NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION |
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REVISION PETITION NO. 1299 OF 2003 |
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(Against the order dated |
in Appeal / Complaint No.
697/2002 |
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of the State Commission, |
Andhra Pradesh) |
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CENTRAL BANK OF |
... Petitioner |
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Vs. |
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TADEPALLI PADMAJA &
OTHERS |
... Respondents |
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REVISION PETITION NO.
1300 OF 2003 |
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(Against the order dated |
in Appeal/ Complaint No.
277/2001 |
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of the State Commission, |
Andhra Pradesh) |
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CENTRAL BANK OF |
…… Petitioner |
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Vs. |
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P.S. PRABHAKAR RAO & OTHERS |
.….. Respondents |
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REVISION PETITION NO.
1301 OF 2003 |
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(Against the order dated |
in Appeal / Complaint No.
308/2001 |
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of the State Commission, |
Andhra Pradesh) |
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CENTRAL BANK OF |
.….. Petitioner |
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Vs. |
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CHADALAVADA LAKSHMAIAH
& OTHERS |
.….. Respondents |
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REVISION PETITION NO.
1170 OF 2005 |
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(Against the order dated |
in Appeal / Complaint No.
261/2003 |
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of the State Commission, |
Andhra Pradesh) |
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CENTRAL BANK OF |
....... Petitioner |
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Vs. |
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B. RAMA MOHANA RAO &
OTHERS |
...... Respondents |
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REVISION PETITION NO.
1076 OF 2007 |
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(Against the order dated |
in Appeal / Complaint No.
355/2004 |
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of the State Commission, |
Andhra Pradesh) |
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CENTAL BANK OF |
...... Petitioner |
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Vs. |
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SMT. V. SAVITRI DEVI &
OTHERS |
...... Respondents |
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REVISION PETITION NO.
3206 OF 2007 |
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(Against the order dated |
in Appeal/ Complaint No.
292/A/2006 |
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of the State Commission, |
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CENTRAL BANK OF |
........ Petitioner |
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Vs. |
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HALWASIYA CHHATRA NIWAS M/s BAJAJ CAPITAL INVESTMENT CENTRE LIMITED |
...... Respondent |
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REVISION PETITION NO.
4059 OF 2007 |
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(Against the order
dated |
in Appeal / Complaint No. A-331/2002 |
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of the State Commission, |
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CENTRAL BANK OF |
...... Petitioner |
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Vs. |
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SMT. T.V.A. LAKSHMY ALIAS ANANTA LAKSHMY |
........ Respondent |
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BEFORE: |
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HON'BLE
MR. JUSTICE M. B. SHAH, PRESIDENT |
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HON'BLE
MRS. RAJYALAKSHMI RAO, MEMBER
HON'BLE MR. ANUPAM DASGUPTA,
MEMBER |
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For the Petitioner Mr. S. M. Shirazi,
Advocate
Mr. Rustom Pardiwala, Advocate Mrs. Asha G. Nair, Advocate |
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For the Respondent Mr. Krishan Mahajan,
Amicus Curiae
Ms. Astha Tyagi, Amicus Curiae
Mr. K Maruti Rao, Advocate.
for RP No 1300/2003
Ms. K Radha, Advocate
Mr. G Ramakrishna Prasad, Advocate
Mr. S Patnaik, Advocate for RP No.
1170/ 2005
Mr. Hari Kishan Proxy Counsel for
Mr. Sachin Chopra, Advocate for
DCM Financial Services Ltd. |
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Dated
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ORDER |
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M.B. SHAH, J., PRESIDENT
These revision petitions are filed against the orders
passed by various State Commissions.
The
first question which is raised is - whether any “complaint” under the
Consumer Protection Act, 1986 (the ‘Act’) would be maintainable against a paid
debenture-trustee for the failure of the
Company in payment of periodical interest and/or the redemption amount.
The
obvious answer is - prima facie, if there is any deficiency in rendering
service by the paid trustee in the discharge of its duties, the trustee would be liable for such
deficiency and can be proceeded against
under the Act.
However,
the main question involved in these petitions is – in which circumstances the debenture trustee would be liable to
reimburse the debenture holders for failure of the issuer - company to pay the
periodical interest and/or for the redemption amount on the due date?
