Delhi High Court

Deutsche Trustee Company Ltd. vs Tulip Telecom Ltd. on 16 April, 2014

Author: R.V. Easwar

* IN THE HIGH COURT OF DELHI AT NEW DELHI

                                         Reserved on: 20th March, 2014
%                                     Date of decision: 16th April, 2014


+     CO. APPL. Nos. 1529/2013 & 1688/2013 IN CO. PET. 329/2013


   DEUTSCHE TRUSTEE COMPANY LTD.              ..... Petitioner
                    Through: Mr. Rajiv Nayar, Sr. Advocate
                             with Mr. L.K. Bhushan and Mr.
                             Anirudh Arunkumar, Advocates.
             versus
   TULIP TELECOM LTD.                         .....Respondent

Through: Mr C A Sundaram, Sr. Adv. with Ms Diya Kapur, Mr. Arjun Singh Puri with Ms. Tejaswi Shetty and Ms. Himani Katoch, Advocates.

Mr Sandeep Sethi, Sr. Adv. With Mr. Devmani Bansal, Advocate for ICICI Bank.

Mr. Darpan Wadhwa with Ms. Roshni Namboodiry, Advocates for workmen.

CORAM:

HON'BLE MR. JUSTICE R.V.EASWAR

R. V. EASWAR, J.:

1. M/s Tulip Telecom Ltd. (hereinafter referred to as "TTL" or the

"respondent-company") is a company incorporated in India. It issued an

offering circular for foreign currency convertible bonds (FCCBs) for

USD 150 million, to be redeemed on maturity at 144.56% of the principal

amount. A trust deed was entered into between TTL and M/s Deutsche

Trustee Company Ltd., the petitioner herein, under which the petitioner

was appointed the trustee for the bondholders. The bonds were to be

redeemed on 26th July, 2012. They had been partly redeemed and the

principal value of the unredeemed bonds on the date of maturity was

USD 97 million. After aggregating the premium payable on maturity, the

amount payable by TTL as on the above date on the bonds came to USD

140 million. It is common ground that when the maturity date arrived,

the unredeemed bonds were not redeemed by TTL. Assurances were

given to the Bombay Stock Exchange and the National Stock Exchange

that the bonds would be redeemed by 10th September, 2012. The trustee

for the bondholders i.e. the petitioner in these proceedings, sent a fax

message to the respondent on 28th August, 2012 informing the latter that

the bonds were not redeemed on the date of maturity. Action was

contemplated by the petitioner and this was also intimated to TTL. In

October, 2012 there was an announcement to the bondholders about the

development. On 19.3.2013 the petitioner sent the statutory demand

notice contemplated by section 434(1)(a) of the Companies Act, 1956

which was followed up by reminders sent in the month of April, 2013.

No amount was forthcoming from TTL despite the statutory demand

notice and reminders.

2. On 8th May, 2013, TTL obtained a letter of approval for a

Corporate Debt Restructuring Scheme, a copy of which is placed as

annexure C to CA 1688/2013. The petitioner on coming to know of the

CDR scheme, filed a winding up petition before this Court on 31st May,

2013 under section 433(e) of the Companies Act seeking winding up of

TTL on the ground of inability to pay its debts. CA 1529/2013 is an

application filed by the petitioner to restrain TTL from modifying in any

manner any security interest granted by TTL to the CDR lenders in the

past. CA 1688/2013 is an application filed by ICICI Bank Ltd., which is

the lead bank in the consortium of banks, seeking impleadment in the

present proceedings.

3. When the company petition No.329/2013 was listed for hearing, on

16th September, 2013, the learned senior counsel appearing for TTL

undertook before the Company Judge that the CDR scheme will not be

given effect to till the disposal of the interim applications. When the

matter was listed for arguments on 7th October, 2013, there was initially

some dispute raised on behalf of the respondent as to whether any such

undertaking was given to this Court, but after some time the learned

senior counsel appearing for the respondent-company made a statement

that if any such undertaking had been given earlier by the senior counsel

who appeared before this Court on the earlier date, the same would be

honoured. Thereafter CA 1529/2013, which is an application for stay of

the CDR scheme was taken up for consideration. Even here initially

there was some objection raised on behalf of the respondent as to whether

CA 1529/2013 was in fact an application for stay of the CDR scheme.

