TMI Blog2013 (10) TMI 571X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's liability, the solvency of the Company might not constitute a standalone ground for setting aside a notice under section 434(1)(a), meaning thereby that if a debt is undisputedly owing, then it has to be paid. If the company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand. I am therefore satisfied that the amount as claimed by the Petitioner in the Petition is due and payable by the Company to the Petitioner. However, the Company despite receiving the statutory notice has failed and neglected to make the payment as called upon by the Petitioner. The defence raised by the Company is totally moonshine and completely lacks merits. I am therefore satisfied beyond any doubt that the Company is unable to pay its debts. The Company Petition is therefore admitted and made returnable on 16th September, 2013 - Following decision of IBAHealth (India) Pvt. Ltd. v. Info-Drive Systems Sdn. Bhd. [2010 (9) TMI 229 - SUPREME COURT OF INDIA] - Decided in favour of Appellant. Appointment of provisional liquidator - Held that:- The Promoters/Directors of the Company after repeatedly stating that they are selling/disposing of the Und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this Court to determine whether the reference filed by the Company is bona fide or not would tantamount to trespassing on the jurisdiction of the BIFR. In view thereof, though I have expressed my view viz. that the Promoters of the Company are absolutely dishonest and have siphoned away the funds of the Company in the manner set out in detail hereinabove and are responsible for the state of affairs of the Company prevalent as of date, I leave it to the BIFR to decide whether the Reference filed by the Company should be registered and/or further entertained. The only direction by this Court to the office is, to forward a copy of this Order to the BIFR for its independent consideration at the time of registering of the Reference and proceeding with the same, if so registered - Decided in favour of appellant. - Co. Petition No. 28 of 2012 - - - Dated:- 30-7-2013 - S.J. KATHAWALLA, J. For the Appellant : Janak Dwarkadas, N.H. Seervai, Rahul Narichania, S. Mandal, Sahil Kanuga and Ankur Kashyap. For the Respondent : F.E. De'vetre, Arif Bookwala, Zal Andhyarujina, S.V. Doijode and Ms. Mrinalini Rajpal. ORDER:- By this Company Petition, the Petitioner seeks winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... million in August, 2008 and US $ 50 million in August, 2007. These Bonds would become due for repayment/redemption in August, 2011 and August, 2012. The Board of Directors propose to augment the funds for the purpose in one or more of the following methods (including) through any combination thereof: (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/re-pay the outstanding Foreign Currency Convertible Bonds which would come for repayment/redemption in August, 2011 and August, 2012. ** ** **" 8. Pursuant to the Resolution passed at the EOGM held on 29th January, 2011, the Company sold its Remote Monitoring and Management Business ("the MSD Business") and on 26th September, 2011 made an announcement on the Bombay Stock Exchange ("BSE") and Nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied towards buy back/redemption of FCCBs in the interest of the Company and in accordance with the applicable law and regulations ." Thus, the Company now also stated on oath that the sale proceeds received by the Company after the sale of the MSD Business will be applied towards buyback/redemption of the Foreign Currency Convertible Bonds ("FCCBs"). Since the Company failed to pay the amounts due under the bonds, despite an unconditional obligation to pay and had sold the MSD Business and the proceeds were not utilised for repaying the debt under the Bonds, the Petitioner urgently filed a Suit before this Court being Suit No. 2865 of 2011 along with a Notice of Motion seeking various reliefs including attachment of assets and deposit security. An application for urgent ad-interim relief was moved during the Diwali vacation. On 26th October, 2011, an order was passed by this Court requiring the Company and the other Defendants to the Suit, to disclose information regarding the sale of the MSD Business. On 4th November, 2011, the Petitioner issued a statutory notice under the Companies Act to the Company stating that the following sums were due and payable as of the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 31st March,2012, of the Company and a copy of the GT Report. E Y on 3rd July, 2012, filed a second valuation report where the CC Business was valued at INR 194 to INR 211 crores in place of the earlier valuation of INR 598 Million. In view thereof, the Division Bench of this Court set aside the ad-interim order dated 14th February, 2012, and remanded the matter back to the Learned Single Judge to hear the Notice of Motion afresh at ad-interim stage based on the 3rd July, 2012, valuation report. Pursuant to the