Case: The Bank of New York Mellon Vs. Zenith Infotech Limited & Others

ORAL JUDGMENT: CJ.1. This appeal is directed against the order dated 1 March 2012 of the learned Single Judge on the appellant-plaintiffs Chamber Summons.2. Respondent No.1 herein-Zenith Infotech Ltd., (defendant No.1 in the suit) offered on 15 September 2006 US $ 33 million 3.0% convertible bonds 2011 due for repayment or redemption in August 2011 and similarly on 14 August 2007 defendant No.1 also offered US$ 50 million 3.0% convertible bonds 2012 due for repayment or redemption in August 2012. The bonds were issued at 100% of the principal amount. The plaintiff is the trustee holding the aforesaid bonds in trust for the bondholders who subscribed to the aforesaid bonds.3. There is no dispute about the fact that when the maturity date of repayment/redemption of the 2011 bonds came in August/September 2011, defendant No.1 did not make any payment. The appellant-plaintiff who is the Trustee appointed under the relevant Trust Deeds for both the series of bonds addressed a Notice of Event of Default and the Notice of Cross Default in September 2011, calling upon defendant No.1 to pay the amounts due under the 2011 bonds. Since no payment was forthcoming from defendant No.1, the plaintiff under the instructions of the instructing Bondholders, sent a letter of demand dated 10 October 2011 notifying that the 2011 Bonds are immediately due and payable at their redemption amount and calling upon defendant No.1 to pay the outstanding amounts. Similarly, in view of the cross default, the plaintiff addressed notices in October 2011 to defendant No.1 being Notice of Acceleration and declaring the 2012 Bonds as due and payable.4. The plaintiff gathered from the public announcement made by defendant No.1 that the Remote Monitoring and Management Business (M.S.D. Business) of the defendant No.1 was spun off into defendant No.4 in a related party transaction and that defendant No.4 was owned 60% between defendant No.5 and defendant No.6, promoters of defendant No.1. Plaintiffs case is that in view of the above defaults and in light of the public information, the counsel for instructing Bondholders sent a letter dated 7 October 2011 requesting details of the proposed transaction. The same was not complied with. The plaintiff also came to learn that on 13 October 2011 defendant No.1 had stated in an announcement to the Bombay Stock Exchange that 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.. The plaintiff also came to know that the Board of Directors of defendant No.1 had informed the shareholders of defendant No.1 company by giving explanatory statement to the agenda notice of special business of the Extra Ordinary General Meeting of defendant No.1 company on 29 January 2011. The Explanatory Statement dated 27 December 2010 read as under:-EXPLANATORY STATEMENT PURSUANT TO SECTION 173(2) OF THE COMPANIES ACT, 1956 IN RESPECT OF THE SPEECIAL BUSINESS. The Company has issued Foreign Currency Convertible Bonds of US $ 33 million in August, 2006 and US $ 50 million in August 2007. These bonds would become due for repayment/redemption in August, 2011 and August, 2012. The Bond of Directors propose to augment the funds for the purpose in one or more of the following methods (including) through any combination thereof:(i) To borrow moneys from Domestic markets and/or through External Commercial Borrowings up to an amount not exceeding Rs.1,500,00,000/- (Rupees One Thousand Five Hundred Crores).(ii) To sell and/or lease the business and/or divisions including the subsidiaries (wholly and partly) of the company and for that purpose to issue debt securities/bonds, etc., in the domestic or international markets, as permitted by law so as to redeem/re-pay the outstanding Foreign Currency Convertible Bonds which would come for repayment/ redemption in August, 2011 and August 2012. 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 the extent of the shares held by them in the Company.By Order of the Boardfor ZENITH INFOTECH LIMITED(RAJ KUMAR SARAF)CHAIRMAN & DIRECTOR(emphasis supplied)5. Since the defaults continued, plaintiff ultimately filed the present suit in December 2011 and prayed for ad-interim/interim reliefs in the various Notices of Motion filed by the plaintiff.6. On 26 October 2011 the learned trial Judge passed the following order directing defendant No.1 Company to make certain disclosures:-The Defendant Nos. 1 to 6 are directed to disclose on oath, the details of the sale/purchase/transfer of the Remote Monitoring and Management Business including the valuation in relation to such sale/purchase/transfer, the amount of proceeds paid or other amounts or any other consideration paid in relation to such sale/purchase/transfer and terms and conditions of such sale/purchase/transfer including any amounts or other consideration paid to Defendant No.1, Defendant No.5 and Defendant No.6 or its promoters, and the capitalisation and ownership of Defendant No.2.S.O. To 14th November, 2011.7. On 14 November 2011 the learned counsel for defendant No1, 5 and 6 made a statement that till further orders the said defendants will not dispose of, sell, transfer, alienate or create any third party right or interest in respect of the cloud computing business of defendant No.1. Thereafter on 25 November 2011 the learned trial Judge referred to the objection of defendant Nos.2,3 and 4 that they were ready to tender the affidavit containing disclosures as directed by the previous order of the Court, but submitted that his clients should be protected by directing the plaintiff not to part with the said disclosures made on affidavit except to the bond holders who are interested in the subject dispute and that in turn the bond holders should not part with the disclosures made on oath by defendant Nos. 2, 3 and 4. Since the said suggestion was acceptable to the plaintiff, the learned trial Judge passed the order on 25 November 2011 recording the following arrangement mutually acceptable to the parties:-4. In view thereof, the following order is passed:(i) The Affidavit dated 4th November 2011 of Defendant Nos.2,3 and 4 is taken on record.