Answer to the question would depend upon the findings whether there is any deficiency in service on the part of the trustee in discharge of its fiduciary duties as trustee as contemplated by statutory provisions. It has to protect the interests of the debenture-holders at all times and on noticing any default by the company, it has to take appropriate timely corrective action. A professional corporate trustee is liable for breach of trust if loss is caused to the debenture holders because of negligence on the part of the trustee to exercise special care and skill which it professes to have.
Facts
As the
question of law raised in all these revision petitions is similar, we take the
facts mentioned in revision petition No. 1299 of 2003, wherein Synergy
Financial Exchange Ltd., a Non-Banking Financial Company (NBFC) is the Company,
which had issued the debentures and the Central Bank of
Pursuant to
the January 23, 1995 decision of its Board of Directors, the Company made a
rights issue of 15.90 crore non-convertible,
transferable and transmittable
debentures (NCDs) of Rs.100/- each, carrying
15% interest per annum, to finance its growing infrastructural requirements.
The Company’s predominant earning came from hire purchase of vehicles and plant
and machinery. It also leased out assets, did merchant banking, was a dealer on
the Over the Counter Exchange of India and an RBI authorized money - changer.
For
the issue of the debentures, a trust deed was executed by the Company with the
Central Bank of
As per clause
(6) of the Financial Covenants, the Company was required to pay all amounts of
principal and interest due under the debenture by crossed account payee cheques or bank drafts drawn on a scheduled bank situated
at Mumbai. It was agreed and undertaken to redeem the debentures in full
at the expiry of three years from the date of allotment, which was
It was also
agreed that the Company was required to pay interest at the rate of 15% p.a.
on the debentures, subject to TDS, on June 30th and December 31st
each year. Failure to pay the interest on the due dates (June 30 and
December 31) each year during the period
In case of
default in redemption of the debentures the Company would pay liquidated
damages of a further two per cent interest per annum for the period and the
amount of the default, upon the footing of compound interest aforementioned,
and such compound interest would also be a charge secured by the debentures.
Conditions for Financial Safety of Debentures
i) The financial
safety of the debentures was to be ensured by the Company and the Trustee as
follows:
a) A Debenture
Redemption Reserve was required to be created by transferring to it
suitable amounts in accordance with the provisions of section N of the
Securities and Exchange Board of India [SEBI] (Disclosure & Investor
Protection) Guidelines, as in force “from time to time”. This was to be ensured
by virtue of the duty, “The company shall submit to the Trustee a Certificate
duly certified by the auditors certifying that the company has transferred a
suitable sum to the debenture redemption reserve at the end of each financial
year”.
b) During the
currency of the debentures, the Company was required to maintain a minimum
security cover of 1.33 times on its securities to be offered for the
debentures. If at any point of time the security cover was reduced below 1.33
times as aforesaid, the Company was required to offer additional securities to
maintain the required security cover, to the satisfaction of the Trustee.
Admittedly,
in the present case, the Company failed to pay the interest or the redemption
amount as agreed.
Hence, the debenture holders filed complaints in various
District Forums. Finally, the State Commissions of Andhra Pradesh, Delhi and
West Bengal dismissed the appeals filed by the Central Bank of India and held
that that the said Bank (Petitioner herein) was liable, as the Debenture
Trustee, to reimburse the complainants for the default of the Company.
Against the
orders passed by the State Commissions, the Central Bank of
The learned
Counsel, Mr. Rustom Pardiwala
appearing for the Petitioner, Central Bank of
(i)
The complainants /
debenture holders are not consumers. For this purpose, he has relied on the
decision of by the
(ii)
The duty of the Trustee
in such case would end as soon as the Trustee filed a suit for recovery of the
debenture amounts from the Company. After filing the suit against the Company
on the basis of the Mortgage Deed executed by it, no further proceedings under
the Act are maintainable. For this purpose, he relies on the decision of this
Commission in ICICI Bank vs. Savitri Pisipati & Ors.
(iii)
The provisions of
sub-section (3) of section 117B of the Companies Act, 1956 laying down the duties
of the Trustees would not be applicable because that amendment came into force
only on 13.12.2000 and in the present case, the winding up proceedings of the
Company started in the year 1999. Before this, the Petitioner Bank had already
filed a suit in the Madras High Court for recovering the amount payable to the
debenture-holders.
