Holding

The scheme is valid and may be sanctioned as clause 7.5 does not give any debenture holder veto power and the majority principle governs, so the appeal is dismissed.

Summary

Garware Polyester Ltd., after incurring massive losses, sought a restructuring scheme under Section 391 of the Companies Act, 1956, which was approved by the majority of its debenture holders. The Administrator of the Specified Undertaking of the Unit Trust of India (UTI) challenged the scheme, arguing that clause 7.5 of the Common Subscription Agreement—a negative covenant—barred the company from filing the scheme and was void under Section 28 of the Indian Contract Act. The Supreme Court held that clause 7.5 does not confer any veto power, that variations to debenture rights require a special resolution by the holders and may be accepted by the company, and that the scheme, having met the majority requirement and being fair, just and reasonable, could be sanctioned. Consequently, the appeal was dismissed.

Issues considered

Whether clause 7.5 of the Common Subscription Agreement prevents the company from seeking sanction of a scheme under Section 391 of the Companies Act.
Whether clause 7.5 is invalid or hits Section 28 of the Indian Contract Act, 1872.
Whether a minority debenture holder can block or invalidate a scheme approved by the requisite majority.
Whether the scheme satisfies the statutory test of being fair, just, reasonable and not contrary to public policy for sanction under Section 391.

Legislation cited

Code of Civil Procedure, 1908s. 28
Companies Act, 1956s. 113, s. 391, s. 393
Indian Contract Act, 1872s. 28
Sick Industrial Companies (Special Provisions) Act, 1985

Subjects

debenture schemesection 391negative covenantmajority principlecorporate democracypari passutrust deedrestructuringcompany lawcontract lawscheme of arrangement

Judgment

A ADMINISTRATOR OF THE SPECIFIED UNDERTAKING OF THE
UNIT TRUST OF INDIA
v.
GARWARE POL YSTER LTD.

MAY 9, 2005
B
[B.P. SINGH AND S.B. SINHA, JJ.]

Companies Act, 1956; Ss. 113, 391, 393/Companies (Issue of Share
C Certificate) Rules, 1960/Bombay Relief Undertakings (Special Provision) Act,
1958/Jndian Contract Act, 1872; Section 28/Code of Civil Procedure, 1908;
Order XXJll Rule 1:

Company-Loss-Revival-Restructing. package/Scheme-Common
Subscription Agreement entered into between a Company and debenture
D holders-Creation of Debenture Trust Deed-Challenged by one of the
debenture holders-appellant-Filing of a Petition by the Compal1)! seeking
approval of lhe Scheme-Allowed by the Company Judge-Appeal dismissed I.
by the Division Bench of the f!igh Court-On appeal, Held: Jn terms of the
Trust Deed, the rights, privileges and conditions attached to the debenture
holders could be vqried, modified or abrogated only in accordance with the
E provisions of law with the consent of debenture holders by way of a special
resolution passed-But resolution shall not be operative.against the company
if its modifies or varies the terms and conditions governing the debentures- •
No provision as of Veto Power/unanimity provided for passing a resolution-
Principle of Majority accepted by the authorities-Court could grant sanction
F to a scheme only when it is satisfied tharthe scheme is fair, just reasonable

~ -
and does not contravene public policy or al(l~tatutory provision-The scheme
applies equally to all the debenture holders and the appellant cannot be
treated as a separate class-The purpose and object of advancing a huge
investment by the appellant to the company is a matter of no concern to the
company/other debenture ho/aers-The Company primafacie showed that the
G scheme is fair and reasonable and having approval of the requisite majority
of the debenture holders-Hence, the Company Judge rightly accepted the
scheme-Sick Industrial Companies (Special Provisions) Act, 1985--.The
Securities and Reconstruction of Financial Assets and Enforcement ofSecurity
Interest Act, 2002.

H 192
ADMINIST. OF THE SPECIFIED UNDERTAKING OF THE U.T.I. v. GARWARE POL YSTER LTD. 193

Commercial documents-Meaning of A
TI:ie respondent-Company is engaged in the manufacture of polyster
film and also exporting its product. The company went for expansion and
in connection thereto obtained finance by way of term loans and by
issuance of debentures to financiers. However, the company suffered a
huge loss and it approached the Industrial Development Bank of India for B
restructuring package to clear its liabilities. All the debenture holders
except the appellant no.2 agreed to the proposed package/scheme. A
common Subscription Agreement was entered into between the company
and the debenture holders. Later, in terms of the agreement, a Debenture
Trust Deed was created. The company filed a petition seeking grant of C
sanction to the Scheme before the High Court in terms of Section 391 of
the Companies Act. The Company Judge allowed the appli~ation.
Aggrieved, the appellant preferred an appeal which was dismissed by the
Division Bench of the High Court. Hence the present appeal.

Dismissing the appeal, the Court D
HELD: 1.1. In terms of clause 10 of the Trust Deed, the rights,
privileges and conditions attached to the debentures may be varied,
modified or abrogated only in accordance with the Articles of Association
of the Company and the Act and with the consent of the debenture holders
by a special resolution passed at the meeting of the debenture holders but E
in terms of the proviso appended thereto nothing in such resolution shall
be operative against the company where such resolution modifies or varies
the terms and conditions governing the debentures, if the same are not
acceptable to the company. The provisions of the Trust Deed and in
particular clauses 22, 23, 24 and 25 thereof leave no manner of doubt that F
a resolution has to be passed in the manner laid down therein and/or in
terms of the Companies Act. [202-D, E; 208-F)

1.2. The common subscription agreement is an investment
agreement. The provisions contained therein are required to be read in
their entirety and for the said purpose it is permissible to read the negative G
covenants with the positive covenants. It will, however, not be correct to
say that the common subscription agreement has to be interpreted on its
own without any reference to the trust deed. The provisions of the trust
deed can be referred to for the purpose of giving a true meaning to the
agreement, as there does not exist any conflict between the two. They are
to be considered together for the purpose of finding out as to how the H
194 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A agreement can be worked out. [208-G-H; 209-A]
1.3. The underlying or basic thread of the agreement vis-a-vis the ~
trust deed is that the majority principle was accepted by the authorities.
They do not provide for an unanimity; or any veto power in favour of
one debenture holder so as to scuttle the decision of the majority. (209-C]
B
Moti Ram and Ors. v. State of Madhya Pradesh, AW (1978) SC 1594,
I
referred to. 1--

