Central Bank Executor and Trustee Co. Ltd. vs Magna Hard Temp Ltd.

G. Bikshapathy, J.—The petition is filed u/s 633(2) of the Companies Act, 1956, seeking a declaration that the petitioner is not liable for any loss or consequences to the respondent or the debenture holders as trustee for the debenture holders, and (b) for a direction to the respondent to pay a sum of Rs. 40,000 towards remuneration due from 1986 to 1990 with interest at 12 per cent. and for costs.

The petitioner is the Central Bank Executor and Trustee Company Limited having its registered office at Bombay. The respondent sent an offer to the petitioner in the year 1985, requesting them to act as trustees and agents for debenture holders in respect of one lakh debentures of the value of Rs. 100 each which were going to be issued shortly. The petitioner sent its consent as per its letter dated September 25, 1984. It was informed to the petitioner that the respondent will give a first charge on the fixed assets of the company for the proposed debentures. It is also agreed to maintain 1.5 times security to cover the net fixed assets. In the annual general body meeting held on October 3, 1985, the respondent passed a resolution for floating debentures. It was agreed to pay a sum of Rs. 8,000 initially to the petitioner for the appointment of the debenture trustees and, thereafter, it was agreed to enhance to Rs. 10,000 per year. The respondent paid only Rs. 8,000 on October 8, 1985, and thereafter, he failed to make any payment. On November 14, 1985, the respondent offered the debentures to the public and the issue was closed on December 16, 1985. As per the offer made by the respondent, it is required to execute the trust deed and create a charge over its fixed assets within 18 months in favour of the petitioner. As per the guidelines issued by the Government of India on January 14, 1987, in order to protect the interest of the debenture holders, the respondent has to create security within 12 months from the date of issue of the debentures. But, however, contrary to the terms of the appointment, the trust deed was not executed by the respondent despite several demands. The respondent evaded the performance of its obligations on the pretext that the financial institutions in whose favour the property was charged earlier are not agreeable for pari passu charge. It is submitted that the debentures were subscribed to the extent of Rs. 33 lakhs only and the company is facing financial difficulties apart from labour unrest. The petitioner also submits that the respondent has not paid the interest on debentures also. It also appears to have made a complaint to the concerned officers in this regard. Since the trust deed has not been executed in favour of the petitioner, it would not be possible for the petitioner to continue as trustees as there was no trust deed in the eye of law and the petitioner cannot be treated as a trustee. It is submitted by the petitioner that it acted honestly and reasonably and it is entitled to be absolved from all its liabilities which may arise out of their appointment as trustees and agents. Since the respondent failed to execute the trust deed, it is seeking a declaration that it is not liable for any loss or consequences and further direction for payment of remuneration from 1986 onwards with interest.

A counter-affidavit was filed by the respondent company stating that the petition is not maintainable u/s 633(2) of the Act. Further, it was stated that the petitioner was requested to act as a trustee and agent for the debenture holders and that it proposed to give the first charge on the fixed assets of the company. However, since the said promise was subject to the happening of certain events, it was intending to clear off the liabilities of the Andhra Bank, A.P.I.D.C., A.P.S.F.C., etc., and a minimum amount of Rs. 44,97,000 was required. But the amount received by the company was only Rs. 33 lakhs and the Andhra Bank had frozen the amount. Therefore, the respondent submits that it had discharged all its obligations. It is further stated by the respondent that the company became sick and a scheme was approved by the Board for Industrial and Financial Reconstruction and the said rehabilitation scheme was under implementation. The company is making all out efforts to make the payment to the debenture holders. Therefore, it is submitted by the respondent that there are no bona fides in the application filed by the petitioner and the same is liable to be dismissed.

A counter-affidavit is also filed by the Registrar of Companies. It is the case of the Registrar that the company had committed certain irregularities and violated the provisions of the Companies Act for which a prosecution has been launched. But, however, learned counsel for the Registrar submits that the petition, as such, filed by the petitioner is not maintainable inasmuch as the petitioner is not a trustee in the eye of law.

