Case: Zenith Infortech Limited & Others Vs. The Bank of New York Mellon London Branch & Another

Oral Judgment: (Dr. D.Y. Chandrachud, J.)The appeals arise from an order of the Learned Single Judge on a Company Petition for winding up. By the order which is impugned in appeal, the Learned Single Judge has admitted the Company Petition and has appointed an administrator.2. The claim of the Respondent in the Petition for winding up arises from moneys due and payable under two series of convertible bonds (a series of 2006 and of 2011). On 15 September 2006, the Appellant offered USD 36 million three per cent convertible bonds which became due for payment on 21 September 2011. The Appellant entered into a Trust Deed with the Respondent, covenanting under Clause 2.2 to unconditionally repay the principal amount. On 14 August 2007, the Appellant offered the second series consisting of USD 50 million three per cent convertible bonds. A Trust Deed was executed with a covenant for unconditional payment. On 27 September 2011, the Respondent issued a default notice calling upon the Appellant to pay the outstanding principal amount of the first series. On 30 September 2011, a notice of cross default was issued to the Appellant. Following this, a notice was issued on 10 October 2011 stating that the amount under the first series was due and payable immediately. By a subsequent notice dated 12 October 2011, the Respondent accelerated the payment of the amount under the second series declaring that it was due and payable as a result of a cross default. A statutory notice was issued on 4 November 2011 claiming that an amount of USD 36.141 million and USD 53.915 million was due. The winding up petition was instituted before the Learned Single Judge in which the impugned order of admission and of the appointment of the administrator has been passed.3. The following submissions have been urged for assailing the order of the Learned Single Judge:(i) A Petition for winding up at the behest of the Respondent was not maintainable since the trusteeship of the Respondent has been terminated and since a suit has been instituted before this Court for the recovery of the amount due and payable under the bonds and in which certain interim orders have been passed;(ii) Under Clause 24 of the Trust Deed, the trustee is entitled to sue for the enforcement of its provisions. A petition for winding up is not a petition for recovery of outstandings and hence, in view of the provisions of Clause 24 of the Deed of Trust, the Petition should not have been entertained;(iii) A Petition for winding up cannot be maintained as a matter of right merely because a debt is due and payable;(iv) The Court while entertaining a Petition for winding up, has the power to appoint a provisional liquidator, but no power is conferred upon the Court to appoint an administrator. In any event, an administrator should not have been appointed in the present case since the Appellant is a going concern which is commercially viable, with one thousand employees on its roll;(v) The Company has a turnover as on 30 June 2013 of Rs.66 crores and has paid its outstanding taxes and its creditors, save and except the Respondent. The effect of appointing an administrator would be to bring the business to a standstill, and would impede the carrying on of business;(vi) The Learned Single Judge has incorrectly proceeded on the premise that there was a siphoning of, of the funds of the Company by the promoters, following the sale of the MSD Division.4. Now, at the outset, it must be noted that there is no dispute about the liability of the company to pay the outstandings due and payable under the bonds. On the date on which the statutory notice for winding up was issued (4 November 2011), the amount due and payable was in excess of USD 89 million under the two series of bonds. Admittedly, the amount has not been paid. The liability under these Foreign Currency Convertible Bonds (FCCBs) has not been discharged.5. The due date for the payment of the principal amount of USD 36 million under the first series was 21 September 2011. On 13 October 2011, the Appellant made an announcement to the Bombay Stock Exchange, being a listed Company, stating inter alia as follows:1. The Company has defaulted on its US$ 33 mn FCCB which was due on September 21, 2011 and the Company was and is in negotiations with the bondholders to extend the time for repayment.-2. As informed to BSE earlier vide letter sated September 24,2011, we have received all monies due from Zenith RMM, LLC except for the amount to be held in escrow, part of which the Company plans to utilize for partial repayment of FCCBs.