(ii) A copy of the said Affidavit dated 4th November2011 is handed over to the learned Advocate for the plaintiff.(iii) The Learned Advocate for the plaintiff states that the plaintiff as well as about six bond holders shall not disclose the particulars set out in the said Affidavit to any other person. However, they shall produce the said Affidavit if required to do so before any Court of Law or a statutory authority. The statement is accepted.(iv) This order shall not prejudice the contention of Defendant Nos.2,3 and 4 that this Court has no jurisdiction to try and entertain the Suit.The learned trial Judge also clarified on 29 November 2011 that the bond holders shall be at liberty to share the information disclosed by defendant Nos. 1 to 6 with their respective legal counsel.8. Coming back to the Notices of Motion taken out by the plaintiff, plaintiff prayed for security of Rs.450 crores with interest thereon. The learned trial Judge by order dated 23 December 2011 held that for the purpose of deciding the application, valuation of the cloud computing business of defendant No.1 be made by reputed valuers and the valuation report placed before the Court. The learned trial Judge also directed defendant No.1 to place on affidavit all the particulars of payments made to various parties from the sale consideration of the MSD business along with other documents in support thereof.9. On 14 February 2012 the learned trial Judge noted that in the valuation report submitted by M/s.Ernst & Young Pvt. Ltd., the cloud computing business of the defendant No.1 was valued at Rs.5983 million i.e. Rs.598 crores. The learned trial Judge then specifically gave the following reasons for not passing any further ad-interim orders beyond injunction against disposal, alienation, transfer, creation of third party interest in respect of cloud computing business:-1. Pursuant to the Order dated 23rd December 2011, M/s.Ernst & Young Pvt. Ltd. have today submitted their Valuation Report before this Court. I have noted that in the report the Valuers have valued the cloud computing business of the Defendant No.1 at Rs.5983 million. According to the Plaintiffs, their claim is in the sum of approximately Rs. 450 crores as on the date of filing of the Suit. In view thereof, at this ad-interim stage, if the Order passed by this Court dated 14th November 2011 directing Defendant Nos.1, 5 and 6 not to dispose of, alienate, transfer and/or create third party interest in respect of the cloud computing business is continued, it will protect the interest of the Plaintiffs. In view thereof, I pass the following Order:-ORDERi) Pending the hearing and final disposal of the Notice of Motion, Defendant Nos.1, 5 and 6 shall not dispose of, alienate, transfer and/or create third party interest in respect of the said cloud computing business of the Defendant No.1.ii) Subject to the convenience of the Court taking Notice of Motion for the year 2011, the above Notice of Motion be placed for hearing and final disposal on 5th March, 2012.iii) In the meantime, the said Report is once again put in a sealed cover and handed over to the Prothonotary and Senior Master of this Court for safe keeping.iv) Parties shall be at liberty to move the regular Court seeking permission to obtain a copy of the Valuation Report submitted by the Valuers Ernst & Young Pvt. Ltd. Needless to add, the parties shall be at liberty to raise all contentions, if such application is made before the regular Court. (emphasis supplied)10. The learned trial Judge while directing that the valuation report be put in a sealed cover, expressly granted liberty to the parties to move the Court seeking permission to obtain copy of the valuation report. The plaintiff accordingly filed Chamber Summons No.346 of 2012 seeking order of the trial Judge for copy of the valuation report. In the impugned order dated 1 March 2012 the learned trial Judge has made the following observations:-7. Considering the rival submissions, as Notice of Motions are pending for final disposal, I am of the view that while considering those motions, if necessary, the Court will permit the parties to verify and/or give a copy of the Valuation Report. The ad-interim order so granted, even after taking note of the Valuation Report, has been continuing since then. I see there is no reason to permit a copy of the report in advance, before hearing the Motions in question.8. Admittedly, there is no challenge to the Valuation Report. I am inclined to accept the submission that in such matter the Valuation Report submitted by the