Nujs-hsf Moot Court Competition, 2014: Finalists - Respondents

IN THE HIGH COURT OF BOMBAY AT MUMBAI

Civil Appeal No. ____/2008 (Under S. 96, Civil Procedure Code, 1908 r/w Rule 1, Bombay High Court Appellate Side Rules, 1960) MiniBank AG…………………………………. …………………………………...Appellant v. Acero Steels Limited……………………………...……………………………...Respondents Clubbed with Civil Appeal No. ____/2011 (Under S. 96, Civil Procedure Code, 1908 r/w Rule 1, Bombay High Court Appellate Side Rules, 1960) MiniBank AG…………………………………. …………………………………...Appellant v. Acero Steels Limited……………………………...……………………………...Respondents Clubbed With Criminal Appeal No. ____/2011 (Under Art. 227, Constitution of India, 1950 r/w Rule 2, Bombay High Court Appellate Side Rules,1960) MiniBank AG…………………………………. ……………………………………Appellant v. Acero Steels Limited……………………………...……………………………….Respondent Written submissions on behalf of, Team Code _______ Counsel for the Respondent. TABLE OF CONTENTS

Index of Authorities.................................................................................................................iii Statement of Jurisdiction..........................................................................................................vi Statement of Facts...................................................................................................................vii Questions Presented..................................................................................................................x Summary of Pleadings.............................................................................................................xi Pleadings...................................................................................................................................1 I.

No Event has Occurred which is a MAC or is Likely to Lead to a MAC..........................1 [A] THE CHANGE COULD BE REASONABLY FORESEEN...........................................................1 [B] THE CHANGE WAS NOT ‘MATERIAL’ TO THE TRANSACTION.............................................3 [C] THE CHANGE WAS NOT EXPERIENCED FOR A ‘DURATIONALLY SIGNIFICANT’ PERIOD.....4

II.

Acero is Entitled to Specific Performance........................................................................4 [A] MERE AWARDING OF DAMAGES CANNOT RESTORE ACERO TO ITS ORIGINAL POSITION...5 [B] SPECIFIC PERFORMANCE IS THE APPROPRIATE REMEDY..................................................5

III.

The Scheme of Restructuring is Just, Valid and is to be Sanctioned...............................6

[A] MINIBANK IS AN UNSECURED CREDITOR.........................................................................6 [B] IN ANY EVENT, MINIBANK ONLY HOLDS A FLOATING CHARGE........................................8 [C] SCHEME OF RESTRUCTURING IS IN ACCORDANCE WITH LAW........................................10 IV. The Criminal Complaint against Acero Should be Quashed.........................................13 [A] NO PRIMA FACIE OFFENCE HAS BEEN ESTABLISHED FROM THE COMPLAINT..................13 [B] THERE IS NO PRIMA FACIE CASE OF CHEATING AGAINST ACERO.....................................14 V. Acero Cannot be made Liable for the Actions of Mr. Sheth...........................................16 [A] MR. SHETH IS NOT SUFFICIENTLY HIGH UP IN THE ORGANIZATIONAL LADDER..............17 [B] MR. SHETH IS NOT DELEGATED WITH COMPLETE DISCRETION AND INDEPENDENCE......17 VI. The Agreement between MiniBank and Vulture Distressed Assets Fund is Void..........18 [A] PARTIAL ASSIGNMENT OF OUTSTANDING DEBTS IS VOID...............................................18 [B] THE ASSIGNMENT

IS AGAINST PUBLIC POLICY..............................................................18

Prayer......................................................................................................................................19

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INDEX OF AUTHORITIES Indian Cases Amritlal v. Bajranglal Agarwalla, 1963 CriLJ 474................................................................14 Asad Ali Tahsildar v. Answar Ali, AIR 1959 Trip 40.............................................................16 Bhajan Lal v. State of Haryana, AIR 1992 SC 604.................................................................13 DLF Ltd v. Punjab National Bank, WP (C), 8520/2010.........................................................16 Doraiswami Mudaliar v. Doraiswami Aiyangar AIR 1925 Mad 753.....................................19 Hari Prasad Chamaria v. Bishun Kumar Surekha and Ors, 1974 CriLJ 352..........................14 Iridium v. Motorola Incorporated and Ors, AIR 2011 SC 2010.............................................17 Lords Chloro Alkali Ltd, Re, (2009) 148 Com Cases 873......................................................13 Miheer H Mafatlal v. Mafatlal Industries Ltd, (1996) 87 Com Cases 792.............................10 Neeraj Poddar v. State of West Bengal, 2013 Indlaw CAL 575.............................................17 Nirma Industries and Anr v. SEBI, Civ. App. No. 6082/2008..............................................2, 3 Nova v. Punjab National Bank, 86 (2000) DLT 159...............................................................14 Official Liquidator v. Victory Hire-Purchasing Co (P) Ltd, (1982) 52 Com Cases 88, 92.....12 Pardeep Kumar v. State of Haryana, 1996 (2) Recent Criminal Reports 791.........................17 Prithviraj Singh v. Dalip Kulkarni, AIR 1999 Raj 201.............................................................6 Ramautar Choukhany v. Hari Ram Todi, 1982 CriLJ 2266....................................................15 S.K Alagh v. State of Uttar Pradesh, (2008) 5 SCC 662.........................................................14 Uttar Pradesh State Electricity Board v. Ram Barai Prasad, AIR 1985 All 26.........................5 VY Jose and Anr v. State of Gujarat and Anr, (2009) 3 SCC 78...........................................17

English Cases Beam Tube Products Ltd, Re, (2007) 2 BCLC 732................................................................10 Braemar Investments Ltd, Re, (1988) 4 BCC 366................................................................7, 8 Concord Trust v. Law Debenture Trust Corporation plc, (2005) UKHL 27.............................5 Double S Printers Ltd, Re, (1999) 1 BCLC 220.....................................................................10 Fletcher v. Royal Automobile Club Ltd., (2000) 1 BCLC 331...............................................11 Grupo Hoteloro Urvasco SA v. Carey Value Added SL and Anr, (2013) EWHC 1039........3, 4 HL Bolton (Engineering) Co Ltd v. TJ Graham & Sons Ltd, (1956) 3 All ER 624, 630.......17 Lewinson v. Farin, (1978) 2 All ER 1149.................................................................................3 Oxford Pharmaceuticals v. Masters International Limited, (2009) EWHC 1753...................12

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R. v. Bernhard, (1938) 2 KB...................................................................................................15 Re Ashpurton Estates Ltd, (1983) 1 Ch 110.............................................................................8 Re Kris Cruisers Ltd, (1948) 2 All ER 1105.............................................................................7 Re MC Bacon Ltd, (1990) BCLC 324....................................................................................15 Re, Kushler Ltd, (1943) Ch 248..............................................................................................12 Re, Resinoid & Mica Products Ltd, (1982) 3 All ER 677........................................................8 Spectrum Plus Ltd, Re, (2005) UKHL 341...............................................................................9 Supercool Refrigeration and Air Conditioning v. Hoverd Industries, (1994) 3 NZLR 300. . .10 Sussex Brick Co Ltd, Re, (1960) 1 All ER 772......................................................................10 Tesco Supermarkets Ltd v. Nattrass, (1971) UKHL 1......................................................17, 18 Vehicular Operators Ltd v. FM Conway, (2012) EWHC 2930...............................................18

