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2015 Supreme(Bom) 793
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
S.J. KATHAWALLA, J.
IDBI Trusteeship Services Ltd. – Petitioner
Versus
Hubtown Ltd. - Respondent
Company Petition No. 644 of 2013
Decided On : 08-05-2015
For the Petitioner:Dr. Veerendra V. Tulzapurkar, Senior Advocate, along with Sandip Parikh, Indranil Deshmukh, Aditya Mehta, Anish Wadia, Pooja Vora, instructed by M/s. Amarchand & Mangaldas & Suresh A. Shroff & Co., Advocates. For the Respondent:Aspi Chinoy, Senior Advocate, D.D. Madon, Senior Advocate, Gaurav Joshi, Senior Advocate, along with Nishit Dhruva, Ashok Agarwal, Prakash Shinde, Neeta Jain, Ambru, Jaising Mani, Chirag Bhavsar, instructed by M/s. MDP & Partners, Advocates.
A transaction that is structured to circumvent the FDI Policy and the FEMA Regulations is illegal and unenforceable.
Headnote:
COMPANY PETITION - [KEYWORD] - [ACT SECTION LIST] - SUMMARY
Fact of the Case:
IDBI Trusteeship Services Ltd. (Petitioner) filed a Company Petition seeking to wind up Hubtown Ltd. (Company) on the ground that the Company is deemed to be unable to pay its debts. The Company raised several defenses, including that the transaction and/or the guarantee are contrary to FEMA and the FDI Policy.
Finding of the Court:
The Court found that the structure/device of routing FMO's FDI amount of Rs. 418 crores to Amazia and Rubix through the newly interposed Vinca (as the nominal recipient of the FDI) was a colourable device structured only to enable FMO to secure repayment (through Vinca) of its FDI amount and interest thereon at 14.75%, contrary to the statutory FEMA Regulations and the FDI Policy embodied therein, which only permit FDI investment in townships/real estate development sector to be made in the form of equity (including Compulsorily Convertible Debentures) and preclude any assured return.
Issues: Whether the transaction and/or the guarantee are contrary to FEMA and the FDI Policy.
Ratio Decidendi: The Court held that the transaction was a colourable device and was structured to enable FMO to secure repayment of its FDI amount (Rs. 418 crores) and a rate return of 14.5% per annum thereon, contrary to the FDI Policy and the statutory FEMA Regulations and in any event the transaction is illegal and prohibited by law, is unenforceable, and consequently the Bank Guarantee issued by Vinca being part of the said structure is also unenforceable.
Final Decision: The Company Petition was dismissed.
1. By the above Company Petition, the Petitioner – IDBI Trusteeship Services Ltd. seek winding up of the Respondent Company – Hubtown Ltd. (“the Company”) on the ground that the Company is deemed to be unable to pay its debts. The Company Petition is taken up for admission.
2. The Petitioner is a Company incorporated under the Companies Act, 1956 and is a Debenture Trustee of the debentures issued to Vinca Developers Pvt. Ltd. (“Vinca”) by Amazia Developers Pvt. Ltd. (“Amazia”) and Rubix Trading Pvt. Ltd. (“Rubix”). Amazia and Rubix are wholly owned subsidiaries of Vinca. The Company and its individual Promoters collectively own 90 per cent shareholding in Vinca.
3. Nederlandse Financierings – Maatschappiji Voor Ontwikkelingslanden N.V. (“FMO”) is a Corporation constituted under the Laws of Netherlands. FMO holds 10 per cent shareholding in Vinca. FMO also holds 3 Compulsorily Convertible Debentures (“CCDs”) issued by Vinca. The said three CCDs are convertible within a period of 60 months from December 2009. Upon such conversion, FMO will hold 90% shareholding in Vinca.
4. The investment made by FMO in Vinca in the form of three CCDs was used by Vinca to purchase Optionally Convertible Debentures (“OPCDs”) issued by Amazia and Rubix. In respect of the OPCDs, a Debenture Subscription and Debenture Trust cum Mortgage Deed was executed on 1st December 2009 between Amazia, the Company and the Petitioner. Similarly in respect of the OPCDs issued by Rubix, a Debenture Subscription and Debenture Trust cum Mortgage Deed was executed dated 1st December 2009 between Rubix, the Company and the Petitioner, as amended by OPCD Amendment Agreement dated 8th September 2010. The aforesaid Deeds shall hereinafter be collectively referred to as “the Debenture Trust Deeds” (“DTDs”).
5. In respect of the liability arising under OPCDs, the Company executed a Deed of Corporate Guarantee dated 9th December 2009 in favour of the Petitioner. 6. Under the Articles of Association of Vinca, the Company can nominate two Directors and two alternate Directors of Vinca. The Promoters of the Company viz. Hemant Shah and Vyomesh Shah can nominate two Directors and two alternate Directors of Vinca. Under the Articles of Association of Vinca, these Directors nominated by the Company and the Promoters of the Company are called ACL Directors. Under the Articles of Association of Vinca, FMO has a right to nominate two Directors (being the Nominee Directors) and two Alternate Directors of Vinca.
7. According to the Articles of Association of Vinca, ACL Directors are deemed to be interested directors in relation to all matters pertaining to OPCD documents which include inter alia the guarantee as also the DTDs. Article 2 (uu) lists out the various reserved matters and Article 63 mandates that no decision, action or omission by the management of Vinca, pertaining to the reserved matters shall be taken without the consent of Vinca's Board and such consent shall require the affirmative approval of the Nominee Directors on the Board of Vinca. Further any decision taken without such affirmative approval is null and void.
8. From 2nd May 2012, the Petitioner issued notices of default to Amazia and Rubix in respect of the liability under the respective OPCDs issued by Amazia and Rubix. On 27th June 2012, the Petitioner issued notices of redemption calling upon Amazia and Rubix to fully redeem all the OPCDs at par value. On 3rd August 2012, the Petitioner issued a demand certificate to the Company invoking the guarantee issued by the Company in favour of the Petitioner on account of the failure of Amazia and Rubix to redeem the OPCDs. On 6th August 2012, a letter was issued on behalf of Vinca, purportedly terminating the appointment of the Petitioner as Trustee under the DTDs. The Petitioner on 14th August 2012 sent a reply that Vinca was not entitled to terminate the Petitioner as a Trustee, since the said decision could not be taken by the Directors nominated by