(iv) In the
memo of Revision Petition, the Bank has also contended:
“The petitioners say and submit that this
Revision raises an important legal issue, viz., the liability of a Trustee vis a vis a Debenture Policy
Holder with whom a Trustee does not have any privity
of contract and for which Trustee has received no monies by way of subscription
or otherwise given by the Debenture Holders.”
I Whether the
Complainants (Debenture Holders) are Consumers
On the
basis of above-said submissions we would first decide whether the complaint is
maintainable. The learned counsel, Mr. Pardiwala submitted
that the order passed by the State Commissions and the District Forums are erroneous
because the debenture holders cannot be considered to be consumers vis a vis the Petitioner Bank
within the meaning of section 2(1)(d) of the Act and, therefore, the complaints
are not maintainable.
In our view,
this submission is without any substance. In terms of the Banking Regulation
Act, 1949, the Central Bank agreed to act as the Debenture Trustee in these
cases for the benefit of the debenture holders and to protect their
interests on receipt of fees. It is not disputed that for such service by
the Bank, the agreed fee has been paid. Thus, the Petitioner is a service
provider for a consideration. Section 2(1)(d)(ii) of
the Act would cover such a situation, because the services of the Petitioner
Bank were hired or availed of for the benefit of the debenture holders.
Thus, the debenture holders are consumers within the meaning of section 2(1)(d)(ii) of the Act. Hence, a complaint against the
Petitioner is maintainable in case there is deficiency in service rendered by
the Petitioner as the Debenture Trustee.
For this
purpose, it would be sufficient to refer the definitions of the
words ‘consumer’ and ‘service’
in Section 2(1)(d) (ii) and
Section 2(1)(o) which are as under:
“ 2(1)(d)(ii) - hires or avails of any services for a consideration
which has been paid or promised or partly paid and partly promised, or
under any system of deferred payment and includes any beneficiary of such
services other than the person who hires or avails of the services for
consideration paid or promised, or partly paid and partly promised, or under
any system of deferred payment, when such services are availed of with the
approval of the first mentioned person but does not include a person who avails
of such services for any commercial”.
“2(1)(o) - "service"
means service of any description which is made available to potential
users and includes, but not limited to, the provision of facilities in
connection with banking, financing insurance, transport, processing, supply
of electrical or other energy, board or lodging or both, housing construction,
entertainment, amusement or the purveying of news or other information, but
does not include the rendering of any service free of charge or under a
contract of personal service”.
Further, the
word “deficiency” is defined in Section (2)(1)(g)
which is as under:
“2(1)(g) "deficiency" means any fault, imperfection,
shortcoming or inadequacy in the quality, nature and manner of performance
which is required to be maintained by or under any law for the time being in
force or has been undertaken to be performed by a person in pursuance of a
contract or otherwise in relation to any service”.
This would
mean that if there is any fault, imperfection in the nature and manner of
performance of duty which is required to be maintained by or under any law for the time being in
force, it would be deficiency in service.
Therefore, the aforesaid Section
leave no doubt that for deficiency in
service by a paid trustee, complaint is maintaible.
In view of
the above discussion, it is not necessary for us to refer to the decisions in R.
D. Goyal and Anr. Vs.
Reliance Industries Ltd. [(2003) 1 SCC 81], wherein the
“In view of the provisions contained in section
36-A of the MRTP Act, an inquiry proceeding can be initiated when an element of
unfair trade practice arises in the matter of promoting sale, or use of any
goods. Shares are not goods. Till the shares are actually issued, the
question of the company having issued debentures as transferable property would
not arise and thus shares before their allotment would not come into existence
and cannot be regarded as goods. Debentures would also not come within
the purview of the definition of stock”. (Emphasis supplied)
The
underlined portion of the aforesaid judgment would clearly establish that the
dispute in the aforesaid case before the
Moreover, the role of the Petitioner
here was that of a Debenture Trustee which is clearly that of a service
provider to the debenture holders – the ‘service’ of safeguarding the financial
interests of the debenture holders at all times till their full redemption by
the Company issuing the debentures This was a ‘paid service’ by the Company on
behalf of the debenture holders, in order to ensure that the debenture holders
would have sufficient satisfaction and confidence before they actually applied
and paid for allotment of the debentures.
Hence, the Bank was a service provider and if there is deficiency in
rendering service, a consumer complaint under the Act is maintainable.
Hence, the
contention that the complaints by the debenture holders in this case are not
maintainable under the Act is without any substance.
