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CASE NO.:

Appeal (civil) 3196 of 2005

PETITIONER:

Administrator of S.U., U.T.I. & Anr.

RESPONDENT:

Garware Polyester Ltd.

DATE OF JUDGMENT: 09/05/2005

BENCH:

B.P. Singh & S.B. Sinha

JUDGMENT:

J U D G M E N T

[Arising out of S.L.P. (Civil) No.20174 of 2004]

S.B. SINHA, J :

Leave granted.

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

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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

81% of the principal outstanding carrying interest @

12.5% need to be repaid in 28 quarterly installments

commencing from 1.4.2003.

19% of the principal outstanding carrying nil rate of

interest need to be repaid partly to the extent of 385 during

2003-2004 and the balance to be repaid with a premium of 85%

in 24 quarterly installments commencing from 1.4.2006

Deferred interest being the interest outstanding carrying

nil rate of interest need to be repaid in 24 quarterly installments

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commencing from 1.4.2006.

Penal interest and Liquidated damages outstanding as on

31.3.2001 to be waived.

In addition to the above, sacrifice being the amount

representing the difference between the contracted rate of

interest and the rate as per the restructuring package will be

paid on net present value (NPV) basis in 12 quarterly

installments commencing from 1.4.2002."

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 :

"1.1. Wherever used in this Agreement, unless the context

otherwise requires the following terms shall have the following

meanings :

a) *** *** ***

b) *** *** ***

c) "Debenture holders" means LIC, UTI, GIC, NIC,

NIA, OIC and UTI or the holders of the Debentures for the time

being deriving their title to the Debentures.

2. COMPANY'S REQUEST FOR FINANCIAL

ASSISTANCE.

The Company has approached the Debenture holders for

financial assistance to the company for long term capital

requirements and the Debenture holders have agreed to advance

financial assistance in the form of subscription to 18.5%, 21,00,000

non-convertible. Privately placed debentures of Rs.100/- each to the

extent mentioned below :

Name of

Debenture holders

Letter No. & Date

Amount in lacs

UTI

DOI/2945/G-76/96-97

23.4.97

400

LIC

INV:C:KAJ DT.

21.4.97

1000

GIC

INV./97 DT. 23.5.97

175

NIC

INVT/UW/DEBS

DT.30.5.97

105

NIA

INV/PM/BUD/72/96

DT. 10.6.97

175

OIC

DEPTT.

INVESTMENT DT

30.5.97

105

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UII

HQ:INV:262:97 DT.

30.5.97

140

Total

2100

2.2 DEBENTURE SHALL RANK PARI PASSU :

The Company shall ensure that the Debentures shall rank

pari passu inter se to all intents and purposes without any

preference or priority of one over the other.

3.3 RIGHT TO REVIEW THE RATE OF INTEREST :

The Company agrees and undertakes that the Debenture

holder(s) shall have a right to review the rate of interest as

mentioned herein. The Company shall pay interest on the

Debentures at the rate that may be stipulated by the debenture

holder(s) as a result of such review. The company also agrees

and undertakes to obtain all necessary consents from the

concerned authorities in accordance with the then prevailing rules

and regulations and to sign all deeds and documents that may be

required in this regard and to endorse the revised interest rates on

the Debenture Certificates as and when communicated by the

Debenture holder(s).

3.7 REPAYMENT :

The Company agrees and undertakes to redeem the

debentures to all the debenture holders in three equal yearly

installments from the end of 4th year from the date of allotment

and ending in the 6th year from allotment.

Name of Debenture Rs. in lacs

Holders At the end of

4th year

5th year

6th year

from the

date of

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

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OIC

35.00

35.00

35.00

UTI

46.66

46.67

46.67

Total

699.98

699.99

700.03

The debenture holders may at the request of the company in

suitable circumstances and also in the absolute discretion of the

Debenture holders, subject to the statutory guidelines as may be

applicable for the purpose, revise/postpone the redemption of the

debentures or any party thereof outstanding for the time being or

any installment of redemption of the said debentures or any part

thereof upon such terms and conditions as may be decided.

If for any reason the amount of the Debentures finally

subscribed for by the debenture holders is less than the amount of

the debentures agreed to be subscribed the installment(s) of

redemption will be reduced proportionately but will however be

payable on the due date as specified.

3.9 DEBENTURE CERTIFICATE :

The Company shall issue debenture certificate/s to the

debenture holder/s after making necessary compliance to the

provisions of section 113(1) of the Companies Act, 1956 read with

the Companies (Issues of share Certificate) Rules, 1960..