American Cases Capital Justice LLC v. Wachovia, 706 F Supp. 2d 23, DDC, December 08, 2009 (Civ. App. 07-2095) (RCL).....................................................................................................................4 Destiny USA Holdings, LLC v. Citigroup Global Market Realty Corp, 2009 WL 2163483, 2009 N.Y. Slip Op. 51550(U) (N.Y. Sup. Ct. 2009)..............................................................6 Elliott Associates LLP v. Banco de la Nacion, 12 F Supp 2d 328 (1999)...............................11 Hexion Specialty Chemicals Inc. v. Huntsman Corp, Del. Ch., C.A. No. 3841-VCL (Sept. 29, 2008)...........................................................................................................................2, 4 IBP v. Tyson Foods Inc, 2001 Del. Ch. LEXIS 81 (June 15, 2001)................................passim In re Marketxt Holdings Corp, 361 BR 368, 398 (Bankr SDNY 2007)...........................12, 16 In re, Applied Theory Corp, 323 BR 838 (Bankr SDNY 2007)........................................12, 16 Rubin v. Manufacturers Hanover Trust Co, 661 F 2d 979, 991 (2nd Cir 1981).....................12 WPP v. Tempus PLC, Panel Statement 2001/15, 6 November 2001........................................1

Canadian Cases Doman Forest Limited v. GMAC Commercial Credit Corporation, (2005) 2 WWR 434........4 Vane v. Yannopoulos (1965) AC 486......................................................................................18

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Books G. Williams, TEXTBOOK OF CRIMINAL LAW, (D.J. Baker ed., 3rd edn., 2012)......................18 POLLOCK AND MULLA THE INDIAN CONTRACT ACT AND SPECIFIC RELIEF ACT, Vol. II (N. Bhadbhade, 14th edn., 2012)..................................................................................................5 Articles D. Cheng, Interpretation of Material Adverse Change clauses in an Adverse Economy, 2(564) COLUMBIA BUSINESS LAW REVIEW, 565, 580 (2009)...............................................2 D. Murphy, A Preliminary Enquiry Into The Causes Of The Credit Crunch, 8(5) QUANTITATIVE FINANCE, 435, 441, (2008)...........................................................................5 S. Worthington, An “Unsatisfactory Area of Law” – Fixed and Floating Charges Yet Again, 7 INTERNATIONAL CORPORATE RESCUE, 6 (2010)................................................................9 S. Worthington, Floating Charges: Use and Abuse of Doctrinal Analysis in COMPANY CHARGES: SPECTRUM AND BEYOND, 29 (J. Getzler, and J. Payne eds., 2006).....................9 Statutes Companies Act, 1956.......................................................................................................passim The Indian Contract Act, 1872................................................................................................20 The Specific Relief Act, 1963...................................................................................................5 The Transfer of Property Act, 1882.......................................................................................19 Miscellaneous Master Circular on External Commercial Borrowings and Trade Credits, Reserve Bank of India (2010).........................................................................................................................19

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STATEMENT OF JURISDICTION APPEAL I The appellant has approached this honourable court under S.96, Civil Procedure Code, 1908 r/w. Rule 1, Bombay High Court Appellate Side Rules, 1960. The respondent humbly submits to the jurisdiction of this Hon’ble Court.

APPEAL II The appellant has approached this honourable court under S.96, Civil Procedure Code, 1908 r/w. Rule 1, Bombay High Court Appellate Side Rules, 1960. The respondent humbly submits to the jurisdiction of this Hon’ble Court.

APPEAL III The appellant approached this honourable court under Art. 227, The Constitution of India, 1950 r/w. Rule 2, Bombay High Court Appellate Side Rules, 1960. The respondent humbly submits to the jurisdiction of this Hon’ble Court.

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STATEMENT OF FACTS The Company and the Bank Acero Steels Limited is a leading manufacturer and exporter of iron ore pellets. Most of its business is with Companies in the United States and continental Europe and a small percentage of its exports are to China and other ASEAN countries. It had been in business for more than twenty years and has achieved tremendous success. In 2006, Acero decided to undertake expansion to meet the growing demand and approached various banks for financing their proposal. Among others, they approached MiniBank AG, a Swiss bank with their proposal and the bank agreed to provide them a loan of US $ 50 million. The Facility Agreement The loan was structured as a medium term loan facility. It was to be disbursed in two tranches of US $ 25 million and to be repaid after 4 years of each instalment. Interest was payable on a quarterly basis. The parties entered the facility agreement on December 22, 2006 and Coronation bank, an Indian bank and also Acero’s largest lender was appointed as the facility agent and security trustee. A charge on book debts was created in favour of MiniBank against the loan but wasn’t registered as per the advice of their Indian solicitors, Lex Legalistics. The first instalment was released on the date of the agreement itself. The construction had started by December 2007. Acero had already started receiving orders from around the world. The Economic Meltdown By mid-2008, the global financial crisis had begun to take its course. The impact of the crisis was felt by Acero when some of its large orders from the US were cancelled. Matters became worse with the fall of the Lehman Brothers in September 2008. Acero decided to continue with its expansion plans in the meeting held in October 2008. On October 17 2008, Acero issued a notice to MiniBank for releasing the second tranche of the loan. MiniBank responded that they were under no obligation to release the instalment according to the terms of the facility agreement. MiniBank had imposed a lending freeze considering the market downturn. Due to the deadlock in talks, Acero initiated legal proceedings in the Bombay

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High Court for specific performance of MiniBank’s obligations under the facility agreement. [Suit 1]. The single judge of the high court granted the remedy in favour of Acero. MiniBank has preferred an appeal against the decision before the Hon’ble High Court (Appeal 1). The Default The impact of the crisis on Acero’s business became more profound in 2009. Acero defaulted on the interest payment obligations towards MiniBank from the 3 rd quarter of 2009-10. It also defaulted on two other principal amounts in the same period. MiniBank informed about the Event of Default in writing. Ten weeks after this Event of Default, MiniBank registered its charge with the Registrar of Companies under the Companies act on the advice of Lex Legalistics. MiniBank also instructed Acero to deposit its book debts into the Nominated Account with MiniBank. However, Acero was allowed to withdraw money from the Nominated Account. The Restructuring Due to its poor financial condition, Acero had no option but to go for debt restructuring under the Companies act. Acero convened a meeting of creditors on February 9, 2009 and proposed a debt restructuring package. Under the terms of the proposal, unsecured lenders were to take a 30% hair cut on the amounts due to them and secured creditors were required to grant a moratorium on the principal till 2017. MiniBank was against the proposal. Acero drafted the scheme and approached the Bombay High Court to hold class meetings. Meetings of four classes, namely secured creditors with fixed charge, secured creditors with floating charge, unsecured creditors and preferential creditors was held on June 23, 2010. MiniBank was placed under the category of unsecured creditor. Requisite majority from all classes of creditors was achieved. Acero approached the Bombay High Court for sanction of the scheme. MiniBank filed strong objections to the scheme on the grounds that meetings were convened wrongly and the requisite majority wasn’t obtained in a fair manner. [Suit 2] MiniBank also gave standing instructions on June 30, 2010, discontinuing withdrawals from the Nominated Account for Acero. The Discovery In August 2010, when the scheme was pending, MiniBank received facts about the deal between Coronation Bank and Acero. Acero had prepaid 25% of the debts due to Coronation 8

Bank and created a charge on part of its borrowings (worth Rs. 20 crore) just two months before the interest payment default towards MiniBank and principal default towards other two lenders. This converted Coronation Bank to the status of secured creditors to the extent of Rs. 20 crores. MiniBank added the ground of concealment of such material facts to its objections in Suit 2. However, the single judge of the Bombay High Court ruled in Acero’s favour and sanctioned the scheme in November 2011. MiniBank has preferred an appeal against this decision before the Hon’ble High Court (Appeal 2). The Criminal Proceeding MiniBank decided to take an aggressive stance against the concealment of the transaction of prepayment and creation of charge in favour of Coronation Bank. It initiated criminal proceedings in the Sessions Court, Mumbai against Acero for criminal breach of trust and fraud. Acero filed for quashing of the criminal proceedings under S. 482 of the Criminal Procedure Code, 1973 [Suit 3]. After hearing the parties, the single judge of the High Court exercised his jurisdiction under S.482 and quashed the proceedings. MiniBank has preferred an appeal against the same before the Hon’ble High Court (Appeal 3). While the appeals were pending, MiniBank assigned part of Acero’s outstanding debt to Vulture Distressed Fund LP, a firm specialising in distressed debts, whereby Vulture Fund was willing to purchase 50% of the outstanding from Acero to MiniBank at a discounted rate of 20%. It has been decided to club the three appeals preferred by MiniBank against Acero, and to hear them in a composite fashion.

