Zenith Infotech Limited Vs The Bank of New York Mellon and Others

Bombay High Court 23 Apr 2014 Appeal (Lodg) No. 14 of 2014 in Company Petition No. 28 of 2012 and Company Application No. 66 of 2012 and Company Application (L) No. 544 of 2013 (2014) 04 BOM CK 0271
Bench: Division Bench
Acts Referenced

Judgement Snapshot

Case Number

Appeal (Lodg) No. 14 of 2014 in Company Petition No. 28 of 2012 and Company Application No. 66 of 2012 and Company Application (L) No. 544 of 2013

Hon'ble Bench

S.J. Vazifdar, J; B.P. Colabawalla, J

Advocates

I.M. Chagla, A.Y. Bookwala, Senior Counsels, Naval Agarwal, S.V. Doijode, Z.T. Andhyarujina, P.A. Kabadi and Mrinalini Rajpal i/b Doijode and Associates, Advocates for the Appellant; Janak Dwarkadas, N.H. Seervai, Senior Counsels and Rahul Narichania i/b AZB, Advocates for the Respondent

Acts Referred
  • Advocates Act, 1961 - Section 35
  • Civil Procedure Code, 1908 (CPC) - Order 38 Rule 5
  • Companies Act, 1956 - Section 173, 433, 434
  • Companies Act, 2013 - Section 2(76)
  • Evidence Act, 1872 - Section 3

Judgement Text

Translate:

S.J. Vazifdar, J.@mdashThis is an appeal against the order of the learned company Judge winding up the appellant and appointing the Official Liquidator as the Liquidator of the appellant. The learned Judge stayed the winding up order to facilitate the sale of a particular business of the appellant as a going concern so as to ensure that the employees of the company associated with that business do not lose their employment or any benefits related thereto and also the sale of the properties and assets of the appellant, if so required. The learned Judge also continued the order passed while admitting the petition by which an Administrator was appointed for the purpose of the sale of the said business and, if necessary, also the properties and assets of the company. The terms of the appointment and the scope of his duties continued as per the admission order. The learned Judge also passed directions for the sale of the said business.

2(A) This appeal raises for our consideration, two aspects. Firstly, whether the appellant company ought to be wound up and secondly, whether the adverse remarks passed by the learned single Judge against the appellant, it''s promoters and directors, ought to be expunged. We have answered both the questions in the negative, against the appellant.

The first question admits of no difficulty and does not even warrant a very detailed discussion. The second question admits of no difficulty but has required a detailed discussion, not because there is any substance in the appellant''s case, but because of the several unsustainable and, we are constrained to say, dishonest defences.

(B) The case in a nutshell is this.

The respondent subscribed to two series of bonds-2011 and 2012 bonds. Not a rupee has been repaid. There is admittedly an amount of over US$ 102 million (about Rs. 600.00 crores) payable by the appellant to the respondent.

Shortly before the 2011 bonds matured for payment, the appellant repeatedly and expressly represented to its shareholders, the respondent, the bondholders, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) that it intended selling its division so as to redeem/repay the bonds.

Two days after the bonds matured for payment, the appellant sold one of its divisions-MSD division for a sum of US$ 55 million. The respondent demanded payment of the 2011 bonds. As the appellant defaulted in making payment, the respondent on 12th October 2011 accelerated the demand for the payment of the 2012 bonds as well, as it was entitled to.

Thereupon, the appellant once again made representations to the BSE that it had received all monies due from the sale of the MSD division and would utilize the same for partial repayment of the bonds. In an affidavit filed in a suit filed by some of the bondholders in the Bombay City Civil Court, the appellant expressly stated on affidavit that the sale proceeds received by it would be applied towards buy-back/redemption of the bonds.

Contrary to the said representations and in violation of the statements to the Court the appellant admittedly did not pay a cent out of the US$ 55 million to the respondent. Instead, within 24 hours of the respondent''s notice of demand, the appellant diverted about US$ 44 million mainly to the members of its group.

(C) The appellant justifies its conduct on the ground that it had offered payment in respect of the 2011 bonds subject to the respondent withdrawing the acceleration of the 2012 bonds, but that the respondent refused the offer. We have demonstrated that the story of the offer is, ex-facie, false. This story was developed for the first time in an affidavit filed only after the petition was admitted and severe strictures were passed by the learned Judge and the Appeal Court. It was not disclosed at any stage in the correspondence even after the notice of demand was made. Nor was it disclosed in the over 18 affidavits filed prior thereto.

In any event, even assuming it was made, it was a conditional offer which the respondent were not bound to accept. The appellant was, therefore, in any event, not entitled to commit a breach of its representations that the sale proceeds would be utilized to repay/redeem the bonds.

(D) Only upon being compelled by the orders of this Court in a suit filed by the bondholders, the appellant disclosed the agreement under which the MSD division was sold and the manner in which the sale proceeds were utilized. The appellant thereupon came up with a case that it did not own the MSD division by itself. It had only a share therein along with its wholly owned subsidiary Zenith Infotech FZE Dubai. Accordingly, the purchaser paid about 50% of the purchase price each to the appellant and to Zenith Dubai.

We have confirmed the findings of the learned Judge that the alleged share of Zenith Dubai in the MSD division was an afterthought. In any event, the aforesaid representations were to the effect that the entire sale proceeds would be utilized to repay/redeem the bonds. It would, therefore, make no difference even if Zenith Dubai had an interest in the MSD division.

(E) Within twenty-four hours of receiving the notice of acceleration i.e. the demand for payment in respect of the 2011 and 2012 bonds, Zenith Dubai had diverted almost its entire share of US$ 27 million to downstream subsidiaries and other group concerns. The appellant itself, apart from paying US$ 6 million towards tax dues, which probably cannot be faulted and allegedly retaining amounts towards future tax dues and salaries, utilized the amounts for payment to various alleged business creditors and for the purchase of capital goods. Accordingly, the appellant ensured that within 24 hours of receiving the notice of demand an amount of about US$ 40 million out of US$ 47 million received (US$ 6 million are still in escrow) had been diverted to various group entities and other vendors and creditors.

(F) There is an absolute refusal by the appellant to bring back any money from any of the subsidiaries or group companies. The assets of the appellant are wholly inadequate to meet even the liabilities of the respondent. There is nothing that even remotely suggests that the company can be revived to function as a viable commercial unit. The substratum of the company has gone with no hope for revival. The order for winding up, therefore, is inevitable.

(G) Mr. Chagla, the learned senior counsel appearing on behalf of the appellant, apart from trying to establish the main case regarding the alleged offer, made various other submissions such as that there were no pleadings regarding siphoning; that the adverse remarks were made against parties who had not been impleaded; that the appellant had made a "without prejudice" offer to sell the remaining business in a fair manner.

THE BONDS:

3(A). By an "Offering Circular" of 15th September, 2006, the appellant offered US$ 33 million unsecured foreign currency convertible bonds at 100% of the principal amount (hereinafter referred to as the "2011 bonds"). 20th September, 2006, was the issue date. 21st September, 2011, was the maturity date. The bonds were to bear interest at 3% per annum payable semi annually in arrears on the 6th month and 12th month of each year, the first interest beginning on 20th March, 2007. The bonds, unless previously converted, redeemed or cancelled, were to be redeemed at 131.721% of the principal amount on the maturity date. The bonds were to be issued under the trust deed between the appellant and the Bank of New York, London branch. On 26th September, 2006, the appellant entered into a trust deed with the respondent in respect of the 2011 bonds. Clause 2.2 of the trust deed reads as under :

"2.2 Covenant to pay

The Company will, on one Business Day prior to any date when the Bonds or any of them become due to be redeemed in accordance with the Conditions, unconditionally pay or procure to be paid to or to the order of the Trustee in London in US Dollars in immediately available funds the principal amount of the Bonds becoming due for redemption or repayment on that date (to be received by 10:00 a.m., London time) together with any applicable premium and will (subject to the Conditions) until such payment (both before or after any judgment or order of a court of competent jurisdiction) unconditionally so pay or procure to pay to or to the order of the Trustee interest in U.S. Dollars on the principal amount of the Bonds outstanding as set out in the Conditions provided that.............................. The Trustee will hold the benefit of the Covenants in this Clause 2.2 on trust for itself and the Bondholders."

(B). In terms identical in all material particulars, the appellant also by an Offering Circular dated 14th August, 2007, offered US $50 million unsecured foreign currency convertible bonds at 100% of the principal amount (hereinafter referred to as the "2012 bonds"). 16th August, 2007, was the issue date. 17th August, 2012, was the maturity date. The bonds were to bear interest at 3% per annum payable semi annually in arrears on 16th February and 16th August in each year, after the issue date beginning 16th February, 2008. The bonds, unless previously converted, redeemed or cancelled, were to be redeemed at 128.704% of the principal amount on the maturity date. The bonds were to be issued under the trust deed between the appellant and the Bank of New York, London Branch. On 17th August, 2007, the appellant entered into a trust deed with the respondents in respect of the 2012 bonds. Clause 2.2. thereof was identical to clause 2.2 of the trust deed dated 20th September, 2006.

APPELLANTS REPRESENTATION THAT IT PROPOSES SELLING ITS ASSETS TO REDEEM/REPAY THE BONDS :

4. By a notice dated 27th December, 2010, the appellant convened an extra ordinary general meeting (EOGM) on 29th January, 2011 to consider and, if thought fit, to pass a resolution according the consent of the company to its Board of directors, inter-alia, to sell its business divisions upto an amount not exceeding Rs. 1,500 crore. The explanatory statement pursuant to section 173 of the Companies Act annexed to the notice reads as follows :

"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:

(i) 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/repay the outstanding Foreign Currency Convertible Bonds which would come for repayment/redemption in August, 2011 and August, 2012.

The Board commends all the above resolutions to the Shareholders. None of the Directors is concerned or interested in the resolutions at item nos. 1 and 2 except to be extent of the shares held by them in the Company."

[emphasis supplied]

5. On 27th December, 2010, the company made the following announcement on the website of the Bombay Stock Exchange :

"Zenith Infotech Ltd. has informed BSE that the Board of Directors of the Company at its meeting held on December 27, 2010 have resolved to raise the funds for re-payment/redemption of Foreign Currency Convertible Bonds due in August 2011 and August'' 2012 and for this purpose the Company is calling an Extraordinary General Meeting for obtaining Shareholders'' approval for borrowing monies upto Rs. 1,500 Crores."

6. By its corporate announcement dated January 6, 2011, the appellant informed BSE that the EOGM of the members of the appellant will be held on 29th January, 2011. In the explanatory statement attached to the said announcement the appellate stated as follows :-

"to sell and/or lease the business and/or division including subsidiary (wholly/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 capital as Foreign Currency Convertible Bonds which would come for repayment/redemption in August 2011/August 2012."

[emphasis supplied]

7. At the meeting of the Board of directors held on 29th January, 2011, a resolution in terms of the resolution proposed in the notice dated 27th December, 2010, convening the meeting was passed. The resolution must be read with and in the context of the explanatory statement to the notice dated 27th December, 2010, which we quoted earlier.

BONDS MATURE-APPELLANT RECEIVES US$ 55 MILLION FOR SALE OF ITS ASSET

8. These four misrepresentations were before the 2011 bonds matured on 21st September, 2011. The appellant defaulted in the repayment on the maturity date.

9(A) On 23rd September, 2011, the appellant and its wholly owned subsidiary Zenith Infotech FZE, Dubai, entered into an Asset Purchase Agreement (APA) for the sale of the remote monitoring and management business (MSD division) to Zenith RMM LLC for a sum of about US$ 55 million. We will refer to this agreement in greater detail later.

(B) The appellant states that on 27th September, 2011, an amount of about US $54.70 million was paid under the Asset Purchase Agreement. According to the appellant, under this agreement, a sum of US$ 27 million was received by its subsidiary Zenith Infotech (FZE) Dubai (hereinafter referred to as Zenith, Dubai). Whether this amount was illegally diverted to Zenith Dubai or not is one of the disputes in this matter. This agreement, which was not entered into with the respondents consent, is seriously disputed. A major part of the controversy centres around this agreement.

10. The day before i.e. on 26th September, 2011, the company made the following announcement on the website of the Bombay Stock Exchange and the National Stock Exchange regarding the sale of its remote monitoring and management business (MSD division) :

"Zenith Infotech Ltd. has informed BSE that the Company have spun off one Division of its Business known as MSD Division to M/s. Zenith Monitoring Services Pvt. Ltd. Mumbai which will be a Subsidiary of Zenith RMM LLC, by way of an Asset Purchase Agreement. However, Zenith Infotech Ltd. is going to be a major shareholder."