-3. Further we would like to inform you that the management, promoters have not in last one year bought or sold any shares of the Company.The representation which was held out by the Company was that: (i) There was an admitted default in the payment of the first series of the bonds; (ii) The Appellant had sold one of its divisions, the MSD Division, and the consideration received from the sale of the division would be utilized for partial payment of the FCCB Bonds. No disclosure was made of any part of the consideration realised from the sale of the MSD Division being transferred to the Dubai associate of the Appellant. As a matter of fact, on 27 December 2010, when the Appellant moved a Special resolution at an Extra-ordinary General Meeting of its shareholders seeking permission to sell the MSD Division, it clarified in the explanatory statement that it was:(ii) To sell and/or lease the business and/or division 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 outstanding foreign currency convertible bonds which would come for re-payment/redemption in August 2011 and August 2012.The Appellant was, therefore, conscious of its liability to pay the outstandings due under the two series of the foreign currency convertible bonds which were liable to come up for re-payment/redemption in August 2011 and August 2012. Both the shareholders and the Stock Exchange were informed by the Appellant that the consideration which would be realised from the sale of the MSD Division would be utilised for payment of the outstandings due and payable under the FCCBs. Admittedly no part of the consideration was utilized for the payment of the amount that became due and payable under the bonds. The sale of the MSD Division was completed on 26 November 2011. During the course of the hearing, it is not in dispute that out of a total consideration of USD 54 million realised from the sale, an amount of USD 27 million was paid over by the purchaser to the Dubai subsidiary of the Appellant and only an amount of USD 21 million was received by the Appellant, while the rest being USD 6 million is lying in escrow. No part of the consideration has been utilized to repay the outstanding balance under the two series of bonds. The Appellant, it may be noted, had made a solemn declaration on affidavit in a suit before the City Civil Court (S.C.Suit2034 of 2011)in the following terms:(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 best interest of the Company and in accordance with applicable law and Regulations and as per Exhibits D, E and G to the Plaint itself.The Learned Single Judge has noted, during the course of the judgment, that the sale consideration which has been received by the Appellant has been utilized for making: (i) Payments to Standard Chartered Bank of USD 12.6 million (Rs. 61.7 crores); (ii) Payments to related parties aggregating to USD 15.3 million (Rs. 74.2 crores); and (iii) Other payments aggregating to USD 23 million (Rs.115 crores). The point to be noted is that no part of the consideration has been paid over to the bond holders despite a solemn statement to the shareholders in the explanatory statement, a representation to the Bombay Stock Exchange and even a statement on affidavit before the City Civil Court.6. Now, it is in this background that the submissions which have been urged on behalf of the Appellant must be evaluated. Clause 24 of the Deed of Trust provides as follows:At any time after the Bonds have become due and repayable, the Trustee may, at its discretion and without further notice, take such proceedings against the Company as it may think fit to enforce repayment of the Bonds together with premium (if any) and to enforce the provision of this Trust Deed, but it will not be bound to take any such proceedings unless (a) it shall have been so requested in writing by the holders of not less than 25 per cent in principal amount of the Bonds then outstanding or so directed by an Extraordinary Resolution and (b) it shall have been indemnified and/or secured to its satisfaction. No holder of the Bonds will be entitled to proceed directly against the Company, unless the Trustee, having become bound to do so, fails to do so and such failure shall have continued for a period of 60 days and no directions inconsistent with such written request or Extraordinary Resolution have been given to the Trustee during such 60 days period by the holders of a majority in principal amount of the outstanding Bonds.Under the Deed of Trust, the Respondent was constituted as a trustee. Clause 24 stipulates that no individual holder of the bonds would be entitled to proceed directly against the Company. Upon the bonds becoming due and payable, it was for the trustee, namely, the Respondent, to adopt proceedings against the Company to enforce repayment of the bonds together with the premium, if any, and to enforce the provisions of the Deed of Trust. Clause 24 also stipulates that the Respondent