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

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

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

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

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 Honble 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 Honble 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 Honble Court.

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 Aceros 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 wasnt 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

High Court for specific performance of MiniBanks 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 Honble High Court (Appeal 1).
The Default
The impact of the crisis on Aceros 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 wasnt 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 Aceros
favour and sanctioned the scheme in November 2011. MiniBank has preferred an appeal
against this decision before the Honble 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 Honble High Court (Appeal 3). While the appeals
were pending, MiniBank assigned part of Aceros 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.

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?

10

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 lenders 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 Aceros 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.

11

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. SHETHS 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

12

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 RBIs 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.

13

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 borrowers 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 lenders 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 lenders knowledge, which could prove to be detrimental to the lenders 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 companys 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, Aceros 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 MiniBanks 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 Courts 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 companys 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 MiniBanks 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 MiniBanks 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 MiniBanks 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 debtors 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, MiniBanks 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 shouldnt 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 Aceros 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 companys 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 wasnt 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 its 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
Boards 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 RBIs 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.