ADMINISTRATOR OF THE SPECIFIED UNDERTAKING OF THE UNIT TRUST OF INDIA v. GARWARE POLYSTER LTD

Citation: [2005] SUPP. 1 S.C.R. 192

Court: Supreme Court of India

Bench: B.P. SINGH, S.B. SINHA

Case summary

ADMINISTRATOR OF THE SPECIFIED UNDERTAKING OF THE UNIT TRUST OF INDIA v. GARWARE POLYSTER LTD.pdf

Judgment text

ADMINISTRATOR OF THE SPECIFIED UNDERTAKING OF THE UNIT TRUST OF INDIA v. GARWARE POLYSTER LTD. MAY 9, 2005 [B. P. SINGH AND S. B. SINHA, JJ. ] Companies Act, 1956; Ss. 113, 391, 393/Companies (Issue of Share Certificate) Rules, 1960/Bombay Relief Undertakings (Special Provision) Act, 1958/Jndian Contract Act, 1872; Section 28/Code of Civil Procedure, 1908; Order XXJll Rule 1: Company-Loss-Revival-Restructing. package/Scheme-Common Subscription Agreement entered into between a Company and debenture holders-Creation of Debenture Trust Deed-Challenged by one of the debenture holders-appellant-Filing of a Petition by the Compal1)! seeking approval oflhe Scheme-Allowed by the Company Judge-Appeal dismissed I. by the Division Bench of the f!

igh Court-On appeal, Held: Jn terms ofthe Trust Deed, the rights, privileges and conditions attached to the debenture holders could be vqried, modified or abrogated only in accordance with the provisions of law with the consent ofdebenture holders by way ofa special resolution passed-Butresolution shall not be operative.

against the company if its modifies or varies the terms and conditions governing the debentures- • No provision as of Veto Power/unanimity provided for passing a resolution- Principle ofMajority accepted by the authorities-Court could grant sanction to a scheme only when it is satisfied tharthe scheme is fair, just reasonable and does not contravene public policy or al(l~tatutory provision-The scheme ~ applies equally to all the debenture holders and the appellant cannot be treated as a separate class-The purpose and object of advancing a huge investment by the appellant to the company is a matter ofno concern to the company/other debenture ho/aers-The Company primafacie showed that the scheme is fair and reasonable and having approval ofthe requisite majority of the debenture holders-Hence, the Company Judge rightly accepted the scheme-Sick Industrial Companies (Special Provisions) Act, 1985--.

The Securities and Reconstruction ofFinancial Assets and Enforcement ofSecurity Interest Act, 2002. ADMINIST. OFTHESPECIFIEDUNDERTAKINGOFTHEU. T. I. v. GARWAREPOLYSTERLTD. 193 Commercial documents-Meaning of TI:ie respondent-Company is engaged in the manufacture of polyster film and also exporting its product. The company went for expansion and in connection thereto obtained finance by way of term loans and by issuance of debentures to financiers. However, the company suffered a huge loss and it approached the Industrial Development Bank of India for restructuring package to clear its liabilities. All the debenture holders except the appellant no. 2 agreed to the proposed package/scheme. A common Subscription Agreement was entered into between the company and the debenture holders. Later, in terms of the agreement, a Debenture Trust Deed was created. The company filed a petition seeking grant of sanction to the Scheme before the High Court in terms of Section 391 of the Companies Act.

The Company Judge allowed the appli~ation. Aggrieved, the appellant preferred an appeal which was dismissed by the Division Bench of the High Court. Hence the present appeal. Dismissing the appeal, the Court HELD: 1. 1. 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 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. [202-D, E; 208-F) 1. 2. The common subscription agreement is an investment 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 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. [208-G-H; 209-A] 1. 3.

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. (209-C] Moti Ram and Ors. v. State ofMadhya Pradesh, AW (1978) SC 1594, I referred to. 1-- Massachusetts B. & Insurance Co. v. US. , (1956) 352 US 128 at 138, referred to. - 2. 1. 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. [209-E] 2. 2. The parties to the agreement are commercial concerns.

Each party would indisputably try to protect its interest when advancing loans or making investmen't but it must also be conceded that they were aware of the risk factor involved therein. A scheme envisaged under Section 391 of the Companies Act, it is well-settled, is a commercial document. [209-F] 2. 3. The Court 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 reaso! lable 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 XXIII, Rule 1 of the Code of Civil Procedure. [210•D, E] Miheer H. Ma/at/al v. Mafatlal Industries Ltd. , [1997) 1 SCC 579 and J. K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. and Ors. etc. , [1969) 2 SCR 866, referred to. 2. 4.