However, the learned senior counsel for the petitioner pointed out that a

prayer for stay of the CDR scheme had been made in para 15 of the

company petition. After this statement was made, the parties addressed

arguments as to whether the CDR scheme should be stayed, pending

admission of the company petition. The position therefore is that this

Court has not passed any order as to whether the company petition

No.329/2013 should be admitted or not; arguments were heard at length

only on the question whether the CDR scheme which was approved by

letter dated 8th May, 2013 and was followed up by a Master Restructuring

Agreement (MRA) dated 17th July, 2013 should continue or should be

stayed till further orders.

4. Mr Rajiv Nayar, the learned senior counsel appearing for the

petitioner put forth the following submissions in support of the

application for stay of the CDR scheme :

(i) There is an undisputed debt which TTL is unable to pay.

There is also acknowledgement of the debt several times. No reply

was sent by TTL to the statutory demand notice, nor was any

payment made in redemption of the bonds. There is thus a prima

facie case for admission of the company petition. If so, there is

also a strong case for granting stay of the CDR scheme.

(ii) The CDR scheme is heavily loaded in favour of the secured

creditors giving rise to the apprehension in the minds of the

petitioner that if the said scheme is implemented, there will be no

assets left which can be liquated for meeting the liability of TTL to

the bondholders.

(iii) Between 31st May, 2013 and 10th July, 2013, the respondent

did not inform the petitioner about the proposed CDR scheme,

even though by that time the default had occurred and the

petitioner had also sent the statutory notice followed up by

reminders.

(iv) After the judgment of the Supreme Court in Jitendra Nath

Singh v. Official Liquidator (2013) 1 SCC 462, the very basis of

any CDR scheme has come under a cloud or question because of

the provision for pooling of securities and for inducting further

securities into the CDR scheme. The CDR scheme in the present

case makes provision for both pooling of securities and for

inducting further securities to the prejudice of the interests of the

petitioner.

(v) The CDR scheme is not a statutory scheme; in any case, the

petitioner is neither bound by the scheme nor can he be compelled

to join the scheme or await the outcome of the scheme.

5. Mr Nayar sought to elaborate the main objection to the CDR

scheme, i.e. the provision for pooling of the securities and the provision

for the induction of further security in the form of shares of a company by

name Tulip Data Centre Pvt. Ltd. a wholly-owned subsidiary of TTL. He

clarified that there is no objection to the security itself, but the objection

is to the pooling of the security amongst the secured creditors who are

participating in the CDR scheme, which may deprive the petitioner of its

legitimate rights to have the proceeds of the assets, even if not charged in

favour of the petitioner, applied to the discharge of the FCCBs. He

strongly relied on the observations of the Supreme Court in para 10 and

11 of the judgment in the case of Jitendra Nath Singh (supra) to the effect

that a secured creditor of an insolvent company which is being wound up

has only a right over the particular property or asset of the company

offered to the secured creditor as a security and the unsecured creditors

have rights over all other properties or assets of the insolvent company.

He also invited my attention to para 8(a) of CA 1529/2013 in which there

is a specific challenge to the pooling of the securities. The other strong

objection to the CDR scheme is that it provides for further induction of

security in the form of shares of Tulip Data Centre Pvt. Ltd., the

argument being that but for such induction of the shares into the CDR

package, they would have been available for being applied towards the

discharge of the liability to the bondholders and thus the induction of

those shares into the CDR package was detrimental to the interests of the

petitioner.

6. The subsidiary objections of Mr Nayar, the learned senior counsel

for the petitioner, are firstly that the CDR scheme cannot fix the

redemption value of the FCCBs since the CDR lenders or those who

participate in the CDR scheme are in no way concerned with the

unsecured creditors such as the bondholders. It is pointed out that as per

the CDR scheme, a cap of Rs.243 cores has been placed on the liability in

respect of the FCCBs which is completely without the sanction of law

and is a unilateral, unauthorised step taken by the CDR lenders.

According to Mr Nayar, TTL has given only two options to the petitioner

- either to accept the amount of Rs.243 cores in full settlement of the

liability now or to accept fresh bonds of 10 years maturity for a total

redemption value of USD 144.71 million, neither of which is acceptable

to the petitioner.

7. Mr. Nayar criticised a few aspects of the CDR scheme which

according to him were detrimental to the interests of the petitioner. He

pointed that the MRA provided for certain sacrifices by the secured

creditors participating in the CDR scheme, according to which the

secured creditors sacrificed only the interest of Rs.238 cores on the loans

advanced by them without any sacrifice of the principal amount, whereas

the expectation of the CDR scheme is that the petitioner should sacrifice a

sum of Rs.650 cores. He submitted that these terms are heavily loaded in

favour of the respondent-company and the secured creditors participating

in the CDR scheme. He placed strong reliance on the judgments of the

Bombay High Court in Sublime Agro Ltd. V. Indage Vinters Ltd. (dated

19.3.2010, S.J. Kathwalla, J.) and BNY Corporate Trustee Services Ltd.