RESPONDENTS NOTICES OF DEMAND :

11. This brings us to the notice of default and a notice of cross default issued by the respondents to the appellant on account of the appellant''s default in the repayment of the 2011 bonds on 21st September, 2011. It would be useful to see the provisions of the Offering Circular under which these notices were issued. The Offering Circular specified that the references to the terms and conditions or any conditions are to the terms and conditions or any conditions contained therein set out in the part of the Offering Circular titled "Terms and Conditions of the Bonds". Clauses 11(A) and (D) of the "Terms and Conditions of the Bonds" read as under :

"11. EVENTS OF DEFAULT

If any of the following events (each on "Event of Default") occurs the Trustee at its discretion may (but shall not be obliged to) and if so requested in writing by the holders of at least 25% in principal amount of the Bonds then outstanding, shall (subject always to the Trustee having been indemnified or provided with security to its satisfaction) give notice to the Company that the Bonds are, and they shall immediately become, due and payable.

(A) Non-payment: The Company fails to pay the principal, premium (if any) or interest (if any) of any of the Bonds when due; or

............

(D) Cross Default:

(1) any other present or future indebtedness for borrowed money of the Company or any of its Subsidiaries of at least US$1,000,000 in aggregate amount outstanding (or its equivalent at the relevant time in any other currency) becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of an Event of Default; or

(2) any such indebtedness for borrowed money is not paid when due, as the case maybe, within any applicable grace period originally provided for; or

(3) the Company or any of its Subsidiaries fails to pay when due (or within any applicable grace period originally provided for) any amount in excess of US$1,000,000 in aggregate payable by it under any present or future guarantee or indemnity in respect of indebtedness for borrowed money (or its equivalent at the relevant time in any other currency); or

..............."

12(A) On 27th September, 2011, the respondent issued a notice of default to the company. The respondents directed the appellant to make all subsequent payments in respect of the bonds to it as a trustee.

(B) On 30th September, 2011, the respondents addressed a notice of cross default under condition 11(D) set out above.

(C) By a letter dated 10th October, 2011, the respondents reiterated the above facts and demanded payment of all amounts due under the bonds.

(D) The respondents addressed a notice dated 12th October, 2011, of acceleration of the 2012 bonds addressed to the appellant reiterating the above facts and notifying the appellant that the 2012 bonds were immediately due and payable at their "Early Redemption Amount" and demanded payment of all amounts due under the bonds.

APPELLANT''S REPRESENTATIONS TO BSE & STATEMENT TO COURT THAT IT RECOVERED THE SALE PROCEEDS & WILL UTILIZE THE SAME TO REPAY/REDEEM THE BONDS :

13. A news-item appeared on a leading web-portal titled "Zenith Infotech Defaults on US $ 33 mm. FCCB payment, Stock Slips." With reference to this news-item, on 13th October, 2011, the appellant clarified to the Bombay Stock Exchange as follows :

"1) The Company has defaulted on its US$33 mn FCCB which was due on 21st September 2011 and is in negotiations 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 utilise for partial repayment of FCCBs."

[emphasis supplied]

14. On 14th October, 2011, some shareholders, who were probably also holders of the bonds, filed a suit against the appellant in the Bombay City Civil Court contending, inter-alia, that the appellant had, contrary to its representations contained in the explanatory statement annexed to the notice dated 29th December, 2010, convening the EOGM on 29th January, 2011, defaulted in the repayment of the said bonds. An affidavit-in-reply dated 24th October, 2011, was filed on behalf of the appellant wherein it was, inter-alia, stated as follows :

"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."

[emphasis supplied]

THE RESPONDENTS SUIT FILED IN THIS COURT :

15(A). On 22nd October, 2011, the respondent filed Suit (Lodg.) No. 3019 of 2011 in this Court in which it took out a Notice of Motion for interim reliefs, including for the attachment of the appellant''s assets. By an ad-interim order dated 26th October, 2011, the learned single Judge passed the following order :

"...........................

The Defendant Nos. 1 to 6 are directed to disclose on oath, the details of the sale/purchase/transfer of the Remote Monitoring and Management Business including the valuation in relation to such sale/purchase/transfer, the amount of proceeds paid or other amounts or any other consideration paid in relation to such sale/purchase/transfer and terms and conditions of such sale/purchase/transfer including any amounts or other consideration paid to Defendant No. 1, Defendant no. 5 and Defendant No. 6 or its promoters, and the capitalisation and ownership of Defendant No. 2."

The appellant herein was defendant No. 1 to the suit.

(B). The appellant and other defendants challenged this order by filing Appeal (Lodg) No. 742 of 2011. The appeal was disposed of by an order dated 14th November, 2011. The appellant appears to have contended that the order did not record reasons. The petitioner herein contended that it was at the request of the defendants that the learned Judge did not record reasons. The Division Bench directed the appellant to go back to the learned Judge to consider the rival contentions.

(C). The learned Judge disposed of the matter by an order dated 25th November, 2011.

An affidavit dated 4th November, 2011, pursuant to the order dated 26th October, 2011, of defendant Nos. 2, 3 and 4 was taken on record and a copy thereof was handed over to the plaintiffs advocate. The plaintiffs stated that they as well as about six bondholders would not disclose the contents of the affidavit to any other person and would produce it, if required to do so, before any court of law or any statutory authority. The statements were accepted by the learned Judge. The learned Judge noted that defendant Nos. 1, 5 and 6 also agreed to comply with the order dated 26th October, 2011, by filing an affidavit, but subject to the protection granted to defendant Nos. 2, 3 and 4 in respect of their affidavit. The learned Judge ordered accordingly. The order was clarified by an order dated 29th November, 2011.

16(A) Upon the sale of the MSD business by the Asset Purchase Agreement, the appellant was left only with the Cloud Computing Division Business. The respondents, therefore, filed Notice of Motion No. 3520 of 2011 to restrain the appellant from selling the business of the Cloud Computing Division.

(B) There followed a series of orders passed by the learned single Judge, the appeal Court and the Supreme Court regarding the appointment of valuers and the valuation reports submitted by them. These orders are now not relevant. Suffice it to note that at the end of a reasonably lengthy exercise it appears that the Cloud Computing Division Business is worth no more than about Rs. 195 crores to Rs. 211 crores.

17. By an order dated 23rd December, 2011, in Notice of Motion No. 3520 of 2011 and Notice of Motion No. 3527 of 2011 in the suit filed in this Court, the learned single Judge directed the appellant to place on affidavit, particulars of payments made to various parties from the sale consideration of the MSD business pursuant to the asset purchase agreement.

By an order dated 9th October, 2012, in the said Notice of Motion, a learned single Judge passed various interim orders, accepted the undertakings of the defendants therein not to dispose of, sell, transfer, alienate or create any third party rights or interest in respect of the Cloud Computing Division Business and to maintain status quo in respect of their fixed assets and certain investments and in respect of the money held in a joint escrow account.

THE STATUTORY NOTICE, FILING OF THE PETITION AND THE ORDER ADMITTING IT :

18(A) In the meantime, the respondents served upon the appellant, a statutory notice dated 4th November, 2011, under sections 433 and 434 of the Companies Act, 1956, calling upon the appellant to pay a sum of US $36,141,167.66 and US$ 53,95,333.33 under the 2011 and 2012 bonds.

(B) The appellant, in its replies dated 5th November, 2011 and 18th November, 2011, did not dispute its liability. The appellant, however, contended that the respondent was negligent and guilty of willful misconduct and called upon the respondent to inform the appellant as to how it was protecting the interest of the bondholders and discharging its fiduciary duties. It is not surprising that Mr. Chagla, the learned senior counsel appearing on behalf of the appellant, did not press before us these and other unsustainable contentions raised in the notices.

19(A) The above company petition was admitted by an order and judgment dated 30th July, 2013. Some of the findings and observations of the learned Judge are as follows.

The appellant had admitted that it had defaulted in repaying the bonds and its liability in the sum of about US$ 89 million (equivalent to about Rs. 586 crores). The appellant had sold the MSD business for US$ 54,712,461 but despite its representations had not paid a single paisa to the respondent/bonds holders in respect of the said bonds. The respondent''s application for the appointment of a provisional liquidator was liable to be upheld on several grounds. The appellant''s promoters/directors had dishonestly made false representations to the shareholders and that the announcements made by it on the website of the BSE were without any intention of making payment. The claim that Zenith Dubai held a critical part of the MSD business was an after-thought. The SAAZ software that was developed by the appellant was the backbone of the delivery from the network operations of the centre with Mumbai indicating that the same was owned only by the appellant. The primary seller of the MSD business under the APA was the appellant; that no material asset was owned by Zenith, Dubai and that there was no basis for paying about 50% of the sale consideration to Zenith, Dubai. It was held that the appellant had used Zenith, Dubai as a vehicle to siphon away the sale proceeds of the MSD business outside the jurisdiction of this Court.

The learned Judge also dealt with the manner in which the amount coming to the appellant under the APA was disbursed viz. US$ 12.6 million. The learned Judge passed strictures about the conduct of the company with respect to its applications under the Sick Industrial Companies Act and before SEBI.

(B) On 19th August, 2013 and 23rd August, 2013, the appellant filed Appeal (Lodg.) No. 344 of 2013 and two employees of the company filed Appeal (Lodg.) No. 347 of 2013 against the order and judgment dated 30th July, 2013. The Division Bench, after referring to the above facts and especially the representations made by the appellant to the shareholders, BSE and the NSE held that the above facts and the statement on affidavit to the City Civil Court showed a complete absence of bona fides on the part of the appellant. Paragraphs 11 and 12 of the judgment read as follows :

"11. The Learned Single Judge has considered the facts and circumstances which have been adverted to in the earlier part of this judgment and has arrived at the following conclusion:

"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 net worth 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."

12. The Respondent applied before the Learned Single Judge for the appointment of a provisional liquidator. The Learned Single Judge has held, and in our view with justification, that if a Provisional Liquidator is not appointed, the promoters/directors of the Company who have been motivated by personal gain and not by the interests of the shareholders, creditors or workers may bring the business of the Company to a stand still by siphoning of its balance assets. This apprehension cannot be regarded as unfounded having regard to the course of events noted in the earlier part of the present judgment. However, it was urged on behalf of the Appellant before the Learned Single Judge that since the Company is engaged in a sensitive business, of Cloud Computing, the office of the Liquidator may not be equipped to deal with the complex handling of such a business. The Learned Single Judge hence directed that an administrator should be appointed. The Learned Single Judge has provided adequate safeguards by directing that the administrator will ensure that the day to day functioning of the Company is not hampered. The appointment of the administrator has been made, in these circumstances, with a view to safeguard the interests of the shareholders, creditors and the workers. Mr. R.A. Dada, Learned Senior Counsel for workers submitted that forty per cent of the turnover is paid towards the salaries of the employees and many of the employees were engaged in both software and hardware business. As the Learned Single Judge noted, having regard to the track record of the promoters/directors, it was necessary in the interests of employees themselves that an administrator should be appointed in the absence of which, in all likelihood, the business and assets would be wasted and the business would be brought to a standstill. The Learned Company Judge has acted within jurisdiction in issuing this direction."

(C) On 24th September, 2013, the appellant filed a petition for special leave to appeal to the Supreme Court against the order and judgment dated 2nd September, 2013. The same was, however, by an order of the Supreme Court dated 30th September, 2013, dismissed as withdrawn.

(D) The admission of the petition was ultimately advertised on 2nd October, 2013, in two news-papers and in the 10th October 2013 edition of the Maharashtra Government Gazette.

(E) By the impugned order dated 13th December, 2013, the company was ordered to be wound up. The learned Judge also passed detailed directions regarding the sale of the Cloud Computing Division Business. The operative part of the order reads as under :

"49. In view thereof, the Company, Zenith Infotech Limited, is directed to be wound up. The Official Liquidator, High Court, Bombay, is appointed as 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 16th 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 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 cooperate 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 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 10th May, 2012 including (a) land and buildings situate at 30 MIDC Road, Andheri (West), Mumbai 400093; (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 16th April, 2014;

(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 cooperate 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;

(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 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.

SEBI''S ORDER :

20. The Integrated Market Surveillance System of The Securities & Exchange Board of India (SEBI) generated an alert on the sudden change in the price of the scrip of the appellant. SEBI also received several complaints against the appellant, inter-alia, in regard to the facts stated by us.

(A) SEBI passed a detailed interim order dated 25th March, 2013, in which it analysed the entire transaction relating to the 2011 and 2012 bonds, the sale of the MSD business under the APA and the manner in which the consideration was received and dealt with. Some of the prima facie observations in the order are as follows. The appellant and its promoters/directors wantonly defaulted in the redemption of bonds, disregarded shareholders resolutions, adopted fraudulent devices to defraud the shareholders, misled the shareholders and the bondholders, made false and misleading statements. The acts, omissions and concealment by the appellant and its promoters/directors were fraudulent as defined in section 2(11)(c) of SEBI (Prohibition of Fraudulent & Unfair Trade Practices relating to Securities Market) Regulations, 2003. The consideration received from the sale of the MSD division was not used for purposes authorised by the shareholders but were taken away for the benefits of the promoters/directors and/or entities owned and/or controlled by them in blatant disregard of the approvals. The conduct of the appellant and its promoters/directors was fraudulent and deceitful and attracted the prohibitions contained in the SEBI Act.

The promoters and the entities controlled by them were restrained from accessing the securities market and from buying, selling or dealing in securities directly or indirectly till further orders. The Board of directors of the appellant was directed to furnish within thirty days, a bank guarantee of a minimum tenure of one year for US$ 33.93 million.

