@JUDGMENTTAG-ORDER
S.J. Kathawalla, J.@mdashBy this Company Petition, the Petitioner seeks winding up of Zenith 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 facts leading to the filing of the present Petition are as under:
2. 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 equipments and machinery including computers, data loggers, process controllers, geophysical and communication instruments, ultrasonic and microwave devices, etc.
3. The Petitioner has stated in the Petition 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).
4. 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 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.
5. The Company also entered into a Trust Deed dated 20th September, 2006, in relation to the 2011 Bonds and a separate Trust Deed dated 17th 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".
6. The maturity date for repayment under the 2011 Bonds was 21st September, 2011. Prior to that, the Company on 27th December, 2010, issued a notice to hold an Extraordinary General Meeting 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, 2008 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:
(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.
.... ...... ......
7. Pursuant to the Resolution passed at the EOGM held on 29th January, 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. 21st 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 in relation 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 10th October, 2011, the Petitioner also addressed a letter to the Company notifying that the 2011 Bonds were 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.
8. On 13th October, 2011, the Company made an announcement on the BSE 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 MSD Business.
9. 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 MSD Business will be utilised for repayment, the Company had defaulted on the Bonds. The Company filed an 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").
10. 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 a 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 26th 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.
11. 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 payable as of 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 5th 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.
12. 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.
13. 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 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 23rd December, 2011, this Court passed an order 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 exercise and Grant Thornton issued a report (G.T. Report) wherein the CC Business was valued at INR 198 to 239 crores.
14. The Petitioner filed an Appeal before the Division Bench of this Court challenging the order dated 14th 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 3rd 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 14th 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 3rd July, 2012, valuation report. Pursuant to the directions of the Hon''ble Division Bench, the ad-interim application of the Petitioner was heard afresh by this Court wherein certain undertakings given by the Company including the following were accepted viz. 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 10th 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.
15. 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 8th March, 2013, before the Securities Appellate Tribunal ("SAT") challenging the order dated 25th March, 2013, passed by SEBI. On 17th 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, which was fixed for 26th 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 23rd July, 2013, a 400 page reference was filed by the Company with the BIFR. On 25th 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, 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.
16. Mr. Janak Dwarkadas, the Learned Senior Advocate appearing for the Petitioner, has submitted that the Company, as stated hereinabove, has repeatedly admitted in its Explanatory Statement to the notice dated 27th December, 2010, in its announcement before the BSE and in its affidavit before the City Civil Court at Mumbai, the dues payable to the Petitioner by the Company and has also repeatedly assured the Shareholders/Petitioner/bondholders, the BSE and the Court that the consideration received from the sale of the MSD Business will be utilised for making payment of FCCBs. However, the Company, as set out hereinafter, siphoned of the consideration received in lieu of the sale of the MSD Business and did not pay a single paisa to the Petitioner in terms of the Trust Deeds executed in relation to the 2011 and the 2012 Bonds. Mr. Dwarkadas therefore submitted that right from day one the Company and its Promoters had no intention to comply with the terms of the Trust Deed and repay the amounts due and payable by the Company to the Petitioner towards repayment of FCCBs. The Promoters/Directors of the Company have therefore left no stone unturned in ensuring that the Petitioner does not receive a single paisa towards repayment of the FCCBs.
