Arbitral Proceedings Cannot Be Imposed On A Debenture Trustee Under A Scheme Of Compromise, In The Absence Of An Arbitration Agreement: Bombay High Court

The Single Bench of Justice A.K. Menon ruled that the Debenture Trustee was an independent obligation of the Company and thus, the arbitration clause contained in the Scheme was not binding on the Debenture Trustee.

The Court observed that though the party appointed as a Debenture Trustee was classified as a creditor under the Scheme, the Scheme contained no reference to the Debenture Trustee or the services rendered by it as a Debenture Trustee. Thus, the Court held that arbitral proceedings could not be imposed on the Debenture Trustee on the basis of the said Scheme only since this is not contemplated under Section 7 of the Arbitration and Conciliation Act, 1996 (A&C Act), which defines the term 'arbitration agreement'.

A Debenture Trust Deed was executed between the applicant HMG Industries Ltd. and the respondent Canara Bank, wherein the respondent was appointed as a Debenture Trustee. An Amended Scheme of Compromise was sanction by the Bombay High Court between the applicant and its creditors, including the debenture holders, equity and preference shareholders, and workers.

The respondent bank raised a demand towards its fee as a Debenture Trustee. The applicant called upon the respondent to pay damages for the loss suffered by the applicant due to the retention of the original title deeds by the respondent bank. The applicant thereafter filed an application before the Bombay High Court for appointment of a Sole Arbitrator.

The applicant HMG Industries Ltd. submitted before the High Court that under the Scheme of Compromise sanctioned by the High Court, the respondent bank was classified as a sundry creditor. The applicant averred that after the sanction of the Scheme the respondent bank was not required to continue as a Debenture Trustee. The applicant contended that despite the sanction of the Scheme of Compromise, the respondent continued to hold on to the original title deeds. The applicant added that it had suffered losses due to the non-return of the original title deeds and, therefore, it was entitled to recover damages from the respondent bank. The applicant added that an Arbitration Clause was incorporated in the said Scheme of Compromise and thus the parties could be referred to arbitration.

The respondent Canara Bank averred that it was appointed as a trustee to the debentures holders and that it had been providing services in terms of the Debenture Trust Deed. The respondent contended that it had demanded fees for its services, which the applicant had declined to pay. The respondent submitted that there was no arbitration agreement between the applicant and the respondent, and thus the application for appointment of a Sole Arbitrator was not maintainable before the Court. The respondent contended that the Amended Scheme of Compromise was not binding upon the respondent bank as a Debenture Trustee.

The applicant HMG Industries Ltd. contended that the Scheme of Compromise entered into under Section 391 of the Companies Act, 1956 was sanctioned by the Court and that it overrode all agreements. Thus, the applicant averred that the said Scheme was binding on the respondent bank and, therefore, the parties could be referred to Arbitration.

The High Court observed that the said Scheme of Comprise was binding on the secured and unsecured creditors, the debenture holders, the equity and preference shareholders, and the workers.

The Court noted that the secured and unsecured creditors were defined in the Scheme and that the Scheme made no reference to the Debenture Trust Deed.

The Court observed that the respondent was appointed as a trustee under the Debenture Trust Deed. The Court noted that under the Amended Scheme of Compromise certain arrangements were made for the payments to be made by the applicant to the secured creditors. The Court held that the said arrangements under the Scheme had nothing to do with the services rendered by the respondent bank as a Debenture Trustee. The Court added that the Amended Scheme of Compromise contained no reference to the respondent bank and its services as a Debenture Trustee.

The Court held that though the Scheme of Compromise overrode all the agreements between affected parties, however, since there was no arbitration agreement incorporated in the Debenture Trust Deed, arbitral proceedings could not be imposed on the Debenture Trustee by virtue of the said Scheme only. The Court added that such an imposition was not contemplated under Section 7 of the A&C Act, which defines the term 'arbitration agreement'.

The Court observed that the Amended Scheme of Compromise set out the intention of the applicant Company to pay the entire principal dues owed by it to the named financial institutions. The Court held that the Debenture Trustee was not one of the entities that were mentioned in the Scheme of Comprise. The Court added that the Debenture Trustee was an independent obligation of the applicant. Thus, the Court held that the arbitration clause contained in the Scheme was not binding on the Debenture Trustee and that the requirements of Section 7 of the A&C Act were not satisfied.

The Court thus dismissed the application.

Case Title: HMG Industries Ltd. versus Canara Bank

Citation: 2022 LiveLaw (Bom) 224

Dated: 13.06.2022 (Bombay High Court)

Counsel for the Applicant: Ms. Anita Castelino, i/by Lambay & Co.

Counsel for the Respondent: Ms. Niyati Merchant, with Mr. Harsh Sheth, i/by MDP & Partners

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