directions of the Hon'ble Division Bench, the ad-interim application of the Petitioner was heard afresh by this Court wherein certain undertakings given by the Company including the following were accepted viz. the Company: (i) shall not dispose of, sell, transfer, alienate or create any third party right or interest in respect of the CC Business; (ii) shall maintain status quo in respect of its fixed assets more particularly described in Exhibit-B to the affidavit dated 10th May, 2012; (iii) shall maintain status quo in respect of the money held in joint escrow account (Wells Fargo Bank, A/c. No. 83722000); (iv) shall maintain status quo i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in their meeting held on July 19, 2013, the Company has made a reference to BIFR". On 26th July, 2013, this Court fixed the hearing for the admission of the Company Petition on 29th July, 2013, when the Company informed the Court that a Reference has been filed by the Company before the BIFR which admittedly is not yet registered. 17. Mr. Janak Dwarkadas, the Learned Senior Advocate appearing for the Petitioner, has submitted that the Company, as stated hereinabove, has repeatedly admitted in its Explanatory Statement to the notice dated 27th December, 2010, in its announcement before the BSE and in its affidavit before the City Civil Court at Mumbai, the dues payable to the Petitioner by the Company and has also repeatedly assured the Shareholders/Petitioner/bondholders, the BSE and the Court that the consideration received from the sale of the MSD Business will be utilised for making payment of FCCBs. However, the Company, as set out hereinafter, siphoned of the consideration received in lieu of the sale of the MSD Business and did not pay a single paisa to the Petitioner in terms of the Trust Deeds executed in relation to the 2011 and the 2012 Bonds. Mr. Dwarkadas therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reconstruction [2004] 50 SCL 742 (Delhi) and submitted that the Company Petition be admitted, the Provisional Liquidator be appointed and the Company be restrained from getting its Reference registered before the BIFR. 19. Mr. Devetre, the Learned Senior Advocate, appearing for the Company, submitted that the appointment of the Petitioner as Trustee is terminated and therefore the Petitioner is not empowered to initiate the winding up proceedings. He submitted that the Petitioner is not entitled to accelerate the 2012 Bonds. Relying upon clause 11 of the Offering Circular, he submitted that the approval of the Reserve Bank of India ("RBI") is not obtained by the Instructing bondholders or the Petitioner Trustee and as such the Acceleration Notice to the Company is illegal and non est and cannot be acted upon. Mr. De'vetre has further submitted that the Company has disputed the fact that the Company is commercially insolvent. Mr. De'vetre further submitted that since the Company has filed a Reference before the BIFR and since the BIFR is an expert body which will look into the merits of the case and pass appropriate orders, this Court should defer the hearing as regards admission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereinabove in the Explanatory Statement dated 27th December, 2010 issued under Section 173(2) of the Act, annexed to the notice dated 27th December, 2010, calling for the EOGM of the Company on 29th January, 2011, the Company inter alia represented to its shareholders that they need to sell and/or lease the business and/or divisions including the subsidiaries (wholly and partly) of the Company so as to redeem/re-pay the outstanding FCCBs which would come for repayment/redemption in August, 2011 and August, 2012. The Company once again admitted its liability towards repayment of FCCBs by making an announcement on the BSE dated 13th October, 2011, inter alia, stating that the Company has defaulted on its US $ 33 million FCCBs which were due on 21st September, 2011 and is in negotiation with the bondholders to extend the time of repayment. The Company also stated that it has received all monies due from Zenith RMM, LLC except for the amount to be held in escrow, part of which the Company plans to utilize for partial repayment of FCCBs. The Company again admitted its liability for repayment of FCCBs by stating on oath in its affidavit dated 17th October, 2011, filed before the City Civ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Petitioner and as such the Acceleration Notice is illegal and non est and cannot be acted upon. As explained by the Petitioner, this is completely contradictory to the said clause itself which sets out in no uncertain terms that "the Issuer (Company) would require prior approval of the RBI". The permission is not required as a condition precedent to the Acceleration Notice as is now sought to be alleged. In fact, the Company asked the RBI vide its letter dated 9th December, 2011 to clarify on this and the RBI by its letter dated 25th January, 2012 clarified that the approval is required for making payment to the bondholders before the redemption date. Thus the requirement is on the Company to seek RBI approval prior to payment and not on the Petitioner to issue acceleration notice. In any event, the 2012 Bonds matured and became payable on 22nd August, 2012, which the Company failed to pay and is therefore in default. 