Massachusetts B. & Insurance Co. v. US., (1956) 352 US 128 at 138,
referred to. -
c 2.1. It is true that a negative covenant by itself is not invalid in law.·
But it is also true that it requires a strict construction. The agreement is
a commercial document. Commercial documents must be construed in a
manner as are understood in commercial parlance. A commercial
document must be read reasonably. It must be construed in such a manner
D so that it is made workable. [209-E]

2.2. The parties to the agreement are commercial concerns. Each
party would indisputably try to protect its interest when advancing loans
or making investmen't but it must also be conceded that they were aware
of the risk factor involved therein. A scheme envisaged under Section 391
E of the Companies Act, it is well-settled, is a commercial document.
[209-F]

2.3. The Court would not grant sanction to such a scheme only
because the same reflects the will of the majority of the creditors or a class
of them but it must consider all aspects of the matter so as to arrive at a :
F finding that the scheme is fair, just and reaso!lable and does not contravene
public policy or any statutory provision. Such a care or caution is required
to be exercised by all courts including the Civil Court in terms of Order
XXIII, Rule 1 of the Code of Civil Procedure. [210•D, E]

G Miheer H. Ma/at/al v. Mafatlal Industries Ltd., [1997) 1 SCC 579 and
J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd. and Ors.
etc., [1969) 2 SCR 866, referred to.

2.4. It is not the case of the Appellant/investor that the Company
Judge has exceeded his jurisdiction and acted in violation of the guidelines.
H Once it is held that the normal rule, namely, the principle of majority in ''
-- ADMINIST. OF THE SPECIFIED UNDERTAKING OFTHE U.T.l. v. GARW ARE POL YSTER LTD.

corporate democracy or in other words, governance of the company by, A.
majority, is accepted, the Appellants could not be heard to say that they
19 5

- had an absolute right to exercise veto power and thereby scuttle a bona ·
fide attempt to revive a company. (211-D, E]

2.5. It cannot be said that clause 7.5 of the agreement puts a total
embargo on the part of the company or other creditors to file a B
<;ompromise under Section 391 of the Companies Act without obtaining
the consent of all debenture holders. The said Clause neither can be read
in such a manner nor should be read. Such a construction would be
unwarranted having regard to the fact that two different expressions have
been used in different clauses. Wherever a right has been conferred upon C
an individual debenture holder, the agreement used the expression 'any
or all the debenture holders' as contrasted by all debenture holders. The
debenture holders are required to exercise their right through the trustee
save and except in the cases which confer specified power to them. The
Appellant cannot claim any priority or preference in the matter of
realization of their dues over the other debenture holders. Each debenture D
holders has a pari passu right with each other, as is evident from clause
2.2 of the agreement. (211-G, H; 212-A)

J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd.
and Ors. etc. (1969) 2 SCR 866 and Andhra Bank v. Official Liquidator and
Anr., (2005] 3 SCALE 178, referred to. E
3.1. The Appellant having failed to establish that they could hold the
entire scheme to ransom so as to stall the proceedings as a result whereof
the majority of debenture holders would be deprived, the purpose or object
motivating him to advance such a huge amount to the company against F
issue of debentures is a matter of little or of no concern to the company/
other debenture holders. A special or a n_ew right cannot be found in
favour of the Appellant in the agreement when it creates none. The scheme
applies equally to all debenture holders and as such the Appellant cannot
be treated as a separate class. Once the Respondent-Company prima facie
showed that the scheme is fair and reasonable and also that the requisite G
majority of the debenture holders recorded their decision in its favour,
the Court in absence of any unforeseen unjustness or unreasonableness
therein ought not to reject the same. The Company Judge by reason of
the impugned judgment while exercising supervisory jurisdiction only
accepted the scheme. The High Court's decision is not being questioned H
196 SUPREME COURT REPORTS (2005] SUPP. l S.C.R.

A as unfair. The company in view of the Scheme has no remedy other than
approaching the High Court under Section 391 of the Companies Act.
[212-D, E, F, GJ

Nanakram v. Kundalrai, [1986] 3 SCC 83 and Nutan Kumar and Ors.
v. find Additional District Judge and Ors., [2002] 8 SCC 31, distinguished.
B
Smt. Rajbir Kaur and Anr, v. Mis. S. Chokesiri and Co., [1989) 1 SCC
19 and Delta International Ltd v. Shyam Sundar Ganeriwalla and Anr., (1999)
4 sec 545, held inapplicable.

Sardar Amarjit Singh Katra (Dead) by Lrs. and Ors. etc. v. Pramod
C Gupta (Smt.) (Dead) by Lrs. and Ors etc., [2003) 3 SCC 272, referred to.
CIVIL APPEL LA TE JURISDICTION : Civil Appeal No. 3196 of 2005.

From the Judgment and Order dated 12.4.2004 of the Bombay High
Court in A. No. 185/2004 in C.A. No. 269 of 2003.
D
Dr. Rajeev Dhawan, Ms. Shubhr Kapur and Sanjay Kapur with him for
the Appellants.

Soli J. Sorabjee, Bhargava V. Desai, .Nimish Pandya, Ms. Kamala N.
Pandya, Nikhil Sakhardande and Sanjeev Kr. Singh with him for the
E Respondent.

The Judgment of the Court was delivered by

S.B. SINHA, J: Leave granted.

