TMI Blog2014 (1) TMI 1476X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the monies realized from the sale of the MSD Division for the benefits/interests of promoters and/or Directors and subsidiaries… I also do not see any compelling reasons to use the monies realized from sale of MSD Division for any purpose – not the least for paying to group entities for various purposes – other than for redemption of FCCBs, which was not only the sole purpose for which approval of shareholders was taken but was also very crucial for protecting the shareholders’ value - prima facie, ZIL and its promoters/directors employed a device or artifice to fraudulently divert the sale proceeds of its MSD Division. Promoters/directors of ZIL have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them. Such conduct of promoters/directors not only defeats the whole purpose of seeking shareholders’ approval for crucial decisions but also jeopardizes the integrity of the securities market - Company has failed to rebut the presumption of its insolvency and is therefore liable to be wound up. In the present case where the Company is unable to pay its debts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which was incorporated on 31st December, 1996, under the provisions of the Companies Act, 1956 (No.1 of 1956) ( the Act ). The Petition is taken up for hearing and final disposal. 2. The facts leading to the filing of the present Petition are as under: 3. The Petitioner is a US National Banking Corporation, having its Office at the address given in the cause title of the Petition. The Petitioner is engaged, inter alia, in the business of providing corporate trustee services. The main object for which the Company was incorporated is to inter alia carry on the business of manufacturers and sellers of all kinds of electronic and electrical equipment and machinery including computers, data loggers, process controllers, geophysical and communication instruments, ultrasonic and microwave devices, etc. 4. The Petitioner has stated in the Petition filed on 21st December, 2011, that the Company is indebted to the Petitioner for an aggregate sum of US $ 36,141,167.66 (US Dollars Thirty Six Million One Hundred Forty One Thousand and One Hundred Sixty Seven and Sixty Six cents only). 5. On 15th September, 2006, the Company offered US $ 33 million 3.0 % convertible bonds 2011 due for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said sale. Since the Company failed to make the repayment under the 2011 Bonds on the maturity date i.e. 21st September, 2011, the Petitioner on 27th September, 2011, issued an Event of Default Notice to the Company for the event of default which had occurred under Condition 11 of the Terms and Conditions relating to the 2011 Bonds. The Petitioner also addressed a notice of Cross Default to the Company stating the occurrence of a cross default in relation to the 2012 Bonds under Condition 11 (D)of the Terms and Conditions in relation to the 2011 Bonds. On 10th October, 2011, the Petitioner also addressed a letter to the Company notifying that the 2011 Bonds were immediately due and payable. On 12th October, 2011, the Petitioner addressed a Notice of Acceleration for the 2012 Bonds to the Company declaring the 2012 Bonds as due and payable due to a cross default. 9. On 13th October, 2011, the Company made an announcement on the BSE stating that its MSD Business had been sold and acknowledged the debt. The announcement made on BSE reads as follows: 1. The Company has defaulted on its US$ 33 Million FCCB which was due on 21st September, 2011 and is in negotiation with the bondh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Bonds; (b) US$ 53,915,333.33 under 2012 Bonds. In response, the Company by its letter dated 5th November, 2011, after raising certain issues, threatened to terminate the Petitioner's Trusteeship on the specious plea that it was acting against the interest of the Company. 13. Thereafter on 15th November, 2011, the Company addressed a letter purportedly terminating the Petitioner as a Trustee. The Petitioner by their letter dated 18th November, 2011, replied to the termination notice stating that the purported termination is contrary to the Trust Deed and therefore void and nonest. The Petitioner pointed out that as per Clause 16.2 of the Trust Deed, termination can only be by way of an extraordinary resolution by threefourths of the bondholders, and no such resolution has been passed. The Petitioner further pointed out that as per clause 11.25 of the Trust Deed, the Petitioner has to act in the best interest of the bondholders. The Petitioner also amended the Plaint in Suit No. 2865 of 2011 and challenged the termination of its Trusteeship, inter alia on the ground that the said termination is illegal and on the face of it null and void. 14. Upon the sale of the MSD Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id by its subsidiaries, if any, and in any event shall make their subsidiaries return an amount of Rs. 25 crores within a period of six months from the date of the order. By the said order, this Court also granted liberty to Defendant Nos. 2, 3 and 4 therein to move this Court seeking appropriate orders if at any time they are of the view that they are entitled to claim the Equity Stake in Continuum Managed Services amounting to Rs. 39.86 crores and/or Rs. 32.27 crores held in joint escrow account. Pursuant to the said liberty granted, the said Defendant Nos. 2, 3 and 4 in the Suit have now moved an application before this Court claiming the said entire amount held in the Joint Escrow Account. 