is not bound to take such proceedings unless it has been so requested by the holders of not less than twenty five per cent of the principal amount of the bonds then outstanding. An individual holder is not entitled to move a proceeding against the Appellant unless the trustee having become bound fails to adopt necessary steps for a stipulated period.7. Clause 24 of the Deed of Trust does not preclude the trustee from instituting a proceeding for winding up. Section 2(12) of the Companies Act, 1956 defines the expression debenture to include debenture stock bonds and any other securities of a company, whether constituting a charge on the assets of the Company or not. Section 439(1) provides that an application for winding up can be filed by a creditor among other persons. Sub-section (2) of Section 439 provides as follows:(2) A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause (b) of sub-section (1). Consequently, the trustee for the holders of debentures is deemed to be a creditor within the meaning of Section 439(1)(b). Hence, there can be no manner of doubt that a petition, at the behest of the Respondent for winding up, was maintainable.8. The Respondent has instituted a suit against the Appellant on the Original Side for the recovery of the outstanding dues under the two series of bonds. In that suit, an application under Order 38 Rule 5 was moved in which on 14 February 2012, the Learned Single Judge inter alia restrained the Appellant from disposing of, alienating or transferring its interests in its Cloud Computing Business. In that ad-interim order, the Learned Single Judge notedthat the value of the computing business as computed in a report of Ernst and Young was Rs.598 crores. By an order dated 1 March 2012, a Learned Single Judge declined to grant a copy of the valuation report to the Respondent. The Division Bench in appeal, by an order dated 27 March 2012 recorded that there was no dispute about the fact that no payment has been made by the Appellant herein on the date on which the bonds fell due for repayment or redemption. The Division Bench in the course of its judgment observed as follows:We find considerable substance in the submission made on behalf of the appellant-plaintiff that if a copy of the valuation report is not given to the plaintiff in advance, grave and substantial injustice will be caused to the plaintiff, particularly to the bond holders for whom the plaintiff is the trustee, who have not been paid a single farthing against their dues of Rs.450 crores, in spite of the fact that defendant No.1 has sold its MSD business ostensibly for the purpose of repayment of the bonds subscribed by the bondholders. In fact in the affidavit in reply dated 17 October 2011 filed by defendant No.1 in the City Civil Court it was specifically stated that upon sale of the MSD business of defendant No.1 company, the sale proceeds will be applied towards redemption of the bonds. (emphasis supplied)The Division Bench directed a disclosure of the Ernst and Youngs report (save and except for one page). A Special Leave Petition against the order of the Division Bench was dismissed by the Supreme Court on 12 April 2012. On 3 May 2012, the Division Bench in an appeal against an order of the Learned Single Judge confining the ad-interim order on the application under Order 38 Rule 5 only to the grant of injunctive relief noted that whereas the Ernst and Young report had valued the assets at Rs.598 crores, the Respondent had produced a valuation report estimating the enterprise value to be between Rs.198 crores and Rs.239 crores. The Division Bench noted the submission of the Respondent that Ernst and Youngs report had been prepared only on the basis of information furnished by the Appellant herein and on the basis of the accounts for the period ending 30 September 2011 and the Company did not furnish to the valuers accounts for the quarter ending 31 December 2011. Hence, the submission of the Respondent was that since the Cloud Computing Business remained to be the only business of the Appellant from 27 September 2011, the true material for making the correct valuation of the Cloud Computing Business ought to have been, but was not furnished to the valuer. In this background, the Division Bench directed the Appellant to furnish to Ernst and Young a copy of the report subsequently obtained by the Respondent and issued directions for the submission of a further report about the valuation of the Cloud Computing Business. In an order dated 9 July 2012, the Division Bench noted that upon reconsidering the value of the Cloud Computing Business, Ernst and Young in their valuation report dated 3 July 2012 had valued the enterprise value at between Rs.152 crores and Rs.211 crores. In view of the subsequent report, the proceedings were remanded