Narotamdas T. Toprani v. Bombay Dying & Mfg. Co. Ltd.

Mrs. Sujata Manohar, J.:— The plaintiff is a debenture-holder in the Bombay Dyeing & Manufacturing Company Limited, the 1st defendant herein. He has filed the present suit on behalf of himself and other debenture-holders of the 1st and 3rd series of debentures for a declaration that the 1st defendant Company is not entitled to issue the proposed debentures pursuant to a Letter of Offer dated May 5, 1986, ranking pari passu with the debentures of the 1st, 2nd and 3rd series of debentures already issued by the 1st defendant Company, and is not entitled to secure the said issue by a first mortgage on the fixed assets of the 1st defendant Company. The plaintiff has prayed that the 1st defendant Company should be permanently restrained from issuing any debentures pursuant to the letter of offer dated May 5, 1986. He has also prayed that the 1st defendant Company should be ordered to repay all application money received by the 1st defendant Company in respect of the proposed new debenture issue. The plaintiff has sought various other reliefs as set out in the plaint.

2. The present Notice of Motion is taken out by the plaintiff for an injunction to restrain the 1st defendant Company from directly or indirectly using the application money received so far pursuant to the letter of offer dated May 5, 1986 and to restrain the 1st defendant Company from allotting and/or issuing the new debentures pursuant to this letter of offer. The Notice of Motion also prays that the 1st defendant Company should be restrained from creating any mortgage and/or charge on the fixed assets of the 1st defendant Company as set out therein. The plaintiff holds 17 debentures of the value of Rs. 100 each in the 1st series of debentures which were issued by the 1st defendant Company in August 1979. He also holds 9 debentures of Rs. 100 each in the 3rd series of debentures which were issued in February 1983. He has filed the present suit under Order 1 Rule 8 of the Code of Civil Procedure on behalf of all the debenture-holders in the 1st and 3rd series issued by the 1st defendant Company.

3. It has been submitted by the 1st defendant Company that the suit itself is not maintainable since the plaintiff has no locus standi to maintain this suit. Hence no relief can be granted to the plaintiff on the present Notice of Motion. According to the 1st defendant Company a suit claiming reliefs of the kind prayed for can only be maintained by the Trustees of the Debenture Trust Deeds in question since the suit is essentially to preserve the securities and enforce covenants given by the 1st defendant Company to the trustees.

4. In order to appreciate this contention it is necessary to examine the terms of the relevant Debenture Trust Deeds, letters of offer and debenture certificates.

5. The 1st series of debentures were initially issued by the 1st defendant Company in the year 1965. These debentures which were to the extent of Rs. 2.50 crores were secured by a Debenture Trust Deed dated June 2, 1965 which was executed by the 1st defendant Company in favour of the trustees of the said debentures.

6. Under the Debenture Trust Deed dated June 2, 1965 clause 3 deals with the powers of the Company to issue further pari passu debentures. Clauses 4 and 6 contain covenants by the Company with the trustees that the Company will pay to the holders of debentures the amount secured by the debentures and interest thereon as set out in the said clauses. As a security for repayment of these amounts the Company under clauses 7, 8, 9, 10 and 11 has created a mortgage in favour of the trustees of various properties of the Company as set out in those clauses and has also created a floating charge on the general assets of the 1st defendant Company. Under clause 55 of the Debenture Trust Deed, “the debenture-holders shall in general meeting have”, inter alia, “the powers to sanction any modification of the rights of the debenture-holders against the Company or against its property whether such rights shall arise under these presents or otherwise”. Under clause 56 the trustees may, from time to time, and at any time whenever they think fit or expedient in the interest of the debenture-holders, waive, on such terms and conditions as to them shall deem expedient, any breach by the Company of any of the covenants contained in the said Trust Deed. Under clause 66 the trustees shall not be liable for any default or omission or delay in performing or exercising any of the powers or trusts contained in the said deed of trust unless the trustees shall have been previously, by notice in writing, requested to exercise such powers, trusts or acts by the holder of at least one-half of the debentures for the time being outstanding. The clause further provides that the trustees shall not be bound to exercise such powers until sufficient moneys have been provided by the debenture-holders for any costs or expenses which the trustees may incur.