16. On 25th March, 2013, the Securities and Exchange Board of India ( SEBI ) passed an order against the Promoters of the Company, inter alia, directing the Promoters of the Company to furnish a Bank Guarantee for US $ 33.93 million. The Company and its Promoters filed an Appeal dated 8th March, 2013, before the Securities Appellate Tribunal ( SAT ) challenging the order dated 25th March, 2013, passed by SEBI. On 17th June, 2013, the Company made a settlement proposal over a 3 year period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/bondholders. I also agree that any beneficent legislation passed for rehabilitating genuinely sick Companies which, because of factors beyond their control have become sick, cannot be brought to the rescue of dishonest Promoters/Directors which will in fact offer a premium/reward for dishonesty, cheating and fraud, which is not countenanced by law. I am also conscious of the fact that such dishonest promoters of the Company, more often than not, take advantage of a beneficent legislation like SICA and by taking repeated adjournments before the BIFR/AAIFR after registration of their Reference, deprive the small and bona fide creditors of the Company for more than a decade, by seeking protection under the provisions of Section 22 of the SICA. . There are several petitions pending in this Court since the year 1998-2000 seeking winding up of Companies which have not seen the light of day for the last 10 to 15 years, since this Court is not allowed to proceed with the matter in view of Section 22 of SICA. The Judges of this Court handling Company matters have time and again drawn the attention of the BIFR/AAIFR to the pathetic situation in which the small creditors of such Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls outside the purview of the Sick Industrial Companies (Special Provisions) Act, 1986. 20. On 19th August, 2013, the Company filed an Appeal before the Secretary of the BIFR challenging the order dated 12th August, 2013, passed by the Registrar of the BIFR. 21. On 19th August, 2013, the Company also filed an Appeal before the Division Bench of this Court challenging the order admitting the Company Petition dated 30th July, 2013 ( DB Appeal ). On 23rd August, 2013, two employees of the Company filed an Appeal challenging the order admitting the Company Petition before the Division Bench of this Court( Employee Appeal ). It is pertinent to note that in the said Appeal, the employees have not taken any ground to the effect that the Cloud Computing Business of the Company is worth approximately INR 400 crores, as now alleged by them in the Application taken out by them to intervene in the present Company Petition. 22. On 26th July, 2013, the SEBI filed a SLP before the Hon'ble Supreme Court seeking leave to file an Appeal challenging the SAT order. On 27th August, 2013, the Hon'ble Supreme Court was pleased to stay the operation of the SAT order. 23. On 2nd September, 2013, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal shortly and dispose it of, we extend the time period for furnishing the bank guarantee from 30 days to 40 days. List the appeal on 24th September, 2013. . The extension from 30 to 40 days expired on 21st October, 2013. In fact on 26th September, 2013, an oral application was made on behalf the Promoters of Zenith before the Hon'ble Supreme Court seeking extension of time for furnishing the Bank Guarantee beyond 24th October, 2013. However, the same was refused by the Hon'ble Supreme Court. This Court is informed by the Petitioner that to the best of their knowledge the Directors/Promoters of the Company have till date not furnished the required Bank Guarantee. 26. On 13th September, 2013, the Secretary of the BIFR rejected the Appeal filed by the Company challenging the order dated 12th August, 2013, rejecting the Company's Reference passed by the Registrar, BIFR. The Secretary in his order made the following observation: .... It is clear that the Company was not carrying any manufacturing activities and has manipulated its balance sheet for the period ended 30.6.2013. 27. Since the Hon'ble Supreme Court by its order dated 30th September, 2013, dismissed as withdraw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company was commercially insolvent. It was also submitted that in view of the order passed by this Court dated 9th October, 2012, in Notice of Motion Nos. 3520 of 2011 and 3527 of 2011 in Suit No. 2865 of 2011, the claim of the bondholders is secured and the Company Petition does not deserve to be admitted and the question of appointment of Provisional Liquidator also does not arise. It was also submitted that the Company has not siphoned away any funds received from the sale of the MSD Business. All the aforestated contentions of the Company advanced at the time of the admission of the Company Petition were rejected by this Court by its detailed order dated 30th July, 2013, the Appeal preferred therefrom before the Hon'ble Division Bench of this Court, as stated earlier, has been dismissed, and the SLP filed therefrom was also dismissed as withdrawn. 31. The Company Petition is now taken up for hearing and final disposal. 32. At the outset it is submitted on behalf of the Company that this Court ought not to proceed with the hearing of the above Company Petition, since the Company has not complied with Rules 24 and 30 of the Companies (Court) Rules, 1959 ( the said Rules ). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Rule 24 of the said Rules requires the Petition to be advertised for not less than fourteen days before the date fixed for hearing, in the issue of the Official Gazette of the State or the Union Territory concerned. The returnable date for the hearing of the present Petition was 21st October, 2013. The advertisement in the newspapers was on time. However, the information about the returnable date and the admission of the Petition was published in the Official Gazette in the issue of the Official Gazette dated 10th October, 2013 16th October, 2013. It is submitted that no application for dispensation of the mandatory period as required, was taken out by the Petitioner. The Company has relied on the decision of the Division Bench of the Hon'ble Delhi High Court in the case of Lt. Col. R.K. Saxena vs. Imperial Forestry Corporation 2001 107 Company