back to the Learned Single Judge for reconsideration. By an order dated 9 October 2012, the Learned Single Judge noted the undertaking of the Appellant not to dispose of its assets and disposed of the application for ad-interim relief accordingly. This aspect has a serious bearing on the conduct of the Appellant and its lack of bona fides.9. A proceeding for winding up, it is well settled, is not a proceeding for the recovery of outstanding dues. Nor for that matter, can the remedy of a Petition for winding up be utilized to pressurise a company which is commercially solvent to pay a debt which is bona fide disputed. In the present case, there is no dispute about the debt due and payable by the Appellant to the Respondent. The company in the present case is unable to pay. The conduct of the Appellant in failing to utilise any part of the sale consideration from the sale of the MSD Division to repay the bond holders despite a solemn assurance to the shareholders, to the Stock Exchange and even despite a statement on affidavit to the City Civil Court shows a complete absence of bona fides. The fact that the Respondent has instituted a suit for recovery cannot displace the maintainability of a petition for winding up. In a petition for winding up, the issue that falls for consideration is as to whether the Company is unable to pay its debts. In IBA Health (India) Pvt. Ltd. vs. Info-Drive System SDN. BHD, (2010) 10 SCC 553 )the Supreme Court has, after considering the earlier decisions on the subject, including the decisions in Amalgamated Commercial Traders (P) Ltd. vs. A.C.K. Krishnaswami, (1965) 35 Comp Cas 456 (SC)MadhusudanGordhandas and Co. vs. Madhu Woollen Industries (P) Ltd. (1971) 3 SCC 632 )and MediquipSystems (P) Ltd. vs. Proxima Medical System GmbH, (2005) 7 SCC 42 )held as follows:A determination of examination of the companys insolvency may be a useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or whether it reflects an inability to pay, in such a situation, solvency is relevant not as a separate ground. If there is no dispute as to the companys liability, the solvency of the company might not constitute a stand alone ground for setting aside a notice under Section 434(1)(a), meaning thereby, 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. The law should be allowed to proceed and if demand is not met and an application for liquidation is filed under Section 439 in reliance of the presumption under Section 434(1)(a) that the company is unable to pay it debts, the law should take its own course and the company of course will have an opportunity on the liquidation application to rebut that presumption.While dealing with the issue of commercial solvency, the Supreme Court observed thus:An examination of the companys solvency may be a useful aid in determining whether the refusal to pay debt is a result of a bona fide dispute as to the liability or whether it reflects an inability to pay. Of course, if there is no dispute as to the companys liability, it is difficult to hold that the company should be able to pay the debt merely by proving that it is able to pay the debts. If the debt is an undisputedly owing, then it should be paid. If the company refuses to pay, without good reason, it should not be able to avoid the statutory demand by proving, at the statutory demand stage, that it is solvent. In other words, commercial solvency can be seen as relevant as to whether there was a dispute as to the debt, not as a ground in itself, that means it cannot be characterised as a stand alone ground.10. In the present case, the material on record would indicate that the Company is unable to pay its debts. The Learned Single Judge has noted that on 17 June 2013, the Company made a settlement proposal for payment to be made to the FCCB bond holders over a three year period in certain proceedings which were pending before the Securities Appellate Tribunal in appeal against an order passed by SEBI. On 4 July 2013, the Company Petition for winding up was fixed for hearing on 26 July 2013. In order to forestall the hearing of the Company Petition, the Appellant made an announcement on the website of the Bombay Stock Exchange to the effect that the Board of Directors had decided to make a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 as the accumulated losses had exceeded the net worth of the Company as per the audited financial results on 30 June 2013. On 19 July 2013, the Company made a corporate announcement on the BSE website of its audited financial results for a period of nine months ending on 30 June 2013. On 19 July 2013, a reference was filed before the BIFR which was announced on 25 July 2013 in a corporate statement on the website. On 26 July 2013, the hearing of the Company Petition for winding up was fixed on 29 