(B) The appellant filed an appeal before the Securities Appellate Tribunal (SAT). On 17th June, 2013, the appellant made a settlement proposal before the SAT in respect of the said bonds.

By an order dated 23rd July, 2013, SAT set aside the order passed by SEBI on 25th March, 2013, and remanded the matter to SEBI for fresh hearing on the ground that the appellant had not been heard and that there was a violation of the principles of natural justice.

(C) On 26th July, 2013, SEBI filed an appeal to the Supreme Court, challenging the order of SAT. By an order dated 27th August, 2013, the Supreme Court stayed the operation of the order of the SAT. On 5th September, 2013, the promoters/directors of the appellant applied to the Supreme Court for a modification of the order. By an order dated 10th September, 2013, the Supreme Court held that it was not inclined to entertain the application for modification of the order dated 27th August, 2013, and dismissed the application. The Supreme Court observed that it intended hearing the appeal shortly and extended the time period for furnishing the bank guarantee by 40 days. The appeal was listed on 24th September, 2013. The extended period expired on 31st October, 2013.

(D) We are informed that the guarantee has not been furnished to date.

ADMITTED FACTS :

21. The consideration of the rival contentions is prefaced with the following admitted facts :

(i) An amount of over US $101 is due and payable by the appellant to the respondents.

(ii) The appellant expressly represented to its shareholders, the bondholders/respondents, the Bombay Stock Exchange, the National Stock Exchange and to the Bombay City Civil Court that it proposed selling the MSD division to raise funds to repay/redeem the 2011 and 2012 bonds.

(iii) The MSD business was sold purportedly on the terms and conditions contained in the Asset Purchase Agreement.

(iv) An amount of about US $55 million was received under the APA (According to the appellant it received only 50% of this amount and its wholly owned subsidiary Zenith Dubai received the balance 50%. This is seriously disputed by the respondents. It, however, makes no difference. Although it was not admitted before us, we will demonstrate that the appellant''s case is that it had represented that the entire sale proceeds from the sale of the MSD business was to be paid to the respondents.)

(v) Not a rupee from the proceeds of the sale of the MSD business was paid to the respondent/bondholders.

SUBMISSIONS ON BEHALF OF THE APPELLANTS :

22. Mr. Chagla raised the following contentions :-

The Instructing Bondholders refused the appellant''s offer to accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds. The appellant and Zenith Dubai were, therefore, justified in utilizing the sale proceeds of the MSD business for other legitimate purposes. As the respondent had not filed a rejoinder to this affidavit, the above averment must be deemed to have been admitted.

The findings of the learned Judge that the appellant, its promoters and directors had siphoned the proceeds from the sale of the MSD business ought not to have been rendered for five reasons. Firstly, the findings are incorrect. Secondly, the sale proceeds were utilized for legitimate purposes and could not, therefore, be held to have been siphoned. Thirdly, there were no pleadings to this effect. There are no allegations in the petition that the appellant had siphoned the amounts or that the utilization of the amounts received under the APA were to defraud the respondent. Fourthly, the adverse findings are also against persons or entities not before the Court. Lastly, the findings were not necessary for the purpose of deciding the issues.

The orders passed at the stage of admission by the learned single Judge or by the appeal court are not binding and are irrelevant at the final hearing of the petition for winding up. The court ought not to have exercised its jurisdiction by winding up the company in view of a "without prejudice" offer made by the appellant.

A company is not bound to be wound up merely because it is insolvent.

The appellant ought not to have been wound up as it had made a bona fide offer for the sale of its remaining assets to pay the respondent.

The manner in which the Cloud Computing business has been directed to be sold by the impugned order is illegal.

23. The appellant''s main contention to resist an order of winding up and any findings of mala fides is best put in it''s own words. In paragraph 32 of the affidavit-in-reply dated 7th November, 2013, the appellant, after referring to the resolution passed at the EOGM held on 29th January, 2011, stated as under :

"........................ I say that the company was entitled to apply the funds received by it upon the sale of MSD Business in a manner which it thinks is most suitable and in the best interest of the company. I say that the Company had the intention of utilizing the sale proceeds of the MSD Business for repayment of the Petitioner''s dues in respect of the 2011 Bonds. However, immediately after the Appellant received the monies from the sale of the MSD Business i.e. on 27th September 2011, the Petitioner illegally accelerated the payment of the 2012 Bonds. Consequently, the demand of the petitioner rose from US$ 35.5 million to US$ 89 million. The Company and its subsidiary viz. Zenith Dubai had received an aggregate sum of US$ 48.7 million from sale of the MSD business. The Company''s offer that the Bondholders accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds was refused by the Instructing Bondholders. The Instructing Bondholders made it clear that it would not accept part payment. In these circumstances, the Company and Zenith Dubai were justified in utilizing the sale proceeds of the MSD Business for its other legitimate purposes."

24. Firstly, this case, even if true, is not a defence to the petition for winding up. It is not a dispute much less a bona fide dispute of the debt. The debt of over US$ 100 million is admitted. Even assuming that the appellant did make an offer to pay the dues in respect of the 2011 bonds, it was conditional upon the respondent withdrawing the acceleration of the 2012 bonds. The respondent was not bound to do so. It was rightly not even contended before us that the respondent was bound to do so. The notice of acceleration was in accordance with the terms and conditions of the issue. It is not even the appellant''s case that it informed the respondent that in view of the respondent''s refusal to withdraw the acceleration it intended using the amount for purposes other than making payment under the 2011 bonds. The diversion of the funds upon the alleged refusal of the respondent to withdraw the acceleration of the 2012 bonds was, therefore, in any event, unjustified.

25. Thus, even assuming that the appellant establishes it''s case that it made an offer to make payment against the 2011 bonds from the proceeds of the sale of the MSD business subject to the respondent withdrawing the acceleration of the 2012 bonds and that the respondent refused the offer, it would make no difference whatsoever to the liability of the appellant which stands established.

26. On the appellant''s own case its resources are insufficient to discharge the liability of over US$100 million in respect of the bonds. We use the opening words "On the petitioner''s case" to indicate that, that is the appellant''s case. The respondent or the Official Liquidator may well be able to succeed in tracing other amounts belonging to the appellant in the hands of third parties, including an amount of US$ 27 million paid by Zenith RMM to Zenith Dubai under the Asset Purchase Agreement. For the purpose of sustaining the order of winding up, it is sufficient to proceed on the basis of the appellant''s case itself regarding its present financial position. The appellant''s only remaining business is the Cloud Computing business which is valued at no more than Rs. 211/- crores. The value of the other assets is not more than Rs. 200 crores. The appellant has not even attempted to demonstrate how it would be able to function as a viable commercial enterprise in view of the extent of its debts. The substratum of the appellant has been eroded.

27. Secondly, we have disbelieved the appellant''s entire case in this regard. We have come to the conclusion that there was no offer as alleged. The appellant has not established it''s case regarding the offer. Apart from its bare word, the appellant has not relied upon anything that even suggests that the offer was made. The respondent has established beyond a shadow of doubt that the appellant''s case regarding the offer is false. The appellant''s case regarding the offer to pay the amounts due in respect of the 2011 bonds is not only false but is demonstrated to be false on the basis of the appellant''s affidavit-in-reply filed after the petition was admitted. The falsity of the case is established by several factors. Even if each of these factors does not by itself establish the falsity of the appellant''s case, taken together they do. Indeed, taken together, these factors establish the falsity of the case beyond any doubt.

28. Before we enumerate these factors, it is important to note that according to the appellant the offer was made only after 12th October, 2011. This is evident from the following sentence in paragraph 32 of the appellant''s reply which was quoted earlier :

"The Company''s offer that the Bondholders accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds was refused by the Instructing Bondholders."

The offer required the withdrawal of the acceleration. The acceleration was by the respondent''s said letter dated 12th October, 2011. Thus, the offer was, according to the appellant, only after 12th October, 2011. We proceed to enumerate the factors.

29. The alleged offer was referred to or pleaded for the first time only in the said affidavit dated 7th November, 2013. This affidavit was filed only after strictures had been passed by the order admitting the petition and the order of the Appeal Court dismissing the appeal against the order. Prior thereto, there was not even a whisper of the alleged offer in even one of the over eighteen affidavits filed over a period of ten months in the above company petition and in the said suits filed in the Bombay City Civil Court and in this Court. The affidavits were filed from about 24th October, 2011, to about 5th August, 2012.

In Suit No. 2865 of 2011, two promoters filed over a dozen affidavits, including affidavits dated 24th October, 2011, 7th November, 2011, 7th November, 2011, 21st November, 2011, 21st November, 2011, 28th November, 2011. 2nd December, 2011, 23rd January, 2012, 2nd February 2012, 10th May, 2012, 8th August, 2012 and 5th August, 2012. There was not a whisper of the alleged offer in any of these affidavits.

Nor was the alleged offer referred to in the pleadings filed in the above petition prior to the said affidavit dated 7th November, 2013. Prior to the said affidavit, the promoters had filed two affidavits dated 20th March, 2012, and affidavits dated 24th April, 2012, 13th July, 2012, 8th August, 2012 and 26th February, 2012 on behalf of the appellant. There was not a whisper of the alleged offer in any of these affidavits either.

30. A factor as important as this would definitely have been referred to in at least one of the affidavits. Indeed, it would have been referred to in the very first affidavit. It is not the appellant''s case that it gave instructions to this effect to it''s solicitors but that the solicitors omitted to mention the same. Indeed, had such instructions been given to the solicitors/advocates, it is inconceivable that they would not have mentioned the same. The alleged offer is not really a mitigating circumstance qua the appellant''s dishonest conduct. It is, however, the only talking point that it has. It is inconceivable that if, in fact, such an offer had been made it would not have been referred to in any of these pleadings.

31. The very admission of a petition for winding up has serious consequences. As a general rule, the consequences of admitting a winding up petition are far more serious than orders of admission of other petitions or appeals. It is not possible that a party such as the appellant would omit to mention such an important aspect prior to the admission of the petition.

32. The number of affidavits in which the alleged offer was not referred to is also important. What is even more important, however, is the stage at which the affidavit dated 7th November, 2013, referring to the alleged offer was filed viz. after the admission of the petition and only after strictures were passed by the learned company Judge in the order and judgment dated 30th July, 2013, admitting the petition and by the Division Bench in the order dated 2nd September, 2013, dismissing the appeal filed against the order.

33(A) That the appellant''s offer could not have been made prior to the notice of acceleration dated 12th October, 2011, is also evident from the fact that the same was not referred to in the correspondence.

There was no reply to the respondent''s said letter dated 27th September, 2011, notifying that an event of default had occurred in respect of the 2011 bonds. There was no response to the respondent''s said letter dated 30th September, 2011, notifying that a cross default had occurred. Nor was there a response to the respondent''s letter dated 10th October, 2011, by which the respondent stated that the 2011 bonds were immediately due and payable.

(B) If the offer had actually been made, the respondent would, without a doubt, have referred to it at some stage in the correspondence. Their failure to do so is contrary to the normal course of conduct especially of parties such as these and in transactions as important as the ones under consideration.

34. Further, as Mr. Seervai rightly pointed out, if the appellant had any intention to pay the amounts in respect of the 2011 bonds and to avoid a cross default, it could have easily done so. It could have paid the amounts upon the receipt of the proceeds of the sale of the MSD business. The proceeds were received on 27th September, 2011. Although an event of default had occurred on 21st September, 2011, in respect of the 2011 bonds, the normal course of conduct would have been for the appellant to inform the respondent that it expected payments under the APA within less than a week and would have requested a grace period. The appellant would thereby have averted the event of a cross-default. Even assuming that the respondent was not bound to accept the same it is inconceivable that the appellant would not even have made an attempt to seek the respondent''s consent to an extension of merely one week to redeem the 2011 bonds. This is wholly inconsistent with the normal course of human conduct.

35. That the alleged offer was not made at any time prior to 12th October, 2011, is conclusively established on the basis of the averment in paragraph 32 of the affidavit dated 7th November, 2013 and in view of the above facts.

36. We will now demonstrate that the offer could not have been made on or after 12th October, 2011 either.

37. Firstly all that we said and the inferences we drew about the over eighteen affidavits filed by the appellant not mentioning the alleged offer would equally apply to the period on or after 12th October, 2011. The affidavits had been filed over a period of ten months from 24th October, 2011 to 5th August, 2012. Had the offer actually been made on or after 12th October, 2011, it is inconceivable that it would not have been referred to in any of the affidavits.

38. In matters such as these, it is inconceivable that an offer, as the one alleged, would have been made only orally. It would have been recorded at least after it was allegedly rejected by the respondent.

39. Mr. Seervai rightly contended that the averment in the affidavit is contrary to what is stated in ground R(i) of the Memorandum of Appeal where it is, inter-alia, stated as follows :

"............ The Appellant Company''s offer that the bondholders accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds was refused by one of the bondholders, which bondholder has allegedly instructed Respondent No. 1 to file the said suit and the Company Petition. The said bondholder made it clear that it would not accept part payment............."

