Bombay High Court
The Bank Of New York Mellon vs Imperial on 13 December, 2013
Bench: S.J. Kathawalla
KPPNair -1- CP 28 of 2012
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO. 28 OF 2012
with
COMPANY APPLICATION NO. 66 OF 2012
with
COMPANY APPLICATION (L) NO. 544 OF 2013.
The Bank of New York Mellon, London Branch )
formerly known as The Bank of New York, London Branch) )
a US National Banking Corporation, having its office at )
th
One Canada Square, 40 Floor, London E14 5AL, )
United Kingdom
vs.
ig )...Petitioner
Zenith Infotech Limited )
a Company registered under the Companies Act, 1956 )
having its registered office at B-52, Electronic Sadan-1, )
MIDC, TTC Area, Mahape, Navi Mumbai-400 710 and )
CIN L30000MH1996PLC 102705 )...Respondent.
Mr. Janak Dwarkadas, Senior Advocate along with Mr. N. H. Seervai, Senior
Advocate, Mr. Rahul Narichania, Mr. S. Mandal, Mr. Sahil Kanuga and Mr. Ankur
Kashyap, instructed by M /s. AZB & Partners, for the Petitioner.
Mr. Arif Bookwala, Senior Advocate, along with Mr. Zal Andhyarujina, Mr. Parag
Kabadi and Ms. Mrinalini Rajpal, instructed by M/s. Doijode Associates, for the
Respondent.
Mr. Shailesh Shah, Senior Advocate, along with Mr. Shardul Singh, instructed by
Gaikwad, for the Applicant in Company Application (L) No. 544 of 2013.
CORAM: S.J. KATHAWALLA, J.
Judgment reserved on : 21
November, 2013
st
Judgment pronounced on : 13 December, 2013
th
JUDGMENT:
1. By this Company Petition, the Petitioner seeks winding up of Zenith
KPPNair -2- CP 28 of 2012
Infotech Limited (hereinafter referred to as 'the Company'), which was
incorporated on 31st December, 1996, under the provisions of the Companies
Act, 1956 (No.1 of 1956) ("the Act"). The Petition is taken up for hearing and
final disposal.
2. The facts leading to the filing of the present Petition are as under:
3. The Petitioner is a US National Banking Corporation, having its Office at
the address given in the cause title of the Petition. The Petitioner is engaged,
inter alia, in the business of providing corporate trustee services. The main
object for which the Company was incorporated is to inter alia carry on the
business of manufacturers and sellers of all kinds of electronic and electrical
equipment and machinery including computers, data loggers, process
controllers, geophysical and communication instruments, ultrasonic and
microwave devices, etc.
4. The Petitioner has stated in the Petition filed on 21 st December, 2011, that
the Company is indebted to the Petitioner for an aggregate sum of US $
36,141,167.66 (US Dollars Thirty Six Million One Hundred Forty One Thousand
and One Hundred Sixty Seven and Sixty Six cents only).
5. On 15th September, 2006, the Company offered US $ 33 million 3.0 %
convertible bonds 2011 due for repayment or redemption in August 2011.
Similarly on 14th August, 2007, it also offered US $ 50 million 3.0 % convertible
KPPNair -3- CP 28 of 2012
bonds 2012 due for repayment or redemption in August 2012. The bonds were
issued at 100 per cent of the principal amount. The Petitioner is the Trustee
holding the aforesaid bonds in trust for the bondholders, who subscribed to the
said bonds.
6. The Company entered into a Trust Deed dated 20 th September, 2006 in
relation to the 2011 Bonds and a separate Trust Deed dated 17 th August, 2007
in relation to the 2012 Bonds with the Petitioner. Under clause 2.2 of both the
Trust Deeds, it was provided that the Petitioner ".... covenants to unconditionally
pay or procure to be paid to or to the order of the Trustee in London in US $ in
immediately available funds the principal amount".
7. The maturity date for repayment under the 2011 Bonds was 21 st
September, 2011. Prior to that, the Company on 27 th December, 2010 issued a
notice to hold an Extraordinary General Meeting ('EOGM') of the Company on
Saturday, 29th January,2011. In the Explanatory Statement annexed to the
said notice it was inter alia provided as under:
"The Company has issued Foreign Currency Bonds of US$ 33
million in August, 2006 and US $ 50 million in August, 2007.
These Bonds would become due for repayment/redemption in
August, 2011 and August, 2012. The Board of Directors
propose to augment the funds for the purpose in one or more
of the following methods (including) through any combination
thereof:
KPPNair -4- CP 28 of 2012
(1) To borrow moneys from Domestic markets and/or
through External Commercial Borrowings upto an amount not
exceeding Rs. 1,500,00,00,000/- (Rupees One Thousand Five
Hundred Crores).
(ii) To sell and/or lease the business and/or divisions
including the subsidiaries (wholly and partly) of the Company
and for that purpose to issue debt securities / bonds, etc. in the
domestic or international markets, as permitted by law so as to
redeem/re-pay the outstanding Foreign Currency Convertible
Bonds which would come for repayment/redemption in
August, 2011 and August, 2012.
.... ...... .... .."
Pursuant to the Resolution passed at the EOGM held on 29 th January,
8.
2011, the Company sold its Remote Monitoring and Management Business ("the
MSD Business") and on 26th September, 2011 made an announcement on the
Bombay Stock Exchange ("BSE") and National Stock Exchange ("NSE")
regarding the said sale. Since the Company failed to make the repayment under
the 2011 Bonds on the maturity date i.e. 21 st September, 2011, the Petitioner
on 27th September, 2011, issued an Event of Default Notice to the Company for
the event of default which had occurred under Condition 11 of the Terms and
Conditions relating to the 2011 Bonds. The Petitioner also addressed a notice of
Cross Default to the Company stating the occurrence of a cross default in
relation to the 2012 Bonds under Condition 11 (D)of the Terms and Conditions
in relation to the 2011 Bonds. On 10 th October, 2011, the Petitioner also
addressed a letter to the Company notifying that the 2011 Bonds were
KPPNair -5- CP 28 of 2012
immediately due and payable. On 12th October, 2011, the Petitioner addressed
a Notice of Acceleration for the 2012 Bonds to the Company declaring the 2012
Bonds as due and payable due to a cross default.
On 13th October, 2011, the Company made an announcement on the BSE
9.
stating that its MSD Business had been sold and acknowledged the debt. The
announcement made on BSE reads as follows:
"1. The Company has defaulted on its US$ 33 Million FCCB
which was due on 21st September, 2011 and is in negotiation
with the bondholders to extend the time of repayment;
2. As informed to BSE earlier vide letter dated September 24,
2011, we have received all monies due from Zenith RMM, LLC
except for the amount to be held in escrow part of which the
Company plans to utilize for partial repayment of FCCBs."
Thus, the Company made a clear admission that the Bonds of US$ 33 Million
(2011 Bonds) are due and payable and the Company has defaulted in making
payment and has plans to partially repay them from the sale proceeds of the
MSD Business.
10. Thereafter, the bondholders filed a Suit against the Company based on
the fact that while as per the Explanatory Statement dated 27th December,
2010, the Company had acknowledged the debt due under the 2011 Bonds and
2012 Bonds and stated that funds from sale of the MSD Business will be utilised
for repayment, the Company had defaulted on the Bonds. The Company filed an
KPPNair -6- CP 28 of 2012
affidavit dated 17th October 2011, opposing grant of ad-interim reliefs wherein
it inter alia stated :
"3 (c ) the sale to Defendant No.2 has been completed to
the knowledge of the Plaintiffs and the sale proceeds
received by Defendant No.1 will be applied towards buy
back/redemption of FCCBs in the interest of the Company
and in accordance with the applicable law and regulations....."
Thus, the Company now also stated on oath that the sale proceeds received by
the Company after the sale of the MSD Business will be applied towards
buyback/redemption of the Foreign Currency Convertible Bonds ("FCCBs").
11. Since the Company failed to pay the amounts due under the bonds,
despite an unconditional obligation to pay, and had sold the MSD Business and
the proceeds were not utilised for repaying the debt under the Bonds, the
Petitioner urgently filed a Suit before this Court being Suit No. 2865 of 2011
along with Notice of Motion seeking various reliefs including attachment of
assets and deposit security. An application for urgent ad-interim relief was
moved during the Diwali Vacation. On 26 th October, 2011, an order was passed
by this Court requiring the Company and the other Defendants to the Suit, to
disclose information regarding the sale of the MSD Business.