The Respondent herein is a company registered under the. Companies
F Act, 1956, and engaged in the manufacture of polyester film; 50% of which
production used to be exported to United States of America, United Kingdom,
Europe, Far East, Middle East, Japan, New Zealand. etc. Having regard to the
adoption of liberalization poli~y by the Government of India, the Company
intended to become globally competitive and went for a massive expansion
G in the year 1996. The scheme of the said expansion was financed by obtaining
term loans and issuance of debentu~es by ,vari6us financial institutions
including the Appellant No.2 herein. For various reasons, including imposition
of European Union Levelled Anti Dumping DutieS, the Respondent suffered
a cumulative loss ofRs.228.58 crores by March 2001. In the said circumstance,
the Respondent approached the Industrial Development Bank of India with
H a request for a restructuring package to clear its liabilities. A restructuring
ADMlNJST. OFTHE SPECIFIED UNDERTAKJNGOFTilE U.T.I. 1·. GARWAREPOLYSTERLTD. (SINHA,J) 197

proposal was mooted; wherefor two meetings were held in March 2001 and A
October 2001 wherein the Unit Trust of India (UTI) participated. All the
debenture holders upon due deliberations agreed to the said proposal of
restructuring package except the Appellants herein. It is not in dispute that
pursuant to or in furtherance of the said restructuring package, the Respondent
herein paid a sum of Rs.64.44 crores to various financial institutions between
the period I.I 0.2001 and 15.1.2003 in the following tenns:
B

"Sr. Institution Principal in Deferred Total
No. (Rs.Crores) Interest

c
I. IDBI 15.5% PPD 99.50 43.70 143.20
2. IDBI 16% NCO 2.18 0.87 3.05
3. ICICI ZCD 6.00 1.95 7.95
4. UTI 16% NCO 9.80 3.92 13.72
5. UTI 18.5% PPS 4.00 1.85 5.85 D
6. LIC 18.5% PPD 10.00 3.41 13.41
7. GIC 18.5% PPD 1.75 0.81 2.56
8. NEW INDIA
18.5% PPD 1.75 0.81 2.56
E
9. NATIONAL
18.5% PPD 1.05 0.49 1.54
10. OIC 18.5% PPD 1.05 0.49 1.54
11. UTI 18.5% PPD 1.40 0.65 2.05
Total 197.43 F
81 % of the principal outstanding carrying interest @ 12.5% need
to be repaid in 28 quarterly installments commencing from 1.4.2003.

19% of the principal outstanding carrying nil rate of interest need
to be repaid partly to the extent of 385 during 2003-2004 and the G
balance to be repaid with a premium of 85% in 24 quarterly
installments commencing from 1.4.2006

Deferred interest being the interest outstanding carrying nil rate
of interest need to be repaid in 24 quarterly installments commencing
from 1.4.2006. H
198 SUPREME COURT REPORTS (2005] SUPP. l S.C.R.

A Penal interest and Liquidated damages outstanding as on 31.3.2001
to be waived.

In addition to the above, sacrifice being the amount representing
the difference between the contracted rate of interest and the rate as
per the restructuring package will be paid on net present value (NPV)
B basis in 12 quarterly installments commencing from 1.4.2002."
l

On or about 19.6.1997, a Common Subscription Agreement was entered
into by and between the Respondent and the debenture holders; the relevant
clauses whereof are as under :

C "I. I. Wherever used in this Agreement, unless the context
otherwise requires the following terms shall have the following
meanings:

(a) *** *** ***
(b) *** *** ***
D
(c) "Debenture holders" means LIC, UTI, GIC, NIC, NIA, OIC and
UTI or the holders of the Debentures for the time being deriving their
title to the Debentures.

2. COMPANY'S REQUEST FOR FINANCIAL ASSISTANCE.
E
The Company has approached the Debenture holders for financial
assistance to the company for long term capital requirements and the Debenture
holders have agreed to advance financial assistance in the form of subscription
to 18.5%, 21,00,000 non-convertible. Privately placed debentures of Rs. 100
each to the extent mentioned below :
F
Name of Letter No. & Date Amount in lacs
Debenture holders

UTI DOl/2945/G-76/96-97 400
23.4.97
G LIC INV:C:KAJ DT. 1000
21.4.97
GIC INV./97 DT.23.5.97 175
NIC INVT/UW/DEBS 105
DT.30.5.97
H NIA INV/PM/BUD/72/96 175
DT. 10.6.97
ADMINIST.OFTHE SPECIFIEDUNDERTAKINGOFTHE U.T.I. v. GAR WARE POLYSTERLTD. (SINHA,J.) 199

OIC DEPTT 105. A
INVESTMENT DT
30.5.97
UII HQ:INV:262:97 DT. 140
30.5.97
Total 2100 B
2.2. DEBENTURE SHALL RANK PARI PASSU :