17. Mr. Dwarkadas submitted that the conduct of the Company in filing the Special Reference before the BIFR is not bona fide. He submitted that the Reference has been filed by the Company under the first proviso to Section 15(1) of the SICA which is solely based on the "opinion" of the Board. He submitted that it is this opinion which the Petitioner calls into question before this Court submitting that this Court has jurisdiction to go into the legality, proprietary and bona fides of the same. Mr. Dwarkadas submitted that the jurisdictional fact which would constitute the statutory, mandatory, condition precedent i.e. the sine qua non for the valid legal and intra vires exercise of power by the Board of Directors of the Company is that "the Board of Directors had sufficient reasons... to form the opinion..... ". The opinion must be formed honestly and in a bona fide manner, in the best interests of the Company and its shareholders as a whole. Naturally such an opinion if motivated by self-interest, or fraudulent interest or on other extraneous grounds, would stand vitiated. If this jurisdictional fact is found wanting and/or is absent for any reason whatsoever including the previous conduct of the Company and its Directors, then the very formation of opinion is bad and the consequent filing of the reference would be ultra vires the first proviso to Section 15(1), illegal and void. It would be non-est. In support of the above submissions, Mr. Dwarkadas relied on the decisions in (i)
18. Mr. De''vetre, the Learned Senior Advocate, appearing for the Company, submitted that the appointment of the Petitioner as Trustee is terminated and therefore the Petitioner is not empowered to initiate the winding up proceedings. He submitted that the Petitioner is not entitled to accelerate the 2012 Bonds. Relying upon clause 11 of the Offering Circular, he 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. Mr. De''vetre has further submitted that the Company has disputed the fact that the Company is commercially insolvent. Mr. De''vetre further submitted that since the Company has filed a Reference before the BIFR and since the BIFR is an expert body which will look into the merits of the case and pass appropriate orders, this Court should defer the hearing as regards admission of the Company Petition and the appointment of Official Liquidator. Relying on the decisions of the Hon''ble Supreme Court in the case of
19. I have considered the submissions advanced on behalf of the Petitioner as well as the Company. The Company offered US $ 33 million 3.0 % convertible bonds 2011 due for repayment or redemption in August 2011, and on 14th August 2007 it also offered US $ 50 million 3.0 % convertible bonds 2012 due for repayment or redemption in August 2012. The Petitioner is the Trustee holding the aforesaid bonds in trust for the bondholders, who subscribed to the said bonds. The Petitioner has repeatedly admitted that payment under the said bonds has become due to the bondholders. As set out in paragraph 7 hereinabove in the Explanatory Statement dated 27th December, 2010 issued u/s 173(2) of the Act, annexed to the notice dated 27th December, 2010, calling for the EOGM of the Company on 29th January, 2011, the Company inter alia represented to its shareholders that they need to sell and/or lease 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 come for repayment/redemption in August, 2011 and August, 2012. The Company once again admitted its liability towards repayment of FCCBs by making an announcement on the BSE dated 13th October, 2011, inter alia, stating that the Company has defaulted on its US $ 33 million FCCBs which were due on 21st September, 2011 and is in negotiation with the bondholders to extend the time of repayment. The Company also stated that it has 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. The Company again admitted its liability for repayment of FCCBs by stating on oath in its affidavit dated 17th October, 2011, filed before the City Civil Court, inter alia, stating that the sale proceeds received by Defendant No. 1 will be applied towards buy back/redemption of FCCBs. In the order passed by the Division Bench of this Court dated 9th July, 2012, the Hon''ble Division Bench has recorded that "there is no dispute of the fact that when maturity date of the repayment/redemption of the 2011 Bonds came in August/September, Defendant No. 1 did not make payment". The amount due by the Company on the date of filing of the Company Petition towards payment of FCCBs due on 2011 and 2012 was US $ 89 million (approximately INR 483 crores) which as of date has increased to Rs. 586 crores. The Company sold its MSD Business for US $ 54,712,461, but did not pay a single paisa to the Petitioner/bondholders towards repayment of FCCBs. The Company has no defence to the claim of the Petitioner in regard to the said amounts due and payable by the Company to the Petitioner.
20. The submission that the termination of the appointment of the Petitioner as Trustee is baseless and untenable since under clause 16.2 of the Trust Deed, the termination can only be by way of an extraordinary resolution by three fourths of the bondholders, and no such resolution has been passed by the bondholders. The Company is a party to the Trust Deed and is aware of the terms and conditions and is further aware that the Trustees act on behalf of and for the benefit of the bondholders. In fact, Clause 11.25 provides that the Trustee shall act in the best interest of the bondholders. Therefore there is no provision which entitles the Company to terminate the Trusteeship. The Company has also contended that the termination of the trustee is subject to English law. As submitted by the Petitioner, no proof of English Law is provided by the Company, despite the burden being squarely upon the Company. In fact, in a decision of the Learned Single Judge of this Court (Coram: S.J. Vazifdar, J.) in
21. The Company relying upon clause 11 of the Offering Circular has sought to contend that RBI approval is not obtained by the Instructing bondholders or the Petitioner and as such the Acceleration Notice is illegal and non-est and cannot be acted upon. As explained by the Petitioner, this is completely contradictory to the said clause itself which sets out in no uncertain terms that "the Issuer (Company) would require prior approval of the RBI". The permission is not required as a condition precedent to the Acceleration Notice as is now sought to be alleged. In fact, the Company asked the RBI vide its letter dated 9th December, 2011 to clarify on this and the RBI by its letter dated 25th January, 2012 clarified that the approval is required for making payment to the bondholders before the redemption date. Thus the requirement is on the Company to seek RBI approval prior to payment and not on the Petitioner to issue acceleration notice. In any event, the 2012 Bonds matured and became payable on 22nd August, 2012, which the Company failed to pay and is therefore in default.