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QUESTIONS PRESENTED I.

WHETHER THE ECONOMIC CRISIS OF

2008

CAN BE CONSIDERED AN EVENT WHICH IS

‘LIKELY TO LEAD TO A MATERIAL ADVERSE CHANGE’?

II.

WHETHER THE LOAN FACILITY AGREEMENT BE SPECIFICALLY ENFORCED?

III.

WHETHER THE SCHEME OF RESTRUCTURING BE SANCTIONED?

IV.

WHETHER THE CRIMINAL COMPLAINT AGAINST ACERO BE QUASHED?

V.

WHETHER ACERO CAN BE HELD CRIMINALLY LIABLE FOR THE ACTIONS OF MR. SHIV SHETH?

VI.

WHETHER THE ASSIGNMENT OF DEBTS TO VULTURE DISTRESSED FUNDS IS VALID?

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SUMMARY OF PLEADINGS I.

NO EVENT HAS OCCURRED OR IS LIKELY TO OCCUR WHICH WILL LEAD TO A MAC

It is submitted that no Material Adverse Change has occurred or is likely to occur. First, A change which can be foreseeable at the time of entering into the contract cannot be a ground for triggering the MAC clause. Macro-economic fluctuations and sudden market collapses are common in businesses and hence a reasonable person in the lender’s position would have anticipated and accounted for these changes. Moreover in open ended MAC clauses, allowing general economic conditions which involve a great degree of uncertainty and subjectivity and hence will make the position of law uncertain. Second, to invoke MAC clauses in loan agreements the ‘material ground’ is the repayment abilities of the borrower. Here, the macro-economic events of 2008 caused only a minor blip in the profits of the company. Further, Acero has enjoyed tremendous success for over twenty years and have a huge market value. Third, MAC clauses can only be invoked if the events likely to cause a MAC subsist over a significant period of time measured in years and not in months. In this case the poor performance of the company for a period of just three quarters is not a ground to make a presumption that the macro-economic events of 2008 is likely to persist into the future and seriously affect Acero’s loan repayment abilities. Hence it is submitted that the events of 2008 cannot trigger the MAC clause of the facility agreement. II. ACERO IS ENTITLED TO SPECIFIC PERFORMANCE OF THE LOAN AGREEMENT First, the Supreme Court of India has laid down that in situations where the subject matter of the contract is rare and is not easily available in the market then the contract can be specifically enforced. In the instant case subsequent to the sub-prime lending crisis credit became a scarce commodity in the market and credit is extremely essential for Acero to carry on with their expansion activity. Second, there are a large number of stakeholders here like shareholders, creditors, employees etc. involved who will be adversely affected if the contract is not enforced. Third, the quantum of compensation cannot be measured in the instant case since a variety of material factors like fluctuating prices, loss of employment, the loans due to lenders etc. have to be taken into account. It is submitted that not only will the amount be staggeringly high but also extremely difficult to quantify. Hence the most just remedy in this situation would be to specifically enforce the contract.

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III. THE SCHEME OF RESTRUCTURING IS JUST AND VALID It is submitted that the scheme of restructuring proposed under S. 391 of the Companies Act, 1956, by Acero is just and valid and therefore should be sanctioned. First, all the statutory requirements have been complied with and all the meetings have been held as required under the statute. MiniBank has been rightfully characterised as an unsecured creditor, due to its omission to register its charge pursuant to statutory requirements. Second, all material facts relating to the financial position of the company were disclosed to the creditors as required under the statute. Third, the class of voters that voted and attended were acting bona fide and in good faith. Hence, the scheme is just and valid and should be sanctioned. IV. THE CRIMINAL COMPLAINT AGAINST ACERO SHOULD BE QUASHED It is submitted that the criminal complaint of breach of trust and fraud against Acero should be quashed by the High Court under S. 482 of the Criminal Procedure Code, 1973. First, there is no prima facie case of breach of trust against Acero. There is nothing in the complaint to satisfy the ingredients of entrustment and dishonest use or misappropriation by Acero as required under S. 405, Indian Penal Code. Second, there is no prima facie case of cheating against Acero under S. 421 of the Indian Penal Code. There is nothing in the complaint to prove that the creation of charge was without receiving adequate consideration. The burden of showing dishonest intention on part of Acero has also not been discharged. Third, the dispute is only of a civil nature involving a breach of contract. The continuation of criminal proceedings for a dispute of civil nature would constitute blatant abuse of the process of the court. V. MR. SHETH’S ACTIONS CANNOT BE ATTRIBUTED TO ACERO It is submitted that Mr. Sheth was not the ‘directing mind and will’ of the company and hence his actions cannot be attributed to the company. A person is said to be the ‘directing mind and will’ is he is sufficiently high up in the corporate ladder and has the authority not just to implement orders but also to influence policy decisions of the company. Here the decision to undertake CDR was taken by the Board of Directors in the lenders meeting. First, Mr. Sheth was merely given the authority to implement the decisions given by the members of the board. In such situations, the mere fact that he was given some degree of discretion does not make him the directing mind and will of the company. Second, an officer

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in the subordinate level can be considered the directing mind and will if he has been given sufficient discretion to act independently. In the instant case although Mr. Sheth was given the authority to spearhead the transaction he was reporting to Mr. Shah who was on the board. Hence he was a part of a chain of organizational command and did not have independence to act on his own. Therefore, it is submitted that he cannot be considered the ‘directing mind and will’ of the company. VI. THE ASSIGNMENT OF DEBTS IN FAVOUR OF VULTURE DISTRESSED FUNDS IS VOID It is submitted that the assignment of debts by MiniBank to Vulture Distressed Assets Fund LP is void. First, partial assignment of debts is not allowed under S. 130 of the Transfer of Property Act, 1882. Second, the loan facility an External Commercial Borrowing and vulture funds are not a recognised lender under Part I, S. 1(A)(ii) of the RBI’s Master Circular on External Commercial Borrowings and Trade Credits. Allowing such a thing will be violation of public policy. Hence, the assignment would be unlawful under S. 23 of the Indian Contract Act, 1872.

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PLEADINGS I.

NO EVENT HAS OCCURRED WHICH IS A MAC OR IS LIKELY TO LEAD TO A MAC

1. It was laid down in IBP1 that to successfully invoke a claim of MAC three tests need to be satisfied. First, the change could not have been reasonably foreseen by the person invoking the MAC clause even by exercising due diligence [A]. Second, the change so occurred should be ‘material’ to the very heart of transaction [B]. Third, the change should not be temporary and should be likely to persist over a ‘durationally significant’ period of time [C]. It is submitted that in the instant case, none of these conditions are satisfied. [A] THE CHANGE COULD BE REASONABLY FORESEEN BY EXERCISING DUE DILIGENCE 2. It is submitted that global economic downturn of 2008 precipitated by the sub-prime lending crisis and the volatility in the general macro-economic conditions could have been anticipated even by exercising due diligence. Two submissions are made in support of this assertion. i.