7.5 NEGATIVE COVENANTS :

Unless the debenture holders/trustees shall otherwise agree,

the Company shall not :

a) DIVIDEND

Declare and/or pay any dividend to any of its

shareholders, whether equity or preference, during any

financial year unless the company has paid to the debenture

holders the installments of principal, if any interest

commitment charges, costs charges and other moneys

payable under this agreement upto and during that year or

has made provisions satisfactory to the debenture holders for

making such payment.

b) CHARGES

Create or permit any charges or lien on any assets of

the Company except as provided in Article-IV, hereof. For

the purpose of this clause, the term 'Lien' shall include

mortgages, pledges, shares, privileges and priorities of any

kind and the term 'assets' shall include revenues and

property of any kind.

c) AMENDMENT OF MEMORANDUM AND

ARTICLES OF ASSOCIATION

Amend its Memorandum and Articles of Association

or alter its capital structure except as specified herein.

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d) MERGER, CONSOLIDATION ETC.

Undertake or permit any merger, consolidation,

re-organization, scheme of arrangements or compromise

with its creditors or share holders or effect any scheme of

amalgamation or reconstruction,

e) INVESTMENT BY THE COMPANY

Make any investment by way of deposits, loans, share

capital etc. in any manner.

f) REVALUATION OF ASSETS

Revalue its assets.

g) TRADING ACTIVITY

Carry on any general trading activity other than the

sale of its own product."

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 :

"45. MODIFICATIONS TO THESE PRESENTS :

The Trustees shall concur with the Company in

making any modifications in these presents which in the

opinion of the Trustees shall be expedient to make.

Provided that once a modification has been approved by

consent in writing of the holder(s) of the Debentures

representing not less than three fourths in value of the

Debentures for the time being outstanding or by a special

resolution duly passed at a meeting of the Debenture holders

convened in accordance with the provisions set out in Fifth

Schedule hereunder written, the Trustees shall give effect to

the same by executing necessary Deed(s) supplemental to

these presents.

xxx xxx xxx

"The Third Schedule above referred to Financial Covenants

and Conditions

1. DEBENTURES TO RANK PARI PASSU

The debentures shall rank pari passu inter se without

any preference or priority of one over the other or others of

them.

10. VARIATION OF DEBENTURE HOLDERS'

RIGHTS

The rights, privileges and conditions attached to the

Debentures may be varied, modified or abrogated in

accordance with the Articles of Association of the Company

and the Act and with the consent of the holders of the

debentures by a Special Resolution passed at the meeting of

the Debenture holders, provided that nothing in such

resolution shall be operative against the Company where

such resolution modifies or varies the terms and conditions

governing the Debenture if the same are not acceptable to

the Company."

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"The Fourth Schedule Above Referred to

Form of Debenture Certificate

Xxx xxx xxx

The Fifth Schedule Above Referred to

Provisions for the Meeting of the Debenture holders

22. A meeting of the Debenture holders shall,

inter alia, have the following powers exercisable in the

manner hereinafter specified in Clause 23 hereof :

xxx xxx xxx

(ii) Power to sanction any compromise or

arrangement proposed to be made between the Company

and the Debenture holders.

(iv) Power to assent to any scheme for

reconstruction or amalgamation of or by the Company

whether by sale or transfer of assets under any power in

the Company's Memorandum of Association or

otherwise under the Act or provisions of any law.

23. The powers set out in Clause 22 hereof shall

be exercisable by a Special Resolution passed at a

meeting of the provisions herein contained and carried by

a majority consisting of not less than three-fourths of the

persons voting thereat upon a show of hands or if a poll

is demanded by a majority representing not less than

three-fourths in value of the votes cast on such poll. Such

a Resolution is hereinafter called "Special Resolution".

24. A Resolution, passed at a general meeting of

the Debenture holder duly convened and held in

accordance with these presents shall, be binding upon all

the Debenture holders whether present or not, at such

meeting and each of the Debenture holders shall be

bound to give effect thereto accordingly, and the passing

of any such resolutions shall be conclusive evidence that

the circumstances justify the passing thereof, the

intentions being that it shall rest with the meeting to

determine without appeal whether or not the

circumstances justify the passing of such resolution.

25. Notwithstanding anything herein contained,

it shall be competent for all the Debenture holders to

exercise the rights, powers and authorities of the

Debenture holders under the said Trust Deed by a letter

or letters signed by or on behalf of the holder or holders

of at least three-fourths in value of the Debentures

outstanding without convening a meeting of the

Debenture holders as if such letter or letters constituted a

resolution or a special resolution, as the case may be

passed at a meeting duly convened and held as aforesaid

and shall have effect accordingly."

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

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filed on behalf of the Respondent, the relevant provisions whereof read as

under :

"The Debenture Certificate is issued in terms of

the Debenture Trust Deed dated 17th day of September,

1997 ("the Trust Deed") entered into between the

Company and the Industrial Credit and Investment

Corporation of India Limited ("the Trustees"). The

Trustees will act as Trustees for the holders for the time

being of the Debentures ("the Debentures holders") in

accordance with the provisions of the Trust Deed. The

Debenture holders are entitled to the benefit of and are

bound by and are deemed to have notice of all the

provisions of the Trust Deed. All rights and remedies of

the Debenture holders against the Company in respect of

arising out of or incidental to the Debenture shall be

exercisable by the Debenture holders only though the

Trustees.