22. The Company has also submitted that pursuant to the orders passed by the Single Judge dated 9th October, 2012, as set out in paragraph 19 above, the Petitioner is adequately protected. As submitted on behalf of the Petitioner, the object and purpose of a suit is very different from the object and purpose of a winding up petition. Whereas a suit is filed to obtain a money decree capable of being executed against a Company, the object of winding up is to wind down a Company which is unable to pay its debts or deemed unable to pay its debts. It is a remedy for protection of creditors in general. The fact that the Civil Court in a money suit has recorded the undertaking of the defendant that it shall not dispose off its assets except by leave of the Court is meant only to ensure that as and when a decree is passed in a suit, there are sufficient assets available to execute the said decree to realize the fruits of the decree. A winding up Court is not concerned with such an undertaking particularly when it is an undisputed position that the assets belonging to the Company are insufficient to meet the debt of the Petitioning Creditor and the undertaking given by the Company not to dispose of such assets cannot be said to be a security to the reasonable satisfaction of the Petitioning creditor.
23. In the present case, the Company has also alleged that it is commercially solvent. The Hon''ble Supreme Court has in the case of IBA Health (India) Pvt. Ltd. (supra) inter alia held that 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 u/s 434(1)(a), meaning thereby that 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. I am therefore satisfied that the amount as claimed by the Petitioner in the Petition is due and payable by the Company to the Petitioner. However, the Company despite receiving the statutory notice has failed and neglected to make the payment as called upon by the Petitioner. The defence raised by the Company is totally moonshine and completely lacks merits. I am therefore satisfied beyond any doubt that the Company is unable to pay its debts. The Company Petition is therefore admitted and made returnable on 16th September, 2013. The Petitioner is directed to advertise the Petition in two local newspapers, viz. ''Free Press Journal'' (in English), ''Nav-Shakti'' (in Marathi) and Maharashtra Government Gazette. The Petitioner shall also deposit an amount of Rs. 10,000/- with the Prothonotary and Senior Master of this Court towards publication charges, within a period of two weeks from the date of this order, with intimation to the Company Registrar, failing which the Petition shall stand dismissed for non-prosecution. However at the request of the Company, the Petitioner is directed not to advertise the admission of this Petition on or before 27th August, 2013.
24. The next issue which needs to be determined is whether the Petitioner has made out a case for appointment of a Provisional Liquidator of the Company. The Promoters of the Company have 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 27th December, 2010 called its EOGM on 29th 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 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 on the part of the Promoters/Directors of the Company shows that they 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 others 1971 Vol. 41 CC 377 confirmed the observations of Justice Bhagwati in
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 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.
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 not making any payment from the consideration received therefrom towards the FCCBs, for which the mandate of the shareholders was obtained.
25. On 13th October, 2011, the Promoters/Directors of the Company made an announcement on the BSE that they have received the entire consideration from the sale of the MSD Business except 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.
26. Emboldened by the repeated dishonest representations made to its shareholders by way of the explanatory statement dated 27th December, 2010, and an announcement on the BSE dated 13th October, 2011, the Promoters/Directors of the Company proceeded to make a false statement on oath, by filing an affidavit dated 17th 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.
27. The Promoters/Directors of the Company, as stated hereinabove, received an amount of US $ 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 disclosed to the shareholders that some part of 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 is 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 23rd September, 2011 (USA APA) sets 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 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.
28. It is therefore clear from the above 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 MSD business outside the jurisdiction of this Court.
29. Despite as stated aforesaid, the Promoters/Directors of the Company 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 the Promoters/Directors of the Company 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)
(i) On 12th October, 2011, the Company purports to have made a payment to SCB of US $ 4.3 million (INR 21.0 crores). The Company has not provided any confirmation from SCB that SCB has in fact received this payment. The Company has also not provided any clarification as to why the sale proceeds from the MSD Business were utilised for these payments.
(ii) On 14th October, 2011, the Company purports to have made another payment to SCB of US $ 2.9 million (INR 14.2 crores). The Company has not provided any confirmation from SCB that SCB has in fact received this payment. The Company has also not provided any clarification as to why the sale proceeds from the MSD Business were utilised for these payments or for the payment of a subsidiary''s obligation to SCB especially when as per the explanatory statement, the sale proceeds were to be utilised to redeem the FCCBs.
(iii) On 14th October,2011, the Company placed a Fixed Deposit with SCB of US $ 5.4 million (INR 26.4 crores). The Company purportedly claims that the fixed deposit has been placed with SCB for the balance payment of SCB. However no documentation has been provided as to how SCB is entitled to this money. The Company has also not provided any clarification as to why the sale proceeds from the MSD Business were utilised for these payments or for the payment of an obligation of the subsidiary companies dues, to SCB.