12. On 4th November, 2011, the Petitioner issued a statutory notice under the
Companies Act to the Company stating that the following sums were due and
KPPNair -7- CP 28 of 2012
payable as on the date of notice.
(a) US$ 36,141,167.66 under 2011 Bonds;
(b) US$ 53,915,333.33 under 2012 Bonds.
In response, the Company by its letter dated 5 th November, 2011, after raising
certain issues, threatened to terminate the Petitioner's Trusteeship on the
specious plea that it was acting against the interest of the Company.
13. Thereafter on 15th November, 2011, the Company addressed a letter
purportedly "terminating" the Petitioner as a Trustee. The Petitioner by their
letter dated 18th November, 2011, replied to the termination notice stating that
the purported termination is contrary to the Trust Deed and therefore void and
non-est. The Petitioner pointed out that as per Clause 16.2 of the Trust Deed,
termination can only be by way of an extraordinary resolution by three-fourths
of the bondholders, and no such resolution has been passed. The Petitioner
further pointed out that as per clause 11.25 of the Trust Deed, the Petitioner has
to act in the best interest of the bondholders. The Petitioner also amended the
Plaint in Suit No. 2865 of 2011 and challenged the termination of its
Trusteeship, inter alia on the ground that the said termination is illegal and on
the face of it null and void.
14. Upon the sale of the MSD Business, the Cloud Computing Business ("CC
Business") was the only business of the Company. In the Notice of Motion filed
KPPNair -8- CP 28 of 2012
in the Suit, the Company stated that the value of the CC Business was
approximately US $ 150 Million. However, the Petitioner contended that this
was not the correct valuation. In view thereof, by an order dated 23 rd
December, 2011, this Court appointing Ernst and Young ( E & Y) to submit a
valuation report. On 14th February, 2012, E & Y valued the CC Business at INR
598 Million. In view thereof, this Court passed an ad-interim order directing the
Company not to dispose of its CC Business and the Petitioner was allowed to
apply for a copy of the E & Y Report. The Petitioner engaged Grant Thornton to
conduct an independent valuation and Grant Thornton issued a report (G.T.
Report) wherein the CC Business was valued at INR 198 to 239 crores.
15. The Petitioner filed an Appeal before the Division Bench of this Court
challenging the order dated 14 th February, 2012. The Division Bench directed E
& Y to submit a further report on the basis of a copy of the unaudited accounts
for the quarter ending 31st March,2012, of the Company and a copy of the GT
Report. E & Y on 3 rd July, 2012, filed a second valuation report where the CC
Business was valued at INR 194 to INR 211 crores in place of the earlier
valuation of INR 598 Million. In view thereof, the Division Bench of this Court
set aside the ad-interim order dated 14 th February, 2012, and remanded the
matter back to the Learned Single Judge to hear the Notice of Motion afresh at
ad-interim stage based on the 3 rd July, 2012, valuation report. Pursuant to the
directions of the Hon'ble Division Bench, the ad-interim application of the
KPPNair -9- CP 28 of 2012
Petitioner was heard afresh by this Court wherein certain undertakings given by
the Company including the following were accepted, i.e. the Company:
(i) shall not dispose of, sell, transfer, alienate or create any third party
right or interest in respect of the CC Business;
(ii) shall maintain status quo in respect of its fixed assets more
particularly described in Exhibit-B to the affidavit dated 10 th May,
2012;
(iii) shall maintain status quo in respect of the money held in joint
escrow account (Wells Fargo Bank, A/c. No. 83722000);
(iv) shall maintain status quo in respect of its investments aggregating to
Rs. 66.01 crores;
(v) shall not utilise the loans repaid by its subsidiaries, if any, and in
any event shall make their subsidiaries return an amount of Rs. 25
crores within a period of six months from the date of the order.
By the said order, this Court also granted liberty to Defendant Nos. 2, 3 and 4
therein to move this Court seeking appropriate orders if at any time they are of
the view that they are entitled to claim the Equity Stake in Continuum Managed
Services amounting to Rs. 39.86 crores and/or Rs. 32.27 crores held in joint
escrow account. Pursuant to the said liberty granted, the said Defendant Nos. 2,
3 and 4 in the Suit have now moved an application before this Court claiming
the said entire amount held in the Joint Escrow Account.
KPPNair -10- CP 28 of 2012
16. On 25th March, 2013, the Securities and Exchange Board of India ("SEBI")
passed an order against the Promoters of the Company, inter alia, directing the
Promoters of the Company to furnish a Bank Guarantee for US $ 33.93 million.
The Company and its Promoters filed an Appeal dated 8 th March, 2013, before
the Securities Appellate Tribunal ("SAT") challenging the order dated 25 th
March, 2013, passed by SEBI. On 17 th June, 2013, the Company made a
settlement proposal over a 3 year period to the FCCB bondholders before the
SAT. On 4th July, 2013, the above Company Petition was mentioned before this
Court for fixing a date of hearing for Admission, which was fixed for 26 th July,
2013. The Company with a view to stall the hearing for Admission, made a
corporate announcement on the BSE website stating that, "The Board of
Directors of the Company have formed an opinion to make a reference to the Board
for Industrial and Financial Reconstruction ("BIFR") pursuant to the provisions of
Sec. 15 (1) of the Sick Industrial Companies (Special Provisions) Act, 1985, as the
accumulated losses have exceeded the networth of the Company as per the Audited
Financial Results as at June 30, 2013". On 19th July, 2013, the Company made
a corporate announcement on the BSE website publishing its audited financial
results for the 9 months period ending on June 30, 2013. On 23 rd July, 2013, a
400 page reference was filed by the Company with the BIFR. On 25 th July, 2013,
the Company made a corporate announcement on the website stating that,
" pursuant to the decision of the Board of Directors of the Company in their meeting
held on July 19, 2013, the Company has made a reference to BIFR". On 26th July,
KPPNair -11- CP 28 of 2012
2013, this Court fixed the hearing for the admission of the Company Petition on
29th July, 2013, when the Company informed the Court that a Reference has
been filed by the Company before the BIFR which admittedly is not yet
registered.
17. On 30th July, 2013, the above Company Petition was heard and this Court
passed an order (i) admitting the winding up petition; (ii) appointing the
Administrator to inter alia take symbolic possession of the Company's
properties; (iii) directing advertisement of the Petition in two local newspapers,
viz. Free Press Journal (in English), Navshakti (in Marathi) and Maharashtra
Government Gazette ("Admission Order"). However, at the request of the
Advocate for the Company, this Court directed that the Admission of the Petition
shall not be advertised till 27th August, 2013.
18. In the context of the reference made to BIFR by the Company, this Court
in its order dated 30th July, 2013 observed that:
As set out hereinabove, I am satisfied that the Promoters/Directors
of the Company have acted dishonestly and are guilty of deliberate
deception with the design of seeking unfair advantage/gain at the
cost of causing loss to the Petitioner/bondholders. I also agree that
any beneficent legislation passed for rehabilitating genuinely sick
Companies which, because of factors beyond their control have
become sick, cannot be brought to the rescue of dishonest
Promoters/Directors which will in fact offer a premium/reward for
KPPNair -12- CP 28 of 2012
dishonesty, cheating and fraud, which is not countenanced by law.
I am also conscious of the fact that such dishonest promoters of the
Company, more often than not, take advantage of a beneficent
legislation like SICA and by taking repeated adjournments before
the BIFR/AAIFR after registration of their Reference, deprive the
small and bona fide creditors of the Company for more than a
decade, by seeking protection under the provisions of Section 22 of
the SICA. .... ... ...
There are several petitions pending in this Court since the year
1998-2000 seeking winding up of Companies which have not seen
the light of day for the last 10 to 15 years, since this Court is not
allowed to proceed with the matter in view of Section 22 of SICA.
The Judges of this Court handling Company matters have time and
again drawn the attention of the BIFR/AAIFR to the pathetic
situation in which the small creditors of such Companies are placed
since the last several years with no light in sight at the other end
of the tunnel. However, it is trite that the function of Courts is
only to interpret the law and not to legislate. As observed by the
Hon'ble Supreme Court in Rishab Agro Industries Ltd. (supra), "If
a provision of law is misused and subjected to the abuse of process
of law, it is for the legislature to amend, modify or repeal it by
having recourse to appropriate procedure, if deemed necessary.
.... .... .....
