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NATIONAL CONSUMER DISPUTES REDRESSAL COMMISSION
M.B. Shah, President, Rajyalakshmi Rao and Anupam Dasgupta, Members
CENTRAL BANK OF INDIA - Appellant
Versus
TADEPALLI PADMAJA AND OTHERS - Respondents
Revision Petition No. 1299 of 2003 (Against the Order dated 25.2.2003 in Appeal/Complaint No. 697 of 2002 of the State Commission, Andhra Pradesh) with Batch
Decided on : 04-07-2008
Mr. S. M. Shirazi, Mr. Rustom Pardiwala Mrs. Asha G. Nair, Advocates, for the Appellant; Mr. Hari Kishan, Proxy for Mr. Sachin Chopra, Advocate, Mr. Krishan Mahajan and Ms. Astha Tyagi, Amicus Curiae., Mr. G. Ramakrishna Prasad and Mr. S. Patnaik, Advocate, Mr. K. Maruti Rao and Ms. K Radha, Advocate, for the Respondent
The main legal point established in the judgment is that a debenture trustee is liable for breach of trust if loss is caused to the debenture holders due to negligence in discharging fiduciary duties. The judgment also emphasizes the statutory provisions and SEBI regulations prescribing the duties of a debenture trustee and the requirement to exercise due diligence and prudence.
Headnote:
Consumer Protection Act - Liability of Debenture Trustee - Companies Act, 1956, Securities and Exchange Board of India (SEBI) Regulations - The court held that a complaint under the Consumer Protection Act would be maintainable against a paid debenture trustee for failure of the company to pay periodical interest and/or redemption amount. The court emphasized the duty of the trustee to protect the interests of the debenture holders and the liability for breach of trust if loss is caused due to negligence. The court also highlighted the statutory provisions and SEBI regulations prescribing the duties of a debenture trustee and the requirement to exercise due diligence and prudence.
Fact of the Case:
The Central Bank of India, as the Debenture Trustee, was held liable for the failure of the Company to pay periodical interest and redemption amount on debentures. The court found that the Bank failed to discharge its fiduciary duty with special care and skill as expected from a professional corporate trustee and did not take appropriate steps as contemplated under the SEBI Regulations.
Finding of the Court:
The court found that the debenture holders were consumers within the meaning of the Consumer Protection Act and that the complaints against the Bank were maintainable. The court emphasized the duty of the trustee to protect the interests of the debenture holders and the liability for breach of trust if loss is caused due to negligence. The court also highlighted the statutory provisions and SEBI regulations prescribing the duties of a debenture trustee and the requirement to exercise due diligence and prudence.
Issues: The main issue was whether the complaints against the Central Bank of India, as the Debenture Trustee, were maintainable under the Consumer Protection Act. The court also considered the duties and liabilities of the trustee under the Companies Act, 1956 and SEBI regulations.
Ratio Decidendi: The court held that the debenture holders were consumers within the meaning of the Consumer Protection Act and that the complaints against the Bank were maintainable. The court emphasized the duty of the trustee to protect the interests of the debenture holders and the liability for breach of trust if loss is caused due to negligence. The court also highlighted the statutory provisions and SEBI regulations prescribing the duties of a debenture trustee and the requirement to exercise due diligence and prudence.
Final Decision: The Revision Petitions were dismissed, and the Central Bank of India, as the Debenture Trustee, was held liable for the failure of the Company to pay periodical interest and redemption amount on debentures. The court directed the Registrar to send a copy of the order to the Chairman, SEBI for appropriate action for the deficiency in discharge of duties by the Central Bank of India Debenture Trustee as prescribed under the SEBI Regulations Code of Conduct.
ORDER
M.B. Shah, President - These revision petitions are filed against the orders passed by various State Commissions.
2. The first question which is raised is whether any "complaint" under the Consumer Protection Act, 1986 (the Act ) would be maintainable against a paid debenture-trustee for the failure of the Company in payment of periodical interest and/or the redemption amount.
3. The obvious answer is prima facie, if there is any deficiency in rendering service by the paid trustee in the discharge of its duties, the trustee would be liable for such deficiency and can be proceeded against under the Act.
4. However, the main question involved in these petitions is in which circumstances the debenture trustee would be liable to reimburse the debenture holders for failure of the issuer company to pay the periodical interest and/or for the redemption amount on the due date
5. Answer to the question would depend upon the findings whether there is any deficiency in service on the part of the trustee in discharge of its fiduciary duties as trustee as contemplated by statutory provisions. It has to protect the interests of the debenture-holders at all times and on noticing any default by the company, it has to take appropriate timely corrective action. A professional corporate trustee is liable for breach of trust if loss is caused to the debenture holders because of negligence on the part of the trustee to exercise special care and skill which it professes to have.
Facts:
6. As the question of law raised in all these revision petitions is similar, we take the facts mentioned in Revision Petition No. 1299 of 2003, wherein Synergy Financial Exchange Ltd., a Non-Banking Financial Company (NBFC) is the Company, which had issued the debentures and the Central Bank of India is the Trustee.
7. Pursuant to the January 23, 1995 decision of its Board of Directors, the Company made a rights issue of 15.90 crore non-convertible, transferable and transmittable debentures (NCDs) of Rs. 100 each, carrying 15% interest per annum, to finance its growing infrastructural requirements. The Company's predominant earning came from hire purchase of vehicles and plant and machinery. It also leased out assets, did merchant banking, was a dealer on the Over the Counter Exchange of India and an RBI authorized money - changer.
8. For the issue of the debentures, a trust deed was executed by the Company with the Central Bank of India as the Debenture Trustee, with Financial Covenants and Conditions as set out in the Fifth Schedule thereof. The said conditions were agreed to be binding upon the Company and the Trustee and also for the benefit and protection of the interests of the debenture holders.
9. As per Clause (6) of the Financial Covenants, the Company was required to pay all amounts of principal and interest due under the debenture by crossed account payee cheques or bank drafts drawn on a scheduled bank situated at Mumbai. It was agreed and undertaken to redeem the debentures in full at the expiry of three years from the date of allotment, which was March 23, 1996.
10. It was also agreed that the Company was required to pay interest at the rate of 15% p.a. on the debentures, subject to TDS, on June 30th and December 31st each year. Failure to pay the interest on the due dates (June 30 and December 31) each year during the period March 23, 1996 to March 23, 1999 would result in levy of compound interest at the same rate over and above the rate of interest of 15% per annum. All such compound interest was a charge secured by the debentures.
11. In case of default in redemption of the debentures the Company would pay liquidated damages of a further two per cent interest per annum for the period and the amount of the default, upon the footing of compound interest aforementioned, and such compound interest would also be a charge secured by the debentures.
Conditions for Financial Safety of Debentures
12. The financial safety of the debentures was to be ensured by the