V. Wockhardt Ltd. (dated 11.3.2011, S.C. Dharmadhikari, J.), and the

judgment of this Court in Citibank N.A. vs. Moser Baer (dated 17th July,

2013).

8. In support of the aforesaid submissions, Mr Nayar made elaborate

references to the CDR scheme and the MRA.

9. The stay application was vehemently opposed on behalf of the

respondent company. Mr. Sundaram, the learned senior counsel

appearing for TTL pointed out that the winding up petition has not even

been admitted and therefore utmost caution has to be exercised in passing

any order on the application which seeks to stay the implementation of

the CDR scheme. He pointed out that the usual parameters for stay, such

as the existence of a prima facie case on merits, the balance of

convenience and the irreparable loss or injury that could be caused to the

parties ought to be taken note of in the present case also, with the

additional aspect being factored in, namely, that the winding up petition

itself is yet to be admitted. With this preface he contended that there was

a marked difference between the judgment of this Court in the case of

Citibank N.A., vs. Moser Baer (supra), relied upon by the petitioner, and

the present case in the sense that Moser Baer relied upon earlier judgment

of this Court in Bipla Chemical Industries V. Shree Keshariya

Investment Ltd. (1977) 47 Com.Cas 211, which was a case which was

not decided on the existence of debts. He submitted that a company court

is a court of equitable jurisdiction and therefore while deciding on the

stay application, it has to weigh all factors which would affect the

justness and the equitable nature of the issue. He heavily relied on the

judgment of the Supreme Court in Hind Overseas Private Ltd. V.

Raghunath Prasad Jhunjhunwalla & Anr. (1976) 3SCC 259 and the

judgment of this Court in Laguna Holdings Pvt. Ltd. & Ors. V. Eden

Park Hotels Pvt. Ltd. & Ors. (2013) 176 Comp. Cas. 118. Mr.

Sundaram submitted that both Bipla Chemical Industries and Moser Baer

(Supra) were cases on the question whether the winding up petition

should be admitted or not. The defence in those cases was that since

there was already a CDR Scheme or a revival scheme in place, the

winding up petition should not be admitted. This Court found no merit in

the defence which, according to Mr.Sundaram, was the right view to take

since at the stage of admission of the winding up petition the company

court has to merely examine whether there was an admitted debt which

the company is unable to pay. If these basic conditions are satisfied, it is

the discretion of the court to admit the petition or not and in the two

decisions of this Court cited above, the Court thought it fit to hold that the

existence of a CDR scheme cannot be an impediment to the admission of

the winding up petition, given that there was an admitted debt and an

inability to pay the same. According to Mr. Sundaram, the present

proceedings are different, in the sense that we are not concerned with the

question whether the winding up petition should be admitted or not; the

petitioner seeks stay even before the petition is admitted, a situation

which according to Mr. Sundaram calls for extreme caution and

sensitiveness. Moreover, according to him, the bondholders are only

speculators, having bought the bonds in the market at a discount and

expecting to gain if the company goes into liquidation, and not genuine

investors. He further contended that it is even doubtful whether the

bonds can be said to represent a "debt" for the purposes of Section

433/434 of the Act.

10. Mr. Sundaram reminded me of the well-settled principle laid down

in Madhusudan Gordhandas V. Madhu Woollen Ind. (1971) 3SCC 632

that the decision whether to wind-up a company or not should be taken by

the company court after taking into consideration the wishes and views of

all the stakeholders including the contributories, the secured creditors, the

workmen as well as the customers. The company court is also bound to

keep in view the economy of the country and the public interest that is

likely to suffer if an order of winding up is made. According to the

learned senior counsel, a majority of the creditors (almost 3-4th) in the

present case desire that the company should revive. The CDR scheme is

a step for the revival of the company. Irrespective of the question

whether it is statutory or not, there can be no gainsaying that the scheme

has the blessing of the Reserve Bank of India which has laid down certain

broad principles and contours for the framing of the CDR Scheme. The

scheme was initiated after a study conducted by Ernst and Young, who

have made some general observations in their technical evaluation report

indicating a positive outlook for TTL.