II. Law
with regard to duties
of Debenture Trustee
(a) At the outset,
it is to be stated that the Debenture Trustee, Central Bank of
The fiduciary
relationship of a ‘cestui que’
trust with the beneficiary is well established. The general
principle of all trusts, as stated in Vol. 48, para.
501, page 343, 4th Edition of Halsbury’s
Laws of England, reads as under:
“Meaning of Trust -
The trustee holds the property or must exercise
his rights of property in a fiduciary capacity, and stands in a fiduciary
relationship to the beneficiary. …………………….”
Further, in the same Volume in para.
841, page 554, it has been stated:
“Trustee’s duty to comply with terms of
trust.
A trustee must strictly conform to and carry out
the terms of the trust so far as they are for the time being in force. ……………”
And, at page 557, para
846 – “Trustee’s duty to use diligence and prudence.
“A trustee must execute the trust with
reasonable diligence, and conduct its affairs in the same manner as an ordinary
prudent man of business would conduct his own affairs, but beyond this he is
not bound to adopt further precautions. A higher duty of care is due from a
trust corporation or similar body which carries on specialized business of
trust management and a professional corporate trustee is liable for breach
of trust if loss is caused to the trust fund through neglect to exercise
special care and skill which it professes to have. ……………”
Section 14 of
the Indian Trusts Act, 1982, specifically provides that a trustee is bound to
deal with trust property as carefully as a man of ordinary prudence would deal
with such property.
Obligation of
a trustee cannot be abrogated or minimized by a covenant (Re: AIR 1940 Cal
337).
(c)
Sections 119(1) and 117B
of the Companies Act, 1956
Keeping
in view the aforesaid general principles, we would now refer to section 119(1)
of the Companies Act, 1956 which reads as under:
“119. Liability of
trustees for debenture holders. —(1)
Subject to the provisions of this section, any provision contained in a trust
deed for securing an issue of debentures, or on any contract with the holders
of debentures secured by a trust deed, shall be void insofar as it would have
the effect of exempting a trustee thereof from, or indemnifying him against,
liability for breach of trust, where he fails to show the degree of care and
diligence required of him as trustee, having regard to the provisions of the
trust deed conferring on him any powers, authorities or discretions.”
In addition, we would refer to section
117B(3), which provides as under:
“117B. Appointment of
debenture trustees and duties of debenture trustees. —
(1) ……
(2) ……
(3) In
particular, and without prejudice to the generality of the foregoing functions,
a debenture trustee may take such steps as he may deem fit –
(a) to ensure that the assets of the company
issuing debentures and each of the guarantors are sufficient to discharge the
principal amount at all times;”
No doubt, the aforesaid sub-section came into force w.e.f. March, 2000, but it is a reiteration of the general
principles applicable to trustees.
In any case,
sub-section (1) of section 119 specifically provides that a trustee would be
liable for breach of trust, in case he fails to take and to have so taken the
degree of care and diligence required of him as a trustee, having regard to the
provisions of the trust deed conferring on him any power, authority or
discretions. This section enacts a statutory provision making void all clauses
in a trust deed exempting the trustee from such liability.
In additikon to the above provisions, SEBI has laid down the
duties of a debenture trustee under Regulation 15 of the Securities and
Exchange Board of India (Debenture Trustees) Regulations, 1993. The relevant
part is as under:
“15. (1) It shall be the duty of every
debenture trustee to:
(a) …………………………;
(b) inspect books of accounts, records,
registers of the body corporate and the trust property to the extent necessary
for discharging his obligations;
(c) …………………………;
(d) enforce security in the interest of the
debenture holders;
(e) do such acts as are necessary in the event the security becomes
enforceable;
(f) carry out such acts as are
necessary for the protection of the debenture holders and to do all things
necessary in order to resolve the grievances of the debenture holders;
(g)
ensure that the -
(i) …………..;
(ii) ………….;
(iii) interest warrants for interest due on the debentures have
been dispatched to the debenture holders on or before the due dates;
(iv) debenture holders have been paid the monies due to them on
the date of redemption of the debentures;
(h) exercise due diligence to ascertain whether or not the assets of
the body corporate which are available by way of security or otherwise are
sufficient or are likely to be or become sufficient to discharge the claims of
debenture holders as and when they become due;
(i) ……………………………….;
(j) to take appropriate measures for
protecting the interest of the debenture holders as soon as any breach of
the trust deed or law comes to his notice;
(k) …………………………;
(l) …………………………;
(m) ……………………………
(n) communicate to the
debenture holders on half yearly basis the compliance
of the terms of the issue by the body corporate, defaults, if any, in payment of interest or redemption of
debentures and action taken therefore.