The Debentures are issued subject to and with the

benefit of the Financial Covenants and Conditions

endorsed hereon which shall be binding on the Company

and the Debenture holders and all persons claiming by,

through or under any of them and shall enure for the

benefit of the Trustees and all persons claiming by,

through or under them. The Company hereby agrees and

undertakes to duly and punctually pay, observe and

perform the Financial Covenants and Conditions

endorsed hereon."

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.

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.

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.

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.

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

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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.

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.

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.

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 vs. M/s Prasad Textiles [(1983) 3 SCC 61]; A.B.C. Laminart Pvt.

Ltd. and Another vs. A.P. Agencies, Salem [(1989) 2 SCC 163]; Food

Corporation of India vs. New India Assurance Co. Ltd. and Others etc.

[(1994) 3 SCC 324]; National Insurance Co. Ltd. vs. Sujir Ganesh Nayak &

Co. and Another [(1997) 4 SCC 366]; Nutan Kumar and Others vs. IInd

Additional District Judge and Others (2002) 8 SCC 31];. Shri Lachoo Mal

vs. Shri Radhey Shyam [(1971) 1 SCC 619]; Miheer H. Mafatlal vs.

Mafatlal Industries Ltd [(1997) 1 SCC 579]; Kempe and another (joint

liquidators of Mentor Insurance Ltd. Vs. Ambassador Insurance Co. (in

liquidation [1998) 1 BCLC 234]; and Re Hawk Insurance Co. Ltd. [(2001) 2

BCLC 480].

The learned counsel would contend that the Appellants herein stand

absolutely on a different footing vis-`-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.

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

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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.

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.

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.

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.

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.

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.

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.

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.

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

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the debentures deriving their title thereto.

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.

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.

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.

The underlying or basic thread of the agreement vis-`-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.

In Moti Ram and others vs. State of Madhya Pradesh [AIR 1978 SC

1594], this Court noticed the observation of Justice Frankfurter in

Massachusetts B. & Insurance Co. vs. U.S. [(1956) 352 US 128 at 138],

which is to the following effect :

"there is no surer way to misread a document than to read

it literally"

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.

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

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countries came down drastically.

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.

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 XXIII, Rule 1 of the

Code of Civil Procedure.

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 :

"6. That the proposed scheme of compromise and

arrangement is not found to be violative of any provision

of law and is not contrary to public policy. For

ascertaining the real purpose underlying the scheme with

a view to be satisfied on this aspect, the Court, if

necessary, can pierce the veil of apparent corporate

purpose underlying the scheme and can judiciously X-ray

the same.

*** *** ***

8. That the scheme as a whole is also found to be just,

fair and reasonable from the point of view of prudent

men of business taking a commercial decision beneficial

to the class represented by them for whom the scheme is

meant."

In J.K. (Bombay) (P) Ltd. vs. New Kaiser-I-Hind Spg. & Wvg. Co.

Ltd. & Ors. etc. [(1969) 2 SCR 866], it was held :

"\005The principle is that a scheme sanctioned by the court

does not operate as a mere agreement between the parties

: it becomes binding on the company, the creditors and

the shareholders and has statutory force, and, therefore

the joint-debtor could not invoke the principle of accord

and satisfaction. By virtue of the provisions of sec. 391

of the Act, a scheme is statutorily binding even on

creditors and shareholders who dissented from or

opposed to its being sanctioned. It has statutory force in

that sense and therefore cannot be altered except with the

sanction of the Court even if the shareholders and the

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creditors acquiesce in such alteration\005"

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 bona fide

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.

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

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 :

"\005The 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\005."

[See also Andhra Bank Vs. 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 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.

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.

The Respondent in view of the Scheme has no remedy other than

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approaching the High Court under Section 391 of the Companies Act.

In Sardar Amarjit Singh Kalra (Dead) by Lrs. and Others etc. vs.

Pramod Gupta (Smt.) (Dead) by Lrs. and Others etc. [(2003) 3 SCC 272],

this Court stated :

"\005As far as possible, courts must always aim to

preserve and protect 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 Vs. Kundalrai [(1986) 3 SCC 83] as also

Nutan Kumar and Others Vs. 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.

In Delhi Development Authority Vs. Durga Chand Kaushish [(1973) 2

SCC 825], the court was concerned with the interpretation of a deed of lease.

It was noticed:

"19. Both sides have relied upon certain passages

in 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 of

construction to which Sections 90 to 94 of the

Indian Evidence Act give statutory recognition and

effect, with certain exceptions contained in

Sections 95 to 98 of the Act. Of course, "the

document" means "the document" read as a whole

and not piecemeal."

(Emphasis supplied)

There is no quarrel with the aforementioned position of law.

In Smt. Rajbir Kaur and Another Vs. 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.

Delta International Ltd. Vs. Shyam Sundar Ganeriwalla and Another

[(1999) 4 SCC 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

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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.