11. Mr. Sundaram further submitted that if the stay application is

allowed and the CDR scheme is stayed, this Court would have reached a

conclusion that there was a case for winding-up even before the winding-

up petition is admitted, a course which would be a reversal of the

proceedings and the normal procedure that the stay application would

come up for consideration only if the winding up petition is admitted or at

least notice is issued to the respondent. He therefore reminded this court

several times, gently but firmly, that this Court should exercise extra

caution and should have very strong and exceptional reasons as to why

the CDR scheme should be stayed even before the winding up petition is

admitted.

12. Mr. Sundaram has also pointed out several provisions in the CDR

scheme and the MRA which are aimed at lightening of the debt burden of

the respondent-company and the increase of its working capital, which

would go a long way in reviving the liquidity of TTL.

13. The workmen numbering about 121 out of 3500 odd workers of

TTL have filed CA No.1796/2013 for impleading. Mr. Wadhwa, the

learned counsel appearing for the workmen strongly relied on the

judgment of the Supreme Court in National Textiles Workers'Union V.

P.R.Ramakrishnanand & Ors. (1983) 1SCC 228 and submitted that the

workers have a right to be heard both before the winding up petition is

admitted and thereafter before any winding up order is passed. He

contended that the CDR scheme will ease the liquidity crunch faced by

TTL. Pointing out that there is nothing in the CDR scheme which

provides for retrenchment of workmen and arguing for a case for

continuance of the scheme, Mr.Wadhwa submitted that the company

court is a court of equitable jurisdiction and is not bound to order winding

up of a company even if the conditions of Section 433 of the Act are

satisfied. The power of the court to admit a winding up petition is

discretionary. Mr. Wadhwa says that if that is so, the position would be a

fortiori in the case of stay application, that too where the winding up

petition is yet to be taken up for admission; the balance of convenience

and the irretrievable loss or injury are loaded in favour of the continuance

of the CDR scheme. He submitted that the petitioner is an unsecured

creditor and all unsecured creditors have an inherent risk and the

petitioner is no exception. The concerns of the workmen should be

protected by the company court. He therefore pleaded that the

implementation of the CDR scheme should not be stayed.

14. Mr. Sandeep Sethi, learned senior counsel appearing for the ICICI

Bank Ltd. in CA No.1688/2013, which is the lead bank in the CDR

scheme pointed out that there are 13 banks and financial institutions

representing more than 2/3rd of the debt owed by TTL participating in the

scheme and an amount in excess of Rs.2000 crores is due to them, the

amount due to ICICI Bank Ltd. being Rs.670 crores. He read out and

relied upon the salient features of the revival scheme, particularly the

provisions relating to restructuring of debts. According to Mr. Sethi, the

CDR scheme does address the concerns of the FCCB holders also and

thus a holistic and macro view has been taken. He pointed out that the

CDR scheme does not envisage any payment to any creditor to the

prejudice of the other creditors and a moratorium on such payment has

been imposed till March, 2015 and therefore at least till that time, no

prejudice would be caused to the petitioner. He drew my attention to the

impressive customer profile of TTL and submitted that once the CDR

scheme is implemented and considerable progress is made, the effect

thereof shall be felt in increased liquidity and possibility of sparing of

funds enabling repayment of the FCCBs. With reference to the argument

of the petitioner that the pooling of the securities would be detrimental to

the interests of the bondholders, Mr. Sethi strongly denied that it would

be so. He argued that the implication of pooling of securities is only that

the secured creditors would inter se make adjustments to their respective

securities without in any way affecting the prospects of the unsecured

creditors and therefore there is no room for the apprehension expressed

on behalf of the petitioner that the pooling of the securities would

diminish the prospects of the unsecured creditors getting any payment in

respect of the bonds. He pointed out that in any case, even before the

CDR scheme, all the creditors, in addition to the charge or security of a

specific asset, had a pari passu charge on the other fixed or moveable

assets and the pooling of securities did not make any effective change to

the same.

15. In his rejoinder to the arguments of the learned senior counsel for

the respondent-company and the ICICI Bank Ltd. as well as to the

arguments of the learned counsel for the workmen, Mr. Rajiv Nayar

summed up his arguments as follows: -

(i) The induction of the shares of Tulip Data Centre Pvt. Ltd.

into the fold of the CDR scheme is wholly detrimental and

prejudicial to the interests of the petitioner and should not be

permitted. The sale of these shares is in the immediate

contemplation of the CDR lenders and there is no provision in the

MRA prohibiting the sale. The only provision is that the payment

to the CDR lenders will be deferred till June, 2015 but the sale of

shares can take place at any time;

(ii) The pooling of the securities contemplated by the CDR

scheme deprives the right of the petitioner by reducing the asset-

base of the respondent-company and creates a new class of

creditors, which is impermissible;