(B) Purported investments/payments in/to related parties aggregating to US $ 15.3 million (INR Rs. 74.2 crores approx.)
(i) On 12th October, 2011, the Company invested an amount of US $ 8.7 million (INR 42.8 crores) in VU Telepresence FZC, UAE. As of 30th September, 2011, VU is a related party and is owned by the Saraf family. It is alleged by the Petitioner that Ms. Devita Saraf (daughter of Raj Saraf) is the Managing Director of VU Telepresence FZC, UAE. This Company carries on a totally different business of selling TVs. While the Company in its disclosure affidavit dated 23rd January, 2012, stated that purported investments had been made in VU, the Company has not provided any evidence as to the nature of the purported investment, whether as equity or debt and has not given any reason as to why such investments were made from the sale proceeds of the MSD Business, especially given the fact that the Company had obtained permission from shareholders to specifically repay the FCCB holders and had defaulted on such payment. Also the Company has not ascribed any valuation to this investment and has not stated the networth of VU or what ownership the Company acquired.
(ii) On 12th October, 2011, the Company invested US $ 5.1 million (INR 24.7 crores) in Zenith Cloud Computing FZC, UAE. As of 30th September, 2011, Zenith Cloud was a related party and owned by the Saraf family and owed INR 30 lakhs to the Company. While the Company in its disclosure affidavit dated 23rd January, 2012, stated that purported investments had been made in Zenith Cloud, the Company has not provided any evidence as to the nature of the purported investment i.e. whether as equity or debt and has not given any reason as to why such investments were made from the sale proceeds of the MSD Business especially given the fact that the Company had obtained permission from shareholders to specifically repay the FCCB holders and had defaulted on such payment. Also the Company has not ascribed any valuation to this investment and has not sated the networth of Zenith Cloud or what ownership the Company acquired.
(iii) On 24th November, 2011, the Company claims that it made a payment to Amplidata of an amount of US$ 1.5 million (INR 7.6 crores). As per the affidavit dated 23rd January, 2012, filed by the Company it appears that the Company purportedly made a substantial payment to Amplidata. However it did not disclose that it had also made an investment of a sum of Rs. 1.24 crore in Datacentec. Datacentec is owned by the same promoters as Amplidata where the Saraf''s are listed as "Key Personnel". Therefore these transactions were related party transactions which were not disclosed to this Court. The Company has not disclosed this investment in Datacentec in the affidavit filed for the purpose of complying with the order dated 23rd December, 2011. Further there has been no disclosure about the fact that this is related party and why such investments were made despite the fact that the Company had failed to repay the FCCB holders especially after having sold the MSD Business and utilizing the sale proceeds other than for paying under the FCCB as per the Company''s affidavit dated 23rd January, 2012.
(C) Other payments aggregating to US $ 23 million (INR 115 crores).
(i) The Company has stated that in October, 2011, it made payment towards advance tax for an aggregate sum of US $ 5.8 million (approximately INR 29.0 crores). Although in its affidavit dated 23rd January, 2012, the Company has stated that payment has been made on account of extraordinary income from sale of MSD Business, from the tax challan annexed at Exhibit "F-1" to "F-25" to the affidavit, it appears to be a payment made on account of advance tax arising on account of income from all sources not just the sale of the MSD Business.
(ii) The Company has stated that in October, 2011, it has made payment towards other business creditors for an aggregate sum of US $ 6.0 million (INR 30.0 crores). While the Company has set out various sundry payments made to other business creditors, it is pertinent to note that given the fact that the Company is conducting business and these are ongoing expenses incurred in the normal course of business, there is no explanation accorded as to why the sale proceeds of the MSD Business were utilised to make these payments especially when as per the explanatory statement the sale proceeds were to be utilised to redeem the FCCBs. Furthermore there are numerous questionable entries where proof of payment has not been supported by invoices and even the letters provided in certain cases are undated or unsigned thereby questioning the veracity of such documents/payments. One such instance is the payment of US $ 1 million (INR 5 crores) to DSSR which is an entity which has no website, and no mention is made of what services were provided.
(iii) The Company has stated that in October, 2011, it made payment towards capital goods purchased for an aggregate amount of US $ 3 million (INR 15.0 crores). While the Company has set out payments made on account of purchase of capital goods, it is pertinent to note that given the fact that the Company is conducting business and these are ongoing expenses incurred in the normal course of business, there is no explanation accorded as to why the sale proceeds of the MSD Business were utilised to make these payments especially when as per the explanatory statement the sale proceeds were to be utilised to redeem the FCCBs. Furthermore out of this payment, US $1.85 million (INR 9 crores) is paid to a company called Trigem Enterprises. No invoices are provided, nor the nature of services rendered by Trigem Enterprises are set out.