July 2013, when the Court was informed that a reference has been filed before the BIFR. This Court has been informed during the course of the hearing of the appeal that the reference was found not to be maintainable on 12 August 2013.11. The Learned Single Judge has considered the facts and circumstances which have been adverted to in the earlier part of this judgment and has arrived at the following conclusion:The Promoters/Directors of the Company have therefore left no stone unturned in ensuring that no amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite an amount of approx. Rs. 586 crores being due and payable to them till date. If at all the net worth of the Company has been eroded, there is no doubt that the same is the creation of the Promoters/Directors of the Company who have siphoned away the moneys from the Company with the sole intention of avoiding repayment of the amounts due under the FCCBs. The order passed by this Court on 9th October, 2012 cannot be said to have secured the claim of the Petitioner since as set out in the said order that was the best that could have been done by the Court whilst passing an order under the provisions of Order 38 Rule 5 of the Code of Civil Procedure, 1908. Under the circumstances the Promoters/Directors of the Company cannot be trusted with the affairs of the Company and if the Provisional Liquidator is not appointed, the Promoters/Directors of the Company who are only interested in personal gains and not in the interest of any of its shareholders, creditors, or workers will within no time bring the company to a standstill by siphoning/milking its balance assets by showing losses in its business and even bringing its 800 workmen on the streets. However, since Mr. Devetre has submitted that the Company is engaged in sensitive business viz. the CC Business and the office of the Liquidator High Court, Bombay may not be equipped to deal with the complex handling of such business, I appoint Shri Salil Shah, Advocate, as the Administrator of the Company. The Administrator shall take symbolic possession of the property, effects, actionable claims, books of accounts, statutory records and other documents of the Company. The Administrator may also retain copies of books of accounts, statutory records and other records as he may deem fit. The Directors of the Company shall provide all information sought by the Administrator pertaining to the working/affairs of the Company and shall forward the agenda of all Board Meetings/General Meetings at least 72 hours in advance to the Administrator and shall not take up any matter at any meeting which is not mentioned in the agenda. In case of emergency the Directors may hold a Board Meeting at short notice with the permission of the Administrator. However, the Administrator shall ensure that the day to day functioning of the Company is not hampered in any manner whatsoever.12. The Respondent applied before the Learned Single Judge for the appointment of a provisional liquidator. The Learned Single Judge has held, and in our view with justification, that if a Provisional Liquidator is not appointed, the promoters/directors of the Company who have been motivated by personal gain and not by the interests of the shareholders, creditors or workers may bring the business of the Company to a stand still by siphoning of its balance assets. This apprehension cannot be regarded as unfounded having regard to the course of events noted in the earlier part of the present judgment. However, it was urged on behalf of the Appellant before the Learned Single Judge that since the Company is engaged in a sensitive business, of Cloud Computing, the office of the Liquidator may not be equipped to deal with the complex handling of such a business. The Learned Single Judge hence directed that an administrator should be appointed. The Learned Single Judge has provided adequate safeguards by directing that the administrator will ensure that the day to day functioning of the Company is not hampered. The appointment of the administrator has been made, in these circumstances, with a view to safeguard the interests of the shareholders, creditors and the workers. Mr. R.A. Dada, Learned Senior Counsel for workers submitted that forty per cent of the turnover is paid towards the salaries of the employees and many of the employees were engaged in both software and hardware business. As the Learned Single Judge noted, having regard to the track record of the promoters/directors, it was necessary in the interests of employees themselves that an administrator should be appointed in the absence of which, in all likelihood, the business and assets would be wasted and the business would be brought to a standstill. The Learned Company Judge has acted within jurisdiction in issuing this direction.