The Company shall ensure that the Debentures shall rank pari passu
inter se to all intents and purposes without any preference or priority of one
~~~ c
3.3. RIGHT TO REVIEW THE RATE OF INTEREST:

The Company agrees and undertakes that the Debenture holder(s) shall
have a right to review the rate of interest as mentioned herein. The Company
shall pay interest on the Debentures at the rate that may be stipulated by the D
debenture holder(s) as a result of such review. The company also agrees and
undertakes to obtain all necessary consents from the concerned _authorities in
accordance with the then grevailing rules and regulations and to sign all
deeds and documents that may be required in this regard and to endorse the
revised interest rates on the Debenture Certificates as and when communicated
by the Debenture holder(s): E
3.7 REPAYMENT:

- The Company agrees and undertakes to redeem the debentures to all
the debenture holders in three equal yearly installments from the end of 4th
year from the date of allotment and ending in the 6th year from allotment. F
-
Name of Debenture Rs. in lacs
Holders At the end of
4th year 5th year 6th year
from the date of allotment G

UTI 133.33 133.33 133.34
LIC 333.33 333.33 333.34
GIC 58.33 58.33 58.34
H
200 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A NIC 35.00 35.00 35.00
NIA 58.33 58.33 58.34
OIC 35.00 35.00 35.00
UTI 46.66 46.67 46.67
~
Total 699.98 699.99 700.03
B The debenture holders may at the request of the company in 1.;__
suitable circumstances and also in the absolute discretion of the
Debenture holders, subject to the statutory guidelines as may be
applicable for the purpose, revise/postpone the redemption of the
debentures or any party thereof outstanding for the time being or any
c installment of redemption of the said debentures or any part thereof
upon such terms and conditions as may be decided.

If for any reason the amount of the Debentures finally subscribed
for by the debenture holders is less than the amount of the debentures
agreed to be subscribed the installment(s) of redemption will be
D reduced proportionately but will however be payable on the due date
as specified.

3.9. DEBENTURE CERTIFICATE:

The Company shall issue debenture certificate/s to the debenture holder/
E s after making necessary compliance to the provisions of section 113(1) of
the Companies Act, 1956 read with the Companies (Issues of share Certificate)
Rules, 1960 ..

7.5. NEGATIVE COVENANTS :

F Unless the debenture holders/trustees shall otherwise agree, the Company
shall not :

(a) DIVIDEND

Declare and/or pay any dividend to any of its shareholders, whether
G equity or preference, during any financial year unless the company
has paid to the debenture holders the installments of principal, if any
interest commitment charges, costs charges and other moneys payable
under this agreement upto and during that year or has made provisions
satisfactory to the debenture holders for making such payment.

H
ADMINIST. OFTHE SPECIFIED UNDERTAKING OF THE U.T.I. v. GARW ARE POLYSTERLTD. [SINHA.J] 201

(b) CHARGES A
Create or permit any charges or lien on any assets of the Company
except as provided in Article-IV, hereof. For the purpose of this
clause, the term 'Lien' shall include mortgages, pledges, shares,
privileges and priorities of any kind and the term 'assets' shall include
revenues and property of any kind. B
(c) AMENDMENT OF MEMORANDUM AND ARTICLES OF
ASSOCIATJON

Amend its Memorandum and Articles of Association or alter its
capital structure except as specified herein. ·1,
c
(d) MERGER, CONSOLIDATION ETC.

Undertake or permit any merger, consolidation, re-organization,
scheme of arrangements or compromise with its creditors or share
holders or effect any scheme of amalgamation or reconstruction,
D
(e) INVESTMENT BY THE COMPANY

Make any investment by way of deposits, loans, share capital etc.
in any manner.

(f) REVALUATION OF ASSETS E
Revalue its assets.

(g) TRADING ACTIVITY

Carry on any general trading activity other than the sale of its
own product." F
In terms of the Common Subscription Agreement on or about 17.9.1997,
a Debenture Trust Deed was created, the relevant clauses whereof are as
under :

"45. MODIFICATIONS TO THESE PRESENTS: G
The Trustees shall concur with the Company in making any
modifications in these presents which in the opinion of the Trustees
shall be expedient to make. Provided that once a modification has
been approved by consent in writing of the holder(s) of the Debentures
representing not less than three fourths in value of the Debentures for H
202 SUPREME COURT REPORTS (2005] SUPP. I S.C.R.

A the time being outstanding or by a special resolution duly passed at
a meeting of the Debenture holders convened in accordance with the
provisions set out in Fifth Schedule hereunder written, the Trustees
shall give effect to the same by executing necessary Deed(s)
supplemental to these presents.

B xxx xxx xxx

"The Third Schedule above referred to Financial Covenants and
Conditions

1. DEBENTURES TO RANK PAR! PASSU
....
c The debentures shall rank pari passu inter se without any
preference or priority of one over the other_ or others of them.

10. VARIATION OF DEBENTURE HOLDERS' RIGHTS

The rights, privileges and conditions attached to the Debentures
D may be varied, modified or abrogated in accordance with the Articles
of Association of the:_ Company and the Act and with the consent of
the holders of the debentures by a_ Special Resolution passed at the
meeting of the Debenture holders, provided that nothing in such
resolution shal_I be operative against the Company where such
resolution modifies or varies the terms and conditions governing the
E Debenture if the same are not acceptable to the Company."

"The Fourth Schedule Above Referred to

Form of Debenture Certificate

F Xxx xxx xxx

The Fifth Schedule Above Referred to Provisions for the Meeting of
the Debenture holders

22. A meeting of the Debenture holders shall, inter a/ia, .have the
following powers exercisable in the manner hereinafter specified in
G Clause 23 hereof :

xxx xxx xxx

(ii) Power to sanction any compromise or arrangement proposed
to be made between the Company and the Debenture holders.
H
ADMINIST OFTHESPECIFIEDUNDERTAKINGOF THEU.T.I. v. GARWAREPOLYSTERLTD. [SINHA,).] 203

(iv) Power to assent to any scheme for reconstruction or A
amalgamation of or by the Company whether by sale or transfer of
assets under any' power in the Company's Memorandum of Association
or otherwise under the Act or provisions of any law.

23. The powers set out in Clause 22 hereof shall be exercisable
by a Special Resolution passed at a meeting of the provisions herein B
contained and carried by a majority consisting of not less than three-
fourths of the persons voting thereat upon a show of hands or if a poll
is demanded by a majority representing not less than three-fourths in
value of the votes cast\on such poll. Such a Resolution is hereinafter
called "Special Resolution".
c
24. A Resolution, passed at a general meeting of the Debenture
holder duly convened and held in accordance with these presents