7. Under the said Deed of Trust the trustees have been given various powers which pertain to taking possession of mortgaged security or to have a receiver appointed for the protection of the said security under various circumstances which are set out in the trust deed.

8. Debentures which were initially issued under the said debenture trust deed were thereafter reissued in 1979 and were secured under the provisions of a supplemental deed of trust dated August 9, 1979. Under the Supplemental Deed of Trust dated August 9, 1979 the original terms of the Debenture Trust Deed of June 2, 1965 were continued with certain modifications. The modification most relevant for the purpose of the present Notice of Motion is contained in the modified clause 3 of the said Supplemental Trust Deed. Under the new clause 3 of the said Supplemental Trust Deed the Company has given certain covenants. These are as follows:

“(a) ………

(b) The Company hereby covenants with the Trustees that during the continuance of this security the Company shall maintain a margin of 40% (forty per cent) or such lower margin as the Trustees may agree, on the security comprising the net (depreciated) book value of the then existing fixed assets (excluding motor cars, vehicles, furniture and fixtures, goodwill, patents etc.) of the Company and the Company both hereby agree and undertake that in case for any reason such net (depreciated) fixed assets cover falls below 40% or such lower margin as may be agreed by the Trustees, the aggregate nominal amount of Rs. 2,50,00,000 (Rupees Two crores and fifty lacs) of the outstanding Debentures, the outstanding amounts of the ICICI Foreign currency Loans, and the outstanding amounts of GBL Deferred payment Guarantees, the Company shall give an additional cover acceptable to the Trustees to the extent of such short fall failing which the Company shall forthwith redeem the Debentures the nominal amounts of which are in excess of the aggregate of the nominal amount of Debentures outstanding together with out standing amounts of the ICICI Foreign Currency Loans and the outstanding amounts of GBL Deferred Payment Guarantees over 60% of the net (depreciated) book value of its fixed assets (or such lower margin as may be agreed by the Trustees) then comprised in the security hereunder and to satisfy the Trustees that the requisite coverage was available the Company shall furnish to the Trustees twice a year within one month from the dates hereinafter specified audited statements showing as on 31st day of March of each year the net (depreciated) value of such assets and additions to the assets as on the 31st day of March of each year, available as and by way of security as aforesaid.

(c) During the continuance of this security, the Company will be entitled to make a further issue of Debentures including the said further — Debentures of Rs. 1,00,00,000 (Rupees One crore) and/or raise further loans ranking pari passu with the existing Debentures issued by the Company; provided that:—

(i) the net aggregate written down value of the fixed assets of the Company forming part of the mortgage security hereunder shall be at least 166% of the value of the Debentures issued and outstanding and any such further issue of debenture and the outstanding debentures/ICICI Foreign Currency Loans/GBL deferred Payment Guarantees ranking pari passu secured by the aforesaid Mortgaged Premises;

(ii) the average of profit of the Company after charging interests on loans for working capital and all expenses of working and management including maintenance and repairs but before charging interest on outstanding Debentures/ICICI Foreign Currency Loans/GBL Deferred Payment Guarantees depreciation, development rebate, reserves and taxes for the three accounting years for which accounts have been audited last preceding the date of any such further issue, and sufficient to cover at least twice the amount required to pay the aggregate of one year's interest on the amount of outstanding existing Debentures and ICICI Foreign Currency Loans and GBL Deferred Payment Guarantees and on the amount of additional Debentures proposed to be issued;

(iii) such further issue of Debentures/raising of further loans is made by Special Resolution of the Debenture-holders passed in accordance with the provisions of the Seventh Schedule hereunder written.”

9. Under clauses 16 and 17 of the Seventh Schedule (original Sixth Schedule in the Debenture Trust Deed of June 29, 1965), a special resolution passed at a general meeting of Debenture-holders is binding on all debenture-holders whether present at the meeting or not A special resolution requires to be passed by a three-fourth majority of Debenture-holders present and voting.

10. Thereafter under a second Supplemental Debenture Trust Deed dated August 28, 1980 further debentures of the aggregate nominal value of Rs. 1,00,00,000 were issued to rank pari passu with the debentures already issued and outstanding. Under cl. 3 of the Second Supplemental Debenture Trust Deed dated August 28, 1980 also it is provided that these debentures are issued pursuant to cl. 3 of the principal Deed which was amended as per Supplemental Trust Deed dated August 9, 1979.