Section 16 of SICA obliges the Board to make such inquiry as it
may deem fit for determining whether any industrial company has
become a Sick Industrial Company in accordance with the
procedure prescribed therein. In view thereof, the decision on the
issue as to whether the opinion formed by the Board of Directors is
honest and bona fide leading to the filing of a reference before the
KPPNair -13- CP 28 of 2012
BIFR also falls within the realm of inquiry by the BIFR under
Section 16 of the SICA. In my view, any attempt by this Court to
determine whether the reference filed by the Company is bona fide
or not would tantamount to trespassing on the jurisdiction of the
BIFR. In view thereof, though I have expressed my view viz. that
the Promoters of the Company are absolutely dishonest and have
siphoned away the funds of the Company in the manner set out in
detail hereinabove and are responsible for the state of affairs of
the Company prevalent as of date, I leave it to the BIFR to decide
whether the Reference filed by the Company should be registered
and/or further entertained. The only direction by this Court to the
office is, to forward a copy of this Order to the BIFR for its
independent consideration at the time of registering of the
Reference and proceeding with the same, if so registered."
19. On 12th August, 2013, the Reference filed by the BIFR was rejected by the
Registrar of the BIFR on the following grounds:
(1) The Directors Report of annual accounts for the year
ending 30th September 2012 states, in general information, that
the Company is a "software company engaged in manufacture,
distribution, marketing, sale of software products and its
services."
(2) It was observed that the items manufactured by the
Company are not found in the Schedule to the Industries
(Development and Regulation) Act, 1951 and consequently, the
Company does not qualify as an "industrial undertaking" and
falls outside the purview of the Sick Industrial Companies
(Special Provisions) Act, 1986.
KPPNair -14- CP 28 of 2012
20. On 19th August, 2013, the Company filed an Appeal before the Secretary
of the BIFR challenging the order dated 12th August, 2013, passed by the
Registrar of the BIFR.
On 19th August, 2013, the Company also filed an Appeal before the
21.
Division Bench of this Court challenging the order admitting the Company
Petition dated 30th July, 2013 ("DB Appeal"). On 23rd August, 2013, two
employees of the Company filed an Appeal challenging the order admitting the
Company Petition before the Division Bench of this Court("Employee Appeal").
It is pertinent to note that in the said Appeal, the employees have not taken any
ground to the effect that the Cloud Computing Business of the Company is worth
approximately INR 400 crores, as now alleged by them in the Application taken
out by them to intervene in the present Company Petition.
22. On 26th July, 2013, the SEBI filed a SLP before the Hon'ble Supreme Court
seeking leave to file an Appeal challenging the SAT order. On 27 th August, 2013,
the Hon'ble Supreme Court was pleased to stay the operation of the SAT order.
23. On 2nd September, 2013, the Division Bench of this Court (Coram: Dr.
D.Y. Chandrachud & M.S. Sonak, JJ.) dismissed the Appeal, inter alia, on the
ground that the present case is one where the Company has admitted the debt,
admitted the default and has admitted insolvency. The employees decided to
KPPNair -15- CP 28 of 2012
accept the said order and did not appeal from the same. However, the
Company preferred a SLP before the Hon'ble Supreme Court impugning the said
order of the Hon'ble Division Bench of this Court which was dismissed as
withdrawn by an order of the Hon'ble Supreme Court dated 30 th September,
2013.
24. In the meantime, on 5th September, 2013, the Promoters/Directors of the
Company filed a Modification Application in respect of the order of the Hon'ble
Supreme Court in the SLP filed by SEBI staying the operation of the said order. It
was contended by the Promoters/Directors of the Company that since the order
passed by SAT dated 27th August, 2013 is stayed by the Hon'ble Supreme Court,
the earlier order passed by SEBI would stand revived wherein in paragraph 25
(ii) the SEBI has directed the Board of Directors of the Company to furnish
within 30 days from the date of the order dated 25 th March, 2013 bank
guarantee (2) of a minimum tenure of one year, for USD 33.93 million (i.e. the
amount of sale proceeds of the MSD Division that has been diverted as described
in para 15 of the order) in the name of Securities and Exchange Board of India,
without using the funds of the Company or creating any charge on the assets of
the Company. It was submitted that if the promoters failed to furnish the said
Bank Guarantee as ordered by SEBI their assets were liable to be attached. It
was therefore submitted that the order dated 27 th August, 2013, be modified to
provide that "operation of the impugned judgment shall remain stayed save and
KPPNair -16- CP 28 of 2012
except that paragraph 25 (ii) of the SEBI's order dated 25 th March,2013 shall not
be enforced till further orders".
25. The Modification Application dated 10 th September, 2013, filed by the
Promoters and/or Directors of the Company in the SEBI Appeal filed before the
Hon'ble Supreme Court was listed and heard. The Hon'ble Supreme Court was
pleased to direct that " We are not inclined to entertain this application filed by the
applicant/respondent for modification of the order dated 27 th August, 2013. The
application is , accordingly, dismissed. Since we intend to hear the appeal shortly
and dispose it of, we extend the time period for furnishing the bank guarantee from
30 days to 40 days. List the appeal on 24th September, 2013.". The extension
from 30 to 40 days expired on 21st October, 2013. In fact on 26th September,
2013, an oral application was made on behalf the Promoters of Zenith before
the Hon'ble Supreme Court seeking extension of time for furnishing the Bank
Guarantee beyond 24th October, 2013. However, the same was refused by the
Hon'ble Supreme Court. This Court is informed by the Petitioner that to the
best of their knowledge the Directors/Promoters of the Company have till date
not furnished the required Bank Guarantee.
26. On 13th September, 2013, the Secretary of the BIFR rejected the Appeal
filed by the Company challenging the order dated 12 th August, 2013, rejecting
the Company's Reference passed by the Registrar, BIFR. The Secretary in his
KPPNair -17- CP 28 of 2012
order made the following observation:
".... It is clear that the Company was not carrying any
manufacturing activities and has manipulated its balance sheet
for the period ended 30.6.2013."
27. Since the Hon'ble Supreme Court by its order dated 30 th September, 2013,
dismissed as withdrawn, the SLP filed by the Petitioner impugning the order
passed by the Hon'ble Division Bench of this Court dated 2 nd September, 2013,
on 1st October, 2013, the Advocates for the Petitioner mentioned the Company
Petition before this Court seeking an extension of the returnable date. This
Court passed an order extending the returnable date to 21 st October, 2013. The
Company through its Advocates was present at the mentioning.
28. On 2nd October, 2013, the admission of the Petition was advertised in new
newspapers viz. Free Press Journal (in English) and Nav Shakti (in Marathi). On
3rd October, 2013, the Company filed an appeal before the Learned Chairman of
the BIFR challenging the rejection order dated 13 th September, 2013 passed by
the Secretary, BIFR. On 10th October, 2013 the admission of the Petition was
published in the October 10 - 16th , 2013 edition of the Government Gazette of
Maharashtra.
29. On 21st October, 2013, the Company Petition was listed for hearing. The
Advocates for the Company were present before the Court for the same. The
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Company Application was mentioned by the Advocate for the employees in the
morning at about 11.00 a.m. and was directed to be taken on Board for hearing
along with the Company Petition. By an order dated 23 rd October, 2013, the
Company was directed to file its affidavit in reply to the Company Petition on or
before 7th November, 2013. The matter was directed to be listed on 11 th
November, 2013. On 7th November, 2013, the Company served its affidavit-in-
reply to the Company Petition and the above Company Petition was placed for
hearing and final disposal on 11 th November, 2013 and is taken up for hearing
and final disposal on that day.
30. At the time of admission of the Company Petition, the Learned Senior
Advocate appearing for the Company had submitted that the appointment of the
Petitioner as Trustee is terminated and therefore the Petitioner is not
empowered to initiate the winding up proceedings. It was submitted that the
Petitioner is not entitled to accelerate the 2012 Bonds. Relying upon Clause 11
of the Offering Circular, it was submitted that the approval of the Reserve Bank
of India ("RBI") is not obtained by the Instructing Bondholders or the Petitioner
Trustee and as such the Acceleration Notice to the Company is illegal and non
est and cannot be acted upon. The Company also disputed the fact that the
Company was commercially insolvent. It was also submitted that in view of
the order passed by this Court dated 9 th October, 2012, in Notice of Motion Nos.
3520 of 2011 and 3527 of 2011 in Suit No. 2865 of 2011, the claim of the
KPPNair -19- CP 28 of 2012
bondholders is secured and the Company Petition does not deserve to be
admitted and the question of appointment of Provisional Liquidator also does
not arise. It was also submitted that the Company has not siphoned away any
funds received from the sale of the MSD Business. All the aforestated
contentions of the Company advanced at the time of the admission of the
Company Petition were rejected by this Court by its detailed order dated 30 th
July, 2013, the Appeal preferred therefrom before the Hon'ble Division Bench of
this Court, as stated earlier, has been dismissed, and the SLP filed therefrom was
also dismissed as withdrawn.