In addition,
the SEBI (Debenture Trustees) Regulations, 1993 provide a Code of Conduct for
the debentures trustees, as contemplated under Regulation 16. This Code
(Schedule III), inter alia, states, as under:
“3. A debenture
trustee shall fulfill its obligation in a prompt, ethical and professional
manner.
4. A debenture
trustee shall at all times exercise due diligence, ensure proper care and exercise
independent professional judgment.
5. A debenture
trustee shall take all reasonable steps to establish the true and full
identity of each of its clients, and of each client’s financial situation and
maintain record of the same.
6. A debenture
trustee shall ensure that any change in registration status/any penal action
taken by Board or any material change in financial position which may adversely
affect the interests of clients/debenture holders is promptly informed to
the clients and any business remaining outstanding is transferred to
another registered intermediary in accordance with any instructions of the
affected clients.
15. A debenture
trustee shall ensure that adequate disclosures are made to the debenture
holders, in a comprehensible and timely manner so as to enable them to make a
balanced and informed decision.
16. A debenture
trustee shall endeavor to ensure that -
a. inquiries from debenture holders are
adequately dealt with;
b. grievances of debenture holders are
redressed in a timely and appropriate manner;
c. where a complaint is not remedied
promptly, the debenture-holder is advised of any further steps, which may be
available to the debenture holder under the regulatory system.
The
aforesaid statutory provisions leave no doubt that debenture trustees are
required to exercise due diligence and see that the Company, which has issued
debentures and for which they have become trustee, has sufficient
funds/property for repayment of the redemption amounts of the debentures and
for payment of interest thereon on the due date(s). If the debenture trustee failed
to discharge his duties as contemplated
under the Act or the SEBI Regulations, then there would be deficiency in
service, for that debenture trustee would be liable.
IIII (a) Hence,
to find out whether the trustee has discharged its duties diligently in this
case in the interest of debenture holders, an order was passed on
“12.2.2008
Heard the learned proxy Counsel for the Petitioner and the
learned Counsel for the Respondents.
The
issues raised by the learned Counsel (amicus curiae) Mr. Krishan
Mahajan for the Respondent are whether the
Petitioners have discharged liabilities as trustees.
(1) for non-Banking Financial Companies under the RBI Act;
(2) under the SEBI Guidelines concerning debentures as well as
the SEBI Act; and
(3) under the Indian Trusts Act wherein the trustees’ duties
have been delineated on the issues of debentures.
He has also enquired as to what the outcome is
of the winding up suit that has been filed by the Central Bank of
He
adds that a note on the issues has been handed over today to the learned Proxy
Counsel for the Petitioner. He further confirms that a copy of the proceedings
and a list of documents placed on record have been given to him to be able to
assist this Commission.
The learned Proxy Counsel for the Petitioner,
however, submits that the main Counsel, Mr. Pardiwala,
is unable to come to the Commission today and the required documents and details
sought by the learned Amicus Curiae would be produced before the next date of
hearing.
It is submitted by the learned Counsel for the
Respondent that the case has been pending for long and yet the reliefs prayed for by the respondents have not been
granted. In order to decide the matter, not only the issues noted above have to
be decided but the Petitioner should also deposit the entire awarded amount in
all the cases with the respective Fora. This plea is justified.
We have perused the orders passed by the State
Commissions and the District Forums. Both the Fora
have decided the case in favour of the Respondents.
Learned Proxy Counsel for the Petitioner submits
that to deposit the entire amount is not called for at this stage as the
arguing counsel Mr. R.M. Pardiwala is not present
today. We notice that Mr. Naqvi has been associated
with this case and, hence, it cannot be said that he is not aware of the facts
of the case. We direct the Petitioner to first deposit the amounts as per the
order of the State Commission within four weeds from today with this
Commission. Stand over to 27.3.2008.
The present position of the winding up
proceedings before the Official Liquidator, particularly for the amounts
finalized in these proceedings to be paid out to the Respondents should also be
given to the Counsel for the Respondents one week before the next date of
hearing by the Petitioner.”