[emphasis supplied]

Thus, whereas in the affidavit dated 7th November, 2013, it is alleged that the instructing bondholders refused to accept the offer, in the Memorandum of Appeal it is alleged that one of the bondholders had refused the offer. This contradiction by itself would not have established the falsity of the appellant''s case. It is, however, a relevant factor when considered along with the other factors. The importance of this contradiction must, in particular, be viewed in the context of a complete failure to furnish any particulars regarding the alleged offer.

40. It is also significant that the case of the alleged offer is vague and devoid, not merely of material particulars, but of any particulars. On an issue as important as this, the appellant has not stated when the offer was made, how it was made and to whom it was made.

Even before us, there was not even an attempt to the identify the bondholder to whom the alleged offer was made. It is not unknown that even at the appellate stage, applications are made to furnish facts that may have remained to be mentioned. It is indeed for the appeal court to decide whether the party ought to be permitted to bring fresh material on record or not. What is significant, however, is that there was not even an attempt made by the appellant to bring such facts on record even after the strong observations of the learned single Judge and the Division Bench and the arguments in this regard before us.

41. The reason for the appellant not attempting to furnish particulars even now regarding the offer is evident. It is virtually impossible for the appellant to establish this case. The case, in view of what we said earlier, is inherently improbable. The appellant''s difficulties are enhanced as this case is belied by it''s own case regarding the dates on which the consideration from the sale of the MSD business was, in turn, disbursed/utilized by the appellant and Zenith Dubai. Even according to the appellant, this offer was made only on or after 12th October, 2011. As we will now demonstrate, by that time, the appellant did not even have the money to comply with the alleged offer. The alleged offer was made only after the monies had been appropriated/utilized for other purposes and diverted to the appellant group concerns.

42. It is necessary to read the averments in paragraph 32 of the affidavit dated 7th November, 2013, again. They make it clear that even according to the appellant, the alleged offer was made only after the respondent gave the notice dated 12th October, 2011, of acceleration of the 2012 bonds. This, as we mentioned, is evident from the averment that the appellant offered that the bondholders accept the dues against the 2011 bonds "and withdraw the acceleration of the 2012 bonds." Thus, the offer was clearly alleged to have been made subsequent to the acceleration of the 2012 bonds by the notice dated 12th October, 2011.

43. It is impossible that the alleged offer had been made on and after 12th October, 2011, either. The facts stated by the appellant itself demonstrate that when the alleged offer was made i.e. on or after 12th October, 2011, the appellant did not have the money to make payment in respect of the 2011 bonds. This is conclusively established by the dates on which the appellant and Zenith Dubai started disbursing/diverting the proceeds received from the sale of the MSD business by the APA. We will, at this stage, for the sake of argument, accept the appellant''s contention that it received only a sum of US$ 21 million and that the balance amount was received by Zenith Dubai. The dispute in this regard will be dealt with later.

44. Before referring to the manner in which the amounts received under the Asset Purchase Agreement were utilized, it is necessary to note the relationship between the appellant and certain other companies.

Zenith Infotech FZE, Dubai (hereinafter referred to as "Zenith Dubai") is a 100% subsidiary of the appellant. Prior to and till 11th/12th October, 2011, Vu Telepresence FZC UAE (hereinafter referred to as "Vu Dubai"), Vu Technology Pvt. Ltd. and Vu Telepresence Inc. USA were shown in the appellant''s annual reports as related parties. On 11th/12th October, 2011, Vu Dubai and Zenith Cloud Computing FZC UAE (hereinafter referred to as "Cloud Dubai") became subsidiaries of Zenith Dubai, Zenith Dubai having been allotted at par 95.58% and 99.20% shares respectively of these companies. Prior to 11th/12th October, 2011, the shares in these subsidiaries of Zenith Dubai were owned and controlled by the promoters and/or members of their group. After 11th/12th October, 2011, they continued to hold shares in these subsidiaries but at a reduced percentage. Zenith Infotech Singapore Pte. Ltd. is a wholly owned subsidiary of the appellant. Vu Technologies Private Limited is an independent company.

45. Under the Asset Purchase Agreement, Zenith RMM, LLC paid (i) Zenith Dubai an amount of US$ 27 million plus 15% equity of Zenith RMM, LLC and (ii) a sum of US$ 21 million to the appellant. A further amount of US$ 6 million to be paid to the appellant is kept in escrow.

(A) The appellant states that it utilized the sale proceeds received by it under the APA as follows :-

(i) On 11th October, 2011, the appellant paid an amount of US$ 6 million as advance income tax.

(ii) US$ 6 million was paid to business creditors and

(iii) US$ 3 million was paid to vendors of capital goods.

(iv) A sum of US$ 4.40 million is earmarked towards estimated further tax liability and a sum of US$ 4.04 million has been allocated as cash in hand/reserve for payment of salaries. The salary bill for the financial year 2010-11 was Rs. 95 cores.

(B) The appellant states that Zenith Dubai utilized the US$ 27 million received by it under the APA as follows :

(i) On 11th October, 2011, US$ 0.73 million was invested in Cloud Dubai and Vu Dubai.

(ii) On 12th October, 2011, US$ 5 million was invested in Cloud Dubai and US$ 8 million was invested in Vu Dubai.

(iii) On 12th October, 2011, US$ 7.2 million was paid to Zenith Infotech Singapore Pte. Ltd., which is a wholly owned subsidiary of the appellant to partly repay the working capital loan taken by Zenith Singapore from the Standard Chartered Bank. It is important to note that in paragraph 4 of an affidavit dated 23rd January, 2012, the appellant stated that oral instructions to do so were given on 29th September, 2011, i.e. much before the alleged oral offer was made. Thus, the process of diverting the funds commenced much before the alleged offer was made.

46. Thus, by 12th October, 2011, the appellant and Zenith Dubai did not have the money-over US$ 33 million to redeem the 2011 bonds. The alleged offer could, therefore, never have been made on or after 12th October, 2011. Mr. Seervai has demonstrated the entire story of the offer to be false.

47. Faced with this, Mr. Chagla submitted that the appellant''s case regarding the offer had not been denied. No rejoinder was filed by the appellant. He contended that the affidavits filed prior to the admission of the petition cannot be looked into. Nor can the pleadings in the suits and the interlocutory proceedings taken out therein be looked at.

48. It is not necessary for us to consider whether at the final hearing of the company petition for winding up the affidavits filed upto the stage of admission can be considered by the Court. Nor is it necessary to consider whether the respondent was entitled to rely upon the pleadings in the two suits and in the interlocutory proceedings taken out therein. This is in view of our finding that a rejoinder on the question of the alleged offer was not necessary as the averments in the petition itself deny the offer alleged to have been made. In the petition, the petitioner set out the facts that we have already adverted to. Paragraphs 23, 24 and 25 of the petition deal with the appellant''s announcement dated 13th October, 2011. Paragraph 25 of the petition reads as under :

"25. The Petitioner submits that the Exchange Announcement contains the following false representation by the Company "the company was and [sic] in negotiations with the bondholders to extend the time for repayment." The Petitioner has learned from the Instructing Bondholders that this representation is a clear misrepresentation to the BSE and the Company''s investors, because the last communication of the Company with the Instructing Bondholders was a completely unproductive meeting on 4th October, 2011, in which the Company''s management presented no concrete plan or proposal in relation to repayment of the defaulted 2011 Bonds and the 2012 Bonds, despite the Instructing Bondholders making numerous attempts to contact the Company''s management after the said meeting and prior to such statement, without any response from the Company post the said meeting. In no way can such conduct of the Company''s Management i.e. its promoters, be considered being "in negotiations" or, as the Company further asserted in an open letter to "customers, vendors and friends" which was published in multiple news articles on 14th October 2011, "actively discussing our debt obligations with our bondholders" when actually the Company to its knowledge, had failed to open any dialogue with the Instructing Bondholders who held more than a majority of each of the 2011 Bonds and the 2012 Bonds."

[emphasis supplied]

It is important to note that the respondent has expressly stated that "The last communication of the company with the instructing bondholders was a completely unproductive meeting on 4th October, 2011." The pleading, therefore, is that there was no meeting after 4th October, 2011. We have already analyzed the pleading in paragraph 32 of the affidavit dated 7th November, 2013, to the effect that the appellant''s case was that the alleged offer was made only after 12th October, 2011. The rival pleadings were, therefore, in place. The respondent''s case was that there was no meeting after 4th October, 2011, between the appellant and the instructing bondholders. The appellant''s case, on the other hand, is that an offer was made by it on or after 12th October, 2011. It remains for the Court to decide which case ought to be accepted. It is not necessary for the respondent to file a rejoinder in view of the categorical stand taken by it in the petition read as a whole and in paragraph 25 thereof in particular. There was no tangible material to establish the appellant''s case. All that the respondent could, therefore, have done was to have filed a formal rejoinder containing mere denials or to have requested the Court to permit it to proceed on the basis of denials. The argument that there were no pleadings is really one of desperation rather than of any substance.

49. Mr. Chagla then submitted that the appellant spent the proceeds from the sale of the MSD business for legitimate purposes such as the payment of tax dues, and payments to the Standard Chartered Bank. It is not suggested that the amounts were not due to the tax department. The appellant, therefore, cannot be said to have siphoned the money. The other adverse remarks were, therefore, unjustified.

50. We will presume that the payment of tax dues despite the representations does not constitute a fraudulent payment as the tax dues, in any event, would have a priority over those of the respondent for the bonds that were unsecured. There is, however, no justification for the payments to non-statutory persons and bodies, including to vendors and banks in view of the representations to the contrary viz. that the proceeds were to be used to redeem the said bonds. By making false representations, the appellant succeeded in lulling the respondent into a state of inaction. Had such a misrepresentation not been made, the respondent may well have considered adopting proceedings to restrain the appellant from disposing off its assets, both movable and immovable and, in any event, to ensure that any disposal of the assets was genuine and in accordance with law. The facts, seen as a whole, lead to an inescapable conclusion that the appellant''s aim was to ensure that the sale of the MSD business is not objected to and the diversion of funds thereafter is complete without any hindrance from the bondholders. This aim was achieved by misrepresenting that the sale was only with a view to paying the bondholders. This was strengthened by the misrepresentation having been made not only to the bondholders and shareholders, but even to the Bombay Stock Exchange and the National Stock Exchange and even to the Bombay City Civil Court. The respondent was justified in relying upon the representation especially as they were also made to such parties and to the Court. The representation to the Court was, of course, much later.

51. That the entire exercise was a preplanned, preconceived strategy to deceive and defraud the respondent is evident from the fact that within fifteen days of the receipt of US$ 48 million under the Asset Purchase Agreement, the appellant and Zenith Dubai "utilized" US$ 44 million without informing any party concerned about the proposed "utilization" of the funds. All this surely could not have been thought of, decided upon and implemented in a few days. Zenith Dubai, for instance, spent over US$ 21 million on 11th and 12th October, 2011. It is no mere coincidence that by 11th October, 2011, the respondent had recalled the amounts due under the 2011 bonds and issued a notice of cross default with respect to the 2012 bonds and that on 12th October, 2011, the respondent issued the notice of acceleration of the 2012 bonds and by 12th October, 2011 about US$ 44 million was "spent", "utilized" and "invested" by the appellant and Zenith Dubai, as alleged.

52. If the appellant''s case regarding the offer and the respondent''s refusal thereof is to be believed, the appellant''s decision to utilize the sale proceeds must have been after the respondent''s refusal of the offer. But the offer, as we have said, was not before 12th October, 2011. Even ignoring the payments made on 11th October, 2011, it is inconceivable that all the policy decisions relating to the "utilization" of US$ 21 million were thought of, decided upon and implemented by Zenith Dubai in the course of the 12th of October, 2011.

53. Mr. Chagla submitted that the learned Judge wrongly held the appellant guilty of siphoning the said amounts. The term "siphon", he submitted indicates the use of funds for one''s own purpose. If that be the meaning of the word it was correctly adopted by the learned Judge at least as far as a major part of the sale proceeds are concerned. Given the facts of this case, it is reasonable to presume that the money was diverted for the benefit of the appellant and/or its promoters and/or directors.

54. Mr. Chagla submitted that the payment to vendors, payment for capital goods, investment in subsidiaries are all payment for legitimate purposes. We will assume they are. A payment for a legitimate purpose is, however, not necessarily legitimate. Payment, even for a legitimate purpose, with somebody else''s money is not legitimate. The "investment" in the subsidiaries was not even a payment for a legitimate purpose.

55. This brings us to the appellant''s case that a part of the software and intellectual property relating to the MSD business belonged to its wholly owned subsidiary Zenith Infotech (FZE) Dubai, being a Free Zone Establishment with limited liability formed in Dubai. The appellant''s case is that under the Asset Purchase Agreement, an amount of US$ 27 million was to be paid to Zenith Dubai and only an amount of US$ 21 million was to be paid to the appellant. Mr. Chagla submitted that Zenith Dubai is a separate legal entity and was and is entitled to deal with its assets as it pleased. It''s share of the proceeds from the sale of the MSD business is of no concern to the respondent/bondholders.