31. The Company Petition is now taken up for hearing and final disposal.
32. At the outset it is submitted on behalf of the Company that this Court
ought not to proceed with the hearing of the above Company Petition, since the
Company has not complied with Rules 24 and 30 of the Companies (Court)
Rules, 1959 ("the said Rules"). It is submitted that this Court therefore ought to
follow the procedure on default of compliance as regards advertisement and
service of notice, as laid down in Rule 31 of the said Rules. Rules 7, 24, 30 and
31 of the said Rules are reproduced hereunder for ready reference:
"7. Power of Court to enlarge or abridge time._ The
Court may, in any case in which it shall deem fit, extend or
abridge the time appointed by these Rules or fixed by an
order of the Court for doing any act or taking any
KPPNair -20- CP 28 of 2012
proceeding, upon such terms (if any) as the justice of the
case may require, and any such enlargement may be ordered
although the application for the same is not made until after
the expiration of the time appointed or allowed.
24. Advertisement of petition.- Where any petition is
required to be advertised, it shall, unless the Judge otherwise
orders, or these rules otherwise provide, be advertised not less
than fourteen days before the date fixed for hearing, in one
issue of the Official Gazette of the State or the Union
Territory concerned, and in one issue each of a daily
newspaper in the English language and a daily newspaper in
the regional language circulating in the State or the Union
Territory concerned, as may be fixed by the Judge.
(2) Except in the case of a petition to wind up a company,
the Judge may if he thinks fit, dispense with any
advertisement required by these Rules.
30. Affidavit of service.- (1) An affidavit or
affidavits stating whether the petition has been advertised as
prescribed by rule 24 and whether the notices, if any have
been duly served upon the persons required to be served shall
be filed not less than 3 days before the date fixed for hearing.
Such proof of the advertisement or of the service, as may be
available, shall be filed along with the affidavit.
(2) An affidavit of service on a company or its liquidator
shall be in form No. 7 or 8 as the case may be.
31. Procedure on default of compliance as regards
advertisement and service of notice.- In default or
compliance with the requirements of the Rules or the
KPPNair -21- CP 28 of 2012
directions of the Judge or Registrar, as regards the
advertisement and service of the petition, the petition shall, on
the date fixed for hearing be posted for orders of the Judge
and the Judge may either dismiss the petition or give such
further directions as he thinks fit."
33. It is submitted on behalf of the Company that Rule 24 of the said Rules
requires the Petition to be advertised for not less than fourteen days before the
date fixed for hearing, in the issue of the Official Gazette of the State or the
Union Territory concerned. The returnable date for the hearing of the present
Petition was 21st October, 2013. The advertisement in the newspapers was on
time. However, the information about the returnable date and the admission of
the Petition was published in the Official Gazette in the issue of the Official
Gazette dated 10th October, 2013 - 16th October, 2013. It is submitted that no
application for dispensation of the mandatory period as required, was taken out
by the Petitioner. The Company has relied on the decision of the Division Bench
of the Hon'ble Delhi High Court in the case of Lt. Col. R.K. Saxena vs. Imperial
Forestry Corporation1 wherein it is held that the Petition for winding up has to
be advertised before the same is placed for hearing before the Court and the
exercise of discretion in Rule 24 of the Rules is confined only to the time limit
for advertisement i.e. only to that part of the Rule, which says, ".......be
advertised not less than fourteen days before the date fixed for hearing....". It is
further submitted on behalf of the Company that not only has the Petitioner not
1(2001 107 Company Cases 401
KPPNair -22- CP 28 of 2012
complied with the mandatory requirement of Rule 24, but has failed and
neglected to comply with the mandatory requirement of Rule 30 of the said
Rules. The affidavit required to be filed as per Rule 30 was admittedly not filed
three days prior to the returnable date viz. 21 st October, 2013. In fact the
affidavit under Rule 30 of the said Rules is dated 8 th November, 2013 and was
sought to be tendered at the hearing of the Petition on 12 th November, 2013. It
is submitted that the affidavit falsely states that the advertisement of the
admission of the Petition was "duly published" as per the directions of the
Single Judge.
34. As stated hereinabove, this Court passed an order on 30 th July, 2013
admitting the Company Petition and directed that the admission of the Petition
be advertised in the Free Press Journal, Nav Shakti and the Maharashtra
Government Gazette. However, at the request of the Company, this Court in
the said order directed the Petitioner not to advertise the admission of the
Petition on or before 27th August, 2013 and made the Company Petition
returnable on 16th September, 2013. Though the Appeal was dismissed by an
order of the Division Bench of this Court dated 2 nd September, 2013, at the
request of the Company, the Division Bench stayed the publication of the
admission of the above Company Petition for a period of four weeks from the
date of its order. The SLP preferred therefrom was dismissed as withdrawn by
the Hon'ble Supreme Court on 30 th September, 2013, thus rendering finality to
the findings in the admission order passed by the Single Judge and confirmed by
KPPNair -23- CP 28 of 2012
the Hon'ble Division Bench. In view thereof, as pointed out by the Petitioner, an
application was made before the Single Judge of this Court on 1 st October, 2013,
seeking extension of the returnable date for hearing of the Company Petition,
when the Advocate for the Company was present, and the Company Petition was
ordered to be made returnable on 21st October, 2013. Again as pointed out by
the Advocates for the Petitioner, the Petitioner has on the very same day i.e. 1 st
October, 2013, contacted the advertising Agency (Bullseye Communications) for
placing the advertisement in two local newspapers as directed and in the
Maharashtra Government Gazette, as per the directions in the admission order.
The advertisement was published in the edition of the Free Press Journal and
Nav Shakti dated 2nd October, 2013. The Maharashtra Government Gazette is
issued on a weekly basis, i.e. on Thursday every week. The advertisement could
not be published in the issue of the Maharashtra Government Gazette for the
period from 3rd October - 9th October, 2013, to be released on 3rd October, 2013,
due to paucity of time and in view of the fact that 2 nd October, 2013 was a
National Holiday. The Petition was therefore advertised in the Maharashtra
Government Gazette at the earliest available opportunity in the next weekly
gazette for the period from 10 th October to 16th October, 2013 in accordance
with the directions of this Court. The decision of the Division Bench of the
Hon'ble Delhi High Court in Lt. Col. R.K. Saxena's case (supra) would not assist
the Company since the facts and circumstances in which the said judgment has
been passed are totally different from the facts of the present case. In Saxena's
KPPNair -24- CP 28 of 2012
case, the advertisement of admission of the winding up petition had not been
placed in the Official Gazette at all. The Hon'ble Delhi High Court therefore
held in that case that it was mandatory to publish the advertisement in the
Official Gazette, with a view to lend authenticity to the advertisement
published in the local newspapers. In that case it was held that Rule 24 was
mandatory in the context of publishing the advertisement in the Official
Gazette. The Court however held that it has the discretion to alter the time limit
prescribed for the advertisement. It was further held that the purpose of
publication of the advertisement of admission for the winding up petition is only
to lend authenticity to the advertisement published in the newspapers.
35. In the present case, the advertisements have been placed in the two local
newspapers as well as in the Maharashtra Government Gazette. Furthermore,
though the returnable date of hearing the Company Petition was scheduled as
21st October, 2013, in fact, the Company Petition was ultimately taken up by this
Court for final hearing only on 11th November, 2013 (i.e. beyond a period of 14
days). Thus the hearing of the Company Petition finally took place more than a
month after the advertisement was published in the newspapers and the
Maharashtra Government Gazette. No person, creditor or contributory has come
forth to oppose or challenge the winding up of the Company. In the facts and
circumstances of the case, it cannot be gainsaid that the Company did not have
notice of the returnable date of the Company Petition. As correctly submitted by
KPPNair -25- CP 28 of 2012
the Petitioner, in any event, no harm, prejudice or injury has been caused either
to the Company or to the creditors at large in view of the fact that apart from
Bondholders whom the Petitioner represents, according to the Company, there
are no other creditors of the Company; and in any case till date, no person,
creditor or contributory has come forward and complained to the Court that it
did not have sufficient time to support/oppose the Company Petition or appear
before the Court to protect their interest. Again, Rules 24 and 30 of the said
Rules are procedural in nature. It is well established that rules of procedure are
only a hand maiden of justice and ought not to come in the way of substantive
justice. Rule 31 relied on by the Company thus gives powers to the Court to
pass further directions if it deems fit in cases where there is a default in
compliance with the advertisement in accordance with Rule 24 and/ or Rule 30
of the said Rules. Thus, even assuming that the alleged defect raised by the
Company as a defence is a valid ground, the same could be cured by further
directions from this Court, inter alia, by adjourning the hearing of the Company
Petition in order to allow for the passage of 14 days from the date of publication
in the Maharashtra Government Gazette. However, in the present case, the
advertisement of admission of the Company Petition was published in the
Maharashtra Government Gazette on 10th October, 2013 and the Company
Petition, although placed for hearing on 21 st October, 2013, was ultimately
heard by this Court only on 11 th November, 2013. In the light of the same
there was no need for such directions to be passed by this Court.