It is to
be stated that there was total non-compliance of the said order.
(b) Correspondence
However, the
Bank has produced on record various documents purporting to show that the Bank
/ Trustee sought from time to time appropriate information from the Company.
In any case,
to find out whether the Trustee has discharged its duties and functions as
required by the Law and the Code, we refer to the steps taken by the Trustee
which is a Public Sector Scheduled Bank specializing in the business of trust
management and thus a professional corporate trustee. From the correspondence
produced by the Bank and referred to hereinafter, it is apparent all that the
Trustee did was to merely write letters and, in effect, failed to take any
concrete and deterrent action against the Company, as enjoined on it by the Law
and the Regulations governing the functions and duties of a Debenture Trustee,
despite the latter having repeatedly failed to pay due interest on the
debentures or to demonstrate establishment of a statutorily mandated Debenture
Redemption Fund and due and timely credits to the said Fund as required under
the Trust Deed for redemption of the debentures.
The
mere letter writing action of the Trustee in this case would be apparent from
the long list of letters produced by the Bank and reproduced below more or less
verbatim.
(1) Letter
dated
“We are in receipt of copy of your balance sheet and we
observe that:
(i) D/E ratio is increased from 3:1 in June, 96 to 4.83:1
in June, 97;
(ii) security coverage ratio falls below 1. The required ASCR
is
(iii) Declining
trend in profits.
We draw your attention to
provisions of Debenture Trust Deed which stipulates that in case at any
point of time the security coverage is reduced below 1:33 times, the
Company shall offer further additional securities to maintain the required
security cover of 1.33 times, to the satisfaction of the trustees. Hence, you
are requested to immediately arrange for additional securities to maintain
required level of security cover. Further, we also request you to submit
Chartered Accountant Certificate regarding Asset Security Coverage available at
present.
You are also aware,
we are receiving various complaints from the debenture holders regarding
non-receipt of interest payment and other grievances. The copy of the complaints are forwarded to you as and when we
receive the same. We advise you to take necessary steps to resolve the
same without any further delay. Since SEBI requires the date of number of
complaints received, resolved and pending during every quarter and therefore we
request you to submit us the same immediately along with C.A. Certificate and
point-wise comment to our observation concerning balance sheet.
Please treat this as “most urgent”
and let us have your reply within a week together with details of the
additional securities to be charged for securing debentures.”
(2) Letter
dated
“Please refer to our various correspondence on the captioned subject.
In this connection, we once again
request you to:
(i) forward the
address of site where the machineries are leased out by you;
(ii) let us know the position of insurance policies;
(iii) forward us the For, No.8 and 13 duly registered with ROC,
Chennai; and
(iv) follow up with Sub-Registrar, Mumbai for the original
trust deed registered by them.
Further,
you have informed vide your letter dated 7.6.97 that you are arranging “NOC”
from your Consortium Banks and complete the creation of additional
securities in our favour. Please let us know the
latest position in this regard”.
(3)
Letter dated
“In spite of our letter and subsequent reminders, we have
not received reply from your end till date. We once again request you to
look into the matter and obtain the Original Trust Deed, duly registered,
from us. Further, please forward us the address and insurance details of HP
holder at the earliest.
Please treat this as most urgent and do the needful at the
earliest”.
(4) Letter
dated
By this letter the Bank requested the Company to submit the
details called for in its letter dated
In response
to the letters of the Bank quoted above, the Company, by its letter dated
25.6.1998, sent a list of addresses of the sites where the leased machineries
were placed and all the vehicles and machineries insured at the time of
renewal. It was further stated by the Company that it was following up with the
Sub-Registrar, Mumbai to get the original trust deed and immediately on its receipt, it would be forwarded to the Bank.
(5) Thereafter, the
Bank, by its letter dated
(6) On 27th
June, 1998, the Bank sought again the information called for under its letter
dated 25th May, 1998, i.e., a detailed and cogent reply on
the downgrading of the CRISIL rating of the NCD programme
of the Company, redressal of the investors’
complaints, plan of action for payment of interest due and other items. The
letter reads as under:
“Please refer
to our letter CBI/DEB/98-99/281 dated
We regret to
note that, in spite of a lapse of one month, there is no response from your
side.
We
once again request you to send us your detailed reply for the points raised by
us in our letter, as we have to report the same to SEBI.