(iii) The CDR scheme will negate the rights of the unsecured

creditors in the case of the liquidation. The CDR scheme does not

take care of the unsecured creditors of which the petitioner is one;

(iv) If the sale of shares takes place, against which there is no

provision, it cannot be reversed by the Company Court; any fresh

charges created upon the aforesaid shares cannot be undone by the

Company Court; even a pledge of shares cannot be undone. In

truth and reality, the CDR scheme is thus only a process of sale of

the assets of the company for the benefit of the secured creditors; it

is not a step towards revival of the company;

(v) The petitioner is not a speculator, as alleged by the

respondent, who has acquired the bonds at a discounted price and

is hoping to derive huge gains if any payment is made by the TTL.

On the contrary, even as per the offer circular, the fluctuation in the

market price of the shares are bound to affect the bonds, but once

the maturity date is crossed, without redemption, the risk factor

cannot operate thereafter;

(vi) As per the circular issued by the Reserve Bank of India on

01.07.2013, even a bond is a debt instrument and, therefore, the

argument advanced on behalf of the respondent-company that the

bonds do not represent a debt qua Sections 433 and 434 of the

Companies Act is without any merit;

(vii) The circulars issued by the Reserve Bank of India on

23.08.2001, 05.02.2013 and 10.11.2005 on the subject of CDR

schemes have no statutory basis. Only the secured creditors who

are parties to the CDR scheme are bound by the circulars;

(viii) The existence of a CDR scheme is not an impediment to the

winding-up proceedings being admitted by the Company Court as

held by the Bombay High Court in Sublime Agro Ltd. (supra) and

Wockhardt Ltd. (supra) The judgment of this Court in Citibank

N.A. vs. Moser Baer (supra) and in the Hongkong and Shanghai

Banking Corporation Ltd. V. M/s Surya Vinayak Ind. Ltd. Dated

12.2.2014 (Bakhru, J.) are also to the same effect;

(ix) The projected profit and loss account shows a dismal picture

of the respondent-company. TTL is a sinking ship. The technical

evaluation and viability report submitted by Ernst & Young on

which reliance was placed by the respondent and the ICICI Bank

Ltd. has no credibility. The Directors' report does not inspire any

confidence;

(x) The conduct of ICICI Bank Ltd., the lead banker, has not

been bona fide in as much as it did not inform the Court about the

existence of the CDR scheme even on 10.07.2013 though the

winding-up petition was filed by the petitioner on 31.05.2013. The

bank had a motive to conceal the fact from this Court because the

MRA was pending approval on that date and the Court, if it had

been informed, could have put the same on hold; and

(xi) The respondent-company has also not informed this Court

about the oral undertaking given by its senior counsel to this Court

on 16.09.2013 that it will not proceed with the CDR scheme. It

was only the petitioner which brought it to the notice of this Court

on 23.10.2013 and 24.10.2013; the respondent has thus not acted

bona fide.

16. The parties have filed written submissions which have been taken

into consideration.

17. At this stage, when the winding-up petition is yet to come up for

admission, the only concern is whether there is any justification for

staying the CDR Scheme, which is yet to be given effect to pursuant to

the undertaking given to this court on behalf of TTL on 16-9-2013. There

can be no dispute that the company court is not bound to order winding-

up even if the conditions of sections 433 and 434 are satisfied, if it is

found that winding-up will not be in the interests of all the stakeholders

of the company, such as the creditors, customers, workmen,

contributories etc. It is also open to the court to ascertain the wishes of

the creditors under section 557 of the Act. The company court should

welcome measures to revive the company rather than wind-up the

company because the liquidation of the company is likely to affect

prejudicially the stakeholders. The question whether the CDR scheme

should be stayed is closely linked to this broad and general rule; a CDR

scheme is aimed at reviving the company which has fallen into

difficulties. Even assuming for the sake of argument that the CDR

Scheme is not statutory in nature despite the backing and support

extended by the RBI, and its implementation is purely voluntary or

contractual and in its very nature cannot include the unsecured creditors,

confined as it is to secured creditors, still one cannot overlook that it is an

attempt by a majority of the secured creditors to revive the company and

help it turn round and overcome the financial crisis. It must also be

appreciated - as I do - that a CDR scheme has to perforce be based on an

optimistic approach, provided the company continues to be viable with its

substratum intact. The technical evaluation and viability report has to be

accorded some credibility in this context and its authors accredited with

some sense of responsibility, even making allowance for the fact that its

highlights could possibly tend to be somewhat exaggerated. The report

has therefore to be viewed as a document which provides the platform for

implementation of further financial strategies and as affording merely a

starting point of a series of optimistic measures to be put in place aimed

at revival. The report is no doubt not a magical talisman, a wand that can

make the past disappear. But it gives the impetus for everyone to take

efforts jointly to make the past of the company disappear.