(iv) The Company has stated that in October, 2011, monies were earmarked for future tax payments for an aggregate sum of US $ 4.2 million (INR 21.0 crores). Given that the Company had accounted for tax arising on account of the sale of the MSD Business to be INR 29 crores, which has purportedly been paid and also part of the proceeds were to be paid to FZE which is in a tax neutral jurisdiction, it is unclear why the sale proceeds were earmarked for future tax liabilities. Given that the payment is to be made on account of income arising from the business of the Company, there is no explanation accorded as to why the sale proceeds of the MSD Business are being set aside for such payments especially when as per the explanatory statement the sale proceeds were to be utilised to redeem the FCCBs.
(v) The Company has further stated in October, 2011, that it has reserved monies for future salary payment for an aggregate sum of US$ 4.0 million (INR 20.0 crores). As per the last audited published annual report for the period ending 30th September, 2011, the Company made an operating profit (before exceptional items and after payment of salaries) of Rs. 23 crores, therefore there is no explanation as to why the sale proceeds of the MSD Business are being set aside for salary payment.
30. 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 19th 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 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. 586 crores being due and payable to them till date. If at all the networth of the Company has been eroded, there is no doubt that the same is the creation of the Promoters/Directors of the Company who have siphoned away the moneys from the Company with the sole intention of avoiding repayment of the amounts due under the FCCBs. The order passed by this Court on 9th October, 2012 cannot be said to have secured the claim of the Petitioner since as set out in the said order that was the best that could have been done by the Court whilst passing an order under the provisions of Order 38 Rule 5 of the Code of Civil Procedure, 1908. Under the circumstances the Promoters/Directors of the Company cannot be trusted with the affairs of the Company and if the Provisional Liquidator is not appointed, the Promoters/Directors of the Company who are only interested in personal gains and not in the interest of any of its shareholders, creditors, or workers will within no time bring the company to a standstill by siphoning/milking its balance assets by showing losses in its business and even bringing its 800 workmen on the streets. However, since Mr. De''vetre has submitted that the Company is engaged in sensitive business viz. the CC Business and the office of the Liquidator High Court, Bombay may not be equipped to deal with the complex handling of such business, I appoint Shri Salil Shah, Advocate, as the Administrator of the Company. The Administrator shall take symbolic possession of the property, effects, actionable claims, books of accounts, statutory records and other documents of the Company. The Administrator may also retain copies of books of accounts, statutory records and other records as he may deem fit. The Directors of the Company shall provide all information sought by the Administrator pertaining to the working/affairs of the Company and shall forward the agenda of all Board Meetings/General Meetings at least 72 hours in advance to the Administrator and shall not take up any matter at any meeting which is not mentioned in the agenda. In case of emergency the Directors may hold a Board Meeting at short notice with the permission of the Administrator. However, the Administrator shall ensure that the day to day functioning of the Company is not hampered in any manner whatsoever. The remuneration of the Administrator is fixed at Rs. 1,00,000/- per month.
31. As stated earlier, Mr. Dwarkadas, the Learned Senior Advocate appearing for the Petitioner, has contended that the BIFR Reference made by the Company is not bona fide. He submitted that the jurisdictional fact which would constitute the statutory mandatory condition precedent i.e. the sine qua non for the valid legal and intra vires exercise of powers by the Board of Directors of the Company is that "the Board of Directors had sufficient reasons... to form the opinion..... ". The opinion must be framed honestly and in a bona fide manner in the best interests of the Company and its shareholders as a whole. He submitted that if this jurisdictional fact is found wanting and/or is absent for any reason whatsoever including the previous conduct of the Company and its Directors, then the very formation of opinion is bad and the consequent filing of the reference would be ultra vires the first proviso to Section 15(1), illegal and void and would be non-est and the Company should not be permitted to proceed with the Reference. Mr. Dwarkadas has in support of his submissions relied on several decisions set out in paragraph 18 above.
32. As held by the Hon''ble Division Bench of the Delhi High Court in the case of B.I.L. Industries Ltd. (supra) the principal object of the SICA is to rehabilitate genuinely sick companies where due to factors beyond their control, the Companies have become sick, and that this Act is really not meant to help those companies where the company has become sick due to dishonesty, siphoning off of funds and misappropriation of funds by its promoters and management. 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 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 BIFR also falls within the realm of inquiry by the BIFR u/s 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.