Fluctuations in the macro-economic conditions are deemed to have been anticipated and accounted for in an MAC clause

3. It has been stated that unless explicitly specified to the contrary, fluctuations in macroeconomic conditions should not be considered relevant to invoke a MAC clause, even if they are because of completely extraneous factors.2 The rationale for this judgment was that it is unwise of a prudent man to assume that the economy will always function in a smooth and stable manner and therefore a rational man would have accounted for economic fluctuations in the economy. The Delaware Chancery Court, upheld this rationale and refused to acknowledge that the 2008 global economic crisis as a relevant factor in invoking the MAC clause.3 The degree of foreseeability is a subjective test and should be considered from the 1 IBP v. Tyson Foods Inc, 2001 Del. Ch. LEXIS 81 (June 15, 2001) [“IBP”]. 2 WPP v. Tempus PLC, Panel Statement 2001/15, 6 November 2001 [“WPP”]. 3 Hexion Specialty Chemicals Inc. v. Huntsman Corp, Del. Ch., C.A. No. 3841-VCL (Sept. 29, 2008) [“Hexion”].

vantage point of the lender seen from a case to case basis. 4 It has been explicitly stated in Hexion5 that a banker who is experienced in the business of lending is deemed to know about the probability of the borrower’s repayment abilities being affected by fluctuating economic conditions. Hence in dealing with varying macro-economic conditions, courts have relied on the caveat emptor doctrine and have laid down that parties are deemed to be aware of the possibilities of fluctuations in the macro-economic conditions.6 4. While it is conceded that the specific events such as the collapse of Lehman Brothers could not have been anticipated, any reasonable man in the position of a banker is expected to have anticipated the possibility of sudden fluctuations in macro-economic conditions while entering into the contract. Hence, it is submitted that the events in question were foreseeable by a reasonable man in the lender’s position and hence the first condition is not satisfied. ii.

Considering macro-economic changes relevant for invoking MAC clauses would defeat the purpose of the clause itself

5. In generic open ended MAC clauses, if macro-economic conditions are considered relevant, then it could open floodgates for capricious use of this provision by the parties in the position of the lender, as general economic fluctuations are fairly frequent. 7 This would put the lender in a position of undue advantage over the borrower.8 6. The purpose of a MAC is to protect the lender from the acts committed by the borrower without the lender’s knowledge, which could prove to be detrimental to the lender’s interests and purpose of entering into the agreement in the first place. 9 However, there is no such information asymmetry in cases of macro-economic changes and considering them relevant 4 Nirma Industries and Anr v. Securities Exchange Board of India, Civ. App. No. 6082/2008 [“Nirma Industries”]. 5 Hexion, Del. Ch., C.A. No. 3841-VCL (Sept. 29, 2008) 6 D. Cheng, Interpretation of Material Adverse Change clauses in an Adverse Economy, 2(564) COLUMBIA BUSINESS LAW REVIEW, 565, 580 (2009). 7 IBP, 2001 Del. Ch. LEXIS 81 (June 15, 2001). 8 Nirma Industries, Civ. App. No. 6082/2008.

for invoking MAC clauses would only defeat the purpose of the clause. Since every economy is bound to experience frequent fluctuations due to various extrinsic reasons, the legal standard for invoking a MAC clause would remain uncertain. 10 The clause itself would stand redundant if each general macro-economic fluctuation is taken to trigger it. [B] THE CHANGE WAS NOT ‘MATERIAL’ TO THE TRANSACTION

7. In loan agreements, a change can be considered ‘material’ only if it impacts the repayment abilities of the borrower.11 Courts in India have held that a very strict standard has to be adopted to prove that the change is material to invoke an MAC clause. 12 It is submitted that the sub-prime lending crisis and the collapse of Lehman Brothers do not constitute events which are ‘material’ to the transaction.

i.

The event is only a minor blip and is not likely to have affected the repayment abilities of Acero

8. A ‘minor blip’ in the financial conditions of the borrower is not sufficient to invoke an MAC clause.13 In the instant case, the Board of Directors of Acero took a formal view that there was only a minor blip in the market conditions and that commodity prices would hold up. 14 Such formal positions have high evidentiary value, as the directors are considered to know best about the performance levels of the company.15 Hence there is no ground to make an adverse presumption that cancellation of orders by some customers of Acero and general 9 Supra note 6. at 570. 10 Grupo Hoteloro Urvasco SA v. Carey Value Added SL and Anr, (2013) EWHC 1039 [“Grupo Hotelero”]. 11 Lewinson v. Farin, (1978) 2 All ER 1149. 12 Nirma Industries, Civ. App. No. 6082/2008. 13 IBP, 2001 Del. Ch. LEXIS 81 (June 15, 2001). 14 See ¶ 8, Factsheet. 15 IBP, 2001 Del. Ch. LEXIS 81 (June 15, 2001).

volatility in economic conditions would seriously impede the loan repayment abilities of Acero.

ii.

Taking a holistic picture of the company into account, it is in the position to repay the loan

9. It has been laid down in Grupo Hoteloro16 that the ‘financial condition’ of a company (and not the general economic condition) is to be considered while assessing its repayment abilities. For this purpose the company’s general financial performance over the years, its assets and liabilities, its market value, overall financial position and size are all the factors which must be taken into consideration.17 Profits over three quarters alone is insufficient. Acero has enjoyed tremendous success in the business for the past twenty years. 18 The overwhelming majority of their clients are based in the US, with significant numbers in South-East Asia and continental Europe. Hence an adverse presumption cannot be made that a relatively mediocre performance over three quarters will affect the earning potential of the company to such a large extent so as to render them unable to repay their loans.19 [C] THE CHANGE WAS NOT EXPERIENCED FOR A ‘DURATIONALLY SIGNIFICANT’ PERIOD 10. A person who is seeking to invoke the MAC clause has a heavy burden to prove that the effect of the change is not temporary, but is likely to persist over a significant duration of time.20 To satisfy this test, the effect of the event claimed to trigger MAC should prolong for years and not just a couple of months.21 Here, the effect of the economic downturn was only seen in three quarters, and hence cannot be considered sufficient proof of the fact that the 16 Grupo Hoteloro, (2013) EWHC 1039. 17 Doman Forest Limited v. GMAC Commercial Credit Corporation, (2005) 2 WWR 434. 18 See ¶ 1, Factsheet. 19 Capital Justice LLC v. Wachovia, 706 F Supp. 2d 23, DDC, December 08, 2009 (Civ. App. 07-2095) (RCL). 20 Hexion, Del. Ch., C.A. No. 3841-VCL (Sept. 29, 2008).

change is permanent and is going to persist over a significant duration. Therefore it is submitted that the sub-prime lending crisis and general volatility in the economic conditions cannot be considered events which leads or is likely to lead to a MAC. II.