18. The predominant concerns of the petitioner, articulated with

precision by Mr. Rajiv Nayar appearing for the petitioner, are: (i) the

pooling of the securities and (ii) the induction of further security in the

form of shares of TDCPL which would have been otherwise available for

the unsecured creditors, including the petitioner. The answer to (i) given

on behalf of the respondent-company is that even before the pooling of

the securities the CDR lenders had, in addition to the asset secured to

them, a first pari passu charge on all the other fixed assets of the

company and a second pari passu charge on the moveable assets; the

working capital lenders had a first pari passu charge over the moveable

asset and second pari passu charge over the fixed assets. It is thus

contended by the respondent that the assets available to the unsecured

creditors cannot be said to be reduced because of the CDR scheme. With

regard to the point No.(ii) above, the respondent contends that the

petitioner's estimate that the shares of TDCPL would fetch around

Rs.3,000 to Rs.4,000 crores is "outrageously exaggerated". My attention

was drawn to the financial statements for the six months period ended

31.03.2013 in which the investment in the said shares is shown at

Rs.214.01 crores. It is also submitted that TDCPL has a total secured

debt of about Rs.350 crores including the debt of Rs.150 crores extended

by ICICI Bank, against which 30% of the shares have been pledged. In

addition another 30% of the shares are pledged to Edelweiss and

Religare. According to the respondent, the realisable value of the shares

in a distress sale would be much below the book value and will not be

sufficient to clear the dues to the bondholders. The argument is that the

induction of the TDCPL shares will not prejudice the interests of the

bondholders, considering their low market value. Excpet the book value

of Rs.214 crores, the other figures - given by the petitioner as the

estimated market price of the shares - and the claim of the respondent

that the shares would fetch a price much below the book value are not

immediately capable of verification in the absence of any acceptable

report by a competent person estimating the market value of the shares on

a realistic basis.

19. I am unable to reject the apprehension of the petitioner as baseless,

so far as these two points are concerned. Even if the respondent is correct

in stating that the pooling arrangement does not cause any fresh prejudice

to the interests of the bondholders, the fresh induction of TDCPL shares

is a cause for concern. A robust commonsense approach would indicate

that the CDR lenders apparently had some basis for the opinion that the

shares are of considerable value; otherwise it is difficult to justify the

decision to induct them into the CDR package scheme. When this move

was made, I am fairly certain that the lender - banks would have taken

pains to assess the real worth of shares and after embarking upon such an

exercise, they must have had enough justification in support of the move,

in terms of the market value of the shares. I am unable to hazard a guess

as to what precisely is the market value of the shares but at the same time

I am fairly certain that their real worth must have been such as to justify

the decision of the lender banks to induct them into the CDR scheme.

20. The question now is whether the mere existence of these two

thorny issues should persuade the Company Court to injunct the

respondent from proceeding further with the CDR scheme. That

consequence seems to me to be somewhat unfair and disproportionate to

the apprehensions of the petitioner. The respondent-company is a

network infrastructure company providing network connectivity to 2000

cities and supporting crucial networks for the government, public sector

banks and various private enterprises. It is one of the largest information

technology infrastructure companies and provides core infrastructure and

essential services. Its customer profile is an impressive array of

electricity boards of several States, leading private sector and public

sector banks, many airlines to which it provides connectivity, police

departments of Jammu & Kashmir, Delhi, etc., National Informatics

Centre (NIC) the States of Haryana, Assam, Madhya Pradesh,

Maharashtra and Gujarat, who avail of the "State wide area network"

provided by the respondent and so on and so forth. The respondent-

company, like many other infrastructure companies, has not been able to

match the cash flows with the requirements of the business or with its

liabilities towards repayment of loans including the bonds on account of

the fact that in all such companies which are capital intensive the

revenues start flowing in only after a long gestation period. Between the

time when the infrastructure is put in place (by which time heavy capital

outlay would have taken place) and the time when the revenues start

trickling in, every such company faces a cash crunch during which period

there is high probability of defaults in loan repayments. Apparently, TTL

being such an infrastructure company providing core and essential

services in the IT sector has been caught in this period. The optimism

generated by the technical evaluation and viability report has factored in

this element; it is only a matter of time, according to the report, that the

company would start earning revenues which would generate adequate

cash inflows. The CDR package scheme enables the company to tide

over this crucial period by providing for funding of interest liability, fresh

infusion of working capital, moratorium on repayment of debt and a slew

of other measures outlined in the CDR scheme and the MRA. In my

opinion, it would be useless beyond a particular point to enter into the

nitty-gritty of the figures mentioned in the CDR scheme and the MRA

since one can adopt a selective approach and cull out figures which suit

what one wants to say.