The respondent contends that although the entire MSD business belonged to the appellant, it structured the deal viz. the Asset Purchase Agreement in such a manner as to divert a sum of US$ 27 million to its wholly owned subsidiary Zenith, Dubai so as to put the money out of the reach of this Court. This constituted siphoning. The learned Judge upheld the respondent''s contentions in this regard.

56. This case of the appellant is unsustainable whichever way it is looked at. There are three clear, distinct and independent answers to it.

Firstly, the case that Zenith Dubai had a share in the MSD business is not established.

Secondly, even assuming that Zenith Dubai had a share it would make no difference, as the appellant by its announcements/statements to it''s shareholders, the bondholders, the Bombay Stock Exchange, the National Stock Exchange and the Bombay City Civil Court clearly represented that it was the sole owner of the MSD business and that it was solely entitled to the sale proceeds in respect thereof under the APA. Assuming Zenith Dubai had an interest in the MSD business, the appellant suppressed the same and by its announcements/statements represented to all concerned, especially the bondholders that it was solely entitled to the MSD division to ensure that they took no action to safeguard their rights and thereby obstruct the sale of the MSD business and the appellant''s strategy to divert the funds, inter-alia, to its group concerns and put them out of reach of this Court.

Thirdly, assuming that Zenith Dubai had a share in the MSD business, the appellant by the said announcements and statements on affidavit represented that even the sale proceeds paid to Zenith Dubai would be utilized to repay/redeem the bonds.

We will now deal with these three answers.

57. The record indicates that the MSD business did belong to the appellant and that the deal was structured to diverting an amount of US$ 27 million to Zenith, Dubai. The facts and circumstances of the case certainly indicate that Zenith Dubai did not have any interest in the MSD business. To put the respondent''s case at its lowest, the facts on record do not indicate that the interest of Zenith Dubai in the MSD business entitled it to payment of US$ 27 million i.e. about 50% of the total consideration.

(A). We referred earlier to the various representations made by the appellant before the APA was entered into and even thereafter. Not one of these representations/announcements indicated even remotely that the appellant had only a 50% share in the MSD business and that the balance interest vested in Zenith, Dubai. The asset purchase agreement is dated 23rd September, 2011. It would be useful to reproduce again, the announcement made by the appellant on the BSE and NSE on 26th September, 2011, regarding the sale of the MSD division. It was as under :

"Zenith Infotech Ltd. has informed BSE that the Company have spun off one Division of its Business known as MSD Division to M/s. Zenith Monitoring Services Pvt. Ltd. Mumbai which will be a Subsidiary of Zenith RMM LLC, by way of an Asset Purchase Agreement. However, Zenith Infotech Ltd. is going to be a major shareholder."

The plain language of the announcement indicates that the appellant owned the MSD division-that the MSD division was one of the appellant''s divisions. There is not even a suggestion that the appellant had only a limited interest in the MSD division. There is no explanation why the announcement did not disclose that the appellant allegedly had only a limited interest in the business. No explanation was offered to the learned Judge. Nor was any offered to us. The announcement clearly suggests that it was the appellant alone who owned the MSD division.

(B) This inference becomes stronger on a reading of the appellant''s announcement on the BSE dated 30th October, 2011, set out earlier. It would be useful to set it out again :

"1) The Company has defaulted on its US$33 mn FCCB which was due on 21st September 2011 and is in negotiations 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 utilise for partial repayment of FCCBs."

[emphasis supplied]

The words "we have received all monies due from Zenith RMM, LLC" indicate that it is the appellant alone who owned the MSD division. The announcement does not indicate even remotely that the appellant had only a share in it. Had it been otherwise, the announcement would have indicated that the appellant had received the sale consideration to the extent of its share in the MSD business.

(C) The matter does not even end there. We mentioned earlier that in its affidavit dated 17th October, 2011, filed before the City Civil Court, the appellant 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."

If Zenith Dubai, in fact, had an interest in the MSD business, the appellant would certainly have mentioned the same in the announcements and in the affidavit filed before the City Civil Court. That it did not do so is a strong indication that the APA was a structured deal, at least to the extent that it provided for the payment of US$ 27 million to Zenith Dubai instead of requiring the entire payment to be made to the respondents.

58. The disclosure regarding the alleged interest of Zenith Dubai was made only in an affidavit filed in the suit pursuant to an order of the Court. The learned Judge was justified in coming to the conclusion that the case regarding the interest of Zenith Dubai in the MSD division is an after thought.

59. Let us now assume the appellant''s case that it had only a share in the MSD business and that the balance share therein vested in Zenith Dubai is correct. The appellant''s conduct in not disclosing the same throws it, it''s directors and promoters in an equally bad light. The appellant must be held to have suppressed this fact with the mala fide intention of lulling the respondent into a state of inaction believing that the business would be sold and the sale proceeds would be handed over to it. Had the appellant disclosed that Zenith Dubai had an interest in the business, the respondent could well have taken steps firstly to ascertain whether Zenith Dubai in fact had an interest in the MSD business and, assuming it had, the respondent could have taken steps to ensure that the same is not, in turn, siphoned out by Zenith Dubai which it, in fact, did. The respondents, the bondholders and shareholders could have adopted proceedings to ensure that the amount of US$ 27 million coming to the appellant''s wholly owned subsidiary is safeguarded.

60. Thirdly, in any event, even assuming that Zenith Dubai had an interest in the MSD division, by the announcements to the BSE and the statement in the affidavit dated 17th October, 2011, the appellant clearly represented that the entire proceeds from the sale of the MSD division, including the amount coming to Zenith Dubai, payable under the APA would be utilized for the re-payment/redemption of the bonds. This is the only commercial meaning that can be attributed to the announcements and to the statement in the affidavit. Most important however, is the fact that the appellant has admitted the same on affidavit. This is established by the following facts and circumstances.

(A) The announcements quoted above themselves clearly represented that the entire proceeds from the sale of the MSD division was to be paid to the respondent. For instance, the 30th October, 2011, announcement on the BSE and the affidavit stated that the appellant had received all the monies due from Zenith RMM LLC and that "the sale proceeds received by defendant No. 1 (appellant) will be used towards buy-back/redemption of FCCB (i.e. the bonds)".

(B) The doubt, if any, is set at rest by the appellant''s case regarding the alleged offer to redeem the 2011 bonds conditional upon the respondent revoking the acceleration of the 2012 bonds. US$ 21 million which came to the appellant was not sufficient to redeem the 2011 bonds. The amount under the 2011 bonds was about US$ 36 million. It was not even suggested that the balance amount of US$ 15 million was to be procured/arranged for by the appellant from sources other than the sale proceeds of the MSD business under the asset purchase agreement.

Although Zenith Dubai is a separate legal entity, it was a wholly owned subsidiary of the appellant. The appellant, therefore, could have procured the payment of the proceeds/amounts received by Zenith Dubai for the redemption of the bonds. The intention to do so is clear from the fact that the statement in the affidavit is to the effect that the sale proceeds were to be applied not merely towards the buy-back/redemption of the 2011 bonds, but also of the 2012 bonds. The US$ 21 million attributable to the alleged share of the appellant in respect of the sale of the MSD business under the APA was not sufficient to redeem/buy-back even the 2011 bonds. The only manner in which the 2011 and the 2012 bonds could have been redeemed (the 2012 bonds, albeit only partly), was by applying the entire proceeds received towards the sale of the MSD business.

(C) That the appellant represented that the amounts paid to Zenith Dubai would be used to repay/redeem the bonds is, in fact, admitted on affidavit by the appellant. It would be useful to quote again the averments from paragraph 32 of the affidavit-in-reply dated 7th November, 2013. The appellant''s case regarding the offer made by it having been rejected by the Instructing Bondholders is as follows :

"The Company''s offer that the bondholders accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds was refused by (sic) the Instructing Bondholders. The Instructing Bondholders made it clear that it would not accept part-payment. In these circumstances, the Company and Zenith Dubai were justified in utilizing the sale proceeds of the MSD business for its other legitimate purposes."

[emphasis supplied]

The last sentence quoted above which is the appellant''s justification not merely for itself but even for Zenith Dubai utilizing the sale proceeds of the MSD business for its other legitimate business purposes viz. of the respondent refused the alleged offer. It is clear, therefore, that the appellant''s representations to its shareholders, bondholders, the Bombay Stock Exchange, the National Stock Exchange and the Bombay City Civil Court was that the entire sale proceeds received under the Asset Purchase Agreement would be paid to the bondholders. If it were not so, there would be no reason for the appellant to justify the utilization of the sale proceeds by Zenith Dubai. This destroys Mr. Chagla''s contention that Zenith Dubai being a separate legal entity was entitled to deal with the amount received by it as it pleased.

61. Thus, whichever way the matter is seen, the express representation by the appellant to the respondent was that the entire consideration from the sale of the MSD business was to be utilized for redeeming the bonds.

62. It is no mere accident that the appellant did not keep its word. There were no circumstances that prevented the appellant from keeping its word. There were no supervening commercial circumstances that disabled the appellant from keeping its word. The appellant''s intention right from the beginning was to mislead all the relevant parties, especially the bondholders and to divert the moneys, including by putting the same out of the reach of this Court.

63. The manner in and the haste with which Zenith Dubai disbursed the amount of US$ 27 million received under the APA also indicates an attempt to divert the monies, putting it beyond the control of the Court and making the recovery thereof even more difficult. The appellant, on being compelled to by this Court, disclosed the facts in this regard. One of the promoters filed an affidavit dated 23rd January, 2012, in Notice of Motion No. 3527 of 2011 in Suit No. 2865 of 2011 filed in this Court pursuant to the directions contained in an order dated 23rd December, 2011. The affidavit discloses that the Asset Purchase Agreement was entered into on 23rd September, 2011, and the payment thereunder was made to the appellant and to Zenith Dubai on 23rd September, 2011. On 11th October, 2011, Zenith Dubai paid an amount of US$ 0.73 million to its subsidiaries viz. Cloud Dubai and Vu Dubai. The notice of acceleration was issued by the appellant on 12th October, 2011. On the same day Zenith Dubai diverted an amount of US$ 20.2 million to or for the benefit of its group companies.

64. The respondent, therefore, has made out more than just a strong prima facie case that the APA was a structured deal-structured with an intention to divert an amount of US$ 27.8 million from the appellant to its wholly owned subsidiary Zenith Dubai. Assuming that the amount was legitimately due to Zenith Dubai it would still make no difference. The suppression of that fact was with the intention to lead the respondent into a state of inaction with a view to ensuring that the respondent did not take any action to prevent the appellant from diverting the amounts and putting them out of the reach of the respondent and the Court. It was not merely a coincidence that this diversion took place on the same day.

65. Mr. Chagla then submitted that there was no allegation of siphoning by the company or its directors or promoters. Accordingly, he submitted that the respondent is not entitled to contend that there was any siphoning by the company, its directors or promoters.

66. The submission is not well founded. It is in fact contrary to the appellant''s understanding of the averment in the petition. After referring to the averments in the petition which, according to us, allege siphoning, we will demonstrate that the appellant itself understood them to be allegations of siphoning and more.

67. The petition itself read as a whole, makes it abundantly clear that the respondent had pleaded that the promoters and directors had siphoned the funds of the company and diverted the same willfully and mala fide. It is sufficient to refer to only some of the averments in the petition. They are as follows :

(A)(i) The announcement to the Stock Exchanges contained false representations that the company was in negotiations with the bondholders to extend the time for payment. The company''s management refused to contact the bondholders after the meeting of 4th October, 2011. The company had violated/breached clause 9.27 of the 2006 and 2007 trust deeds. With the benefit of hindsight it appears that at the time of the EOGM held on 29th January, 2011, the company had no real intention to comply with the covenant in the explanatory statement that the monies would be used to repay the said bonds.

(ii) Mr. Chagla submitted that this last averment was merely speculative and was not a positive allegation of fraud or siphoning. That is incorrect. That the respondent drew the inference on the basis of hindsight is irrelevant. Indeed, when the representations were made, the respondent believed the same in good faith. They did not doubt the same. It is only thereafter, and despite the representations, the proceeds from the sale of the MSD business were not utilized to redeem the bonds and in view of the surrounding circumstances, did the respondent realize that the company had no intention to comply with the covenants in the explanatory statement. The case that the company had no intention to comply with the covenant in the explanatory statement is in fact a pleading of a misrepresentation and fraud. The words "had no real intention to comply with the covenant with the explanatory statement" imply that the company even while making the representation had no intention of abiding by the same. In other words, when it made the representation, it did so without any intention of complying with the same.