11. Thus, the 1st series of debenture-holders are beneficiaries of covenants which the 1st defendant Company has given to the trustees of the said series, as a result of which the 1st defendant company is required to maintain a margin of 40% (or a lower margin as the trustees may agree upon) on the security comprising the net book value of then existing fixed assets of the 1st defendant Company as set out in the said cl. 3. There is also a further covenant between the Company and the trustees that the Company, if it makes a further issue of debentures which rank pari passu with the existing issue, will maintain this margin of fixed assets in relation to the value of debentures issued and outstanding, certain other loans which are also secured by a pari passu mortgage of the said securities and further issue of debentures (hereinafter referred to as ‘the fixed assets cover’). The Company has also covenanted with the trustees to maintain the ratio of profits to interest required to be paid on such debentures in proportion of 2: 1. The quantum of profits and of interest is to be calculated as set out in the said clause 3. (This is hereinafter referred to as the profits cover).

12. The debenture certificates which have been issued are in forms which are annexed to these debenture trust deeds. The debenture certificates state that the 1st defendant Company will on the dates specified therein pay to the registered holders on presentation of such certificates the amount set out therein. The certificates also state that the Company will, during the continuance of security, pay to the registered holders interest as set out therein. The Certificates further state that “the debenture is issued subject to the provisions of the above-mentioned Trust securities whereby all remedies for the recovery of the principal monies and interest secured by the Debentures are vested in the Trustees on behalf of the Debenture-holders and it is accordingly expressly stipulated that the Debenture shall operate only according to the tenor thereof”.

13. The 3rd series of debentures which rank pari passu, inter alia, with the 1st series of debentures are issued pursuant to the Letter of Offer dated February 28, 1983. They are secured by Debenture Trust Deed dated January 15, 1985 as a result of which the 1st defendant Company has created certain securities in favour of the trustees of the 3rd series of debentures on terms and conditions which are set out in the said Debenture Trust Deed. Under cl. 3.4 of the said Debenture Trust Deed it is provided as follows:

“3.4 During the subsistence of the Debentures and during the period the security in favour of the Agent and Trustees subsists, if the Company makes a further issue of debentures and/or raises further terms loans and/or avails of deferred payment or guarantee facilities on the security of its fixed assets ranking on pari passu basis with the Debentures the Company shall comply with the following conditions:—

(i) the net aggregate written down value of the fixed assets of the Company forming part of the mortgaged assets for the Debentures shall be one and a half times the value or such lesser value as may be agreed to by the Agent and Trustees of the Debentures issued and outstanding and the outstanding term loans, deferred payment liabilities/guarantee facilities and any such further debentures and the term loans and deferred payment facilities/guarantee facilities secured on pari passu basis as the mortgaged assets;

(ii) the average of profits of the Company after charging interest on loans for working capital and all expenses of working and management including maintenance and repairs but before charging interest on term loans/deferred payment guarantees/guarantee facilities, depreciation, development rebate, investment allowance, resources and taxes for the three accounting years for which accounts have been audited last preceding the date of any such further issue or raising of term loans or availing of deferred payment guarantee facilities sufficient to cover as far as possible, at least twice the amount required to pay the aggregate of one year's interest on the amount of the Debentures issued and outstanding and the outstanding term loans, deferred payment or guarantee facilities and on the amount of further debentures, term loans, deferred payment guarantees facilities;

(iii) such further issue of debentures, raising of further loans and/or deferred payment or guarantee facilities are sanctioned by a Special Resolution of the holders of the Debentures passed in accordance with the provisions contained in the regulations for meeting of the holders of the Debentures, as provided in Annexure ‘D’ to the Companies (Central Government) General Rules and Forms, 1965 as amended and prevailing from time to time.”

14. Debenture Certificates which are issued under this Debenture Trust Deed are substantially in the same form as the earlier Debenture Certificates.

15. It is the contention of the 1st defendant Company that the covenants under these various Debenture Trust Deeds which require the 1st defendant Company to maintain a certain ratio between its fixed assets and the value of debentures as also between its profits and interest to be paid on these debentures, are covenants which are entered into between the 1st defendant Company and the trustees. There are no such covenants between the Company and any of the debenture-holders. The 1st defendant Company, therefore, contends that a debenture-holder by himself or on behalf of the entire class of debenture-holders cannot maintain the present action which is an action for enforcement of these covenants.