KPPNair -26- CP 28 of 2012
36. As regards the contention raised by the Company that the Petitioner has
not complied with Rule 30 of the said Rules , an affidavit dated 8 th November,
2013 under the said Rules has been affirmed on behalf of the Petitioner on 8 th
November, 2013, and has been tendered on 11 th November, 2013. The Court
was on vacation from 1st to 10th November, 2013, during which time the Filing
Departments of the Court including the Company Department were also closed.
Accordingly, the said affidavit was filed on the first working day thereafter. Non
filing of the affidavit of service three working days prior to the hearing of the
Company Petition is a curable defect. In view of the sufficient compliance with
the order of the Court by the Company and also in view of Rule 7 of the Rules,
whereunder the Court is given powers to enlarge or abridge the time and the
Court also has the power to give further directions as it thinks fit, in regard to
any procedure or default in the compliance of service of notice, the delay on
the part of the Petitioner in filing the said affidavit is condoned and the said
affidavit taken on record on 11th November, 2013.
37. Without prejudice to the aforestated contention raised by the Company, it
is next submitted on behalf of the Company that the Cloud Computing Business
(CC Business) may be sold as a going concern and in the event there is any
shortfall in satisfying the dues of the bondholders, other movable properties and
assets of the Company be sold in order to satisfy the Petitioner's claim to the
KPPNair -27- CP 28 of 2012
extent possible. It is further submitted on behalf of the Company that if the
winding up order is passed, it would adversely affect the quantum of
consideration that could be realized from the sale of the CC Business. The
Company accordingly submitted that the hearing of the Petition be adjourned till
the aforesaid exercise is completed.
38. The Petitioner has opposed the Company's request on the ground that
such a plea by the Company is nothing but an attempt to delay the hearing of
the Petition in anticipation that the Company's reference under Section 15 (1)
of the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA") will be
registered with the Board for Industrial and Financial Reconstruction ("BIFR")
and the stay under Section 22 of the SICA will operate in respect of the
proceedings under the present Company Petition. It is submitted on behalf of
the Petitioner that the conduct of the Company is not bona fide throughout and
the hearing of the Petition if adjourned, will act against the interest of not only
the Petitioner but also the shareholders of the Company as well as the workers.
39. From the manner in which the Company has raised one or the other
technical objections pertaining to the procedure purportedly not followed by the
Petitioner qua the present Company Petition, I have no doubt that the
Company is determined to leave no stone unturned in attempting to delay the
hearing of the Petition. The submission of the Petitioner that the aforestated
KPPNair -28- CP 28 of 2012
suggestion/submission advanced on behalf of the Company is again an attempt
to delay the hearing of the Petition in anticipation that the Company's reference
under Section 15 (1) of the SICA will be registered with the BIFR and the stay
under Section 22 of the SICA will operate in respect of the proceedings under
the present Company Petition cannot be brushed aside. Again, the submission
made on behalf of the Petitioner that the conduct of the Company is throughout
not bonafide and the Petitioner is not at all ready to accept/rely on any
suggestion made by the Company on any ground whatsoever, is fully justified in
view of the following mala fide conduct of the Promoters/Directors of the
Company since inception:
(i) The Promoters of the Company had admittedly not repaid the
amounts due to the Petitioner/Bondholders under the 2011 Bonds as per the
terms of the 2006 Offering Circular and the 2006 Trust Deed as well as under
the 2012 Bonds as per the terms of the 2007 Offering Circular and the 2007
Trust Deed and the Company has therefore defaulted in the repayment of the
2011 as well as 2012 Bonds. The Company by its notice dated 27 th December,
2010 called its EOGM on 29 th January, 2011, and in the Explanatory Statement
annexed to the said notice inter alia represented to its shareholders that the
Company is desirous of selling and/or leasing the business and/or divisions
including the subsidiaries (wholly and partly) of the Company so as to
redeem/re-pay the outstanding FCCBs which would become due for
repayment/redemption in August, 2011 and August, 2012. The Company based
KPPNair -29- CP 28 of 2012
on its said representation obtained the mandate of its shareholders to sell and/or
lease the business and/or Divisions including subsidiaries (wholly or partly) of
the Company and in fact thereafter sold its MSD Business for a huge sum of US
$ 54,712,461. However, after the sale of the MSD Business, the said
representation made to the shareholders was brazenly breached by the
Promoters/Directors of the Company and not a single paisa was paid to the
Petitioner/bondholders towards the outstanding FCCBs. This shows that the
Promoters/Directors of the Company dishonestly made a false representation to
their shareholders that they will be selling the undertaking of the Company for
making repayment of the FCCBs and thereafter defrauded the shareholders by
not paying a single paisa towards the FCCBs despite sale of the MSD Business of
the Company for US $ 54,712,461. It is the bounden duty of a Company to
scrupulously follow and observe the mandatory provision of Section 173 of the
Act, which is enacted in the interest of the shareholders. The Hon'ble Supreme
Court in the case of Firestone Tyre and Rubber Co. vs. Synthetics and Chemicals
Ltd. and others2 confirmed the observations of Justice Bhagwati in Sheth
Mohanlal Ganpatram vs. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. 3
wherein Bhagwati, J. after holding that Section 173 of the Act enacted a
provision which was mandatory and not directory, observed as follows:
"The object of enacting section 173 is to secure that all facts
which have a bearing on the question on which the shareholders
have to form their judgment are brought to the notice of the
2 1971 Vol. 41 Company Cases 377
3 (1964) 34 Comp. Cas. 777, 841 :AIR 1965 Guj. 96, 104
KPPNair -30- CP 28 of 2012
shareholders so that the shareholders can exercise an intelligent
judgment. The provision is enacted in the interests of the
shareholders so that the material facts concerning the item of
business to be transacted at the meeting are before the
shareholders and they also know what is the nature of the
concern or interest of the management in such item of business,
the idea being that the shareholders may not be duped by the
management and may not be persuaded to act in the manner
desired by the management unless they have formed their own
judgment on the question after being placed in full possession of
all material facts and apprised of the interest of the management
in any particular action being taken. If, therefore, there was any
contravention of the provisions of Section 173, the meeting of the
company held on 5th September, 1961, would be invalid and so
also would the resolution passed at that meeting be invalid."
(ii) Despite the above sanctity/seriousness being known to the
Promoters/Directors of the Company, as stated hereinabove, they nonchalantly
proceeded to make a false representation in the explanatory statement dated
27th December, 2010, and defrauded the shareholders by selling a valuable
asset/undertaking of the Company and thereafter did not make any payment
from the consideration received therefrom towards the FCCBs, for which the
mandate of the shareholders was obtained.
(iii) On 13th October, 2011, the Promoters/Directors of the Company
made an announcement on the BSE that they have received the entire
KPPNair -31- CP 28 of 2012
consideration from the sale of the MSD Business except for the amount to be
held in escrow and the Company plans to utilise the said consideration for
partial repayment of FCCBs. However, no amount whatsoever was paid towards
the repayment of FCCBs. It is therefore again established that the
announcement made on the BSE by the Promoters/Directors of the Company
was without any intention of making any payment towards repayment of
FCCBs.
(iv)
Emboldened by the repeated dishonest representations made to its
shareholders by way of the explanatory statement dated 27 th December, 2010,
and an announcement on the BSE dated 13 th October, 2011, the
Promoters/Directors of the Company proceeded to make a false statement on
oath, by filing an affidavit dated 17 th October, 2011, stating therein that the
sale proceeds received by the Company will be applied towards buy
back/redemption of FCCBs. Thus, it is established beyond any doubt that the
Promoters/Directors of the Company had at all relevant times decided not to
make any payment to the Petitioner/bondholders towards the FCCBs and at the
same time sell a substantial division of the Company and empty the coffers of
the Company by making false representations to the shareholders, to the BSE, to
the Court and to the Petitioner/bondholders.