ACERO IS ENTITLED TO SPECIFIC PERFORMANCE

11. An unsuccessful invocation of a MAC clause amounts to breach of contract under law.22 A contract can be specifically enforced if monetary compensation cannot be quantified 23 or is not an adequate relief.24 Admittedly, Courts in India and UK have held that if a contract to lend money is breached then monetary damages are ascertainable and hence specific performance cannot be granted.25 However, the Supreme Court has acknowledged that in certain exceptional cases the courts may specifically enforce the lender to fulfil his end of the contractual bargain.26 Such exceptional cases of two kinds. First, where mere award of damages is insufficient as a restitutionary measure [A]. Second, where the interests of justice are best served if specific performance is granted [B]. [A] MERE AWARDING OF DAMAGES CANNOT RESTORE ACERO TO ITS ORIGINAL POSITION 12. When the subject matter of the agreement is not easily available in the market then Courts should specifically enforce the contract in the event of the breach. 27 In the instant case,

21 IBP, 2001 Del. Ch. LEXIS 81 (June 15, 2001). 22 Concord Trust v. Law Debenture Trust Corporation plc, (2005) UKHL 27. 23 S.10(a), The Specific Relief Act, 1963. 24 S.10(b), The Specific Relief Act,1963. 25 POLLOCK

AND

MULLA THE INDIAN CONTRACT ACT

AND

SPECIFIC RELIEF ACT, Vol. II,

1931 (N. Bhadbhade, 14th edn., 2012). 26 Infra Services Pvt Ltd v. Dena Bank, GA No. 3010 of 2013 (November 18, 2013), available at http://indiankanoon.org/doc/189806067/ (Last accessed on March 8, 2014). 27 Uttar Pradesh State Electricity Board v. Ram Barai Prasad, AIR 1985 All 26.

following the economic crisis of 2008, credit became scarce in India and around the world. 28 As a leading metals manufacturer, Acero’s business potential and expansionary plan would be severely hampered if the second tranche is not disbursed by MiniBank, as it would be extremely hard to access new sources of finance in a credit-scarce economic environment. Here, payment of damages alone will not enable them to go ahead in their economic endeavour. Thus, it would be in the principles of justice and equity to specifically enforce the contract. [B] SPECIFIC PERFORMANCE IS THE APPROPRIATE REMEDY 13. Courts have consistently considered specific performance to be the appropriate remedy where non-enforcement of a contract would badly affect shareholders, creditors, and other stakeholders.29 Such rationale was recently upheld in Destiny Holdings,30 where nonenforcement of a contract in a credit scarce atmosphere would have led to loss of employment opportunities to a lot of workers and badly impacted the shareholders. Similarly in the present case, if the contract is not specifically enforced then because of the inability to expand, a lot of stakeholders including MiniBank will be adversely affected. 14. Moreover, where the quantum of economic loss cannot be quantified, Courts have held specific performance to be the appropriate remedy. In the Prithviraj Singh v. Dalip Kulkarni,31 specific performance was awarded since not only would damages for breach of contract be staggeringly high, it was also near-impossible for the court to arrive at an exact figure by taking into account all relevant factors, including fluctuating share-prices, contracts of employees etc. At best, it could only arrive at a reasonable surmise. It is submitted that the ratio aforementioned is patently applicable in the present case. When a wide array of relevant facts are considered to arrive at a figure for damages such as the possible non28 D. Murphy, A Preliminary Enquiry Into The Causes Of The Credit Crunch, Vol.8(5), QUANTITATIVE FINANCE, 435, 441, (2008). 29 IBP, 2001 Del. Ch. LEXIS 81 (June 15, 2001). 30 Destiny USA Holdings, LLC v. Citigroup Global Market Realty Corp, 2009 WL 2163483, 2009 N.Y. Slip Op. 51550(U) (N.Y. Sup. Ct. 2009) [“Destiny Holdings”]. 31Prithviraj Singh v. Dalip Kulkarni, AIR 1999 Raj 201.

availability of loans, fluctuating interest rates, the loss of employment for workers, compensation for lenders etc., the figure arrived at can only be a surmise. Hence awarding specific performance would do away with the necessity of speculation and allow for a precise remedy for MiniBank’s breach of contract. III.

THE SCHEME OF RESTRUCTURING IS JUST, VALID AND IS TO BE SANCTIONED

15. It is submitted that the scheme of restructuring is just, valid and in the best interests of the company, and therefore is to be sanctioned. First, MiniBank has been rightfully categorized as an unsecured creditor due to its failure to register its charge pursuant to statutory requirements [A]. Second, even if the delay in registration is condoned, MiniBank would only hold a floating charge, which would not have affected the statutory majority in support of the scheme [B]. Third, the scheme is in accordance with law, as required by statute [C]. Where the scheme is bona fide, genuine and workable, and in the universal interest of all parties involved, it would be just and equitable to sanction the scheme of restructuring. [A] MINIBANK IS AN UNSECURED CREDITOR 16. A charge on the book-debts of a company needs to be compulsorily registered32 within the statutorily prescribed maximum of sixty days and where such registration has not been completed, it can only be effected following condonation of delay by the Company Law Board.33 The consequence of non-registration of the charge is that the security created becomes void against the creditor claiming it.34 It is submitted that MiniBank is merely an unsecured creditor due to its failure to register its charge pursuant to statutory requirements under the Companies Act, 1956. 17. Condonation of delay in registering a charge with the Registrar of Companies is granted only if it is shown that there is sufficient cause behind the omission to register.35 The underlying guide to the exercise of the Court’s discretion under S. 141 of the Companies Act, 1956 is 32 S. 125(4)(d), Companies Act, 1956. 33 S. 141, Companies Act, 1956. 34 S. 125(1), Companies Act, 1956. 35 Re Kris Cruisers Ltd, (1948) 2 All ER 1105.

whether it would be just and equitable to grant relief under the circumstances. 36 It is, therefore, to be assessed if the omission to register was accidental or due to some inadvertence, and whether condonation would prejudice the position of creditors or shareholders of the company. 37 Two submissions are made in this context. i.

The company is facing the imminence of liquidation

18. When the charge is sought to be registered at a time where the company is facing the imminence of liquidation, courts have declined to condone the delay, as registration would unfairly prejudice the rights of the creditors, who are party to liquidation. 38 It is to be noted that MiniBank sought to register its charge 10 weeks after the Event of Default and over three and half years after the execution of the charge agreement, at a time when the possibility of liquidation became very evident. By this point, Acero had defaulted on a number of payment obligations and it was reasonable to assume that the company would likely be wound up.39 There is multiple judicial precedent to the effect that where a charge is sought to be registered after a long lapse and liquidation is also imminent, condonation of delay would not be granted.40 ii.

The ratio in Braemar is inapplicable

19. In Braemar,41 a delay in registration was condoned as the omission to register was due to a breach of duty owed by the solicitors to the bank. It is submitted that the ratio in Braemar is inapplicable in the present case. This is because first, in Braemar, the bank had explicitly asked the solicitors to register the charge, and by erring to do so, the solicitors were in breach of fiduciary duty owed to the company. Second, the company in question in Breamar 36 Braemar Investments Ltd, Re, (1988) 4 BCC 366 [“Braemar”]. 37 S. 141(a), (b), Companies Act, 1956. 38 Re, Resinoid & Mica Products Ltd, (1982) 3 All ER 677. 39 S. 433(e), Companies Act, 1956. 40 Re Ashpurton Estates Ltd, (1983) 1 Ch 110. 41 Braemar, (1988) 4 BCC 366.