Please treat
this as most urgent and let us hear.”
(7) By letter dated
(8) By its letter
dated 23rd July, 1998 the Bank again requested the Company to supply
the information sought in its letter dated 25th May, 1998, i.e.
furnishing documents like (1) Form No.8 & 13 duly registered with the ROC,
Chennai; (2) position of asset security cover; (3) reasons for reduction in
profits; and (4) cogent reply on downgrading of CRISIL rating.
(9) Thereafter, by
letter dated 18th August, 1998, the Bank asked the Company to submit
report on the complaints, as per SEBI Guidelines, on quarterly basis as follows
(i.e., quarter ending on March, June, September and December):
(i) No. of
complaints received;
(ii) No. of complaints resolved; and
(iii) Reasons for complaints pending/action
taken.
The Bank also
requested the Company to look into the matter once again and inform the steps
taken to resolve the complaints forwarded to the Company.
(10) As there was no satisfactory reply from the
Company to the Bank’s letters referred to above, the Bank sent reminders on (i) 19.8.1998; (ii) 10.9.1998; (iii) 24.9.1998; and (iv) 8.10.1998.
(11) In the letter
dated
“Please note we are receiving several complaints regarding
non-payment of interest/redemption amount from the debenture holder. The copy
of the complaints forwarded to your office as and when we received the
same. But, we failed to receive the
response from your end till date. The reason for non-compliance of the same is
not known.”
Thereafter, the Bank forwarded the complaints received from
various debenture-holders to the Company.
(12) Letter
dated
“Enclosed, please find the Xerox copy of the complaint
received from the debenture holders, Miss C. B. Noronha
and Mrs. Annamma Varghese, which is self explanatory.
We once
again request you to look into the matter without further delay and do the
needful at the earliest.”
(13) Similar letters
were written on 24.11.1998 and 1.12.1998 to the Company.
(14) In response to these complaints, the Company
assured the Bank by its letter dated 2.12.1998 that it would pay the interest
to the debenture- holders by mid January, 1999.
(15) During
(16) Finally, on
(c) From the
aforesaid correspondence, it is apparent that the since March, 1998 the Bank –
Trustee was fully aware that the Company was committing various defaults in
payment of interest. The security coverage for the debentures had reduced.
However, even in April 1998, the Bank did not know the details of the sites
where the machineries leased out by the Company were located. The original
Trust Deed was also not received by the Bank till
Thereafter, the only action of the Bank
was to correspond with the Company but no effective steps were taken to verify
the statements of the Company or initiate any action to recover the amount due
to be paid by the Company to the debenture holders.
All that the learned counsel for the
Bank has submitted is that the Bank has filed a civil suit before the Madras
High Court for the mortgaged property; a Liquidator has been appointed by the
High Court and as soon as the suit was decided, the amounts recovered would be
distributed as per the provisions of the Companies Act, 1956. He, therefore,
contended that there is no deficiency in service on the part of the Petitioner
Bank.
As against this, learned Amicus Curiae
has submitted that mere filing of a suit when the Company was to be wound up
cannot be considered to be sufficient with regard to the discharge of duties of
the Bank as the Debenture Trustee, in view of the Law and the SEBI Regulations.
IV. Findings
In our view, the submission made by
the Amicus Curiae is required to be accepted. If the Central Bank accepted to
be a debenture trustee, it was its duty to first verify, at every relevant
stage, the financial position of the Company which issued the debentures and
secondly, to ensure that these assets were at all relevant times adequate to
meet the financial obligations of the Company to the debenture holders.
Most important, the Petitioner
ought to have discharged its duty as a professional corporate trustee and if
the loss was caused to the debenture holders due to its deficiency in not
taking special care and in not exercising its special expertise as a corporate
trustee, which it professes, then it is
liable for its deficiency in service.
Further, we have to state that if
there are certain conditions or covenants in the Trust Deed, which abrogate or
minimize such duties, those covenants are required to be ignored. That is
specifically provided in section 119(1) of the Companies Act, 1956. It was the
duty of the petitioner to verify whether the assets of the company were
sufficient to discharge the liability towards the debenture holders.