21. One of the contentions of the petitioner was that the CDR scheme

is not viable, that its object is not to revive the company but to merely

realize the assets of the company for the benefit of the secured creditors.

I do not think that such a sweeping charge can be countenanced. As

already pointed out, the CDR scheme has the support and backing of the

RBI, which has issued several guidelines through various circulars and

though it is doubtful whether the CDR scheme can be called statutory, yet

it has a basic sanctity and reflects an attempt by the secured creditors to

revive the company. The basic object of any CDR scheme is to

restructure the debts of the company and to provide the company with the

much needed time to equalise its revenues with its repayment obligations.

Any company may at any time of its existence go through phases of

financial crunch. In many cases it may be temporary and may be due to

mismatch of the revenue and payment streams. The CDR mechanism

certainly is not a guarantee that the company will overcome the financial

crisis. It is an attempt, bona fide made, to assist the company get back on

to rails. It attempts to infuse a sense of financial discipline and resilience

into the company. However, the success of the CDR scheme depends on

several factors, not the least of them being a sense of commitment on the

part of the company to adhere to the terms of the scheme. The company

cannot by any means be said to ignore the unsecured creditors and prefer

the secured creditors by entering into a CDR scheme. Despite sincere

efforts, it may happen that during the implementation of the scheme, it

may not be able to adhere to certain projected parameters/figures. But

one cannot doubt the sincerity on the part of the company merely because

it has not been able to achieve the targeted or projected figures during the

implementation of the scheme. The rationale is that the company must be

given a fair chance to acquit itself well, survive the financial crisis and

move forward to honouring its commitments.

22. Mr. Nayar also took objection to the effect that the CDR lenders

have made a sacrifice of only Rs.238 crores by giving up the interest on

the loans temporarily while at the same time they expect the bond holders

to make a sacrifice of the entire amounts due on the bonds. The CDR

scheme is confined to the secured creditors. They can only speak for

themselves which is what they did when they announced a sacrifice of

Rs.238 crores. By placing a cap of Rs.243 cores I do not think that the

intention is that the balance of around Rs. 650 cores due to the bond

holders should be sacrificed by them. The cap of Rs.243 crores has been

placed in the CDR scheme as one of the bases for calculating the cash

flows of the company. The CDR lenders certainly have no right to say

that the balance of the amount should be sacrificed by the bond holders.

While working out the possible cash flows of the company certain

assumptions have to be made both in respect of the revenues and the

payments. One such assumption is a cap of Rs.243 crores on the liability

to bond holders and the cash flows available to the company are worked

out on that basis. It can hardly be said to imply that the bond holders

should give up their claim to the extent of Rs.650 cores. In any case, it is

only an option offered at best, and it is open to the petitioner to reject it.

23. Taking an overall view of the conspectus of the case it seems to me

that the implementation of the CDR scheme cannot be stayed. That will

not be in the interests of the company or the various stake holders; nor

would it be in the interest of the bondholders. Mr. Nayar, strongly

contended that the argument that the success of the CDR scheme would

be beneficial to the petitioner and therefore the petitioner should not try to

block it is unacceptable because the CDR scheme, even if it is

implemented, appears to be only for the benefit of the secured creditors.

But what this contention overlooks is that the bondholders are unsecured

creditors, whereas the CDR lenders are all secured creditors. I must

hasten to clarify that I do not mean to convey the idea that an unsecured

creditor need not be paid back his dues. But having lent monies without

any security, an unsecured creditor would appear to have taken a greater

risk, as pointed out by Mr. Wadhwa, the learned counsel appearing for

the workmen of the company, and therefore cannot complain when the

secured creditors join together and take steps to revive the company. The

revival, if successful, would benefit not only the secured creditors but

also the bondholders who may expect to be paid their dues once the

company revives. The bondholders, in my humble opinion will not be

justified in claiming that the company should be willy-nilly wound up

just because their dues have not been paid, even when steps for revival of

the company are afoot. It is in this context necessary to recapitulate that

it is the duty of the Company Court to welcome revival rather than

affirm the death of the company. The respondent-company is an IT

infrastructure company providing core infrastructure and essential

services. It employs about 3500 workmen on whom some 20,000 lives

are dependent. Staying the CDR scheme at this juncture would

practicably amount to winding up of the company which step has to be

taken only as a last resort. The legislative thinking on this aspect can also

be gleaned from the provisions of the Companies Act, 2013 which is yet

to come in force fully, though many of its provisions have been notified.