16. Now, the rights of a debenture-holder and the obligations which the Company has towards its debenture-holders, depend essentially upon the terms of the agreement between the company and its debenture-holders as also between the company and the trustees of such debentures. A debenture-holder can sue the company for the recovery of amounts payable to him as the holder of the debenture certificate because the debenture certificate, as in the present case, usually contains a covenant directly between the company and the debenture-holder that the company will pay the said amount and interest thereon to the debenture-holder. However, where there is no such direct covenant between the company and the debenture-holder it has been held that the debenture-holder cannot maintain such an action. Thus In re Uruguay Central and Hygueritas Railway Company of Monte Video the company had issued bonds or debentures and had created a debenture stock. There was no direct covenant between the company and the debenture stock holders for payment of any amount to the stock-holders. The covenant was between the company and the trustees for payment of the amounts. The Court held that in view of the terms of the deed the holders of bonds were not creditors of the company; they were merely cestuis que trust of a charge, having a right, no doubt, to put their trustees in motion to compel payment under the covenant, but not having any independent right to sue the company either at law or in equity.

17. Similarly, In re: Dunderland Iron Ore Company Limited a trust deed for securing debenture stock made between the company and the trustees for the stock-holders, provided that the company would pay the interest to the stockholders. But the certificate delivered to each stock-holder did not contain any direct covenant with the stock-holder to pay him interest. It was held that stockholders whose interest was in arrears were not entitled to present a winding up petition as creditors under s. 82 of the English Companies Act, 1862.

18. In both these cases a debenture-holder was held not to be a creditor of the company on the basis of covenants contained in the debenture certificate which was issued to him by the Company. There are a number of cases, however, where English Courts have construed the debenture-holder as a creditor of the company wherever there has been such a direct covenant between the company and the debenture-holder. Thus, for example, In re Olathe Silver Mining Company the earlier decision In re Urugway Central and Hygueritas Railway Company of Monte Video (supra) was distinguished. Looking to the covenants contained in the debenture certificate, the holder of the debenture in that case to whom interest was overdue was held entitled to petition for the winding-up of the company.

19. Nearer home, in the case of Bachharaj Factories Ltd. v. Hirje Mills Ltd. a Division Bench of this Court distinguished the case of Re: Dunderland Iron Ore Company, Ltd. (supra) and held that in the case before the Division Bench there were debentures and not stock certificates. The debentures contained a personal covenant by the Mills to pay to the debenture-holders. Hence the circumstances which prevailed upon the Court in Re: Dunderland Iron Ore Company Ltd. (supra) were not present in the case before them and the debenture-holder was entitled to present a winding-up petition as a creditor of the Company.

20. In view of the express provision now contained in s. 439 of the Companies Act, 1956 there can be no doubt that a debenture-holder is a creditor of the company for the purpose of presenting a winding up petition. In a later case of this High Court in Sholapur Spinning an a Weaving Co. Ltd. a learned single Judge of this Court has held that a winding up petition by a debenture-holder was maintainable in view of the direct covenant contained in the debenture certificates between the company and the debenture-holder to pay the amount to the debenture-holder, although in that case one of the relevant conditions was to the effect that the debenture was issued subject to the provisions of the trust deed whereby all remedies for the recovery of the principal money and interest secured by the debentures were vested in the trustees on behalf of the share-holders.

21. All these cases deal with the right of a debenture-holder to sue the company or take steps against the company for recovery of his money-claim under the debenture certificate. The present suit is somewhat different in character. The suit is for ensuring that the securities which are given under the Debenture Trust Deeds and the covenants which are contained therein for the protection of debenture-holders are maintained by the company and not diluted in any manner. The debenture certificate only sets out that the Debenture is issued subject to the provisions of the Trust Deed. There is no direct covenant between the debenture-holder and the company to the effect that the company would maintain either the fixed assets cover or profits cover as set out in the trust deeds. Therefore, strictly speaking, the ratio of the above cases does not help the plaintiff in the present case.