Decision:
0[ds]10. In the present case, the material on record would indicate that the Company is unable to pay its debts. The Learned Single Judge has noted that on 17 June 2013, the Company made a settlement proposal for payment to be made to the FCCB bond holders over a three year period in certain proceedings which were pending before the Securities Appellate Tribunal in appeal against an order passed by SEBI. On 4 July 2013, the Company Petition for winding up was fixed for hearing on 26 July 2013. In order to forestall the hearing of the Company Petition, the Appellant made an announcement on the website of the Bombay Stock Exchange to the effect that the Board of Directors had decided to make a reference to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985 as the accumulated losses had exceeded the net worth of the Company as per the audited financial results on 30 June 2013. On 19 July 2013, the Company made a corporate announcement on the BSE website of its audited financial results for a period of nine months ending on 30 June 2013. On 19 July 2013, a reference was filed before the BIFR which was announced on 25 July 2013 in a corporate statement on the website. On 26 July 2013, the hearing of the Company Petition for winding up was fixed on 29 July 2013, when the Court was informed that a reference has been filed before the BIFR. This Court has been informed during the course of the hearing of the appeal that the reference was found not to be maintainable on 12 August 2013.11. The Learned Single Judge has considered the facts and circumstances which have been adverted to in the earlier part of this judgment and has arrived at the following conclusion:The Promoters/Directors of the Company have therefore left no stone unturned in ensuring that no amount whatsoever is paid to the Petitioner/bondholders of the FCCBs despite an amount of approx. Rs. 586 crores being due and payable to them till date. If at all the net worth of the Company has been eroded, there is no doubt that the same is the creation of the Promoters/Directors of the Company who have siphoned away the moneys from the Company with the sole intention of avoiding repayment of the amounts due under the FCCBs. The order passed by this Court on 9th October, 2012 cannot be said to have secured the claim of the Petitioner since as set out in the said order that was the best that could have been done by the Court whilst passing an order under the provisions of Order 38 Rule 5 of the Code of Civil Procedure, 1908. Under the circumstances the Promoters/Directors of the Company cannot be trusted with the affairs of the Company and if the Provisional Liquidator is not appointed, the Promoters/Directors of the Company who are only interested in personal gains and not in the interest of any of its shareholders, creditors, or workers will within no time bring the company to a standstill by siphoning/milking its balance assets by showing losses in its business and even bringing its 800 workmen on the streets. However, since Mr. Devetre has submitted that the Company is engaged in sensitive business viz. the CC Business and the office of the Liquidator High Court, Bombay may not be equipped to deal with the complex handling of such business, I appoint Shri Salil Shah, Advocate, as the Administrator of the Company. The Administrator shall take symbolic possession of the property, effects, actionable claims, books of accounts, statutory records and other documents of the Company. The Administrator may also retain copies of books of accounts, statutory records and other records as he may deem fit. The Directors of the Company shall provide all information sought by the Administrator pertaining to the working/affairs of the Company and shall forward the agenda of all Board Meetings/General Meetings at least 72 hours in advance to the Administrator and shall not take up any matter at any meeting which is not mentioned in the agenda. In case of emergency the Directors may hold a Board Meeting at short notice with the permission of the Administrator. However, the Administrator shall ensure that the day to day functioning of the Company is not hampered in any manner whatsoever.12. The Respondent applied before the Learned Single Judge for the appointment of a provisional liquidator. The Learned Single Judge has held, and in our view with justification, that if a Provisional Liquidator is not appointed, the promoters/directors of the Company who have been motivated by personal gain and not by the interests of the shareholders, creditors or workers may bring the business of the Company to a stand still by siphoning of its balance assets. This apprehension cannot be regarded as unfounded having regard to the course of events noted in the earlier part of the present judgment. However, it was urged on behalf of the Appellant before the Learned Single Judge that since the Company is engaged in a sensitive business, of Cloud Computing, the office of the Liquidator may not be equipped to deal with the complex handling of such a business. The Learned Single Judge hence directed that an administrator should be appointed. The Learned Single Judge has provided adequate safeguards by directing that the administrator will ensure that the day to day functioning of the Company is not hampered. The appointment of the administrator has been made, in these circumstances, with a view to safeguard the interests of the shareholders, creditors and the workers. Mr. R.A. Dada, Learned Senior Counsel for workers submitted that forty per cent of the turnover is paid towards the salaries of the employees and many of the employees were engaged in both software and hardware business. As the Learned Single Judge noted, having regard to the track record of the promoters/directors, it was necessary in the interests of employees themselves that an administrator should be appointed in the absence of which, in all likelihood, the business and assets would be wasted and the business would be brought to a standstill. The Learned Company Judge has acted within jurisdiction in issuing this direction.