shall, be binding upon all the Debenture holders whether present or
not, at such meeting and each of the Debenture holders shall be
bound to give effect thereto accordingly, and the passing of any such D
resolutions shall be conclusive evidence that the circumstances justify
the passing thereof, the intentions being that it shall rest with the
meeting to determine without appeal whether or not the circumstances
justify the passing of such resolution.

25. Notwithstanding anything herein contained, it shall be E
competent for all the Debenture holders to exercise the rights, powers
and authorities of the Debenture holders under the said Trust Deed by
a letter or letters signed by or on behalf of the holder or holders of
at least three-fourths in value of the Debentures outstanding without
convening a meeting of the Debenture holders as if such letter or
letters constituted a resolution or a special resolution, as the case may F
be passed at a meeting duly convened and held as aforesaid and shall
have effect accordingly."

Encumbrances having admittedly been created in favour of the debenture
holders including the Appellant No.2 herein, in respect of the properties of
the Respondent herein situated at Chikalthana, Nasik and Waluj in the State G
of Maharashtra wherefor a legal m~age by way of Debenture Trust Deed
was created on the Debenture Certificate issued to the parties as contained in
Annexure R-4 appended to the Counter Affidavit filed on behalf of the
Respondent, the relevant provisions whereof read as under :
H
204 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A "The Debenture Certificate is issued in terms of the Debenture
Trust Deed dated 17th day of September, .J 997 ("the Trust Deed")
entered into between the Company and the Industrial Credit and
Investment Corporation of India Limited ("the Trustees''). The Trustees
will act as Trustees for the holders for the time being of the Debentures
("the Debentures holders") in accordance with the provisions of the
B Trust Deed. The Debenture holders are entitled to the benefit of and
are bound by and are deemed to have notice of all the provisions of
the Trust Deed. All rights and remedies of the Debenture holders
against the Company in respect of arising out of or incidental to the
Debenture shall be exercisable by the Debenture holders only though
C the Trustees.

The Debentures are issued subject to and with the benefit of the
Financial Covenants and Conditions endorsed hereon which shall be
binding on the Company and the Debenture holders and all persons
claiming by, through or under any of them and shall enure for the
D benefit of the Trustees and all persons claiming by, through or under
them, The Company hereby agrees and undertakes to duly and
punctually pay, observe and perform the Financial Covenants and
Conditions endorsed hereon."

It is accepted that the total sums invested by the financial institutions
E in the aforementioned debentures is to the tune of Rs.197.43 crores whereas
UTI invested a sum of Rs.19 .57 crores i.e. only about 10% of the total
investment.

The Respondent herein having regard to the aforementioned restructuring
scheme filed an application before the High Court of Judicature at Bombay
F in terms of Section 391 of the Companies Act which was marked as Company
Petition No.269 of 2003. In the said proceedings except UTI, all other
debenture holders sanctioned the restructuring package.

Before the learned Company Judge, the Appellants herein, inter alia,
G contended:(!) having regard to clause 7.5 of the agreement, the Respondent
is totally precluded from filing the said application before the court without
its consent; (2) the Responde~t had suppress.ed material facts in the sense that
disclosure to the effect that the Respondent-Company was granted relief
under the Bombay Relief Undertakings Act, 1958 had not been made to the
said court; (3) the proposed scheme of arrangement is unfair, unreasonable
H and unjust which no prudent businessman will accept; and (4) UTI being an
ADMINIST.OFTHE SPEC. UNDERTAKINGOFTHEU.T. OF INDIA" GARWAREPOLYSTERLTD. [SINHA,J.] 205

investment company forms a separate class by itself and, thus, cannot be A
compared with other financial institutions, as they are only lenders whereas
UTI is an investing agency.

The learned Company Judge rejected all the contentions raised on behalf
of the Appellants herein in terms of its judgment and order dated I. I 0.2003.
Aggrieved by and dissatisfied therewith, an appeal was preferred by the B
Appellants herein, which was dismissed by a Division Bench of the said
Court by reason of the impugned order dated 12.4.2004.

Dr. Rajeev Dhawan, the learned Senior Counsel appearing on behalf of
the Appellants, took us through various documents and principally raised the C
following two contentions in support of this appeal : (i) Clause 7.5 of the
agreement having not been found unfair or unconscionable is not hit by
Section 28 of the Indian Contract Act and (ii) The negative covenant as
contained in clause 7 .5 of the agreement in relation to the matters specified
therein is imperative in nature.
D
. Dr. Dhawan would urge that clause 7.5 being a consent clause, the
Respondent herein could not have taken any action in violation thereof as
thereby the entire investment plan of the Appellants would be put to jeopardy.

Our attention was drawn to the fact that the Respondent herein obtained
moratorium in terms of the provisions of the Bombay Relief Undertakings E
(Special Provisions) Act, 1958 on 6.8.2001 whereupon a notification was
issu.ed declaring the Respondent Company as "Relief Undertaking" and thereby
directing that any right, privilege, obligation or liability accrued before
6.8.2001 would be suspended and any remedy for enforcement thereof shall
also be suspended and all proceedings relating thereto before any court,
tribunal, officer or authority shall be stayed. Such moratorium was extended F
by notifications dated 6.2.2002, 5.2.2003; and February 2004 for a period of
one year commencing from 6.2.2004 to 5.2.2005.

Referring to Section 28 of the Indian Contract Act, Dr. Dhawan would
submit that the said provisions must be read in the light of the definition of G
'consideration' as contained in Section 2(d) thereof having regard to the fact
that the negative covenants are included as a part of consideration therein
and, thereby no absolute bar was created for enforcing the rights of the
Respondent under or in respect of the agreement in any ordinary tribunal.
The Respondent, Dr. Dhawan would argue, had no legal right to maintain an
application under Section 391 of the Companies Act as it was not an ordinary H
206 SUPREME COURT REPORTS [20(}5] SUPP. I S.C.R.

A Tribunal. A Company Judge, according to Dr. Dhawan, merely exercises a
supervisory jurisdiction in terms of Section 391 of the Companies Act and
keeping in view the fact that by reason of a negative covenant even a right
can be extinguished or foreclosed, the High Court committed a serious error
in holding that clause 7.5 would be hit by Section 28 of the Indian Contract