(v) The Promoters/Directors of the Company received an amount of US $
KPPNair -32- CP 28 of 2012
54,712,461 pursuant to the sale of the MSD business out of which the
Promoters/Directors of the Company paid US $ 27 Million to Zenith FZE, Dubai
("the Dubai entity") and only an amount of US$ 27.12 Million was retained by
the Company. The Company admittedly had not disclose to the shareholders
that some part of the MSD Business was held by Zenith FZE, Dubai. Further, the
paid up capital of Zenith FZE, Dubai was only AED 1,00,000/-, yet USD 27
million was paid to Zenith Dubai. As an afterthought the Company is claiming
that a critical part of the MSD Business was held by Zenith Dubai. The schedules
to the USA Asset Purchase Agreement dated 23 rd September, 2011 (USA APA)
set out the "Purchased Assets" that have been transferred to the Purchasers. As
pointed out by the Petitioner as and by way of illustration, page 21 of the
Schedule - Exhibit A to Schedule 1.1 ( c ), lists out "Zenith Success Stories -
Managed Services". In this list there are several domain names listed and each of
these domain relates to www.zenithinfotech.com which clearly indicates that
the assets in such list is owned by Respondent Company - Zenith Infotech. On
page 37 of the Schedule, details of the SAAZ Software are provided which the
contract itself terms on page 37 " This (SAAZ Software) is by far the most
important intellectual property as the SAAZ Software is what our resellers/MSP's
pay for as well as it form the backbone of how service delivery to our
resellers/MSP's are performed from our network operation centre in Mumbai,
India." The fact that the SAAZ Software is developed by the Company and that
it is the backbone of the delivery from the network operation of centre with
KPPNair -33- CP 28 of 2012
Mumbai clearly indicates that it is also owned by the Company. In any event,
on page 93 it is shown that the trademark for SAAZ is owned by the Company.
On page 105 a list of material contracts are set out and each of such contracts
are with the Company.
It is therefore clear that the primary seller of the Assets under the US APA is the
Company ; no material asset was owned by the Dubai entity which was sold to
the Purchasers ; there is no basis for paying around 50% sale consideration to
the Dubai entity ; the payment to the Dubai entity in no way justifies payment
of consideration of US $ 27 million. It is therefore evident that the Company has
used the Dubai entity as a vehicle to siphon away the sale proceeds of the MSD
business outside the jurisdiction of this Court.
(vi) Despite as stated aforesaid, the Promoters/Directors of the Company
by representing to its shareholders, the BSE and to the Bombay City Civil Court
that the consideration received from the sale of the MSD Business would be
utilised towards the repayment of the FCCBs, not only siphoned away 50 per
cent of the consideration to its Dubai entity as aforesaid, but without paying a
single paisa to the Petitioner purportedly utilised the balance payment retained
by the Company as follows:
(a) Purported payments to Standard Chartered Bank ("SCB") aggregating to
US $ 12.6 Million (INR 61.7 crores) as more particularly set out in paragraph
30(A) (Page 25) of the Admission Order.
KPPNair -34- CP 28 of 2012
(b) Purported investments/payments in/to related parties aggregating to US
$ 15.3 million (INR Rs. 74.2 crores approx.) as more particularly set out in
paragraph 30(B) (Page 26) of the Admission Order.
(c) Other payments aggregating to US $ 23 million (INR 115 crores) as more
particularly set out in paragraph 30 (C ) (Page 28) of the Admission Order. .
(vii) The Promoters/Directors of the Company therefore after repeatedly
stating that they are selling/disposing of the Undertaking/Division to make
repayment of FCCBs and even after the sale of the MSD Business stating that the
consideration received will be utilised for repayment/partial repayment of the
FCCBs, did not make any payments towards FCCBs to the
Petitioner/bondholders, but instead in the aforestated manner siphoned away
the consideration thereby defrauding its shareholders and its creditors including
the Petitioners/bondholders. The Promoters/Directors of the Company after
submitting a settlement proposal to the FCCB bondholders before the SAT on
17th June, 2013, made a corporate announcement on 19 th July, 2013 on the BSE
website stating that, "The Board of Directors of the Company have formed an
opinion to make a reference to the Board for Industrial and Financial
Reconstruction ("BIFR") pursuant to the provisions of Sec. 15 (1) of the Sick
Industrial Companies (Special Provisions)Act, 1985, as the accumulated losses have
exceeded the networth of the Company as per the Audited Financial Results as at
June 30, 2013" and a 400 page Reference was filed by the Company with the
BIFR on 23rd July, 2013 which is not admitted till date. The Promoters/Directors
KPPNair -35- CP 28 of 2012
of the Company have therefore left no stone unturned in ensuring that no
amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite
an amount of approx. Rs. 600 crores being due and payable to them till date.
In the above circumstances, the Bondholders cannot be blamed for having lost
complete faith and trust in the Company, its Promoters and Management, and
for not being ready to trust their word in view of their past conduct of giving
false assurances only to renege therefrom. In fact, as set out hereinabove, the
Promoters/Directors of the Company have not only been dishonest with the
Bondholders and the Stock Exchange but have also been dishonest with the
Court, and as stated hereinabove made a false and dishonest statement on oath
in its affidavit dated 17th October, 2012, filed before the City Civil Court inter
alia stating that the sale proceeds received will be applied towards buy
back/redemption of FCCBs and have thereafter not paid a single paisa to the
Bondholders and have dishonestly utilized the said amounts as set out
hereinabove. In fact, the Securities and Exchange Board of India ("SEBI") vide
its interim order dated 25th March, 2013 ("SEBI order") recorded the following
findings against the Promoters and Promoter Group of the Company and
directed them to furnish a Bank Guarantee in the sum of USD 33.93 Million. The
relevant portion of the said order is extracted hereinbelow:
"15..... I note that out of the sale proceeds of MSD Division of ZIL
(USD 48 million), an amount of USD 33.93 million was diverted
for the purposes that were not even remotely connected to the
KPPNair -36- CP 28 of 2012
authorization of the shareholders as under:
i. US$ 13 million transferred to VU Dubai & Cloud Dubai;
ii. US$ 7.2 million and US$ 3.2 million transferred to Zenith
Singapore;
iii. US$ 1.53 towards purchase of capital goods by Zenith
Dubai;
iv. US$ 6 million to business creditors of ZIL;
The sequence of events and pattern of transactions in this case
prima facie indicate that the ZIL and its promoters/directors not
only wantonly defaulted in redemption of FCCBs and disregarded
shareholders' resolution but also adopted fraudulent device and
artifice to defraud the shareholders..
16. It appears from the above that ZIL and its
promoters/director through their decision and announcement
dated December 27, 2010 made a promise to the shareholders
without intending to perform the same. They diverted the monies
realized from the sale of the MSD Division for the benefits/interests
of promoters and/or Directors and subsidiaries... I also do not see
any compelling reasons to use the monies realized from sale of
MSD Division for any purpose - not the least for paying to group
entities for various purposes - other than for redemption of
FCCBs, which was not only the sole purpose for which approval of
shareholders was taken but was also very crucial for protecting the
shareholders' value. The above facts and circumstances of the case,
prima facie, indicate that the ZIL and its promoters/directors
employed a device or artifice to fraudulently divert the sale
proceeds of its MSD Division.
21. In light of the aforesaid prima facie findings, I note that the
promoters/directors of ZIL have in a devious manner attempted to
KPPNair -37- CP 28 of 2012
take away the assets of a listed company directly and indirectly for
their own benefit or for benefit of entities owned and controlled by
them. Such conduct of promoters/directors not only defeats the
whole purpose of seeking shareholders' approval for crucial
decisions but also jeopardizes the integrity of the securities market.
25. The board of directors of ZIL is hereby directed to furnish
within 30 days from the date of this order, bank guarantee(s) of a
minimum tenure of one year, for USD 33.93 million (i.e. the
amount of sale proceeds of MSD Division that has been diverted as
described in para 15 above), in the name of Securities and
Exchange Board of India, without using the funds of ZIL or
creating any charge on assets of ZIL".
As set out hereinabove, despite the Hon'ble Supreme Court having extended the
time to enable the Promoters/Directors of the Company to furnish the Bank
Guarantee as required under the SEBI Order, the Promoters/Directors have
failed and neglected to provide the Bank Guarantee till date. I am therefore not
inclined to defer the hearing or the decision on the Company Petition as
submitted/suggested by the Company.
40. The Petitioner is also correct in its submission that even if the CC
Business were to be sold, the value thereof as per the Valuation Report of Ernst
and Young dated 3rd July, 2012, is in the region of about Rs. 196 crores - Rs.