was not sufficiently close to liquidation, so as to reject condonation on grounds of prejudice to creditors.42 Neither condition is satisfied here. Ignorantia juris neminem excusat. It would be just and equitable to reject a petition for condonation of delay. [B] IN ANY EVENT, MINIBANK ONLY HOLDS A FLOATING CHARGE 20. It is submitted that even if condonation of the delay in registration is granted by the Company Law Board, MiniBank will only hold a floating charge. It is asserted that MiniBank did not possess requisite control over the charged assets to render it fixed. Furthermore, even a re-categorization of MiniBank as a secured creditor would not have affected the outcome of the scheme of restructuring, as the scheme would still have enjoyed statutorily mandated support.43 As such, the scheme is just and fair and it would in the interests of justice, equity, and good conscience to sanction the scheme, so as to enable the company to carry on its business. 21. After Spectrum,44 the essential difference between a fixed and a floating charge turns upon the ability of the chargor to deal with the charged assets, removing them from the ambit of the security without the consent of the chargee. In particular, the charge is floating if the chargor is free to remove the charged assets from the scope of the security, and use them for its own benefit in the course of business.45 In Spectrum, the House of Lords held a charge over the book-debts of a company to be floating, despite the fact that the charge agreement described the same as ‘fixed’, and required the chargor to pay the proceeds of collection of debts into an account with the lending bank. 46 Since the chargor in question had sufficient control over the charged book debts with reference to withdrawal and utilisation in the 42 Per Hoffmann J, Braemar, (1988) 4 BCC 366, 371. 43 See ¶ 10, Factsheet. 44 Spectrum Plus Ltd, Re, (2005) UKHL 341 [“Spectrum”]. 45 S. Worthington, Floating Charges: Use and Abuse of Doctrinal Analysis in COMPANY CHARGES: SPECTRUM AND BEYOND, 29 (J. Getzler, and J. Payne eds., 2006). 46 Hence, a charge is fixed only if the chargor is legally obliged to preserve the charged assets for the benefit of the chargee. In all other cases, the charge is floating.

ordinary course of its business, the charge was held to be floating. Hence for a charge to be construed as fixed, there should be an express prohibition on any other application of the fund, other than repayment of the loan 22. The essential question therefore, is one of control – a test which MiniBank fails to satisfy, since it does not have sufficient control over the book debts to render it fixed. First, although the charge agreement mandated the collection of charged assets in a Nominated Account with the chargee bank, its characterisation as ‘Blocked’ is merely titular. It is submitted that this stated restriction on operation was not seen in practice, as Acero was allowed to withdraw from the ‘blocked’ account without restrictions for full six-months following the Event of Default.47 Acero was given express approval to utilise the charged book-debts in the ordinary course of its business. There was a habitual drawing by the company from a purportedly ‘blocked’ account without obtaining prior consent, unaccompanied by any genuine exercise of discretion by MiniBank. The security in question therefore, cannot be said to have been necessarily preserved for the benefit of the chargee. In light of these facts, a characterization of the charge as fixed is mistaken in law.48 23. In any case, it has been stated that even if free usage of the proceeds is given for a limited time period, after which the chargor is precluded from utilising the charged assets, the charge will still be construed as floating.49 It is submitted that the position in the present case is virtually the same. The Nominated Account became functionally blocked only six months after the Event of Default, and Acero was prohibited from free usage of the proceeds only from this point. It is evident from their actions that both parties intended for Acero to continue its business – an act that would be impossible if the company could not freely use the proceeds of its book debts.50 A fortiori, the agreement to pay the proceeds of charged book debts into the company’s account with the chargee bank would not give the bank 47 See ¶ 11, Factsheet, read with S. 15(c), Appendix A, Factsheet. 48 S. Worthington, An “Unsatisfactory Area of Law” – Fixed and Floating Charges Yet Again, 7 INTERNATIONAL CORPORATE RESCUE, 6 (2010). 49 Beam Tube Products Ltd, Re, (2007) 2 BCLC 732 [“Beam Tube”]. 50 Supercool Refrigeration and Air Conditioning v. Hoverd Industries, (1994) 3 NZLR 300.

effective possession of the proceeds to constitute a fixed charge on them.51 Therefore at best, MiniBank only has a floating charge over the book-debts of Acero. [C] SCHEME OF RESTRUCTURING IS IN ACCORDANCE WITH LAW 24. In order to merit rejection under S. 391 of the Companies Act, 1956, a scheme must be “obviously unfair, patently unjust and unfair to the meanest intelligence.”52 The Court, therefore, has to satisfy itself of three primary tenets: 53 that the provisions of the statute have been complied with and all requisite meetings as contemplated by statute have been held and that the scheme is backed by a statutory majority (i); that all material facts related to the company be disclosed and placed before the voters at concerned meetings as required by statute (ii); and that the class of creditors who attended and voted were acting bona fide and in good faith and in the best interests of the company (iii). It is submitted that all three requirements have been satisfactorily complied with, and the scheme is to be sanctioned.

i.

The scheme is backed by requisite statutory majority of creditors

25. Under the Companies Act, a scheme needs to obtain the support of three-fourths majority of each class of creditors present and voting, before it can be said to have requisite statutory approval.54 It has already been proved that MiniBank’s classification as an unsecured creditor is lawful. Even if the delay in registration is condoned and MiniBank is classified as a secured creditor with a floating charge, it would have been the only dissenting voice in that class.55 Successful objection to the scheme could only be raised, had MiniBank been classified as a secured creditor with a fixed charge. However, MiniBank does not possess 51 Double S Printers Ltd, Re, (1999) 1 BCLC 220. 52 Sussex Brick Co Ltd, Re, (1960) 1 All ER 772. 53 Miheer H Mafatlal v. Mafatlal Industries Ltd, (1996) 87 Com Cases 792 [“Mafatlal”]. 54 S. 391(1), Companies Act, 1956. 55 See ¶ 14, Factsheet.

sufficient control over the charged assets to render its claim fixed. A reclassification by itself does not necessarily require the court to modify a scheme, if it can be shown that the outcome of the scheme would have been the same anyway. Hence although the court order may be based on wrong facts, if it turns out to have been the right decision in the light of the true facts, then an action for reconsideration of the sanctioned scheme because of fraud is bound to fail.56 Therefore, the allegation that classification is wrong is baseless and invalid, since the necessary resolutions passed by the majority are in accordance with the law. ii.

All material facts have been disclosed and the scheme does not unfairly prejudice creditors in any way

26. The scheme of classification was made keeping in mind MiniBank’s failure to register its charge. As an unsecured creditor, it is not entitled howsoever to challenge the transaction, as its rights were not being affected in any way. Furthermore, at no point was the charge created deemed to rank earlier in violation of priority rights of any creditor. On an event of liquidation, all debts owed by the company would have been distributed pari passu without affecting the repayment rights of any creditor.57 The payment in question cannot be considered a fraudulent preference, as it would be beyond time limit prescribed by Indian law.58 On a bare perusal of the statute, it is evident that if restructuring fails and winding up of the company commences, the prepayment would have been made more than six months beforehand. Hence the provision itself is inapplicable. In any case, a payment is fraudulent only where there is an intent to prefer a particular creditor;59 such intention cannot be inferred from mere suspicion alone.60 Since the company was acting solely by reference to ‘proper commercial considerations’ while making the payment, and a ‘subjective wish’ to prefer a particular creditor cannot be inferred from the acts of the company, then such 56 Fletcher v. Royal Automobile Club Ltd., (2000) 1 BCLC 331 (Court of Appeal). 57 Elliott Associates LLP v. Banco de la Nacion, 12 F Supp 2d 328 (1999). 58 S. 531, Companies Act, 1956. 59 Official Liquidator, Kerala High Court v. Victory Hire-Purchasing Co (P) Ltd, (1982) 52 Com Cases 88, 92. 60 Re, Kushler Ltd, (1943) Ch 248.

payment would not amount to a fraudulent preference. 61 MiniBank’s interests are therefore not prejudiced in any way so as to move the Court to reject the scheme. Hence, it is suggested that such motion be quashed. 27. It should also be noted that a transfer of security on account of antecedent debt is always considered adequate consideration.62 In Applied Theory,63 the trustees to a property argued that grant of security interest to secure antecedent debt constituted a fraudulent conveyance under S. 548(a)(1) of the Bankruptcy Code. The Court however, found that security granted did not entitle the lenders with anything more than the amount of money they had provided, and that the debtor’s liability did not increase from doing so. Following the ‘uniform’ 64 federal case law on the issue, it was thus held that the grant of security interest did not constitute a fraudulent or undervalued conveyance. On such an analysis, it is also submitted that the charge created in favour of Coronation Bank is valid, since it satisfies the requirements under S. 534 of the Companies Act, 1956. iii.