Expert Valuers which have secret material or formula and confidential and/or necessary materials need not be disclosed to other side unless very essential or any challenge is raised. The requirement is the basic satisfaction of the Court, as well as, the parties that the valuation so made is correct or not and if made what is the basis. There is no question of breach of principle of natural justice, in such matter. Considering the fact that the Court has, after verifying the amount so mentioned, not permitted the parties immediately to have a copy of the same, that itself in my view, also the additional factor, the Court will consider at the time of hearing of Notice of Motions. (emphasis supplied)It is the aforesaid order which is challenged in this appeal.11. Mr. Janak Dwarkadas, learned counsel for the appellant-plaintiff submitted that the learned trial Judge, after having proceeded on the basis that the plaintiff has a right to challenge the valuation report, has erred in not considering that the plaintiff would not be able to challenge the valuation report without getting a copy of the same in advance. It is further submitted that the observation of the learned trial Judge that while considering those Motions, if necessary, the Court will permit the parties to verify and/or give a copy of the Valuation Report will not be of any assistance to the plaintiff, because the learned trial Judge has specifically mentioned that there was no reason to permit a copy of the report in advance before hearing the Notices of Motion in question. It is submitted that for controverting the valuation contained in the valuation report in question, the plaintiff will have to go through the said report and get valuation made by the plaintiffs valuer. The learned counsel for the appellant-plaintiff submitted that if valuation report is given at the hearing of the Notices of Motion, the plaintiffs would not be in a position to submit valuation report of its own valuer and, therefore, for all intent and purposes the learned trial Judge has declined the plaintiffs prayer for being supplied with a copy of the valuation report in advance.12. Our attention is invited to the explanatory statement dated 27 December 2010 sent by the defendant No.1 company to its shareholders while convening the Extra Ordinary General Meeting seeking permission to sell and/or lease the business and/or division of the defendant No.1 Company.Our attention is also invited to the affidavit in reply filed on behalf of defendant No.1 company in the City Civil Court where the shareholders of the defendant No.1 company had challenged the sale of the MSD Division and the following statement was made in paragraphs 3(c) of the said affidavit dated 17 October 2011:-(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 buyback/ redemption of FCCBs in the interest of the Company and in accordance with the applicable law and Regulations....13. Learned counsel for the plaintiff also pointed out that out of the sale consideration of 48.7 million US dollars which defendant No.1 received from sale of its M.S.D.business, defendant No.1 has paid 15.3 million US dollars (Rs.74.2 crores) to related parties including Zenith Cloud Computing Business 5.5 million US Dollars Rs.24.7 crores to Zenith UAE, Dubai and 8.7 million US dollars (Rs.42.8 crores) to VU which is a related party and is owned by the Saraf family where Devita Saraf (daughter of Raj Saraf) is the Managing Director.14. It is, therefore, submitted on behalf of the appellant-plaintiff that the plaintiff ought to be allowed to find out as to which are the assets of the defendant No.1 and whether the valuation of such assets is really Rs.598 crores as valued by the valuer appointed by the Court or whether it is less than the plaintiffs claim in the suit which is Rs.450 crores plus interest. The plaintiffs will be greatly prejudiced if the plaintiff is required to argue the Notices of motion without getting a copy of the valuation report in advance.15. On the other hand Mr. Rohit Kapadia, learned counsel for the defendants has opposed the appeal and has raised a preliminary objection against maintainability of the appeal. Learned counsel for the defendants strongly relied on the decision of the Supreme Court in Shah Babulal Khimji vs. Jayaben D. Kania & Anr., (1981) 4 SCC 8. It is submitted that the trial Judge has not decided any rights of the parties and, therefore, the appeal is not maintainable against a procedural order.16. In response to the above, the learned counsel for the appellant-plaintiff has submitted in rejoinder that one of the tests laid down by the Supreme Court is grave and substantial injustice to the appellant by even a procedural order of the trial Court. If the decision of the trial Court prejudices the procedural rights of a party then also the appeal would be maintainable.17. In Shah Babulal Khimji vs. Jayaben D. Kania & Anr., (1981) 4 SCC 8 , the Supreme Court has, inter alia, laid down the following principles:-There may also be interlocutory orders which are not covered by Order 43 Rule 1 but which also possess the characteristics and trappings of finality in that, the orders may adversely affect a valuable right of the party or decide an important aspect of the trial in an ancillary proceeding. Before such an order can be a judgment the adverse effect on the party concerned