B Act. In support of the said contentions, strong reliance has been placed by
Dr. Dhawan on Mis MG .. Brothers Lorry Service v. Mis Prasad Textiles,
[1983] 3 SCC 61; A.B.C. Laminart Pvt. Ltd. and Anr. v. A.P. Agencies,
Salem, [1989] 2 SCC 163; Food Corporation of India v. New India Assurance
Co. Ltd. and Ors. etc., [1994] 3 SCC 324; National Ins1!rance Co. Ltd. v.
Sujir Ganesh Nayak & Co. and Anr., [1997] 4 SCC 366;.Nutan Kumar and
C Ors. v. Ilnd Additional District Judge and Ors., [2002] 8 SCC 31 ;. Shri
Lachoo Mal v. Shri Radhey Shyam, [1971) 1 SCC 619; Miheer H. Mafatlal
v. Mafatlal Industries Ltd., [I 99J] I SCC 579; Kempe and Anr. Ooint
liquidators of Mentor Insurance Ltd. v. Ambassador Insurance Co. (in
liquidation, (1998) I BCLC 234 and Re Hawk Insurance Co. Ltd., (2001) 2
BCLC 480.
D
The learned counsel would contend that the Appellants herein stand
absolutely on a different footing vis-a-vis the other credi~ors as they invest.
money on a long term basis whereas the Appellants make· investment for the
benefit of the members of the mutual fund.

E Mr. Soli J. Sorabjee, the learned Senior Counsel appearing on behalf of
the Respondent, on the other hand, would submit that the agreement dated
19.6.1997 must be read with the trust of deed dated 17.9.1997 and so read
it would be seen that the Appellants herein did not have any power of veto
so as to frustrate such a scheme which is beneficial to all the debenture
F holders. According to the learned counsel, clause 7.5 does not confer an
absolute or unbriddled power. upon all the debenture holders but the same
having regard to the principle of corporate democracy would only mean that
such a decision would be taken by the majority of debenture holders. As the
Appellants herein, the learned counsel would argue, made <,:ontribution only
to the extent of I 0% of the total amount lent by the debenture holders and
G their right being pari passu with other debenture holders, _they cannot claim
a preferential right. If clause 7 .5 of the agreement is read in the manner, as
suggested by the Appellants herein, Mr. Sorabjee would urge that thereby
words have to be added thereto which is impermissible in law as by reason
thereof one debenture holder would be conferred a power of veto resulting
H whereof not only in violation of the principle of corporate democracy would
ADMJN!ST. OF THE SPECIFIED UNDERTAKING OF THE U.T.l. v. GARW AREPOLYSTERLTD. [SINHA, I.) 207

be violated, but a change in the integrity of the document would also be A
brought about.

Section 28 of the Indian Contract Act was invol<ed by the Respondent
before the High Court, it was contended, only because the Appellants herein
raised a contention that by reason of clause 7.5 an absolute bar has been
created in moving an application under Section 391 of the Companies Act. B
For the purpose of this case, we shall proceed on the premise that
clause 7 .5 of the agreement is valid and is not hit by Section 28 of the Indian
Contract Act.

A Common Subscription Agreement was entered into by and between C
the Respondent herein and all the debenture holders. The debenture holders
named therein are collectively referred to by that expression and the expression
means the debenture holders specified therein deriving their title to the
debenture. The said agreement was entered into having regard to the fact that
the Respondent approached all the debenture holders for financial assistance D
for meeting their long term capital requirement in response whereto which
debenture holders agreed to advance various sums of monies, in the form of
subscription to 18.5%, 21,00,000 non-convertible privately placed debentures
of Rs. 100 each. Out of the total investment ofRs.21,00,00,000 made by the
debenture holders, the contribution of the Appellant is only Rs. 4,00,00,000
The Respondent in terms of the said agreement had undertaken to redeem the E
debentures in three equal instalments from the end of fourth year of the date
of allotment and ending in the sixth year.

In terms of clause 2.2 all debenture holders are entitled to be treated
pari passu inter se wherefor no preference or priority of one over the other
can be given. F

The Industrial Credit and Investment Corporation Limited became the
_trustee for the debenture holders. In the agreement wherever an individual
right has been conferred upon the debenture holders, they have been described
as debenture holder(s) or debenture-holder/s. Debenture certificates were issued G
to the debenture holders in terms of the Debentures Trust Deed pursuant
whereto they became entitled to the benefits specified therein but they were
bound by and were deemed to have notice of all the provisions of the Trust
Deed. The rights and remedies of the debenture holders against the company
were to be exercised only through the trustee.
L
H
208 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A Clause 7.5 contains a negative covenant which enjoined the company
not to undertake or affect any scheme of amalgamation or re-construction
unless the debenture holders/trustees would otherwise agree.

Does this mean that all the debenture holders/trustees singularly or
collectively must agree thereto that the decision of the majority shall prevail,
B is the question involved in this appeal.

We may at the outset notice that clause 7.8 of the said agreement uses
the expression 'any or all of debenture holders'. The .parties to the agreement,
therefore, have used two different expressions in the said agreement, namely,
(I) debenture-holders/trustees; and (2) any or all of debenture holders. We
C have noticed hereinbefore that the debenture holders have been referred to in
the agreement in the said capacity collectively. The definition of debenture
holders contains the expression 'means' which shows that it is not an expansive
definition. The category of the debenture holders are confined to those who
in terms of the agreement are holders of the debentures deriving their title
D thereto.

In tenns of clause I 0 of the Trust Deed, the rights, privileges and
conditions attached to the debentures may be varied, modified or abrogated
only in accordance with the Articles of Association of the Company and the
Act and with the consent of the debenture holders·by a special resolution
E passed at the meeting of the debenture holders but in terms of the proviso
appended thereto nothing in such resolution shall be operative against the
company where such resolution modifies or varies the terms and conditions
governing the debentures, ifthe same are not acceptable to the company. The
Trust Deed speaks of such resolution also in terms of clauses 22 and 24
F thereof. Clause 25 provides that such a .resolution may be adopted by
circulation of Jetter or letters. The provisions of the Trust Deed and in particular
clauses 22, 23, 24 and 25 thereof leave no manner of doubt that a resolution
has to be passed in the manner laid down therein 'and/or in terms of the
Companies Act.

G The common subscription agreement is an investment/ loan agreement.
The provisions contained therein are required to be read in their entirety and