The scheme is in the best interests of the company

28. It is evident that all material facts regarding the company have been disclosed, and voting by creditors has been on the basis of truthful submissions backed by legal evidence. The allegations of financial malpractice by Acero are unwarranted, unsubstantiated, and fallacious. Acero has followed the procedure established by law in obtaining statutorily mandated majorities in support. The scheme has received overwhelming approval from each class of creditors,65 and the Court has no jurisdiction to sit in appeal over the commercial 61 Per Cawson QC, Oxford Pharmaceuticals v. Masters International Limited, (2009) EWHC 1753. 62 Rubin v. Manufacturers Hanover Trust Co, 661 F 2d 979, 991 (2nd Cir 1981). 63 In re, Applied Theory Corp, 323 BR 838 (Bankr SDNY 2007). 64 See In re Marketxt Holdings Corp, 361 BR 368, 398 (Bankr SDNY 2007): “the cases are uniform that grant of collateral for a legitimate antecedent debt is not, without more, a constructive fraudulent conveyance.” 65 See ¶ 14, Factsheet.

wisdom of the majority, “who with their eyes wide open have give approval to the scheme”.66 It is prima facie evident that the scheme was genuine, workable, and in the best interests of the company. Hence, it is submitted that the scheme is to be sanctioned by the Company Court. IV.

THE CRIMINAL COMPLAINT AGAINST ACERO SHOULD BE QUASHED

29. One way of quashing a proceeding under S. 482 of the Criminal Procedure Code, 1973 is by showing that there is no prima facie offence established in the complaint .67 It is submitted that the complaint of criminal breach of trust and fraud filed by MiniBank should be quashed under S. 482 of the Criminal Procedure Code, 1973 for three reasons. First, no prima facie offence of criminal breach of trust and cheating has been established from the complaint against Acero [A]. Second, there is no prima facie case of cheating against Acero [B]. Third, the dispute is only of a civil nature [C]. Hence, MiniBank’s complaint should be quashed to prevent an abuse of due process of law. [A] NO PRIMA FACIE OFFENCE HAS BEEN ESTABLISHED FROM THE COMPLAINT 30. For any transaction to be classified as breach of trust, three ingredients are to be met according to S. 405 of the Indian Penal Code, 1860. There has to be entrustment of property or dominion over property to the accused (i). The accused should dishonestly use or dispose or misappropriate the said property (ii). The use or disposal or misappropriation should be in violation of the contract touching that trust (iii).68 It is submitted that in the instant case, the complaint does not establish these ingredients, nor does it show any dishonest intention on part of Acero. Hence, the criminal proceedings are to be quashed.69

66 Lords Chloro Alkali Ltd, Re, (2009) 148 Com Cases 873. 67 Bhajan Lal v. State of Haryana, AIR 1992 SC 604. 68 S.K Alagh v. State of Uttar Pradesh, (2008) 5 SCC 662. 69 Hari Prasad Chamaria v. Bishun Kumar Surekha and Ors, 1974 CriLJ 352.

i.

There is no entrustment of property

31. It is submitted that there is no entrustment of property to constitute a breach of trust under S. 405 of the Indian Penal Code, 1860. It cannot be contended that book-debts were entrusted to Acero as a trustee at the time when the charge was created in favour of Coronation Bank. When the charge in favour of Coronation Bank was created in October 2009, 70 MiniBank had not registered its charge on book debts. Hence the charge itself became void against MiniBank due to its non-registration.71 A fortiori, there could not be any entrustment of a void charge. Further, it has been clearly established that to fulfil the ingredient of the entrustment, it is essential that the property relating to which breach of trust is said to be committed must be the property of someone other than the accused. The accused and the owner/ beneficial interest holder shouldn’t be the same entity.72 It would be quite illogical to presume ‘entrustment’ where the accused is in fact, the owner of the property concerned. Hence, it is submitted that there is no entrustment of the book-debts as alleged. ii.

There is no dishonesty in use/disposal of book debts

32. It is the duty of the person alleging dishonesty to prove the same. 73 It is submitted that the complaint does not disclose any dishonesty on Acero’s part. In the instant case, there is nothing to prove the presence of a dishonest intention. It cannot be said that the book debts were used/disposed of dishonestly. Acero was under the belief that the charge was void and hence it had no obligation under S. 15(c) of the Facility Agreement. In any case, Acero could not have reasonably foreseen that the delay in registration would be condoned, since the charge was sought to be registered over three years after its inception. Hence it would be unjust to a duty of constructive trusteeship on Acero, since it was holding the book debts under a bona fide claim of right.74 It had no intention of causing wrongful loss to MiniBank 70 See ¶ 16, Factsheet. 71 S. 125(4)(d), Companies Act, 1956. 72 Nova v. Punjab National Bank, 86 (2000) DLT 159. 73 Amritlal v. Bajranglal Agarwalla, 1963 CriLJ 474. 74 R. v. Bernhard, (1938) 2 KB.

and the transaction with Coronation Bank was merely in the ordinary course of business. Further, it received no wrongful gain from the transaction either as they were only claiming what they thought was lawfully theirs. There was no attempt of intentional deprivation of property by Acero. Hence, there is no dishonest intention in the instant case. [B] THERE IS NO PRIMA FACIE CASE OF CHEATING AGAINST ACERO 33. For an offence to be made out under S. 421 of the Indian Penal Code, 1860, the following four conditions are to be satisfied:75 There needs to be a concealment or removal or delivery or transfer of property by the accused; the transfer was without any adequate consideration; the accused intended to prevent or knew that he was likely to prevent the distribution of the property among the creditors according to law; the accused acted dishonestly and fraudulently. It is submitted that no prima facie charge has been made out as charge created in favour of Coronation Bank was not without adequate consideration and no dishonesty has been proved. i.

The transaction with Coronation Bank was for adequate consideration

34. It cannot be said that creation of charge in favour of Coronation Bank was without adequate consideration. What is ‘adequate’ must be examined from the company’s point of view.76 For a company facing financial difficulties, the term ‘adequate’ must be interpreted in context. Furthermore, it is evident that the charge was granted in lieu of an antecedent debt. This kind of a transaction involving a creation of charge on an antecedent debt has been accepted as a legitimate transaction involving sufficient consideration even in other common law jurisdictions.77 Hence, there is nothing in it the transaction which makes it different from the transactions of ordinary course of business. ii.