Section 253 of that Act provides that the Company or 50% in value of its

secured creditors may file an application before the Company Law

Tribunal for a determination that the company be declared sick and for

stay of the winding up proceedings to facilitate revival. Section 256

provides for appointment of an interim administrator to consider whether

it is possible to revive and rehabilitate a sick company on the basis of the

draft scheme, if any, filed along with the application for revival and

rehabilitation filed under section 254(1) by a secured creditor or the

company itself. Thus the legislative thinking also appears to be to revive

and rehabilitate the company if possible and save it from liquidation.

This is legislative recognition of the judicial decisions.

24. Before I conclude, it is necessary for me to explain my decision in

Citibank, N.A. vs. Moser Baer rendered on 17th July, 2013, on which

reliance was placed by Mr. Rajiv Nayar, the learned senior counsel for

the petitioner. In the subsequent decision rendered by me on 3.4.2014 in

the same case in CA No.2091/2013 I had dealt with my earlier decision in

Moser Baer (supra) and distinguished it as follows:-

"21. The context in which the observations were made by me in paragraphs 16 to 18 of my order dated 17th July, 2013 needs to be appreciated. That was the admission stage of the company petition. The contention of the petitioner was that the discretion should not be exercised in favour of the respondent's company by refusing to admit the company petition merely because of the existence of a CDR scheme and the infusion of the funds by the consortiums of banks. For the purpose of admitting a winding up petition it is only necessary for the petitioner to make out a prima facie case for winding up. The petition was under Section 433(e) of

the Companies Act. Under this provision the Court may wind up a company if the company is unable to pay its debts. It is a discretion given to the Company court to admit the winding up petition when it is shown that the company is unable to pay its debts. I had, while dealing with the company petition at the admission stage referred to the judgment of T.P.S. Chawla, J (as he then was) of this Court in Bipla Chemical Industries vs. Shree Keshariya Investment Ltd. (1977) 47 Company Cases 211. This judgment of the learned single judge relates to the admission stage and the governing principle was held to be that as soon as a prima facie case for winding up was made out, the petition ought to be admitted. It was in this context held by me that all the arguments advanced by the respondent-company that no winding up order should be made in view of the steps for revival initiated by the CDR scheme, would be relevant at a later stage when the court is faced with the question whether the winding up order should be passed or not. It was in this context observed by me that the merits of the CDR scheme cannot be gone into at the stage of admission of the winding up petition. I did advert to the fact that there was no manageable or objective yard stick by which to judge the efficacy of the CDR level scheme. But that was only in deference to the argument that the existence of the CDR scheme is sufficient to preclude the admission of the winding up petition. It was in that context observed by me, taking care to clarify that it was only a prima facie observation, that the quantum of funds to be infused by the company into the CDR scheme (Rs.150 crores) does not compare well with the outstanding liability of around Rs.863 crores due to the petitioner as trustee for the bond-holders. I further proceeded to make a distinction between cases where the company has substantial defences and cases where the argument is only that there are attempts at reviving the company. To explain further- as it is my duty to do so- at the stage of admission one has to examine whether the company has substantial defence and not whether the company would in future be able to pay the debts because of the CDR scheme or similar revival attempts. The case of the respondent-

company did not measure up to any substantial defence at the admission stage, which was considered by me to be sufficient and relevant to admit the petition. The existence of the CDR scheme was considered by me to be not relevant at the admission stage. I referred to two judgments of the Bombay High Court (supra) wherein it was held that the existence of a CDR scheme was held not to be an impediment to the admission of a winding-up petition. Hence I admitted the petition."

25. The result is that there will be no stay of the CDR scheme and the

company is at liberty to implement the same forthwith. The undertaking

given to this Court on 16.09.2013 stands discharged. However, I direct

that though there can be a pooling of the securities, any sale of a pooled

security shall be subject to the orders passed by this Court and prior

approval of such sale shall be taken from this Court. In respect of the

shares of TDCPL, though they can be inducted into the CDR scheme, any

sale of the said shares or any charge, pledge or security interest created

upon them shall be subject to the orders of this Court and before creating

any such charge etc. or disposing of the shares, the company shall take

the prior permission of this Court. This shall constitute sufficient

protection of the interests of the bondholders.