(B)(i) The further averments in the petition are as follows. The company and its promoters failed to tell the shareholders and bondholders that Zenith Monitoring was incorporated by the promoters of the company and two of the directors of the company conducted the identical business of remote monitoring of data. These promoters and directors also owned 60% of Zenith Monitoring in their personal capacity and 40% of the shares of Zenith Monitoring were held by the company. The appellant and the promoters also failed to disclose to the bondholders and shareholders that substantial assets were transferred from the company to Zenith Dubai and that more than half the sale proceeds from the sale of the MSD business were paid to Zenith Dubai. The appellant and its promoters colluded with Zenith RMM, LLC, Summit and Zenith Monitoring to structure the transactions relating to the MSD business intentionally. The appellant failed to disclose any useful information relating to the sale of the MSD business either to the shareholders or the respondent acting on behalf of the bondholders, including the consideration received or paid by the appellant and its promoters which were supposed to be used for the repayment to the bondholders. A very substantial part of the business of the company was spun off to Zenith Monitoring and sold to Zenith RMM with a substantial portion of the proceeds being delivered to Zenith Dubai although the promoters were fully aware that the company had defaulted in payment. These facts make it very hard to believe that the promoters of the company were not trying to siphon off funds with an intention of personal gain and to remove any monies received out of the reach of its creditors, including the bondholders.

(ii) The respondents, therefore, clearly pleaded that the funds received from the sale of the MSD business had been siphoned off with an intent of personal gain on the part of the promoters. That the phrase "makes it very hard to believe that the promoters of the company were not trying to siphon off funds" is in the negative makes no difference. The allegation is quite clearly one of siphoning.

(C)(i) The further averments in the petition are as follows. The company and other entities viz. Zenith Dubai, Zenith Monitoring and Zenith RMM had structured the transaction "in a veiled attempt to circumvent clause 9.27 of the trust deed and to hinder, delay and defraud bondholders thereby seeking to collect on obligations due and owing while improperly conveying benefit to themselves to ensure that maximum benefits accrue to themselves and with respect to the company and the promoters of the company the proceeds were not paid to the bondholders. The sale of the MSD was not conducted on an arm''s length basis and was made with an intent to "willfully default on its obligation to both the shareholders and its creditors i.e. the bondholders." The sale of the MSD business had been deliberately structured by the company and the promoters to frustrate the legitimate claims of the bondholders. There was lack of transparency especially with respect to Zenith Dubai and the transfer of the assets of the MSD business. These facts strengthen the possibility that payment of consideration for sale of the MSD business had been structured in a manner so as to benefit the promoters of the company and the non-disclosure or intent to siphon off the funds from the company with intent to defraud not only the bondholders but also the shareholders of the company. The conduct of the company and the promoters was dubious. The Court was misled. The conduct cast serious aspersions against the credibility of the company.

(ii) A bare reading of these averments is sufficient to reject Mr. Chagla''s contention that there is no pleading of siphoning, mala fides etc. An analysis of the averments in the petition are unnecessary.

68. The suggestion that this pleading is not one of siphoning is unsustainable. The appellant itself considered the averments to be allegations of siphoning. This is clear from the fact that in paragraph 42 of the affidavit-in-reply, the appellant has denied that there was collusion and has denied that the promoters were trying to or have siphoned off any of the funds. Mr. Chagla''s submission is, therefore, contrary to the appellant''s understanding of the allegations in the petition.

69. The contention that the respondent had not pleaded that the appellant had siphoned the monies, that the appellant had defrauded the respondent and that the appellant acted dishonestly etc. is, therefore, rejected.

70. Mr. Chagla submitted that the learned Judge has rendered findings of far reaching consequences against third parties who were not impleaded. Mr. Chagla submitted that allegations of siphoning and of fraud have been made against the directors and the promoters despite the fact that neither the promoters nor the directors have been impleaded. Mr. Chagla submitted that the adverse observations of the learned Judge are unsustainable as they affect third parties without their having been afforded a hearing or any opportunity to meet the case. Such third parties, according to him, are the directors and promoters of the appellant Zenith RMM, LLC USA, Zenith Dubai and its subsidiaries.

71. It is not necessary in a petition for winding up a company to implead all the directors and promoters. If the company court finds the conduct of the company sought to be wound up to be dishonest, it is open to the company court to say so and pass orders accordingly. To do so, it is not necessary to order all the directors and/or promoters to be impleaded. This has never been the practice. It is wholly unnecessary. There are innumerable petitions for winding up where the conduct of a company is adversely commented upon. A view to the contrary would unnecessarily complicate the procedure in winding up petitions.

72. In a winding up petition, the company court is entitled to record adverse findings against the directors in general or the promoters in general even if they have not been impleaded. If such findings are recorded against a particular director or a particular promoter, then it may be necessary to join such a director or promoter as the case may be. However, if the Court finds the conduct of the company to be mala fide depending on the facts of the case, it is entitled to draw an inference that the mala fides ought to be attributed to the Board of directors or to the promoters, generally without joining all the directors/promoters. It is reasonable to presume that such acts were performed by or at the instance of the Board of directors. When the promoters are also on the Board of directors, the presumption would extend to them as well. The strength of the inference would depend upon various facts and circumstances such as the extent of ownership of the company by the promoters, the extent of their representation on the Board of directors and the extent of their presence at relevant meetings. It would also depend upon the nature and extent of their involvement and participation in the acts concerned. It is then for the Official Liquidator or any other Court, Tribunal or authority to ascertain which of the directors or promoters was responsible for the relevant acts of misfeasance, malfeasance or otherwise. It is at this stage that the particular director/promoter would be heard with reference to specific allegation against them.

73. Absent anything else, it is reasonable for a company Court to presume that the directors were responsible for the acts found to be dishonest and mala fide. The learned Judge has indeed passed strictures against the company and its promoters and directors. There is, however, no particular director or promoter against whom the adverse remarks have been made. The directors and the promoters have been referred to generally. In the course of the winding up, it will be necessary for the Official Liquidator to take suitable action and file proceedings including for misfeasance and malfeasance on the part of the director or the promoter concerned. It is at that stage that the director or promoter concerned would have to be identified and proceeded against. It is not necessary to do so at the hearing of the petition, whether at the admission stage or at the final hearing of the petition.

The adverse remarks, however, do not necessarily apply to every director and/or promoter irrespective of whether the promoter is also a director of the appellant or not. Merely because a promoter is also on the Board of directors, it would make no difference. There may be promoters who had nothing to do with the conduct of the company in question. Equally, there may be directors on the board who were not responsible for the conduct of a company in question. Whether a particular director or promoter was responsible for the conduct of a company in question would indeed depend upon the facts of each case.

74. In the circumstances, we see no reason to expunge the adverse remarks. Nor do we find it necessary to refrain from passing adverse remarks against the appellant, the Board of directors and the promoters of the appellant in general. Which of the directors or promoters was responsible for what has been done will undoubtedly fall for determination in the course of the winding up of the appellant and in other proceedings and inquiries. It would also be the subject matter of the proceedings that the Official Liquidator and the respondent may deem necessary to adopt not merely against the appellant, its directors and promoters but also against any other company, including the appellant''s sister concerns and group companies as well as against Zenith RMM, LLC.

75. Mr. Chagla apprehends that because of the adverse findings, the Official Liquidator would charge/proceed against every promoter and every director. It would then be for the promoter/director concerned to prove his innocence.

76. What the Official Liquidator or any other authority may do cannot be a ground for a court refraining from making adverse remarks against the company and its promoters and directors even in general. Issues such as burden of proof must be decided in any proceedings that may be adopted. Further, a particular promoter or director may have a defence personally. The validity of the defence will then be for the company court or any other court, authority or Tribunal seized of the matter to decide. In appropriate proceedings, the courts, tribunals or authorities will determine which of the promoters or directors were responsible for the conduct complained of.

77. Mr. Chagla then submitted that the observations have far reaching consequences as against Zenith Dubai and Zenith RMM LLC.

78. As far as Zenith Dubai is concerned, the argument is unfounded. Zenith Dubai is a wholly owned subsidiary of the appellant. Statements have, in fact, been made in the affidavit on behalf of Zenith Dubai, including justifying the manner in which Zenith Dubai utilized the amounts received under the APA. The appellant was aware of the conduct, management and dealings of Zenith Dubai throughout including as to its alleged interest in the MSD business and its entitlement to the receipt of about 50% of the consideration under the APA. The appellant has not even contended to the contrary in the affidavits. Nor was it contended before us that the appellant was not in active management of Zenith Dubai and was unaware of its dealings. The appellant has failed to disclose any particulars regarding the manner in which Zenith Dubai acquired the alleged interest in the MSD division despite knowing all the details regarding Zenith Dubai. We are not inclined to expunge the adverse remarks. However, with a view not to leave no cause for grievance and out of abundant caution, we leave it to Zenith Dubai to make any application in this regard if it so desires.

79. As far as the apprehension regarding the adverse remarks affecting Zenith RMM, LLC is concerned, it was clarified by Mr. Seervai that for the purpose of these proceedings, the respondent will not press its contention that Zenith RMM, LLC was part of a conspiracy to defraud the respondent. It would be open to the respondent to press this case in any other proceedings as it has not been given up. It has only not been pressed for the purpose of these proceedings. The observations that the APA was a structured deal will still stand qua the appellant and Zenith Dubai. It is possible that a purchaser would make payment in such manner and to such parties as the vendor directs. It is possible that Zenith RMM, LLC was unaware that Zenith Dubai did not have an interest in the MSD business, but bona fide made the payment of about 50% of the consideration at the instance of the appellant. This again is an issue which will be decided in appropriate proceedings such as in the suit filed by the respondent before this Court and before the appropriate Tribunals and authorities. The apprehension that adverse remarks may affect Zenith RMM, LLC in the United States of America cannot be a ground for expunging the remarks against the appellant. The regulatory authorities in the United States of America would obviously not be bound by adverse remarks made in these proceedings. The regulatory authorities in the United States of America may well investigate the matter independently in the event of an application being made or information being furnished to them by the Official Liquidator or the respondent or by any other party.

80. There is indeed a possibility of the issue arising even in the United States of America or in Dubai as to the genuineness of the entire transaction relating to the APA, the receipt of the money thereunder and the manner in which the same was dealt with. That is a matter for the authorities, courts or Tribunals of those countries to decide. The Official Liquidator ought to make enquiries of and furnish information to the authorities and adopt proceedings in those jurisdictions. Directions for the mode of doing so must be passed by the company court in the first instance.

81. Mr. Chagla relied upon the judgment of the Supreme Court in The State of Uttar Pradesh Vs. Mohammad Naim, , to contend that the High Court has the power to expunge remarks. Mr. Seervai did not contend to the contrary. In any event, while considering an appeal against an order, it is always open to the Court to take a contrary view and while doing so, to expunge any remarks it considers unjustified. We find no reason, however, to expunge the remarks.

82. Mr. Chagla relied upon the judgments of the Supreme Court in The State of Uttar Pradesh Vs. Mohammad Naim, and in State of Maharashtra Vs. Public Concern for Governance Trust and Others, in support of his contention that adverse remarks ought not to be made against parties who are not before the Court.

83. In State of Uttar Pradesh v. Mohd. Naim, the Supreme Court held that in the matter of making disparaging remarks against persons or authorities whose conduct comes into consideration, it is relevant to consider whether the party whose conduct is in question is before the Court or has an opportunity of explaining or defending himself. The impugned judgment in that case made sweeping and general observations against the entire Police force of the State of Uttar Pradesh, although the case related only to one Police officer. Nor were they necessary for the disposal of the case.

The judgment is clearly distinguishable from the case before us. The company i.e. the appellant is before us. The allegations are made against the company. Adverse remarks as against the conduct of the company that has come into consideration can, therefore, certainly be made. As we have demonstrated later in this judgment, it was necessary to consider the conduct of the company for a variety of reasons which we have enumerated. Further, a company acts through it''s Board of directors. It is not even the appellant''s case that the Board of directors was not responsible for the transactions and the dealings of the appellant under consideration. The promoters hold about 65% of the equity shares of the appellant. Some of them are on the Board of directors. In such circumstances, observations against the Board of directors in general and the promoters in general can be made. The important distinction between the judgment of the Supreme Court and the case before us is that adverse remarks have not been made against the entire Board of directors or against all the promoters. One or more of them is certainly responsible for the acts. The adverse remarks by the learned Judge and by us are not against the entire Board of directors or against all the promoters. In fact, we have clearly mentioned that it will be necessary to identify which of the directors or which of the promoters was responsible for the same.

84. Mr. Chagla relied upon paragraphs 29 and 30 of the judgment of the Supreme Court in State of Maharashtra Vs. Public Concern for Governance Trust and Others, , which read as under :-

"29. In the instant case, allegations have been made against the then Chief Minister, however, he was not made party before the Court. Therefore, the allegations made against him are one-sided and do not merit any consideration.

30. We are surprised to find that inspite of catena of decisions of this Court, the High Court did not, give an opportunity to the affected party, the then Chief Minister, before making remarks. It cannot be gainsaid that the nature of remarks made in this judgment will cast a serious aspersion on the Chief Minister affecting his reputation, career etc. Condemnation of the then Chief Minister without affording opportunity of being heard was a complete negation of the basic principles of natural justice."

Here again, the adverse remarks were made against a particular person viz. the then Chief Minister who had not been made a party before the Court. We have not made any observations against a particular director or a particular promoter. The distinction drawn by us in respect of the judgment in State of Uttar Pradesh v. Mohd. Naim, applies equally in the present case.

