9911796707
TMI Blog2014 (4) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closed 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 after- thought. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ESPONDENTS 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 Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmission 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bondholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount 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 $55 million was received under the APA (According to the appellant it received only 50% of this amount and its wholly owned subsidiary Zenith Dubai received the balance 50%. This is seriously disputed by the respondents. It, however, makes no difference. Although it was not admitted before us, we will demonstrate that the appellant's case is that it had represented that the entire sale proceeds from the sale of the MSD business was to be paid to the respondents.) (v) Not a rupee from the proceeds of the sale of the MSD business was paid to the respondent / bondholders. SUBMISSIONS ON BEHALF OF THE APPELLANTS : 22. Mr. Chagla raised the following contentions :- The Instruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale proceeds of the MSD Business for repayment of the Petitioner's dues in respect of the 2011 Bonds. However, immediately after the Appellant received the monies from the sale of the MSD Business i.e. on 27th September 2011, the Petitioner illegally accelerated the payment of the 2012 Bonds. Consequently, the demand of the petitioner rose from US$ 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arding 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 Bondholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 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 refu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 20011 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances 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 issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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 faile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile 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 rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erse 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 State of Uttar Pradesh v. Mohd. Naim AIR 1964 SC, 703, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentify 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 v. Public Concern for Governance Trust & Ors. (2007) 3 SCC 587, 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 Gulabchand v. Kudilal & Ors. AIR 1966 SC 1734 . 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 Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion. 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 v. Bhanwarlal & Ors. AIR 1964 SC 1366. 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 Razik Ram v. J.S. Chouhan & Ors., AIR 1975 SC 667. "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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 v. K.G. Eshwar (2000) 6 SCC 721. 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isconduct 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 proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gestion 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispose 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 k ..... X X X X Extracts X X X X X X X X Extracts X X X X
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