No dishonest intention has been established

35. It is also submitted that there is nothing in the complaint to indicate that there was dishonest intention on part of Acero when it created a charge in favour of Coronation Bank. Lack of 75 Ramautar Choukhany v. Hari Ram Todi, 1982 CriLJ 2266. 76 Re MC Bacon Ltd, (1990) BCLC 324. 77 See In re Marketxt Holdings Corp, 361 BR 368, 398 (Bankr SDNY 2007).

bona fide or honest intention is an essential ingredient for constituting the offence alleged. For a transaction to be dishonest, it has to be with an intention to cause wrongful loss or gain to someone.78 There is no wrongful loss to MiniBank here as their charge wasn’t registered at the time the floating charge in favour of Coronation Bank was created. This meant their interests were in no way affected by this transaction. There is also no unlawful gain to Acero by such a transaction. Therefore, no dishonesty has been established by the complainant. 36. The creation of a charge on an antecedent debt and prepayment of a loan constitute normal business transactions.79 Prepayment cannot be questioned as it’s a right inherent in every loan transaction while charge creation can only be said to be a bona fide breach of the contract containing the negative pledge clause.80 The distinction between a case of mere breach of contract and one of cheating depends on intention of the accused, 81 and a bona fide breach of contract cannot be classified as offence of cheating. It has been held time and again that a mere breach of contract cannot lead to criminal prosecution of cheating or breach of trust if the element of dishonesty is missing. 82 Such a matter which essentially involves dispute of a civil nature should not be allowed to be the subject-matter of a criminal offence.83 Hence, to avoid this abuse of process of the court, the complaint should be quashed.84 V.

ACERO CANNOT BE MADE LIABLE FOR THE ACTIONS OF MR. SHETH

37. Jurisdiction under S. 482, CrPC, 1973, can be exercised even in cases where the company has been held responsible in the FIR for the actions done by one of its employees without 78 S. 24, Indian Penal Code, 1860. 79 In re, Applied Theory Corp, 323 BR 838 (Bankr SDNY 2007). 80 DLF Ltd v. Punjab National Bank, WP (C), 8520/2010, decision dated May 27, 2010. 81 Asad Ali Tahsildar v. Answar Ali, AIR 1959 Trip 40. 82 Pardeep Kumar v. State of Haryana, 1996 (2) Recent Criminal Reports 791. 83 Neeraj Poddar v. State of West Bengal, 2013 Indlaw CAL 575. 84 VY Jose and Anr v. State of Gujarat and Anr, (2009) 3 SCC 78.

showing how the liability can be attributed to the company.85 In the instant case, it is submitted that that Mr. Sheth is not the directing mind and will of the company and hence the liability cannot be attributed to the company. It cannot be contended that the company has a duty to supervise the actions of its employees and the failure to do so makes the company culpable for the acts of the employee. This is because a failure to supervise the actions of the employee can only amount to the tort of negligence which is a civil breach and not criminal.86 [A] MR. SHETH IS NOT SUFFICIENTLY HIGH UP IN THE ORGANIZATIONAL LADDER OF THE COMPANY

38. It is a well settled rule that that a company can be held liable for the criminal acts of its employees if they are sufficiently high up in the corporate ladder to be considered as the ‘directing mind and will’ of the company.87 While some people are vested with the decision making authority of the company, others only have the authority to implement and operationalize these decisions.88 The actions of only the former category of the people are considered to constitute the ‘directing mind and will’ of the company and their actions can be attributed to that of the company. 39. In this particular case, the major policy decision to undertake CDR was taken by the Board of Directors. Mr. Sheth was merely given the authority to implement these decisions. 89 Although Mr. Sheth was ‘spearheading’ CDR, it is evident that he merely carried out the Board’s instructions. It has been categorically stated that if subordinates do not have any decision making authority, then the fact that they were given discretion makes no difference.90 Therefore in this case, the mere fact that Mr. Sheth was spearheading the

85 Iridium v. Motorola Incorporated and Ors, AIR 2011 SC 2010. 86 Tesco Supermarkets Ltd v. Nattrass, (1971) UKHL 1 [“Tesco”]. 87 Tesco, (1971) UKHL 1. 88 HL Bolton (Engineering) Co Ltd v. TJ Graham & Sons Ltd, (1956) 3 All ER 624, 630. 89 See ¶ 12, Factsheet.

implementation of the entire CDR process does not mean he becomes the directing mind and will of the company. [B] MR. SHETH IS NOT DELEGATED WITH COMPLETE DISCRETION AND INDEPENDENCE 40. Although there is no hard and fast rule that the directing mind and will has to be a board member, courts have always considered the Board of Directors to be the ‘directing mind and will’ of the company.91 In multiple cases, the fact that the Board of Directors did not pass a resolution approving of an alleged fraudulent act was considered a crucial factor to hold that the company did not have the requisite mens rea to commit the offence.92 Subordinate officers can be considered the ‘directing mind and will’ of the company only when they have been granted complete autonomy without them being answerable to anyone with respect to those matters.93 In the instant case, although Mr. Sheth was given considerable discretion he was still answerable to a board member.94 Despite his authority he formed a subordinate part of an established chain of command.95 Hence Mr. Sheth cannot be considered the ‘directing mind and will’ of the company. VI.

THE AGREEMENT BETWEEN MINIBANK AND VULTURE DISTRESSED ASSETS FUND IS

VOID

41. It is submitted that the assignment of debts by MiniBank to Vulture Distressed Assets Fund LP96 is void and thus, unenforceable. First, partial assignment of outstanding debts is not a valid transfer as per S. 130 of the Transfer of Property Act, 1882 [A]. Second, external 90 Tesco, (1971) UKHL 1 91 G. Williams, TEXTBOOK OF CRIMINAL LAW, 1322 (D.J. Baker ed., 3rd edn., 2012). 92 Vehicular Operators Ltd v. FM Conway, (2012) EWHC 2930. 93 Vane v. Yannopoulos (1965) AC 486. 94 See ¶ 19, Factsheet. 95 Tesco, (1971) UKHL 1. 96 Hereinafter ‘VDF’.

commercial borrowings cannot be assigned to vulture funds under the RBI’s Master Circular on External Commercial Borrowings and Trade Credits [B]. [A] PARTIAL ASSIGNMENT OF OUTSTANDING DEBTS IS VOID 42. Courts have laid down that if a debt has to be assigned to a third party, then the assignment must be of the whole debt and cannot be of a part. 97 MiniBank may have the right to assign the debt to a third party.98 However, they have only assigned only 50% of their outstanding debts to Vulture fund and not the whole debt. 99 Hence their assignement does not amount to the valid transfer of an actionable claim as per the Transfer of Property Act, 1882.100 [B] THE ASSIGNMENT

IS AGAINST PUBLIC POLICY

43. The Master Circular issued by the Reserve Bank of India on External Commercial Borrowings includes an exhaustive list which specifies ‘recognised lenders’ to whom the debts can be assigned.101 Vulture funds are ineligible lenders under the ECB guidelines. Thus, the assignment of debts to VDF violates the guidelines laid down by the Reserve Bank of India and therefore, is unlawful for being against public policy.102

97 Doraiswami Mudaliar v. Doraiswami Aiyangar AIR 1925 Mad 753. 98 S. 23, Appendix A, Factsheet. 99 See ¶ 20, Factsheet 100 S. 130, The Transfer of Property Act, 1882. 101 Part I, S. 1(A)(ii), Master Circular on External Commercial Borrowings and Trade Credits,

Reserve

Bank

of

India

(2010),

available

at

http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8101 (Last accessed on March 8, 2014) [‘ECB guidelines’]. 102 See S. 23, The Indian Contract Act, 1872.

PRAYER Wherefore in light of the issues raised, arguments advanced and authorities cited, it is humbly prayed that this Court may be pleased to hold, adjudge and declare that 1. The appeals filed by the Appellant are dismissed. 2. The contractual obligation of the Appellant to disburse the second tranche of the loan is specifically enforced. 3. The sanctioning of CDR is upheld. 4. The quashing of the criminal proceedings against the Respondent by upheld. 5. The Respondent is not criminally liable for the actions of Mr. Shiv Sheth. 6. The assignment of debt by the Appellant is void. And pass any other order it may deem fit in the interest of justice, equity and good conscience.

All of which is humbly prayed, Team Code ______, Counsel for the Respondent.