211 crores (which is approximately USD 31.6 Million - USD 34 Million as per
KPPNair -38- CP 28 of 2012
the conversion rate on November 19, 2013). The Land and Building and other
immovable property of the Company belong to MIDC and a sale would require
their permission as well as payment of premium which would devalue the
property and delay matters indefinitely and that in any event, the sale of the CC
Business and other assets would not be sufficient to satisfy the claim of the
bondholders, which as on date is over USD 101.57 Million and a winding up
order is inevitable. In response, the Company has contended that the value
of the CC Business has gone up due to the fall in the value of the Indian currency
as compared to the US Dollar, and that nearly all the Company's revenue comes
from overseas customers. The Company has further submitted that it is confident
that if the CC Business is sold as a running business without passing a winding
up order, it will fetch more than the claim of the Petitioner. The Petitioner is
correct in denying and disputing this contention advanced on behalf of the
Company and the same cannot be accepted for the following reasons:
(i) The above submission of the Company is entirely without merit and
has no credible financial basis whatsoever. It is inconceivable that an
approximately 20 per cent depreciation in the value of the Indian Rupee can lead
to a three-fold increase in the value of the CC Business.
(ii) The Company has in its reference dated 22 nd July, 2013 filed with
the BIFR represented at page 12 that its net worth has been eroded, such that
its accumulated losses are more than its net worth, necessitating protection from
BIFR.
KPPNair -39- CP 28 of 2012
(iii) The financials of the Company admittedly make it clear that the CC
Business is a loss making enterprise and its EBIDTA has been continuously
depreciating over the past two years while its accumulated losses have been
continuously appreciating during the said period.
(iv) The present case is one where there is an admitted debt, admitted
insolvency and admitted default on the part of the Company. It would therefore
be an exercise in futility and in nobody's interest to defer hearing of the
Company Petition until the CC Business and/or the other assets of the Company
are sold.
41. The Company has also submitted that the winding up of the Company
would (i) affect the employees who would lose their jobs; (ii) prejudice the
shareholders; and (iii) result in the Company being unable to recover its various
outstanding dues, including payments in respect of warranties provided by the
Company to its various customers, which would become payable only after
expiry of the warranty period. Though I am satisfied that the employees have
been put forward by the Company with an oblique motive of protecting its own
interest, and the interest of the employees and the concern shown with regard
to the employees loosing their jobs is a mere pretence on the part of the
Company, I have no doubt in my mind that the jobs/employment of the
employees should be uppermost in the mind of the Court at the time of passing
an order directing winding up of a Company. However, I also cannot lose sight
KPPNair -40- CP 28 of 2012
of the fact that the winding up process cannot be delayed on the ground that the
employees may loose their jobs because when an organization like the present
Company is headed by dishonest Promoters/Directors who have a single point
agenda viz. their self-interest, they may with the passage of time bring the
Company to such a state that the employees may not even get the fruits of their
toil put in for several years viz. their terminal benefits, which it is at least
possible to secure at this point of time. However, I have noted and appreciate
the stand taken by Mr. Dwarkadas, the learned Senior Advocate appearing for
the Petitioner, that as suggested by Mr. Shailesh Shah, the learned Senior
Advocate appearing for the employees, the Court whilst passing an order of
winding up of the Company may consider a stay of the said order for a particular
period, with the necessary safeguards and directions to the Administrator
already appointed by this Court to dispose of the CC Business of the Company as
a going concern within such period.
42. In respect of the issue of recovery of outstanding dues of the Company
including payments towards warranty/services, it is noted that apart from a bald
statement in the affidavit in reply, no particulars or details have been furnished
by the Company with regard to the alleged warranties/services. Hence the
aforestated submission of the Company in that regard cannot be accepted.
43. It is submitted on behalf of the Company that there has been no
KPPNair -41- CP 28 of 2012
siphoning of money by the Promoters of the Company. The submission is
incorrect. This Court has already set out in its Admission Order dated 30 th July,
2013 and reproduced the relevant paragraphs hereinabove showing how monies
were fraudulently transferred by the Company to its related parties in Dubai and
Singapore with a view to keep it outside the reach of the Petitioner and this
Court. As mentioned above, the SEBI by its order dated 25 th March, 2013, has
also given its findings with regard to the fraudulent siphoning of funds by the
Promoters/Directors.
44. It is submitted on behalf of the Company that merely because the
Company Petition has been admitted, it does not necessarily mandate a final
order of winding up of the Company. The Petitioner has submitted that the
detailed admission order passed by this Court dated 30 th July, 2013 has been
confirmed by the order of the Hon'ble Division Bench dated 2 nd September, 2013
and the SLP preferred therefrom has been dismissed as withdrawn by the
Company by an order of the Hon'ble Supreme Court dated 30 th September, 2013.
It is submitted by the Petitioner that the said order/judgment though passed at
the admission stage are binding even at the final hearing of the Company
Petition. It is submitted that the orders do not merely record any prima facie
view. Instead the findings in the orders have been made after considering all the
facts and circumstances on record, the averments made, the arguments
advanced and the evidence led on behalf of both the parties to the Company
KPPNair -42- CP 28 of 2012
Petition. It is also submitted that since the SLP has been dismissed and the
employees have chosen not to challenge the Division Bench order, the findings
therein and in the admission order have become final and binding. Apart from
the fact that I am in agreement with the submissions advanced by the Petitioner,
in my view, the facts and circumstances on the basis of which I have passed the
admission order dated 30th July, 2013, have remained the same till date and do
not call for any different findings at this stage than those arrived at during the
stage of admission. I therefore once again confirm all the findings arrived at by
this Court in the admission order dated 30th July, 2013.
45. The Company has also pressed the arguments and contentions
advanced at pages 801 to 813 of the affidavit in reply. The same is almost a
repetition of what was submitted by the Learned Senior Advocate appearing for
the Company at the stage of admission and is already dealt with in the admission
order dated 30th July, 2013 and herein.
46. The Company has next submitted that the Petitioner has not made
out adequate grounds to mandate the winding up of the Company. In support of
its contention, the Company has relied upon the judgments of the Hon'ble
Gujarat High Court in Tata Iron & Steel Company vs. Micro Forge (India) Ltd. 4
and American Express Bank Ltd. v. Corehealth Care Ltd. 5 . In my view, the
4 (2001) 104 Comp Cas 533
5 (1999) 96 Comp Cas 841
KPPNair -43- CP 28 of 2012
Company cannot draw any support from the said judgments since the said
judgments were passed before the judgment of the Hon'ble Supreme Court in the
case of IBA Health (India) Pvt. Ltd. vs. Info-Drive Systems Sdn. Bhd. 6 which
holds the field as on date. In the said judgment, the Hon'ble Supreme Court in
paragraph 24 observed thus:
"24. A determination of examination of the Company's insolvency
may be a useful aid in deciding whether the refusal to pay is a
result of the bona fide dispute as to liability or whether it reflects
an inability to pay, in such a situation, solvency is relevant not as
a separate ground. If there is no dispute as to the Company's
liability, the solvency of the Company might not constitute a stand
alone ground for setting aside a notice under Section 343 (1) (a),
meaning thereby, if a debt is undisputedly owing, then it has to be
paid. If the Company refuses to pay on no genuine and substantial
grounds, it should not be able to avoid the statutory demand. The
law should be allowed to proceed and if demand is not met and an
application for liquidation is filed under Section 439 in reliance of
the presumption under Section 434 (1) (a) that the Company is
unable to pay it debts, the law should take its own course and the
Company of course will have an opportunity on the liquidation
application to rebut that presumption."
This Court has noted that the Company has failed to rebut the presumption of
its insolvency and is therefore liable to be wound up. In the present case where
the Company is unable to pay its debts as and when due, has admittedly
committed a default in the payment of the amounts due under the 2011 Bond
6 (2010) 10 SCC 553
KPPNair -44- CP 28 of 2012
and the 2012 Bonds and is admittedly insolvent, an order for winding up of
the Company must follow as a matter of course. The judgments of the Hon'ble
Gujarat High Court referred to above are therefore, with respect, not binding
or relevant for determination of the facts, circumstances and issues arising in
the present case. The Petitioner is correct in submitting that the Company has
failed to rebut the presumption of insolvency and is therefore liable to be
wound up.
47.
It is also submitted on behalf of the Company that insofar as the
wrongful and illegal acts of Directors and Promoters are concerned, SEBI is
investigating into the same and therefore it was not necessary for this Court to
take cognizance of the conduct of the Directors and Promoters in determining
whether the Company ought to be wound up. In response, the Petitioner has
correctly relied upon the judgment of the Hon'ble Supreme Court in D.D.A. vs.