85. Mr. Chagla then submitted that it was not necessary to pass adverse remarks as the only question before the Court is whether the appellant ought to be wound up or not.

86. We have no hesitation in rejecting this submission. The appellant sought to justify its failure to comply with the representations made by it to the bondholders, shareholders, the Bombay Stock Exchange, the National Stock Exchange and the Bombay City Civil Court. It sought to do so on the basis of the alleged offer. It was necessary, therefore, to consider the case. Had the learned Judge failed to do so, the appellant would have been justified in raising a grievance that it''s case had not been considered. It was also necessary to consider the conduct of the respondent as the appellant sought to resist the order of winding up. One of the important factors for a court to consider such an argument is the bona fides of the persons in the management. This is especially so when the company is admittedly insolvent on the date on which the petition is heard. This aspect becomes even more important when the company refuses to discharge its obligations and fails to come up with any viable scheme for its revival. Further still, the appellant made a strong plea for the mode in which the only existing business ought to be sold. It was necessary, therefore, for the court to consider whether any suggestion by such an appellant ought to be considered. We, in fact, do not see how the learned Judge could have avoided considering the conduct of the appellant in these circumstances.

87. Had the appellant come forward honestly admitting its liability, expressing its regret for having failed to not merely honour its obligations but also its representations and indicated a genuine intention to repay/redeem the bonds, a lenient view could have been pressed for. The appellant has, however, supported its stand, shown no remorse and expressed no regret for its failure to pay over US$ 100 million and not offered to bring back the US$ 44 million diverted by it to Zenith Dubai and others. It is, therefore, not open to the appellant to contend that the observations insofar as they are adverse to the appellant were not necessary for deciding the petition. The attitude of the appellant before the learned company Judge and before us left the learned Judge and leaves us with no option but to consider the conduct of the appellant. The submission that the conduct of the appellant is not relevant is unsustainable.

88. Mr. Chagla submitted that allegations of fraud and cheating have criminal consequences. It is necessary, therefore, for the respondent to establish these allegations beyond reasonable doubt and not merely on a preponderance of probability. He submitted that even in civil cases where the allegations, if established, also entail consequences in criminal law, the level of proof must be beyond reasonable doubt as in criminal proceedings and not on the basis of preponderance of probability as in civil cases.

89. The submission is contrary to the judgment of a Constitution Bench of the Supreme Court in Seth Gulabchand Vs. Seth Kudilal and Others, . The Supreme Court held :

"11. In S. 3 of the Indian Evidence Act, the words "proved", "disproved" and "not proved" are defined as follows :

"Proved.-A fact is said to be proved when, after considering the matters before it, the Court either believes it to exist, or consider its existence so probable that a prudent man ought under the circumstances of the particular case, to act upon the supposition that it exists."

"Disproved.-A fact is said to be disproved when, after considering the matters before it, the Court either believes that it does not exist, or considers its non-existence so probable that, a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it does not exist."

"Not proved.-A fact is said not to be proved when it is neither proved nor disproved."

It is apparent from the above definitions that the Indian Evidence Act applies the same standard of proof in all civil cases. It makes no difference between cases in which charges of a fraudulent or criminal character are made and cases in which such charges are not made. But this is not to say that the Court will not, while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. In our opinion, Woodroffe, J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt.

............

13. Mr. Aggarwala, relying on Raja Singh and Others Vs. Chaichoo Singh, , further urges that in case of circumstantial evidence the circumstances must be such so as to exclude any other reasonable possibility and he says that if this principle is applied to this case the finding of bribery must be reversed as the facts are equally consistent with the plaintiff having acted honestly. Meredith, J. had observed as follows :

"Now it is well settled that where fraud is to be inferred from the circumstances, and is not directly proved, those circumstances must be such as to exclude any other reasonable possibility. In other words, the criterion is similar to that which is applicable to circumstantial evidence in criminal cases."

We are unable to agree with these observations. As we have said before, the fact that the party is alleged to have accepted bribe in a civil case does not convert it into a criminal case, and the ordinary rules applicable to civil cases apply. The learned counsel has not been able to cite any other authority to show that there is any such well-settled proposition as stated by Meredith, J."

The judgment is a complete answer to the submission. On a parity of reasoning, the fact that the appellant is alleged to have committed a fraud upon the respondent or to have siphoned the money or to have cheated the respondent in a civil case viz. the winding up petition, does not convert it into a criminal case. The ordinary rules applicable to civil cases would apply. On the test of balance of probability, Mr. Seervai has succeeded in establishing the allegations.

90. Mr. Chagla relied upon the judgment of a Constitution Bench of the Supreme Court in the case of Mohan Singh Vs. Bhanwarlal and Others, This judgment was indeed prior to the judgment in Gulabchand v. Kudilal. It is impossible, however, to hold that Gulabchand''s case was decided per incuriam because it did not refer to Mohan Singh''s case. It cannot be held that the judgment of the Supreme Court in Gulabchand v. Kudilal was implied per incuriam. We do not say so because three of the learned Judges were parties to the judgments in both the cases. That is not the test. Mohan Singh''s case was entirely different. It was a case under The Representation of Peoples'' Act, 1951. Paragraph 12 of the judgment relied upon by Mr. Chagla reads as under :

"12. Counsel for Mohan Singh challenged the finding of the High Court that Mohan Singh was instrumental in publishing the leaflets annexures ''D'' and ''E''. He urged that in the trial of an election petition approach to the evidence must be as in a criminal trial and no fact may be held proved unless it is established beyond reasonable doubt. The onus of establishing a corrupt practice is undoubtedly on the person who sets it up, and the onus is not discharged on proof of mere preponderance of probability, as in the trial of a civil suit; the corrupt practice must be established beyond reasonable doubt by evidence which is clear and unambiguous. But the testimony of Rameshchandra corroborated by the circumstances set out in detail in the judgments of the Tribunal and the High Court was accepted and the testimony of witnesses for Mohan Singh who claimed that other persons without his consent or connivance were responsible for getting the leaflets printed was disbelieved. The evidence about the distribution of the leaflets to question by the appellant and his agents was also accepted by the Tribunal and the High Court. It was also found that these leaflets were distributed simultaneously. In recording their conclusions the Tribunal and the High Court did not proceed on mere grounds of probability. The findings recorded by the Tribunal and the High Court are therefore concurrent findings of fact founded on appreciation of oral evidence and no ground is made out for departing from the settled practice of the Court against interference with those concurrent findings of fact."

The Supreme Court held that in the trial of an election petition, the approach must be as in a criminal trial and, therefore, allegations of corrupt practices must be proved, not on a mere preponderance of probability, but beyond reasonable doubt. In fact, the Supreme Court held that proof of mere preponderance of probability is sufficient in trial of a civil suit. The Supreme Court held that corrupt practice must be established beyond reasonable doubt in view of its finding that in the trial of an election petition, the approach to the evidence must be "as in a criminal trial". In other words, the Supreme Court considered an election petition to be akin to a criminal trial. Once it is held that a particular proceeding is or is akin to a criminal trial, it would follow that the level of proof required to establish allegations of the criminal acts alleged therein must be beyond reasonable doubt as in the case of a criminal trial. A winding up petition is neither a criminal trial nor akin to one. The judgment therefore, is of no assistance to the appellant.

91. Mr. Chagla then relied upon paragraph 15 of the judgment of the Supreme Court in Ch. Razik Ram Vs. Ch. Jaswant Singh Chouhan and Others, .

"15. Before considering as to whether the charges of corrupt practice were established, it is important to remember the standard of proof required in such cases. It is well settled that a charge of corrupt practice is substantially akin to a criminal charge. The commission of a corrupt practice entails serious, penal consequences. It not only vitiates the election of the candidate concerned but also disqualifies him from taking part in elections for a considerably long time. Thus the trial of an election petition being in the nature of an accusation, bearing the indelible stamp of quasi-criminal action the standard of proof is the same as in a criminal trial. Just as in a criminal case, so is an election petition, the Respondent against whom the charge of corrupt practice is levelled, is presumed to be innocent unless proved guilty. A grave and heavy onus therefore, rests on the accuser to establish each and every ingredient of the peaceable evidence beyond reasonable doubt. It is true that there is no difference between the general rules of evidence in civil and criminal cases, and the definition of "proved" in Section 3 of the Evidence Act does not draw a distinction between civil and criminal cases. Nor does this definition insist on perfect proof because absolute certainly amounting to demonstration is rarely to be had in the affairs of life. Nevertheless, the standard of measuring proof prescribed by the definition, is that of a person of prudence and practical good sense. ''Proof'' means the effect of the evidence adduced in the case. Judged by the standard of prudent man, in the light of the nature of onus cast by law, the probative effect of evidence in civil and criminal proceedings is markedly different. The same evidence which may be sufficient to regard a fact as proved in a civil suit, may be considered insufficient for a conviction in a criminal action. While in the former, a mere preponderance of probability may constitute an adequate basis of decision, in the latter a far higher degree of assurance and judicial certitude is requisite for a conviction. The same is largely true about proof of a charge of corrupt practice, which cannot be established by a mere balance of probabilities and, if, after giving due consideration and effect to the totality of the evidence and circumstances of the case, the mind of the Court is left rocking with reasonable doubt-not being the doubt of a timid, fickle or vacillating mind-as to the veracity of the charge, it must hold the same as not proved."

This judgment was also in a case under The Representation of Peoples'' Act, 1951. Gulabchand''s case is not referred to. In any event, Gulabchand''s case cannot be held to have been over-ruled as this case was decided by a bench of two learned Judges. The case, however, is distinguishable. It was one under The Representation of Peoples'' Act, 1951, and the Supreme Court held that the standard of proof required "in such cases is not a mere preponderance of probability, but beyond reasonable doubt." The Supreme Court noted that the trial of an Election Petition is in the nature of an accusation of a quasi-criminal action. In other words, an election petition itself is a quasi-criminal action or one akin thereto. It is for that reason that the standard of proof in an election petition is the same as in a criminal trial. The Supreme Court noted that in an election petition, the commission of corrupt practice entails not merely civil, but serious penal consequences. A finding of corrupt practice not only vitiates the election of the candidate concerned, but also disqualifies him for taking a part in elections for a considerable long period. The judgment is also distinguishable for the reason and on the basis of what we said in relation to Mohan Singh''s case.

92. Mr. Chagla then relied upon the judgment of a bench of three learned Judges of the Supreme Court in the case of H.V. Panchaksharappa Vs. K.G. Eshwar, . The appellant had filed a complaint alleging professional misconduct against the respondent under section 35 of the Advocates Act, 1961, on the ground that the respondent had filed an application without instructions. The Disciplinary Committee of the State Bar Council dismissed the complaint. The Disciplinary Committee of the Bar Council of India dismissed the appeal. The Supreme Court held :

"6. A charge of professional misconduct is in the nature of a quasi-criminal charge. Such a charge requires to be proved in the manner of proving a criminal charge and the nature of proof required to prove it is that of beyond a reasonable doubt. Both, the State Bar Council as also the Bar Council of India, on the basis of material on the record, found that the charge against the respondent had not been proved. In our opinion, the findings recorded by both, the State Bar Council and the Bar Council of India, are on correct and proper appreciation of evidence available on the record. The findings do not suffer from any infirmity. Even if we were to overlook the assertions made on behalf of the respondent regarding conduct of the appellant as disclosed in the counter affidavit filed by him in this Court on 14-10-1997, to which the appellant has filed no rejoinder, we find that the appellant has miserably failed to establish that the respondent committed any professional misconduct. We are not persuaded to accept the submission made by the learned counsel for the appellant that application and the affidavit filed in Miscellaneous Application No. 105 of 1990 had not been signed and verified by the appellant. The submission is without any basis. The documentary evidence belies the submission. According to the appellant, some conversation had taken place in the office of the respondent when the appellant along with his friend Shri Nagaraja and Shri Jayanna had gone to make enquiries about the Miscellaneous Application No. 105 of 1990 when the respondent admitted filing of the miscellaneous application without instructions using signatures obtained on blank papers,. In the complaint it was stated that the conversation was recorded on a tape and the same will be produced, but none was in fact produced. The withholding of the tape-recorded conversation is a serious lacuna. The Bar Council took a serious note of it and, in our opinion, rightly. Learned counsel for the appellant has failed to point out any infirmity in the impugned order."

The judgment of the Constitution Bench in Gulabchand''s case was not referred to. There is no question of Gulabchand''s case being even impliedly over-ruled as this was a judgment of a Bench of three learned Judges. Further, the Supreme Court held that the charge of professional misconduct is in the nature of a quasi-criminal charge. The observation is in the context of proceedings under the Advocates Act. The complaint, as we noted, was for professional misconduct under section 35 of the Advocates Act. Section 35 deals with punishment of advocates for misconduct. The Disciplinary Committee of a State Bar Council is entitled under sub-section (3) of section 35 to reprimand the advocate, suspend the advocate from practice for such period as it may deem fit or remove the name of the advocate from the State Roll of Advocates. Under sub-section (4), where an advocate is suspended he shall, during the period of suspension, be debarred from practicing in any Court or before any authority or before any person in India. Thus, the proceedings under the Advocates Act themselves lead to the imposition of severe penalties. It is obviously for this reason that it was held that a charge of professional misconduct is in the nature of a quasi-criminal charge. In a winding up petition, the main order is of winding up. That, in the course of winding up, misfeasance and malfeasance summonses may be filed is an entirely different matter. It is possible that in those proceedings the conduct alleged may have to be proved beyond reasonable doubt as those proceedings may well result in penal consequences. That would not lead to the conclusion that even in the proceedings for winding up, the conduct complained of must be proved beyond reasonable doubt.