It is not the case of the Appellant/investor that the Company Judge has exceeded his jurisdiction and acted in violation of the guidelines. Once it is held that the normal rule, namely, the principle of majority in '' ADMINIST. OFTHESPECIFIEDUNDERTAKINGOFTHEU. T. l. v. GARWAREPOLYSTERLTD. 195 -- corporate democracy or in other words, governance of the company by, A. 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 bona · fide attempt to revive a company. (211-D, E] 2. 5. It cannot be said that clause 7. 5 of the agreement puts a total embargo on the part of the company or other creditors to file a r.. 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 ofall 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 realization 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. In J. K. (Bombay) (P) Ltd. , (supra), it was held : "The Court could not have completed, as contended by the appellants, . their rights which were still incomplete or order the company to execute a debenture trust deed or the second mortgage, and thus set up the appellants and the other Sch.

'B' creditors as secured creditors against the rest of the unsecured creditors. Such an order could not be passed as· it would be contrary to and in breach of the right of distribution pari passu of the joint body of unsecured creditors. " [See also Andhra Bank v. Official Liquidator and Anr. , (2005) 3 SCALE 178] 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 rroceedings 1as 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 J\ppellants 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-thatthe 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 unreasonablen_ess therein ought not to reject the same. The Company Judge by reason of the impugned judgment while exercisllig a supervisory jurisdiction only accepted the scheme. The High Court's decision is not being questioned as unfair. The Respondent in view of the Scheme has no remedy other than approaching the High Court under Section 391 of t~e Companies Act In Sardar Amarjit Singh Katra (Dead) by Lrs. qnd Ors. etc. v. Pramod Gupta (Smt. ) (Dead) by Lrs. and Ors. etc. , [2003) 3 SCC 272], this Cotirt ADM! NIST. OF THE~PECIFIEDUNDERTA. KINGOFTHEU. T. l. 1•. GARWAREPOLYSTERLTD. [SINHA,l.

] 213 ~: "As far as possible, courts must always aim to preserve and protect ·i the rights of the parties and extend help to enforce them rather than deny relief and thereby render the rights themselves otiose, "ubi jusibi remedium" (where there is a right, there is a remedy) being a basic principle of jurisprudence. Such a course would be more conducive and better conform to a fair, reasonable and proper administration of justice. " We may at this stage refer to the decisions relied upon by Dr. Dhawan. In the case of Nanakram v. Kundalrai, [1986] 3 SCC 83 as also Nutan Kumar and Ors. v. Ilnd Additional District Judge and Ors. , [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. In Delhi Development Authority v. Durga Chand Kaushish, [1973] 2 sec 825, the court was concerned with the interpretation of a deed· of lease. It was noticed: "19.

Both sides have relied upon certain passages m Odgers' Construction of Deeds and Statutes (5th Edn. 1967). There (at pp. 28- 29), the First General Rule of Interpretation formulated is: "The meaning of the document or of a particular part of it is therefore to be sought for in the document itself'. That is, undoubtedly, the primary rule ofconstruction to which Sections 90 to 94 ofthe Indian Evidence Act give statutory recognition and effect, with certain exceptions contained in Sections 95 to 98 of the Act. Ofcourse, "the document" means "the document" read as a whole and not piecemeal. " (Emphasis supplied) There is no quarrel with the aforementioned position of Jaw. In Smt. Rajbir Kaur and Anr. v. Mis. 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 h~d been put in exclusive possession in the tenanted premises. The said decision has no application to the fact of the present case. Delta International Ltd. v. Shyam Sundar Ganeriwa/la and Anr. , [1999] 4 sec 545 again dealt with a similar question. It was observed: "27. Lastly, it is to be noted that if the document is a camouflage as ( stated earlier, the mask or veil is required to be removed for ' determining the true intent and purpose of the document. In the present case, there is no pleading by the defendants that the document was a camouflage so as to defeat the rights of a tenant who had inducted the appellant or that of the owner of the premises. As stated earlier, . the document contemplates three types of agreements, one, that of a leave and licence; secondly, in case a consent is obtained from the tenant.

(sic landlord), for execution of a sub~'lease which would create an interest in the property as a sub-tenant and thirdly, in case of a sub-lease, for purchase of equipment, fitting and fixtures at a price of Rs 2,50,000. The second and third parts of the agreement never came into operation. Hence, for the reasons discussed above, we hold that the agreement dated 18-7-1970. is a deed of "leave and licence" and not a "lease". " The said decision also has no application in the instant case. 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. 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. S. K. S. Appeal dismissed.