Referring to Section 28 of the Indian Contract Act, Dr. Dhawan would submit that the said provisions must be read in the light of the definition of 'consideration' as contained in Section 2(d) thereof having regard to the fact that the negative covenants are included as a part of consideration therein and, thereby no absolute bar was created for enforcing the rights of the Respondent under or in respect of the agreement in any ordinary tribunal. The Respondent, Dr. Dhawan would argue, had no legal right to maintain an application under Section 391 of the Companies Act as it was not an ordinary Tribunal. A Company Judge, according to Dr. Dhawan, merely exercises a supervisory jurisdiction in terms of Section 391 of the Companies Act and keeping in view the fact that by reason of a negative covenant even a right can be extinguished or foreclosed, the High Court committed a serious error in holding that clause 7.5 would be hit by Section 28 of the Indian Contract Act. In support of the said contentions, strong reliance has been placed by Dr. Dhawan on M/s. M.G. Brothers Lorry Service v. M/s. Prasad Textiles [(1983) 3 SCC 61]; A.B.C. Laminart Pvt. Ltd. and another v. A.P. Agencies, Salem [(1989) 2 SCC 163]; Food Corporation of India v. New India Assurance Co. Ltd. and Others etc. [(1994) 3 SCC 324]; National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. and another [(1997) 4 SCC 366]; Nutan Kumar and others v. IInd Additional District Judge and others (2002) 8 SCC 31]; Shri Lachoo Mal v. Shri Radhey Shyam [(1971) 1 SCC 619]; Miheer H. Mafatlal v. Mafatlal Industries Ltd. [(1997) 1 SCC 579]; Kempe and another (Joint Liquidators of Mentor Insurance Ltd. v. Ambassador Insurance Co. (in Liquidation [1998) 1 BCLC 234]; and Re Hawk Insurance Co. Ltd. [(2001) 2 BCLC 480].

14. The learned counsel would contend that the Appellants herein stand absolutely on a different footing vis-a-vis the other creditors as they invest money on a long term basis whereas the Appellants make investment for the benefit of the members of the mutual fund.

15. Mr. Soli J. Sorabjee, the learned Senior Counsel appearing on behalf of the Respondent, on the other hand, would submit that the agreement dated 19-6-1997 must be read with the trust of deed dated 17-9-1997 and so read it would be seen that the Appellants herein did not have any power of veto so as to frustrate such a scheme which is beneficial to all the debenture-holders. According to the learned counsel, clause 7.5 does not confer an absolute or unbriddled power upon all the debenture-holders but the same having regard to the principle of corporate democracy would only mean that such a decision would be taken by the majority of debenture-holders. As the Appellants herein, the learned counsel would argue, made contribution only to the extent of 10% of the total amount lent by the debenture-holders and their right being pari passu with other debenture-holders, they cannot claim a preferential right. If clause 7.5 of the agreement is read in the manner, as suggested by the Appellants herein, Mr. Sorabjee would urge that thereby words have to be added thereto which is impermissible in law as by reason thereof one debenture-holder would be conferred a power of veto resulting whereof not only in violation of the principle of corporate democracy would be violated, but a change in the integrity of the document would also be brought about.

16. Section 28 of the Indian Contract Act was invoked by the Respondent before the High Court, it was contended, only because the Appellants herein raised a contention that by reason of clause 7.5 an absolute bar has been created in moving an application under Section 391 of the Companies Act.

17. For the purpose of this case, we shall proceed on the premise that clause 7.5 of the agreement is valid and is not hit by Section 28 of the Indian Contract Act.

18. A Common Subscription Agreement was entered into by and between the Respondent herein and all the debenture holders. The debenture-holders named therein are collectively referred to by that expression and the expression means the debenture-holders specified therein deriving their title to the debenture. The said agreement was entered into having regard to the fact that the Respondent approached all the debenture-holders for financial assistance for meeting their long term capital requirement in response whereto which debenture holders agreed to advance various sums of monies, in the form of subscription to 18.5%, 21,00,000 non-convertible privately placed debentures of Rs. 100/- each. Out of the total investment of Rs. 21,00,00,000/- made by the debenture holders, the contribution of the Appellant is only Rs. 4,00,00,000/. The Respondent in terms of the said agreement had undertaken to redeem the debentures in three equal instalments from the end of fourth year of the date of allotment and ending in the sixth year.

19. In terms of clause 2.2 all debenture-holders are entitled to be treated pari passu inter se wherefor no preference or priority of one over the other can be given.

20. The Industrial Credit and Investment Corporation Limited became the trustee for the debenture-holders. In the agreement wherever an individual right has been conferred upon the debenture-holders, they have been described as debenture-holder(s) or debenture-holder/s. Debenture certificates were issued to the debenture-holders in terms of the Debentures Trust Deed pursuant whereto they became entitled to the benefits specified therein but they were bound by and were deemed to have notice of all the provisions of the Trust Deed. The rights and remedies of the debenture-holders against the company were to be exercised only through the trustee.