Skipper Construction Company (P) Ltd. 7 wherein the Hon'ble Supreme Court
in paragraph observed as follows:
"28. The concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or to
defraud people. Where, therefore, the corporate character is
employed for the purpose of committing illegality or for defrauding
others, the court would ignore the corporate character and will
look at the reality behind the corporate veil so as to enable it to
pass appropriate orders to do justice between the parties concerned.
7 (1996) 4 SCC 622
KPPNair -45- CP 28 of 2012
The fact that Tejwant Singh and members of his family have
created several corporate bodies does not prevent this Court from
treating all of them as one entity belonging to and controlled by
Tejwant Singh and Family if it is found that these corporate bodies
are merely cloaks behind which lurks Tejwant Singh and/or
members of his family and that the device of incorporation was
really a ploy adopted for committing illegalities and/or to defraud
people."
In the light of this, it is futile for the Company to distance itself from the actions
of the Promoters and Directors who admittedly hold almost 65% of the
shareholding of the Company and who have been found by the SEBI and this
Court to have diverted large sums of the money realized from the sale of MSD
Business to corporate entities situated in Dubai and Singapore. Consequently
the illegal and mala fide acts of the Promoters and the Directors of the
Company are relevant and material to determine whether to pass an order for
winding up of the Company.
48. In the circumstances, none of the defences/pleas raised by the Company
have any merit. Given the fact that (i) the Company's liability is admitted, (ii)
the Company is unable to pay its debt as and when they fall due and (iii) the
Company is admittedly in a state of insolvency, all the criteria required for its
winding up are fully satisfied. Therefore the Company ought to be wound up.
49. In view thereof, the Company, Zenith Infotech Limited, is directed to be
wound up. The Official Liquidator, High Court, Bombay, is appointed as
KPPNair -46- CP 28 of 2012
Liquidator of the Company with all the powers prescribed under the provisions
of the Companies Act, 1956. However, the winding up order is stayed upto 16 th
April, 2014, in order to facilitate the possible sale of the CC Business of the
Company as a going concern so as to ensure that the employees of the Company
associated with the said business do not loose their employment or any benefits
related thereto, and also the sale of properties and assets of the Company if so
required. The Administrator appointed under the Admission Order shall
continue for the purpose of the sale of the CC Business and if necessary also for
the properties and the assets of the Company. The terms of his appointment and
the scope of his duties shall be as set out in the Admission Order and
hereinafter The sale of the CC Business as well as the assets of the Company
shall be conducted on the following terms:
(i) The Administrator shall offer the CC Business for sale in a public auction,
which auction shall be widely advertised in national newspapers as well
as in the international press;
(ii) The Administrator is granted liberty to seek the assistance of any
Investment Bank as also an independent law firm of repute in Mumbai
to assist him in the sale process and the legal issues arising out of the
sale of or related to or associated with the sale of the CC Business.
However before the appointment of the Investment Bank and the law
firm, the approval of this Court shall be obtained;
(iii) The Investment Bank and the law firm so appointed by the Administrator
KPPNair -47- CP 28 of 2012
after seeking the approval of this Court shall conduct a financial,
accounting, business, legal and customer relation due diligence of the
CC Business and also prepare an Information Memorandum. The
Company and its Promoters shall be required to co-operate in the
process of preparation of the Information Memorandum and for the
purposes of requesting the due diligence exercises to be undertaken. As
part of the sale process, the Company shall also prepare management
meetings, meetings with customers, bidders and such other measures
which are customary in transactions of such nature ;
(iv) No related party or affiliate of the Promoter or Promoter Group shall be
entitled to participate in the bid for the proposed sale of the CC
Business. The term 'related party' shall have the same meaning ascribed
to it in Section 2 (76) of the (Indian) Companies Act, 2013 and also
include 'associate' as defined under the Income Tax Act, 1961;
(v) The Petitioner, Instructing Bondholders (as such persons are identified to
the Company by the Petitioner from time to time) shall also be at liberty
to solicit potential buyers and be actively involved in the sale of the CC
Business and shall for this purpose have access to due diligence
materials and reports produced by the Administrator, Auditors and
Investment Bankers and to also attend all meetings with the
Administrator, the Investment Banks and the law firm and also to put
forth their views. If any other documents/records are required by the
KPPNair -48- CP 28 of 2012
Petitioners, Instructing Bondholders, the Petitioner shall be at liberty to
apply to this Court and obtain necessary directions;
(vi) The CC Business shall be sold as a going concern to the highest bidder ;
(vii) The costs for the sale of the CC Business including all costs for
appointing Advisors shall be borne by the Company;
(viii) In the event of the amount received from the sale of the CC Business
being insufficient to satisfy the claim in the Company Petition, the
Administrator shall be entitled to sell the other immovable properties
and fixed assets of the Company situated at various locations in
Mumbai and U.S., as disclosed in the Affidavit dated 10 th May, 2012
including (a) land and buildings situate at 30 MIDC Road, Andheri
(West), Mumbai-400 093; (b) an Industrial Gala at SEEPZ, Andheri,
Mumbai; (c ) furnitures and fixtures; (d) factory and office equipments;
(e) electrical fittings; and (f) computers (hardware and software) by
public auction after a valuation being carried out by an independent
valuer who will fix the reserve bid, with the sale being carried out under
the supervision of Administrator. In this context, the Administrator
shall be entitled to seek assistance of the same independent law firm
appointed to sell the CC Business, to assist him on any legal issues
arising out of the sale of or related to or associated with the sale;
(ix) The entire process of sale shall be completed on or before 16 th April,
2014;
KPPNair -49- CP 28 of 2012
(x) It shall be the responsibility of the Promoters and Directors of the
Company to obtain the necessary approvals, consents and permissions
as may be necessary to effectuate the sale of the CC Business and the
immovable properties and fixed assets of the Company and to keep the
Administrator informed about the status and progress of the same;
(xi) The Company, its Promoters and Directors shall co-operate with the
Petitioner, the Instructing Bondholders (as such persons are identified
to the Company by the Petitioner from time to time) and the
Administrator to effectuate sale of the CC Business and the Company's
immovable properties and fixed assets in a timely manner during the
period set out herein;
(xii) The Petitioners and the Instructing Bondholders along with their Counsel
shall be permitted to attend, participate and put forth their views in the
meetings with the Administrator in respect of the sale of the CC
Business and the immovable properties and fixed assets of the
Company;
(xiii) In the event of the sale proceeds from the CC Business and the sale of
other immovable properties and fixed assets being insufficient to fully
satisfy the claim raised in the Company Petition, then the order winding
up the Company shall forthwith become operative without any further
orders and the Official Liquidator shall forthwith take charge of the
affairs of the Company;
KPPNair -50- CP 28 of 2012
(xiv) The gross proceeds from the sale of the CC Business and the immovable
properties and fixed assets shall be deposited with the Prothonotary and
Senior Master of this Court, who shall on receipt of the same, forthwith
invest the same from time to time in fixed deposit(s) of a nationalized
bank, initially for a period of two months and thereafter renew the same
as directed by this Court;
(xv) In the event of the sale proceeds received from the sale of the CC
Business and/or the sale of the immovable properties and fixed assets
being sufficient to fully satisfy the claim raised in the Company Petition
by the Petitioner, the Administrator shall through publication in local
newspapers viz. Free Press Journal (in English) and Nav Shakti (in
Marathi) invite claims from the creditors of the Company;
(xvi) In the event of the Administrator receiving claims which along with the
claim of the Petitioner exceeds the amount received by way of sale
consideration of the sale of the CC Business and the sale of the
immovable properties and fixed assets of the Company, then the present
order of winding up of the Company shall forthwith be made operative
without any further orders and the Official Liquidator shall forthwith
take charge of the affairs of the Company. However, if the Petitioner's
present claim along with the other claims received can be satisfied from
the sale proceeds of the CC Business and the sale proceeds of the
immovable properties and fixed assets of the Company, the same shall
KPPNair -51- CP 28 of 2012
be disbursed to the Petitioner as well as other creditors to the extent of
their claim, and the order of winding up of the Company shall stand set
aside and the surplus if any shall be handed over to the Company.
50. The above winding up Petition along with Company Application No.
66 of 2012 and Company Application (L) No. 544 of 2013 is accordingly
disposed of. However the Parties shall be at liberty to move this Court for
necessary directions if required, for compliance/implementation of this order.
ig (S.J. KATHAWALLA, J.)