for the said purpose it is permissible to read the negative covenants with the
positive covenants. It will, however, not be correct to say that the common
subscription agreement has to be interpreted on its own without any reference
to the trust deed. The provisions of the trust deed, in our opinion, can be
H referred to for the purpose of giving a true meaning to the agreement, as
ADMIN!ST. OF THE SPECIFIED UNDERTAKING OF THE UT.I. v. GARWAREPOLYSTERLTD. (SINHA,J.] 209

there does not exist any conflict between the two. They are to be considered A
together for the purpose of finding out as to how the agreement can be
worked out.

This Court in this case is not called upon to interpret the nature of a
document or the covenants entered into by and between the parties. The
agreement specifies the rights and privileges of the parties thereto and in B
particular the rights and privileges of the debenture holder either collectively
or individually.

The underlying or basic thread of the agreement vis-a-vis the trust deed
is that the majority principle was accepted by the authorities. They do not
provide for an unanimity; or any veto power in favour of one debenture C
holder so as to scuttle the. decision of the majority.

In Moti Ram and Ors. v. State of Madhya Pradesh, AIR (1978) SC
1594, this Court noticed the observation of Justke Frankfurter in
Massachusetts B. & Insurance Co. v. U.S.,, (1956) 352 US 128 at 138 which D
is to the following effect :

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

It is true that a negative covenant by itself is not invalid in law. But it
is also true that it requires a .strict construction. The agreement is a commercial E
document. Commercial documents must be construed in a manner as are
understood in commercial parlance. A commercial document must be read
reasonably. It must be construed in such a manner so that it is made workable.

The parties to the agreement are commercial concerns. Each party would
indisputably try to protect its interest when advancing loans or making F
investment but it must also be conceded that they were aware of the risk
factor involved therein. The factors which are responsible for sufferance of
loss by the Respondent herein to the extent of 228.58 crores was as a result
of market situation then prevailing, i.e. steep devaluation of currencies of
Korea and Indonesia who were the major suppliers of film in the international
market as a result whereof they started dumping the materials at cheap prices G
in Europe, and the levy of anti-dumping/anti-subsidy duties by the European
Union as a result whereof sales to European countries came down drastically.

The restructuring package was evolved at the instance of the Industrial
Development B~nk of India which was the largest lender and the trustee upon H
210 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A obtaining a report in that behalf from KPMG, a reputed concern. A scheme.
envisaged under Section 391 of the Companies Act, it is well-settled, is a
commercial document.

Section 391 read with Section 393 of the Act postulate that where a
compromise or arrangement is proposed between a company and its creditors
B or any class of them; or between a company and its members or any class
of them, the court is required to direct holding of meetings of creditors or
class of creditors or members or class of members who are concerned with
such a scheme. In the event majority of the creditors representing three-
fourths in value of the creditors or class of creditors or members or class of
C members, as the case may be, present or voting either in person or by proxy
at such a meeting accord thefr approval thereto thus put to vote, whereupon,
the court may consider the question of grant· of sanction thereto. Section
39l(l)(a) enjoins that requisite information therefor should be placed for
consideration before the voters, in terms whereof the creditors or class of
creditors can take an informed decision in relation thereto. The court, however,
D would not grant sanction to such a scheme only because the same reflects the
will of the majority of the creditors or a class of them but it must consider
all aspects of the matter so as to arrive at a finding that the scheme is fair,
just and reasonable and does not contravene public policy or any statutory
provision. Such .a care or caution is required to be exercised by all courts
E including the Civil Court in tenns of Order XXIIl, Rule 1 of the Code of
Civil Procedure.

The scope and jurisdiction of the Company Court has been examined
at some length by a Division Bench of this Court in Miheer H. Ma/at/al
(supra) wherein the broad contours of such jurisdiction have been enumerated
F indicating :

"6. That the proposed scheme of compromise and arrangement is not
found to be violative of any provision of law and is not contrary Jo
public policy. For ascertaining the real purpose underlying the scheme
with a view to be satisfied on this aspect, the Court, if necessary, can
G pierce the veil of apparent corporate purpose underlying.the scheme
and can judiciously X-ray the same.

*** *** ***
8. That the scheme as a whole is also found to be just, fair and
H reasonable from the point of view of prudent men of business taking
ADMINIST. OF THE SPECIFIED UNDERTAKING OFTHE U.T.I. v. GARWARE POL YSTER LTD. [SINHA. J.) 211

a commercial decision beneficial to the class represented by them for A
whom the scheme is meant."

In J.K. (Bombay) (P) Ltd v. New Kaiser-I-Hind Spg. & Wvg. Co. Ltd
and Ors. etc., [1969] 2 SCR 866, it was held :

" ....... The principle is that.a scheme sanctioned by the court does not B
operate as a mere agreement between the parties : it becomes binding
on the company, the creditors and the shareholders and has statutory
force, and, therefore the joint-debtor could not invoke the principle
of accord and satisfaction. By virtue of the provisions of sec. 391 of
the Act, a scheme is statutorily binding even on creditors and
shareholders who dissented from or opposed to its being sanctioned. C
It has statutory force in that sense and therefore canno~ be altere,d
except with the sanction of the Court even if the shareholders and the
creditors acquiesce in such alteration"

It is not the case of the Appellants that the learned Company Judge has
exceeded his jurisdiction and acted in violation of the said guidelines, Once D
it is held that the normal rule, namely, the principle of majority in corporate
democracy or in other words, governance of the company by majority, is
accepted, the Appellants could not be heard to say that they had an absolute
right to exercise veto power and thereby scuttle a bona fide attempt to revive
a company. Efforts to keep a company from becoming insolvent and even to
1
E
revive an insolvent corporate have been receiving legislative and executive
support, as would be evident from several Parliamentary Act, as for example
the Sick Industrial Companies (Special Provisions) Act, 1985, and. the
Sectiritization and ,Reconstruction of Financial Assets and Enforcement of
Security ·Interest· Act, 2002.