93. The suggestion that the impugned order was passed in anger is less than fair to the learned Judge. The learned Judge indeed adversely commented upon the conduct of the appellant in the proceedings before the BIFR. That, however, was by no means the basis on which the impugned order was passed. It was certainly not the main basis on which the impugned order was passed. The impugned order was passed in view of the default of the appellant in the repayment of a sum of over US$ 100 million and in view of the conduct of the appellant.

We do not intend making any observations regarding the proceedings before the BIFR. It is not necessary for us to consider Mr. Seervai''s submission that the application before the BIFR under the Sick Industrial Companies Act, 1985, is unsustainable. The authorities under the Act have held that the Reference is not maintainable. That, however, is an issue which must be decided in proceedings relating to the Reference. Suffice it to state at this stage, the Reference is not pending in respect of the appellant under the SICA.

94. One of the contentions raised before us is that we ought not to find ourselves bound by the observations in the judgment of the Division Bench dismissing the appeal against the order of the company Judge admitting the petition. Mr. Chagla submitted that the order and judgment of the learned Judge admitting the petition and of the Division Bench dismissing the appeal against the order are of no relevance at the final hearing of the petition for winding up. According to him, even the learned company Judge was not bound by the said orders. In support of this contention, Mr. Chagla submitted that at the admission stage the Court normally does not go into the question in as much depth as it does at the final hearing. The considerations that weigh with the court at the final hearing, he submitted, are different from those that weigh with the court at the stage of admission. He, therefore, persuaded us to go into the matter in detail without reference to the orders and judgments at the admission stage.

Mr. Seervai, on the other hand, contended that orders at the stage of admission would be binding at the final hearing absent any change in circumstances or additional facts and evidence. In the present case, according to him, there were no additional facts and no change in circumstances. The learned Judge was, according to him, therefore, bound by his own judgment admitting the petition and by the judgment of the Division Bench dismissing the appeal against it. Similarly, he submitted that we are bound by the order and judgment of the Division Bench dismissing the appeal against the order of admission.

95. We do not intend expressing any opinion in this regard. We have considered the matter afresh and independent of these judgments. Our judgment is not based on the observations of the Division Bench. Nor is it based on the observation of the learned single Judge. It is certainly not based on the observations of the order of the SEBI. At the appellant''s instance, we went into the matter in great detail de novo, afresh and have come to the conclusions on our own, independent of the findings recorded in the earlier orders.

Having done so, we, in fact, found the respondent case to be much stronger than what is indicated in the earlier orders. Mr. Seervai has indeed succeeded in making out a much stronger case against the appellant than was made out at the stage of admission.

96. Mr. Chagla submitted that it is not necessary that the company court is bound to wind up the company merely because it is insolvent at a given point of time.

We agree. The company court has the discretion while dealing with a winding up petition to ensure and safeguard the interests of all the parties concerned including the company itself, its shareholders and employees.

97. There are, however, no circumstances which persuade us not to wind up the company in the present case. The debt to the extent of over US$ 100 million is admitted. The company''s assets are wholly inadequate to repay this debt. There is nothing to indicate that the appellant will be able to repay the debt ever. There never was and there is no intention to repay/redeem the bonds. The aim is, in fact, to avoid payment. We repeatedly asked Mr. Chagla whether the appellant would "persuade" its subsidiaries and group companies to bring back the money that was diverted by the appellant to them. He refused. We asked whether the amounts still remained with them or with their other group companies could be brought back. He refused. To our repeated questions as to where the money was presently, he merely stated that the money had been "put to use in business and is presently not available." The appellant has, to put it quite simply, no intention of repaying its debts. We have already referred to the conduct of the company, its directors and promoters. The learned Judge would have been entirely unjustified in exercising his discretion in not winding up the company.

98. Mr. Chagla lastly tendered a draft minutes of order proposed by the appellant "strictly without prejudice". He stated that the same established the appellant''s bona fides as it indicated the desire of the appellant to ensure the sale initially of the Cloud Computing business and in the event of there being a shortfall, the sale of the other assets of the appellant in an open, transparent and fair manner.

99. The offer does not impress us. The Official Liquidator would also have to bring the assets of the appellant to sale in a fair, open and transparent manner. The appellant is always at liberty to apply to the company Judge for any directions to ensure that the sale of the assets are conducted properly. We are not inclined to accept the offer for more than one reason.

(a) The assets of the company are wholly inadequate to meet even the appellant''s liability towards the respondent of over US$ 100 million. There is not even a suggestion as to how the shortfall can be made up. The reports thus far obtained indicate that the Cloud Computing business is worth no more than about Rs. 210 crores to Rs. 220 crores. The remaining assets are worth only about Rs. 200 crores. Interest is mounting on a daily basis. There is no indication of how the shortfall is likely to be made up.

(b) More importantly, there are two crucial conditions imposed by the appellant neither of which can be accepted. Firstly, the appellant wants the order of winding up not to be stayed, but to be set aside. The justification for this is that the Cloud Computing business would not fetch a proper price if the order is merely stayed. There was no indication why the price would be higher if the order is set aside than if the order is only stayed. We have endorsed the course taken by the learned Judge only staying the winding up order to enable the Cloud Computing business to be sold for the benefit of the employees. Secondly, the offer is conditional upon all the adverse remarks and observations made against the promoters/directors of the appellant-company being expunged from the admission order and the order impugned in this appeal. There is no justification for this demand. Once we come to the conclusion that the remarks were justified, there is no question of expunging the same merely because an offer is made for the sale of the properties. The appellant does the respondent no favour by repaying/redeeming the bonds. It is bound to do so. The appellant does not do any one a favour by making the offer. In any event, the assets of the company must be sold in a fair and proper manner and in accordance with law. Any party, including the appellant would be entitled to have the same ensured by making a proper application before the company court.

(c) There is yet another reason why we are not inclined to accept the offer. The same would unnecessarily delay the winding up proceedings. This is a matter where it will be necessary for the Official Liquidator to take steps expeditiously especially for tracing the funds of the company into the hands of third parties. This would include not merely the subsidiaries of the appellant, but also all the other group companies and other parties associated or connected or related to the appellant. The Official Liquidator will also be required to investigate whether the APA ought to be challenged or not and in this regard, it would be necessary for the Official Liquidator to take steps to obtain information including from the authorities in USA, Dubai and Singapore. These are matters in respect whereof the company court would undoubtedly pass necessary directions. By accepting the terms the entire process would be delayed. In view of the conduct of the appellant and its promoters and directors, we see no reason why any opportunity ought to be granted to them to further prejudice the rights and interests not only of the respondent, but also of all other relevant parties.

100. Mr. Chagla submitted that the order for the sale of the Cloud Computing business in the manner stipulated therein is contrary to the provisions of law.

It is not open to the appellant to raise this contention for this part of the order was passed by the learned Judge as a matter of indulgence on the suggestion of the appellant and of the employees of the company. In paragraph 41, the learned Judge noted the submission on behalf of the appellant that the winding up order would affect the employees who would lose their jobs, prejudice the shareholders and result in the company being unable to recover its various outstanding dues. The learned Judge noted that he was satisfied that the employees had been put forward with the oblique motive of protecting the appellant''s interest and that the interest of the employees was a mere pretence. The learned Judge, however, rightly observed that the jobs/employment of the employees should be upper most in the mind of the court at the time of passing an order directing the winding up of a company. That, however, as noted rightly by the learned Judge cannot delay the winding up process especially in view of the facts of this case. It is important to note that the learned Judge appreciated the stand taken on behalf of the respondent, accepting the suggestion made by the learned counsel appearing on behalf of the employees. It is important also to note that the learned Judge appreciated the stand taken on behalf of the respondent accepting the suggestion made by the learned counsel appearing on behalf of the employees that the Court while passing an order of winding up of the company may consider a stay of the said order for a particular period with necessary safeguards and directions to the Administrator already appointed by this Court to dispose of the Cloud Computing business of the company as a going concern within such period.

101. It is clear, therefore, that the order was passed at the behest of the appellant and the employees. It was passed in the interest of the employees. In the circumstances, there is no warrant for setting aside the order. We hasten to add that even if that part of the order were to be set aside, the order of winding up would, in any event, remain.

102. In this view of the matter, it is not even necessary to consider various other facts and aspects relied upon by Mr. Seervai in this regard which were accepted by the learned single Judge.

103. We must, however, mention that merely because the paid up capital of Zenith Dubai was only AED 100,000/- it would not lead to the conclusion that it could not hold assets far in excess of that amount. The value of the assets of a company are not necessarily proportionate to the paid up share capital of a company.

104. Mr. Seervai submitted that the appellant had transferred the MSD business initially to Zenith Monitoring Services Private Limited (Zenith Monitoring) in a related party transaction at a time when Zenith Monitoring was a subsidiary of the appellant. The MSD business was, in turn, transferred by Zenith Monitoring to Zenith RMM, LLC. Zenith RMM, LLC is a company that was formed by Summit Partners LP as a special purpose vehicle for the purchase of the MSD business. Mr. Seervai submitted that the transaction is contrary to clause 9.27 of the 17th August, 2007, trust deed which reads as under :

"9. General Covenants :

So long as any Bond is outstanding, the Company will............

9.7. Subsidiaries not sell, dispose, transfer (except for a transfer by way of security only) or otherwise divest itself of any of its shares in a Subsidiary where such sale, disposal, transfer or divestiture would result in the Company holding less than 50 per cent of the issued share capital of such Subsidiary to any third person other than any Subsidiary and to procure that no Subsidiary shall merge or sell, transfer, dispose or otherwise divest itself of substantially all of its assets, without the consent of the Trustee, acting on the instruction of the Bondholders holding nor less than 75 per cent of the principal amount of the Bonds then outstanding, provided that any of the Subsidiaries may merge with or amalgamate with each other or with the Company and the consent of the Trustee to such mergers or amalgamation shall not be required."

105. Mr. Chagla submitted that it is not open to the respondent to raise this contention as it was not taken before the learned single Judge.

106. We would nevertheless have permitted the respondent to take this point before us as it requires the mere interpretation of a clause. Had we permitted the contention to be raised we would, of course, have granted the appellant an opportunity of meeting the same, including by filing an affidavit. We, however, do not intend permitting the appellant to raise this contention as we, in any event, intend dismissing the appeal. Further, it is always open to the respondent to take appropriate steps to challenge the APA or even the transaction relating to the appellant, Zenith Monitoring and Zenith RMM, LLC.

107. We had kept the matter for pronouncement on 21st April, 2014, The respondents, at that stage, applied to bring further facts on record. The respondent wanted to bring on record an order of the Chairman of the BIFR dated 3rd April, 2014, rejecting the appeal. The appeal was against the order holding the Reference to be not maintainable. The respondent also wanted to bring on record the order dated 11th April, 2014, passed by the SEBI, confirming the ex-parte order dated 25th March, 2013, after a full hearing. Lastly, the respondent wanted to bring on record certain further facts regarding the conduct of the appellant. We did not permit the respondent to bring these facts on record as we have, in any event, decided to dismiss the appeal. The respondent is always at liberty to rely upon these facts in future in any other proceedings, including in the course of winding up.

108. In the circumstances, the appeal is disposed of by the following order :

(i) The appeal is dismissed. However, the winding up order is stayed upto and including 31st August, 2014, in order to facilitate the possible sale of the Cloud Computing business of the appellant as a going concern as directed by the impugned order.

(ii) The application for expunging the remarks is rejected. The findings of the learned Judge and the adverse remarks except to the extent indicated above, are confirmed.

(iii) The respondent shall be entitled to costs of Rs. 5,00,000/- to be recovered in the winding up proceedings.

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Case Metadata
  • Ck Citation: (2014) 04 BOM CK 0271
  • Coram: S.J. Vazifdar, J; B.P. Colabawalla, J
  • Bench: Division Bench
  • Advocates: I.M. Chagla, A.Y. Bookwala, Senior Counsels, Naval Agarwal, S.V. Doijode, Z.T. Andhyarujina, P.A. Kabadi and Mrinalini Rajpal i/b Doijode and Associates, Advocates for the Appellant; Janak Dwarkadas, N.H. Seervai, Senior Counsels and Rahul Narichania i/b AZB, Advocates for the Respondent
Referenced Acts & Sections
  • Advocates Act, 1961 - Section 35
  • Civil Procedure Code, 1908 (CPC) - Order 38 Rule 5
  • Companies Act, 1956 - Section 173, 433, 434
  • Companies Act, 2013 - Section 2(76)
  • Evidence Act, 1872 - Section 3
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