On the basis of the pleadings as set out above, it is to be considered whether the petition is maintainable u/s 633(2) of the Companies Act, 1956.

For a proper appreciation of the case, it is necessary to refer to section 633(2), which is extracted below :

"Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1)".

The word "officer" has also been defined u/s 2(30) of the Act, which reads as follows :

''"officer" includes any director, managing agent, secretaries and treasurers, manager or secretary, or any person in accordance with whose directions or instructions the board of directors or any one or more of the director is or are accustomed to Act, and also includes :

(a) where the managing agent or the secretaries and treasurers is or are a firm, any partner in the firm;

(b) where the managing agent or the secretaries and treasurers is or are a body corporate, any director or manager of the body corporate.''

Thus, a reading of sub-section (2) of section 633 goes to show and makes it clear that if any officer of the company has reason to apprehend that any proceedings will or might be brought against him in respect of any negligence, etc., he may approach the High Court for relief and this court shall have the power to relieve him as if it is a court before which the proceedings have been brought u/s 633(1). The primary ingredient that is to be considered in the instant case is whether an application has been made to this court by an officer of the company. A reading of the definition of the word "officer" shows that the directors, managing agent, secretaries, etc., are covered by the said definition.

Learned counsel has not been able to place any decisions or provisions under which the petitioner who has agreed to act as agents and trustees are the officers of the company. Even though it is specifically contained in the offer of debentures that the petitioner company has agreed to act as an agent and trustee, it could not be called as an officer of the company. Learned counsel for the petitioner contends that since the remuneration has been fixed, they are to be treated as the officer. On the other hand, learned counsel for the respondent submits, firstly, that the petitioner has no locus standi to file an application u/s 633(2) of the Act, as it is not an officer. The application is maintainable only by the officer of the company. Secondly, the trust deed has not been executed in favour of the petitioner company. Therefore, it cannot claim any rights as if it is a trustee of debentures.

Learned counsel for the petitioner also submits that the debenture trustee has a heavy responsibility, inasmuch as he is required to protect the interest of the debenture holders and, therefore, by refusing to execute the trust deed the petitioner company has exhibited a lack of trust towards the debenture holders.

I have considered the respective contentions of learned counsel. The application has been filed on the premise that it is an officer of the company and that it apprehends proceedings for misfeasance, breach of duty, etc., and, therefore, seeks a declaration u/s 633 that it is not liable for any loss or consequences to the respondent or debenture holders as trustee.

Before going into the merits of the case, whether the petitioner can seek such a relief, it has to be established that the petitioner is an officer, and until and unless such an issue is decided, further probe into the matter would be unnecessary. As per the admitted facts in the instant case, debentures have been floated by the company and as against rupees one crore anticipated investment, it had received only Rs. 33 lakhs. Even the said amount was frozen by the Andhra Bank for various reasons which are not relevant. After a careful consideration in the matter, I find that the petitioner is not an officer of the company and, therefore, such an application u/s 633(2) of the Act is not maintainable. Accordingly, the petition is liable to be dismissed.

Accordingly, the petition is dismissed. However, it is a matter of great concern that the interest of the debenture holders has not been protected as required under law. That is the reason why the statute provides for the appointment of debenture trustee and execution of trust deed in his favour. Even, according to the company, no trust deed has been executed and thus, there is a violation of the provisions of the Act. Though the company is expressing difficulties that on account of certain unforeseen circumstances, pari passu charge could not be obtained from the other financial institutions and that the amounts were frozen by the Andhra Bank, it cannot be absolved of its statutory obligations. The very purpose of creating debenture trust and executing the trust deed is to safeguard the interest of the debenture holders. Therefore, the Registrar shall take appropriate action to ensure that the interest of the debenture holders is not put in jeopardy. There shall be no order as to costs.