21. Clause 7.5 contains a negative covenant which enjoined the company not to undertake or affect any scheme of amalgamation or re-construction unless the debenture holders/trustees would otherwise agree.

22. Does this mean that all the debenture holders/trustees singularly or collectively must agree thereto that the decision of the majority shall prevail, is the question involved in this appeal.

23. We may at the outset notice that clause 7.8 of the said agreement uses the expression 'any or all of debenture-holders'. The parties to the agreement, therefore, have used two different expressions in the said agreement, namely, (1) debenture-holders/trustees; and (2) any or all of debenture-holders. We have noticed hereinbefore that the debenture-holders have been referred to in the agreement in the said capacity collectively. The definition of debenture-holders contains the expression 'means' which shows that it is not an expansive definition. The category of the debenture holders are confined to those who in terms of the agreement are holders of the debentures deriving their title thereto.

24. In terms of clause 10 of the Trust Deed, the rights, privileges and conditions attached to the debentures may be varied, modified or abrogated only in accordance with the Articles of Association of the Company and the Act and with the consent of the debenture-holders by a special resolution passed at the meeting of the debenture-holders but in terms of the proviso appended thereto nothing in such resolution shall be operative against the company where such resolution modifies or varies the terms and conditions governing the debentures, if the same are not acceptable to the company. The Trust Deed speaks of such resolution also in terms of clauses 22 and 24 thereof. Clause 25 provides that such a resolution may be adopted by circulation of letter or letters. The provisions of the Trust Deed and in particular clauses 22, 23, 24 and 25 thereof leave no manner of doubt that a resolution has to be passed in the manner laid down therein and/or in terms of the Companies Act.

25. The common subscription agreement is an investment/ loan agreement. The provisions contained therein are required to be read in their entirety and for the said purpose it is permissible to read the negative covenants with the positive covenants. It will, however, not be correct to say that the common subscription agreement has to be interpreted on its own without any reference to the trust deed. The provisions of the trust deed, in our opinion, can be referred to for the purpose of giving a true meaning to the agreement, as there does not exist any conflict between the two. They are to be considered together for the purpose of finding out as to how the agreement can be worked out.

26. This Court in this case is not called upon to interpret the nature of a document or the covenants entered into by and between the parties. The agreement specifies the rights and privileges of the parties thereto and in particular the rights and privileges of the debenture-holder either collectively or individually.

27. The underlying or basic thread of the agreement vis-a-vis the trust deed is that the majority principle was accepted by the authorities. They do not provide for an unanimity; or any veto power in favour of one debenture-holder so as to scuttle the decision of the majority.

28. In Moti Ram and others v. State of Madhya Pradesh [AIR 1978 Supreme Court 1594], this Court noticed the observation of Justice Frankfurter in Massachusetts B. and Insurance Co. v. U.S. [(1956) 352 US 128 at 138], which is to the following effect :

29. It is true that a negative covenant by itself is not invalid in law. But it is also true that it requires a strict construction. The agreement is a commercial document. Commercial documents must be construed in a manner as are understood in commercial parlance. A commercial document must be read reasonably. It must be construed in such a manner so that it is made workable.

30. The parties to the agreement are commercial concerns. Each party would indisputably try to protect its interest when advancing loans or making investment but it must also be conceded that they were aware of the risk factor involved therein. The factors which are responsible for sufferance of loss by the Respondent herein to the extent of 228.58 crores was as a result of market situation then prevailing, i.e. steep devaluation of currencies of Korea and Indonesia who were the major suppliers of film in the international market as a result whereof they started dumping the materials at cheap prices in Europe, and the levy of anti-dumping/anti-subsidy duties by the European Union as a result whereof sales to European countries came down drastically.

31. The restructuring package was evolved at the instance of the Industrial Development Bank of India which was the largest lender and the trustee upon obtaining a report in that behalf from KPMG, a reputed concern. A scheme envisaged under Section 391 of the Companies Act, it is well-settled, is a commercial document.

32. Section 391 read with Section 393 of the Act postulate that where a compromise or arrangement is proposed between a company and its creditors or any class of them; or between a company and its members or any class of them, the court is required to direct holding of meetings of creditors or class of creditors or members or class of members who are concerned with such a scheme. In the event majority of the creditors representing three-fourths in value of the creditors or class of creditors or members or class of members, as the case may be, present or voting either in person or by proxy at such a meeting accord their approval thereto thus put to vote, whereupon, the court may consider the question of grant of sanction thereto. Section 391(1)(a) enjoins that requisite information therefor should be placed for consideration before the voters, in terms whereof the creditors or class of creditors can take an informed decision in relation thereto. The court, however, would not grant sanction to such a scheme only because the same reflects the will of the majority of the creditors or a class of them but it must consider all aspects of the matter so as to arrive at a finding that the scheme is fair, just and reasonable and does not contravene public policy or any statutory provision. Such a care or caution is required to be exercised by all courts including the Civil Court in terms of Order 23, Rule 1 of the Code of Civil Procedure.