23. The Company has also submitted that pursuant to the orders passed by the Single Judge dated 9th October, 2012, as set out in paragraph 19 above, the Petitioner is adequately protected. As submitted on behalf of the Petitioner, the object and purpose of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posit an amount of Rs. 10,000/- with the Prothonotary and Senior Master of this Court towards publication charges, within a period of two weeks from the date of this order, with intimation to the Company Registrar, failing which the Petition shall stand dismissed for non-prosecution. However at the request of the Company, the Petitioner is directed not to advertise the admission of this Petition on or before 27th August, 2013. 25. The next issue which needs to be determined is whether the Petitioner has made out a case for appointment of a Provisional Liquidator of the Company. The Promoters of the Company have admittedly not repaid the amounts due to the Petitioner/bondholders under the 2011 Bonds as per the terms of the 2006 Offering Circular and the 2006 Trust Deed as well as under the 2012 Bonds as per the terms of the 2007 Offering Circular and the 2007 Trust Deed and the Company has therefore defaulted in the repayment of the 2011 as well as 2012 Bonds. The Company by its notice dated 27th December, 2010 called its EOGM on 29th January, 2011, and in the Explanatory Statement annexed to the said notice inter alia represented to its shareholders that the Company is desirous o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid." Despite the above sanctity/seriousness being known to the Promoters/Directors of the Company, as stated hereinabove, they nonchalantly proceeded to make a false representation in the explanatory statement dated 27th December, 2010, and defrauded the shareholders by selling a valuable asset/undertaking of the Company and thereafter not making any payment from the consideration received therefrom towards the FCCBs, for which the mandate of the shareholders was obtained. 26. On 13th October, 2011, the Promoters/Directors of the Company made an announcement on the BSE that they have received the entire consideration from the sale of the MSD Business except the amount to be held in escrow and the Company plans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany - Zenith Infotech. On page 37 of the Schedule, details of the SAAZ Software are provided which the contract itself terms on page 37 " This (SAAZ Software) is by far the most important intellectual property as the SAAZ Software is what our resellers/MSP's pay for as well as it form the backbone of how service delivery to our resellers/MSP's are performed from our network operation centre in Mumbai, India." The fact that the SAAZ Software is developed by the Company and that it is the backbone of the delivery from the network operation of centre with Mumbai clearly indicates that it is also owned by the Company. In any event, on page 93 it is shown that the trademark for SAAZ is owned by the Company. On page 105 a list of material contracts are set out and each of such contracts are with the Company. 29. It is therefore clear from the above that the primary seller of the Assets under the US APA is the Company; no material asset was owned by the Dubai entity which was sold to the Purchasers; there is no basis for paying around 50% sale consideration to the Dubai entity; the payment to the Dubai entity in no way justifies payment of consideration of US $ 27 million. It is theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany invested an amount of US $ 8.7 million (INR 42.8 crores) in VU Telepresence FZC, UAE. As of 30th September, 2011, VU is a related party and is owned by the Saraf family. It is alleged by the Petitioner that Ms. Devita Saraf (daughter of Raj Saraf) is the Managing Director of VU Telepresence FZC, UAE. This Company carries on a totally different business of selling TVs. While the Company in its disclosure affidavit dated 23rd January, 2012, stated that purported investments had been made in VU, the Company has not provided any evidence as to the nature of the purported investment, whether as equity or debt and has not given any reason as to why such investments were made from the sale proceeds of the MSD Business, especially given the fact that the Company had obtained permission from shareholders to specifically repay the FCCB holders and had defaulted on such payment. Also the Company has not ascribed any valuation to this investment and has not stated the networth of VU or what ownership the Company acquired. (ii) On 12th October, 2011, the Company invested US $ 5.1 million (INR 24.7 crores) in Zenith Cloud Computing FZC, UAE. As of 30th September, 