Debenture Trustees Must Continuously Verify Issuing Company's Financial Position For Debenture Holders' Interest, Delhi State Commission Holds Bank Of Baroda Liable
The Delhi State Consumer Disputes Redressal Commission bench of Justice Sangita Dhingra Sehgal (President) and Pinki(Judicial Member) held that banks, as trustees, have a duty to verify, at every stage, the financial position of the company which issued the debentures. The bench held that as a corporate trustee, the bank must take special care and expertise in protecting and...
The Delhi State Consumer Disputes Redressal Commission bench of Justice Sangita Dhingra Sehgal (President) and Pinki(Judicial Member) held that banks, as trustees, have a duty to verify, at every stage, the financial position of the company which issued the debentures. The bench held that as a corporate trustee, the bank must take special care and expertise in protecting and safeguarding the financial interest of the debenture holder after exercising due diligence.
Brief Facts:
The Complainant held 100 debentures, totalling Rs. 13,500/-, inclusive of interest in Hindustan Developers Corporation (“Company”). The 'Debenture Redemption Amount' was to be paid in 5 instalments by the Company. Bank of Baroda (“Bank”) was acting as a trustee. It failed to honour the commitment made by the Company, despite assurances of payment. The Bank stated there were ongoing legal proceedings against the Company as the reason for non-payment. Feeling aggrieved, the Complainant filed a complaint against the District Consumer Disputes Redressal Commission, New Delhi (“District Commission”) against the Bank.
In response, the Bank argued that as per the trust deed, it was empowered to enforce security and recover money for the benefit of all debenture holders, not individual holders. The bank claimed that it took necessary steps to safeguard the interests of debenture holders, but legal complications arose due to the Company's proposed arrangement with another entity.
The District Commission held that debenture holders are consumers, and the Bank, as a trustee, had a duty to ensure the financial stability of the issuing Company. The District Commission directed the Bank to pay the Complainant the due amount with interest and awarded compensation for deficiency in service and litigation expenses. Dissatisfied with the District Commission's decision, the Bank filed an appeal to the Delhi State Consumer Disputes Redressal Commission (“State Commission”).
Observations by the State Commission:
The State Commission referred to Regulation 15(1)(n) of the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. These regulations stipulate the duties of debenture trustees, specifically emphasizing their responsibility to safeguard the interests of debenture holders and to address any grievances they may have. The State Commission held that the trustees' role primarily revolves around protecting the financial interests of debenture holders.
Therefore, the State Commission held that the Bank, in its capacity as a trustee, bore the duty to continually verify the financial position of the Company issuing the debentures. As a corporate trustee, the Bank held an obligation to exercise special care and expertise in safeguarding the financial interests of the debenture holder.
Consequently, the State Commission upheld the decision of the District Commission which directed the Bank to pay the Complainant a sum of Rs. 13,500/- and pay a compensation of Rs. 15,000/- along with Rs. 10,000/- for litigating expenses.
Case Title: Bank Of Baroda Vs Mr. Prem Chand Chachra and Ors.
Case Number: First Appeal No. 306/2015
Date of Pronouncement: 30.05.2024