33. The scope and jurisdiction of the Company Court has been examined at some length by a Division Bench of this Court in Miheer H. Mafatlal (supra) wherein the broad contours of such jurisdiction have been enumerated indicating :

35. It is not the case of the Appellants that the learned Company Judge has exceeded his jurisdiction and acted in violation of the said guidelines. Once it is held that the normal rule, namely, the principle of majority in corporate democracy or in other words, governance of the company by majority, is accepted, the Appellants could not be heard to say that they had an absolute right to exercise veto power and thereby scuttle a bonafide attempt to revive a company. Efforts to keep a company from becoming insolvent and even to revive an insolvent corporate have been receiving legislative and executive support, as would be evident from several Parliamentary Act, as for example the Sick Industrial Companies (Special Provisions) Act, 1985 and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

36. It is difficult for us to agree with the submission of Dr. Dhawan that clause 7.5 puts a total embargo on the part of the company or other creditors to file a compromise under Section 391 of the Companies Act without obtaining the consent of all debenture-holders. Clause 7.5 neither can be read in such a manner nor should be read. Such a construction would be unwarranted having regard to the fact that two different expressions have been used in different clauses. Wherever a right has been conferred upon an individual debenture-holder, the agreement used the expression 'any or all the debenture holders' as contrasted by all debenture-holders. The debenture-holders are required to exercise their right through the trustee save and except in the cases which confer specified power to them. The Appellants herein cannot claim any priority or preference in the matter of realisation of their dues over the other debenture-holders. Each debenture-holders has a pari passu right with each other, as is evident from clause 2.2.

37. In J.K. (Bombay) (P) Ltd. (supra), it was held :

[See also Andhra Bank v. Official Liquidator and Anr., 2005 (3) SCALE 178]

38. In view of the our findings aforementioned, we are of the opinion that the Appellants herein having failed to establish that they could hold the entire scheme to ransom so as to stall the proceedings as a result whereof the majority of debenture-holders would be deprived, the purpose or object motivating the Appellants to advance such a huge amount to the Respondent against issue of debentures is a matter of little or of no concern to the Respondent-company or other debenture-holders. A special or a new right cannot be found in favour of the Appellants in the agreement when it creates none. The scheme applies equally to all debenture-holders and as such the Appellants cannot be treated as a separate class. Once the Respondent-Company prima facie showed that the scheme is fair and reasonable and also that the requisite majority of the debenture-holders recorded their decision in its favour, the court in absence of any unforeseen unjustness or unreasonableness therein ought not to reject the same.

39. The Company Judge by reason of the impugned judgment while exercising a supervisory jurisdiction only accepted the scheme. The High Court's decision is not being questioned as unfair.

40. The Respondent in view of the Scheme has no remedy other than approaching the High Court under Section 391 of the Companies Act.

41. In Sardar Amarjit Singh Kalra (Dead) by L.Rs. and others etc. v. Pramod Gupta (Smt.) (Dead) by L.Rs. and others etc. [(2003) 3 SCC 272], this Court stated :

42. We may at this stage refer to the decisions relied upon by Dr. Dhawan.

43. In the case of Nanakram v. Kundalrai [(1986) 3 SCC 83] as also Nutan Kumar and others v. IInd Additional District Judge and others [(2002) 8 SCC 31] the question which arose for consideration was as to whether a lease in violation of statutory provision was void. Such a question does not arise for consideration herein.

44. In Delhi Development Authority v. Durga Chand Kaushish [(1973) 2 SCC 825], the court was concerned with the interpretation of a deed of lease. It was noticed:

(Emphasis supplied)

45. There is no quarrel with the aforementioned position of law.

46. In Smt. Rajbir Kaur and Another v.. M/s. S. Chokesiri and Co. [(1989) 1 SCC 19], the court was concerned with the interpretation as to whether a document in question was a lease or a licence. The said decision has been rendered on the fact of the said case and on the basis of the evidence brought on records as to whether the tailor and the ice-cream vendors had been put in exclusive possession in the tenanted premises. The said decision has no application to the fact of the present case.

47. Delta International Ltd. v. Shyam Sundar Ganeriwalla and another [(1999) 4 SCC 545] again dealt with a similar question. It was observed :

48. The said decision also has no application in the instant case.

49. In view of our findings aforementioned, it is not necessary for us to enter into the question as to whether clause 7.5 of the agreement is hit by Section 28 of the Indian Contract Act or not.

50. We do not find any merit in this appeal which is dismissed accordingly. However, in the facts and circumstances of the case, there shall be no order as to costs.

Appeal dismissed.