Cases 401 wherein it is held that the Petition for winding up has to be advertised before the same is placed for hearing before the Court and the exercise of discretion in Rule 24 of the Rules is confined only to the time limit for advertisement i.e. only to that part of the Rule, which says, .......be advertised not less than fourteen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the directions in the admission order. The advertisement was published in the edition of the Free Press Journal and Nav Shakti dated 2nd October, 2013. The Maharashtra Government Gazette is issued on a weekly basis, i.e. on Thursday every week. The advertisement could not be published in the issue of the Maharashtra Government Gazette for the period from 3rd October 9th October, 2013, to be released on 3rd October, 2013, due to paucity of time and in view of the fact that 2nd October, 2013 was a National Holiday. The Petition was therefore advertised in the Maharashtra Government Gazette at the earliest available opportunity in the next weekly gazette for the period from 10th October to 16th October, 2013 in accordance with the directions of this Court. The decision of the Division Bench of the Hon'ble Delhi High Court in Lt. Col. R.K. Saxena's case (supra) would not assist the Company since the facts and circumstances in which the said judgment has been passed are totally different from the facts of the present case. In Saxena's case, the advertisement of admission of the winding up petition had not been placed in the Official Gazette at all. The Hon'ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd/ or Rule 30 of the said Rules. Thus, even assuming that the alleged defect raised by the Company as a defence is a valid ground, the same could be cured by further directions from this Court, inter alia, by adjourning the hearing of the Company Petition in order to allow for the passage of 14 days from the date of publication in the Maharashtra Government Gazette. However, in the present case, the advertisement of admission of the Company Petition was published in the Maharashtra Government Gazette on 10th October, 2013 and the Company Petition, although placed for hearing on 21st October, 2013, was ultimately heard by this Court only on 11th November, 2013. In the light of the same there was no need for such directions to be passed by this Court. 36. As regards the contention raised by the Company that the Petitioner has not complied with Rule 30 of the said Rules , an affidavit dated 8th November, 2013 under the said Rules has been affirmed on behalf of the Petitioner on 8th November, 2013, and has been tendered on 11th November, 2013. The Court was on vacation from 1st to 10th November, 2013, during which time the Filing Departments of the Court including the Company Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present Company Petition, I have no doubt that the Company is determined to leave no stone unturned in attempting to delay the hearing of the Petition. The submission of the Petitioner that the aforestated suggestion/submission advanced on behalf of the Company is again an attempt to delay the hearing of the Petition in anticipation that the Company s reference under Section 15 (1) of the SICA will be registered with the BIFR and the stay under Section 22 of the SICA will operate in respect of the proceedings under the present Company Petition cannot be brushed aside. Again, the submission made on behalf of the Petitioner that the conduct of the Company is throughout not bonafide and the Petitioner is not at all ready to accept/rely on any suggestion made by the Company on any ground whatsoever, is fully justified in view of the following mala fide conduct of the Promoters/Directors of the Company since inception: (i) The Promoters of the Company had admittedly not repaid the amounts due to the Petitioner/Bondholders under the 2011 Bonds as per the terms of the 2006 Offering Circular and the 2006 Trust Deed as well as under the 2012 Bonds as per the terms of the 2007 Offering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. If, therefore, there was any contravention of the provisions of Section 173, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid. (ii) Despite the above sanctity/seriousness being known to the Promoters/Directors of the Company, as stated hereinabove, they nonchalantly proceeded to make a false representation in the explanatory statement dated 27th December, 2010, and defrauded the shareholders by selling a valuable asset/undertaking of the Company and thereafter did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As pointed out by the Petitioner as and by way of illustration, page 21 of the Schedule Exhibit A to Schedule 1.1 ( c ), lists out Zenith Success Stories Managed Services . In this list there are several domain names listed and each of these domain relates to www.zenithinfotech.com which clearly indicates that the assets in such list is owned by Respondent Company Zenith Infotech. On page 37 of the Schedule, details of the SAAZ Software are provided which the contract itself terms on page 37 This (SAAZ Software) is by far the most important intellectual property as the SAAZ Software is what our resellers/MSP's pay for as well as it form the backbone of how service delivery to our resellers/MSP's are performed from our network operation centre in Mumbai, India. The fact that the SAAZ Software is developed by the Company and that it is the backbone of the delivery from the network operation of centre with Mumbai clearly indicates that it is also owned by the Company. In any event, on page 93 it is shown that the trademark for SAAZ is owned by the Company. On page 105 a list of material contracts are set out and each of such contracts are with the Company. It is therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the Board for Industrial and Financial Reconstruction ( BIFR ) pursuant to the provisions of Sec. 15 (1) of the Sick Industrial Companies (Special Provisions)Act, 1985, as the accumulated losses have exceeded the networth of the Company as per the Audited Financial Results as at June 30, 2013 and a 400 page Reference was filed by the Company with the BIFR on 23rd July, 2013 which is not admitted till date. The Promoters/Directors of the Company have therefore left no stone unturned in ensuring that no amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite an amount of approx. Rs. 600 crores being due and payable to them till date. In the above circumstances, the Bondholders cannot be blamed for having lost complete faith and trust in the Company, its Promoters and Management, and for not being ready to trust their word in view of their past conduct of giving false assurances only to renege therefrom. In fact, as set out hereinabove, the Promoters/Directors of the Company have not only been dishonest with the Bondholders and the Stock Exchange but have also been dishonest with the Court, and as stated hereinabove made a false and dishonest stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid prima facie findings, I note that the promoters/directors of ZIL have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them. Such conduct of promoters/directors not only defeats the whole purpose of seeking shareholders approval for crucial decisions but also jeopardizes the integrity of the securities market. 25. The board of directors of ZIL is hereby directed to furnish within 30 days from the date of this order, bank guarantee(s) of a minimum tenure of one year, for USD 33.93 million (i.e. the amount of sale proceeds of MSD Division that has been diverted as described in para 15 above), in the name of Securities and Exchange Board of India, without using the funds of ZIL or creating any charge on assets of ZIL . As set out hereinabove, despite the Hon ble Supreme Court having extended the time to enable the Promoters/Directors of the Company to furnish the Bank Guarantee as required under the SEBI Order, the Promoters/Directors have failed and neglected to provide the Bank Guarantee till date. I am therefore not inclined to defer the hearing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore be an exercise in futility and in nobody s interest to defer hearing of the Company Petition until the CC Business and/or the other assets of the Company are sold. 41. The Company has also submitted that the winding up of the Company would (i) affect the employees who would lose their jobs; (ii) prejudice the shareholders; and (iii) result in the Company being unable to recover its various outstanding dues, including payments in respect of warranties provided by the Company to its various customers, which would become payable only after expiry of the warranty period. Though I am satisfied that the employees have been put forward by the Company with an oblique motive of protecting its own interest, and the interest of the employees and the concern shown with regard to the employees loosing their jobs is a mere pretence on the part of the Company, I have no doubt in my mind that the jobs/employment of the employees should be uppermost in the mind of the Court at the time of passing an order directing winding up of a Company. However, I also cannot lose sight of the fact that the winding up process cannot be delayed on the ground that the employees may loose their jobs bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company by an order of the Hon ble Supreme Court dated 30th September, 2013. It is submitted by the Petitioner that the said order/judgment though passed at the admission stage are binding even at the final hearing of the Company Petition. It is submitted that the orders do not merely record any prima facie view. Instead the findings in the orders have been made after considering all the facts and circumstances on record, the averments made, the arguments advanced and the evidence led on behalf of both the parties to the Company Petition. It is also submitted that since the SLP has been dismissed and the employees have chosen not to challenge the Division Bench order, the findings therein and in the admission order have become final and binding. Apart from the fact that I am in agreement with the submissions advanced by the Petitioner, in my view, the facts and circumstances on the basis of which I have passed the admission order dated 30th July, 2013, have remained the same till date and do not call for any different findings at this stage than those arrived at during the stage of admission. I therefore once again confirm all the findings arrived at by this Court in the admission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... committed a default in the payment of the amounts due under the 2011 Bond and the 2012 Bonds and is admittedly insolvent, an order for winding up of the Company must follow as a matter of course. The judgments of the Hon ble Gujarat High Court referred to above are therefore, with respect, not binding or relevant for determination of the facts, circumstances and issues arising in the present case. The Petitioner is correct in submitting that the Company has failed to rebut the presumption of insolvency and is therefore liable to be wound up. 47. It is also submitted on behalf of the Company that insofar as the wrongful and illegal acts of Directors and Promoters are concerned, SEBI is investigating into the same and therefore it was not necessary for this Court to take cognizance of the conduct of the Directors and Promoters in determining whether the Company ought to be wound up. In response, the Petitioner has correctly relied upon the judgment of the Hon ble Supreme Court in D.D.A. vs. Skipper Construction Company (P) Ltd. (1996) 4 SCC 622 wherein the Hon ble Supreme Court in paragraph observed as follows: 28. The concept of corporate entity was evolved to encourage and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; ( ..... 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