As per the Code of Conduct for the
debenture trustees prescribed under the SEBI Regulations, the Petitioner, as a
debenture trustee, was required to take all reasonable steps to ascertain and
satisfy itself of the true and full identity of the companies for which it
undertook to become the debenture trustee and the financial position of each of
the companies from the very beginning. It is apparent that
this was not done in the present case. In this view of the matter, the impugned
orders passed by the State Commissions cannot be said to be in any way illegal
or erroneous.
As
a Debenture Trustee, the Petitioner – a public sector scheduled commercial bank
with specialized skills to operate as a Debenture Trustee, ought to have taken
a number of steps prescribed under the relevant Act and the SEBI Regulations,
1993.
(i) First, the Trust Deed was required to
conform with the set of minimum requirements specified
in Schedule IV of the SEBI Regulations. The learned Counsel for the Petitioner
has not stated anything before us to establish that this was indeed so. Under
Regulation No. 15 (1) (b), the Petitioner should have inspected the books of
accounts, records and registers of the Company as well as the property offered
as the security cover for the debentures to ensure that the said property was
sufficient at all times to the extent necessary for the Company to discharge
the obligations. The Trustee should have further taken necessary steps to
ensure that this security was enforceable.
(ii) Further, the Trustee was
also required to take appropriate measures to protect the interests of the
debenture holders as soon as any breach of the Trust Deed or the particular
lapse came to its notice.
(iii) It was also mandatory for the Debenture Trustee to either to call
or cause the Company to call a meeting of the debenture holders on the happening
of any event which constituted a default or which, in the opinion of the
Trustee, affected the interests of the debenture holders.
(iv) In addition, as the Debenture Trustee, the Petitioner was required to
take all actions specified in Scheduled III (Code of Conduct). In reality,
however, all that the Debenture Trustee did was to write letters to the Company
– it simply failed to take (or refrained from taking, for reasons best known to
it) any effective action even after repeated instances of default by the
Company in the payment of half-yearly interest on the debentures came to its
notice. By its own admission, the Petitioner took no effective steps till long
after taking over as the Debenture Trustee, to even ensure that the original
version of the Trust Deed was secured and kept in its possession. For long, it
took no steps to ascertain even the locations of the Company’s assets stated to
have been leased / hired out by the Company as part of its regular business
activities. Clearly, there was no verification by the Petitioner to ascertain
and establish that these assets were actually available at these locations and
in good condition, i.e., they were and would continue to remain productive and
yield necessary income to the Company so as to enable the latter to discharge
its financial liability under the Debenture Trust Deed.
(v) The
Petitioner conducted no inspection of either the books of accounts of the
Company or the relevant assets pledged by way of security for the debentures,
even after it became fully aware that the security coverage ratio under the
Debenture Trust Deed had fallen well below the minimum mandate of 1.33 times.
Merely writing letters to the Company to point out that the debt equity ratio
had risen or the debt service coverage ratio had fallen is altogether a
different matter from investigating as to why these actually happened and what
ought to be done by the Company immediately as well as over the tenure of the
debentures to meet the two primary requirements, namely, the regular payment of
half-yearly interest and full redemption of the debentures on maturity.
In
short, the Petitioner-Bank failed to discharge its fiduciary duty with special
care and skill as is expected from professional corporate trustee and had
not taken appropriate steps as contemplated under the SEBI Regulations.
For the reasons stated above, these
Revision Petitions are dismissed. There
shall be no order as to costs.
Lastly, it is to be stated that the
learned counsel for the Petitioner has argued out the matter on the basis of
the facts of Revision Petition No.1299/2000 pertaining to Synergy Financial
& Exchange Ltd. and, therefore, facts of other matters are not dealt with.
The DCM Financial Services Ltd. had also issued 9.50% secured redeemable
non-convertible debentures and the Petitioner-Central Bank of
Considering
the finding recorded above, the Registrar of this Commission is directed to send
a copy of this Order to the Chairman, SEBI for appropriate action, if thought
fit, for the deficiency in discharge of duties by the Central Bank of
We highly appreciate the assistance
rendered by both the amicus curiae, Mr. Krishan Mahajan and Ms. Astha Tyagi. The Registry
is directed to pay a sum of Rs.5,000/- to each of them
from the Consumer Legal Aid Account.
Sd/-
…………………………………..J
(M.B. SHAH)
PRESIDENT
Sd/-
……………………………………
(RAJYALAKSHMI
RAO)
MEMBER
Sd/-
…..…………………………………
(ANUPAM
DASGUPTA)
MEMBER