22. Under the terms of the deeds of trust the covenants relating to fixed assets cover as well as profits cover are given by the company to the trustees. Under the trust deeds there are various remedies which are available to the trustees for protection and realization of mortgage securities. Therefore, if one goes strictly by the conditions of the Deeds of Trust and the conditions as set out in the debenture certificates and applies the ratio of the above cases, a debenture-holder would not be entitled to enforce these covenants.

23. However, these covenants are given by the company to the trustees for the benefit of the debenture-holders. The covenant that the company would maintain certain ratio between the value of its fixed assets and the value of debentures as set out in the relevant clause and that it would maintain a certain ratio between its annual profits (to be calculated as set out in the debenture trust deed) and the interest payable by the company, are meant to ensure that proper securities are available for realisation of dues of the debenture-holders under the debenture certificates. The debenture-holders are, therefore, beneficiaries under the trust deeds. In these circumstances, although the remedy to enforce these securities may vest in the trustees, the debenture-holders, as beneficiaries, would be entitled to enforce covenants which are for their benefit although they may not be directly parties to the covenants.

24. The right of a beneficiary under a trust to enforce contracts which are for his benefit, is recognised under our law. In the case of M.C Chacko v. The State Bank of Travancore the Supreme Court has observed as follows (at page 508):

“……It has however been recognised that where a trust is created by a contract, a beneficiary may enforce the rights which the trust so created has given him. The basis of that rule is that though he is not a party to the contract his rights are equitable and not contractual. The Judicial Committee applied that rule to an Indian case Khwaja Muhammad Khan v. Husaini Begum. It must therefore be taken as well settled that except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract.”

25. The present case is covered by this exception. In Palmer's Company Precedents, Part 3, 16th Ed. at p. 410 remedies which are available to a debenture-holder with the aid of the Court are discussed. Clause (c) refers to “Action against the company to restrain it from issuing debentures in priority to or ranking pari passu with the existing debentures in violation of the terms of the security”. At page 416 actions to enforce secured or mortgage debentures; are discussed. Under the paragraph heading ‘Claiming in writ where trust deed”, it is set out as follows:

“Where there is a trust deed the writ should claim a declaration as to, and the enforcement of, the charge, to have the trusts of the deed carried into execution, and the appointment of a receiver……”.

26. Form 196 at page 465 sets out the form of an action by a debenture-holders on behalf of himself and by other holders of debentures. In Butterworth's Encyclopaedia of Forms and Precedents, 4th Ed. Vol. 6 at p. 1133 it is stated as follows:

The most common mode of proceedings through the court is an action by one or more debenture holders on behalf of all the rest……

27. The present suit is filed by the plaintiff on behalf of himself and all other debenture-holders in the First and Third series. The trustees are also made party-defendants to the suit along with the 1st defendant company. In these circumstances, in my view, the suit is maintainable. Interim relief cannot be refused on the ground of non-maintainability of the suit.

28. [After considering factual aspects for interim relief, the judgment proceeds]

29. In the circumstances, there will be no order on the Notice of Motion, save and except that such of the debenture holders of the 3rd series (other than financial and public institutions) who want to recover the amounts payable under their debenture certificates will be entitled to recover the same if they apply to the 1st defendant company for such payment within 12 weeks from today. For this purpose the company will issue a circular letter to the balance 4% of debenture holders in the 3rd series informing them of their right to receive immediately the amount under their debenture certificates.

30. The proposed allocation of debentures will, however, be subject to the outcome of the suit.

31. In the circumstances of the case, there will be no order as to costs.

32. Mr. Kotval, learned counsel for the plaintiff, applies for continuance of ad interim order for a period of one week from today. Originally pending the disposal of the Motion, the 1st defendant company had by consent between the parties made a statement that they would not issue debentures till July 2, 1986 although the entire series had been subscribed to. For various reasons which need not be examined, as the Motion was not likely to be disposed of by that date, on July 1, 1986 the statement was extended for the entire period during the pendency of the Motion. I do not see any reason why any stay should be granted now preventing the 1st defendant Company from issuing new debentures. The Company has received monies as far as back as May 1986 and it has not issued debentures so far entirely because of the statement made during the pendency of Motion. In my view, it would not be in the interest of the proposed debenture-holders to hold up the issue of proposed debentures. The application for stay is rejected.

33. Order accordingly.