2011, Zenith Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on account of advance tax arising on account of income from all sources not just the sale of the MSD Business. (ii) The Company has stated that in October, 2011, it has made payment towards other business creditors for an aggregate sum of US $ 6.0 million (INR 30.0 crores). While the Company has set out various sundry payments made to other business creditors, it is pertinent to note that given the fact that the Company is conducting business and these are ongoing expenses incurred in the normal course of business, there is no explanation accorded as to why the sale proceeds of the MSD Business were utilised to make these payments especially when as per the explanatory statement the sale proceeds were to be utilised to redeem the FCCBs. Furthermore there are numerous questionable entries where proof of payment has not been supported by invoices and even the letters provided in certain cases are undated or unsigned thereby questioning the veracity of such documents/payments. One such instance is the payment of US $ 1 million (INR 5 crores) to DSSR which is an entity which has no website, and no mention is made of what services were provided. (iii) The Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised for repayment/partial repayment of the FCCBs, did not make any payments towards FCCBs to the Petitioner/bondholders but instead in the aforestated manner siphoned away the consideration thereby defrauding its shareholders and its creditors including the Petitioners/bondholders. The Promoters/Directors of the Company after submitting a settlement proposal to the FCCB bondholders before the SAT on 17th June, 2013, made a corporate announcement on 19th July, 2013 on the BSE website stating that, "The Board of Directors of the Company have formed an opinion to make a reference to the Board for Industrial and Financial Reconstruction ('BIFR') pursuant to the provisions of section 15 (1) of the Sick Industrial Companies (Special Provisions)Act, 1985, as the accumulated losses have exceeded the networth of the Company as per the Audited Financial Results as at June 30, 2013" and a 400 page Reference was filed by the Company with the BIFR on 23rd July, 2013 which is not admitted till date. The Promoters/Directors of the Company have therefore left no stone unturned in ensuring that no amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite an amount of approx. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As stated earlier, Mr. Dwarkadas, the Learned Senior Advocate appearing for the Petitioner, has contended that the BIFR Reference made by the Company is not bona fide. He submitted that the jurisdictional fact which would constitute the statutory mandatory condition precedent i.e. the sine qua non for the valid legal and intra vires exercise of powers by the Board of Directors of the Company is that "the Board of Directors had sufficient reasons... to form the opinion". The opinion must be framed honestly and in a bona fide manner in the best interests of the Company and its shareholders as a whole. He submitted that if this jurisdictional fact is found wanting and/or is absent for any reason whatsoever including the previous conduct of the Company and its Directors, then the very formation of opinion is bad and the consequent filing of the reference would be ultra vires the first proviso to section 15(1), illegal and void and would be non est and the Company should not be permitted to proceed with the Reference. Mr. Dwarkadas has in support of his submissions relied on several decisions set out in paragraph 18 above. 33. As held by the Hon'ble Division Bench of the Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for determining whether any industrial company has become a Sick Industrial Company in accordance with the procedure prescribed therein. In view thereof, the decision on the issue as to whether the opinion formed by the Board of Directors is honest and bona fide leading to the filing of a reference before the BIFR also falls within the realm of inquiry by the BIFR under section 16 of the SICA. In my view, any attempt by this Court to determine whether the reference filed by the Company is bona fide or not would tantamount to trespassing on the jurisdiction of the BIFR. In view thereof, though I have expressed my view viz. that the Promoters of the Company are absolutely dishonest and have siphoned away the funds of the Company in the manner set out in detail hereinabove and are responsible for the state of affairs of the Company prevalent as of date, I leave it to the BIFR to decide whether the Reference filed by the Company should be registered and/or further entertained. The only direction by this Court to the office is, to forward a copy of this Order to the BIFR for its independent consideration at the time of registering of the Reference and proceeding with the same, if so r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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