F
It is difficult for us. to agree with the submiss.i_on of i;:>r.. Dhawan that
clause 7.5 puts a total embargo on the part of the company or other creditors
to file a compromise under Section 391 of the Companies Act without
obtaining the consent of all debenture holders. Clause 7.5 neither can be read
_in such a manner nor should be read. ,Such a construction would be G
unwarranted having regard to the fact that two different expressions have
been used in different clauses. Wherever a right has been conferred upon an
individual debenture holder, the agreement used the expression 'any or all
the debenture holders' as contrasted by all debenture holders. The debenture
holders are required to exercise their right through the trustee save and except
in the .cases which confer specified power to them. The Appellants herein H
212 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A cannot claim any priority or preference in the matter of realization of their
dues over the other debenture holders. Each debenture holders has a pari
passu right with each other, as is evident from clause 2.2.

In J.K. (Bombay) (P) Ltd., (supra), it was held :

B "The Court could not have completed, as contended by the appellants,
.their rights which were still incomplete or order the company to
execute a debenture trust deed or the second mortgage, and thus set
up the appellants and the other Sch. 'B' creditors as secured creditors
against the rest of the unsecured creditors. Such an order could not
be passed as· it would be contrary to and in breach of the right of
c distribution pari passu of the joint body of unsecured creditors."

[See also Andhra Bank v. Official Liquidator and Anr., (2005) 3 SCALE
178]

In view of the our findings aforementioned, we are of the opinion that
D the Appellants herein having failed to establish that they could hold the entire
scheme to ·ransom so as to stall the rroceedings 1as a -result whereof the
majority of debenture holders would be deprived, the purpose or. object
_motivating the Appellants to advance such a huge amount to the Respondent
·~against issue of debentures is a matter of little or of no concern to the
E Respondent ~ company or other debenture holders.- A special or a new right
-. cannot be found in favour of the J\ppellants in the agreement when it creates
none. The scheme applies equally to all debenture holders and as such the
Appellants cannot be treated as a separate class. Once the Respondent-
Company prima facie showed-thatthe scheme is fair and reasonable and also
that -the requisite majority of the debenture holders 'recorded their decision in
F its favour, the court in absence of any unforeseen unjustness or
unreasonablen_ess therein ought not to reject the same.

The Company Judge by reason of the impugned judgment while
exercisllig a supervisory jurisdiction only accepted the scheme. The High
G Court's decision is not being questioned as unfair.

The Respondent in view of the Scheme has no remedy other than
approaching the High Court under Section 391 of t~e Companies Act

In Sardar Amarjit Singh Katra (Dead) by Lrs. qnd Ors. etc. v. Pramod
H Gupta (Smt.) (Dead) by Lrs. and Ors. etc., [2003) 3 SCC 272], this Cotirt
ADM!NIST. OF THE~PECIFIEDUNDERTA.KINGOFTHE U.T.l.1•. GARWAREPOLYSTERLTD. [SINHA,l.] 213

~: A
"As far as possible, courts must always aim to preserve and protect
·i the rights of the parties and extend help to enforce them rather than
deny relief and thereby render the rights themselves otiose, "ubi jusibi
remedium" (where there is a right, there is a remedy) being a basic
principle of jurisprudence. Such a course would be more conducive B
and better conform to a fair, reasonable and proper administration of
justice."

We may at this stage refer to the decisions relied upon by Dr. Dhawan.

In the case of Nanakram v. Kundalrai, [1986] 3 SCC 83 as also Nutan C
Kumar and Ors. v. Ilnd Additional District Judge and Ors., [2002] 8 SCC 31
the question which arose for consideration was as to whether a lease in
violation of statutory provision was void. Such a question does not arise for
consideration herein.

In Delhi Development Authority v. Durga Chand Kaushish, [1973] 2 D
sec 825, the court was concerned with the interpretation of a deed· of lease.
It was noticed:

"19. Both sides have relied upon certain passages m Odgers'
Construction of Deeds and Statutes (5th Edn. 1967). There (at pp. 28-
29), the First General Rule of Interpretation formulated is: "The E
meaning of the document or of a particular part of it is therefore to
be sought for in the document itself'. That is, undoubtedly, the primary
rule of construction to which Sections 90 to 94 of the Indian Evidence
Act give statutory recognition and effect, with certain exceptions
contained in Sections 95 to 98 of the Act. Of course, "the document" F
means "the document" read as a whole and not piecemeal. "

(Emphasis supplied)

There is no quarrel with the aforementioned position of Jaw.

In Smt. Rajbir Kaur and Anr. v. Mis. S. Chokesiri and Co., [1989] 1
G
SCC 19, the court was concerned with. the interpretation as to whether a
document in question was a lease or a licence. The said decision has been
rendered on the fact of the said case and on the basis of the evidence brought
on records as to whether the tailor and the ice-cream vendors h~d been put
in exclusive possession in the tenanted premises. The said decision has no H
214 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A application to the fact of the present case.
Delta International Ltd. v. Shyam Sundar Ganeriwa/la and Anr., [1999]
4 sec 545 again dealt with a similar question. It was observed:

"27. Lastly, it is to be noted that if the document is a camouflage as
stated earlier, the mask or veil is required to be removed for
(
B '
determining the true intent and purpose of the document. In the present
case, there is no pleading by the defendants that the document was
a camouflage so as to defeat the rights of a tenant who had inducted
the appellant or that of the owner of the premises. As stated earlier,
. the document contemplates three types of agreements, one, that of a
c leave and licence; secondly, in case a consent is obtained from the
tenant. (sic landlord), for execution of a sub~'lease which would create
an interest in the property as a sub-tenant and thirdly, in case of a
sub-lease, for purchase of equipment, fitting and fixtures at a price of
Rs 2,50,000. The second and third parts of the agreement never came
D into operation. Hence, for the reasons discussed above, we hold that
the agreement dated 18-7-1970. is a deed of "leave and licence" and
not a "lease"."

The said decision also has no application in the instant case.

E In view of our findings aforementioned, it is not necessary for us to
enter into the question as to whether clause 7.5 of the agreement is hit by
Section 28 of the Indian Contract Act or not.

We do not find any merit in this appeal which is dismissed accordingly.
However, in the facts and circumstances of the case, there shall be no order
F as to costs.

S.K.S. Appeal dismissed.