must be direct and immediate rather than indirect or remote. [Para 113(3)] The Courts must give sufficient allowance to the Trial Judge and raise a presumption that any discretionary order which he passes must be presumed to be correct unless it is ex facie legally erroneous or causes grave and substantial injustice. [Para 119(1)]After giving the illustrative examples of the orders which may be treated as judgments, the Supreme Court made the following pertinent observations:-122. We have by way of sample laid down various illustrative examples of an order which may amount to judgment but it is not possible to give such an exhaustive list as may cover all possible cases. Law with its dynamism, pragmatism and vastness is such a large ocean that it is well-nigh impossible for us to envisage or provide for every possible contingency or situation so as to evolve a device or frame an exhaustive formula or strategy to confine and incarcerate the same in a strait-jacket.18. Applying the aforesaid principles, 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, inspite 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.As per the valuation report cloud computing business of defendant No.1 company is valued at Rs.598 crores. If the plaintiff does not get an opportunity to get the valuation report in advance, the plaintiff will not be able to get the valuation made on its own and will not be able to test the correctness or otherwise of the valuation made by M/s.Ernst & Young Pvt. Ltd. The plaintiff will, therefore, be seriously prejudiced at the hearing of the Notices of Motion in which they are seeking interim relief directing the defendants to furnish security for the suit claim of Rs.450 crores. If the plaintiff does no get t an opportunity to get the report in advance, merely being permitted to peruse the valuation report or getting the valuation report at the hearing of the Notices of Motion, will not enable the plaintiff to submit the valuation report of its own valuer, who may disagree with the valuation report submitted by M/s.Ernst & Young Pvt. Ltd.19. The learned trial Judge while passing the impugned order did not consider that on 14 February 2012, the learned predecessor Judge had specifically reserved liberty to move the Court for seeking permission to obtain a copy of the valuation report submitted by M/s.Ernst & Young Pvt. Ltd.20. In the above view of the matter, this Court has no hesitation in holding that the impugned order of the learned trial Judge causes grave and substantial injustice. The learned trial Judge has decided an important aspect of the trial in the Chamber Summons by rejecting the plaintiffs prayer for being supplied with a copy of the valuation report in advance. The adverse effect of the impugned order on the plaintiff as explained above is direct and immediate, rather than indirect or remote.21. As regards the contention of the defendants that the valuation report contains confidential information regarding the business of defendant No.1 and, therefore, a copy of the valuation report should not be given to the plaintiff, this submission is merely based on the perception of the defendant No.1 that confidential information given by defendant No.1 to the valuer might have been indicated in the report.22. After hearing the learned counsel for the parties and with the consent of the learned counsel for the defendant No.1, at the hearing of this appeal on 22 March 2012 we had perused the valuation report and noted that only page 8 of the valuation report could be said to be containing confidential information.23. We must also place on record that on 22 March 2012 as well as today when the hearing commenced the learned counsel for the defendants were offered inspection of the valuation report contained in the sealed envelope in order to point out whether the contents of any part of the valuation report (other than page 8) contains, according to the defendants, any confidential information. Learned counsel for the defendants, however, stated that he himself is not an expert. Thereupon the Court has permitted the learned counsel for the defendants to enquire from their clients, but the learned counsel for the defendants has not accepted the said offer also.24. Having heard the learned counsel for the parties and having gone through the valuation report and also having gone through the previous orders of this Court particularly order dated 25 November 2011 whereby this Court had directed that a copy of the affidavit containing disclosure about the sale of MSD business of defendant No.1 company be handed over to the learned Advocate for the plaintiff and that the plaintiff as well as about six bond holders will be permitted to see the report, but they shall not disclose the particulars set out in the said affidavit to any other persons, but if required it may be produced before any Court of Law or Statutory Authority, we are inclined to allow the appeal in the same terms.

Decision reasoning: 1[ds]17. In Shah Babulal Khimji vs. Jayaben D. KaniaAnr., (1981) 4 SCC 8  , the Supreme Court has, inter alia, laid down the followingmay also be interlocutory orders which are not covered by Order 43 Rule 1 but which also possess the characteristics and trappings of finality in that, the orders may adversely affect a valuable right of the party or decide an important aspect of the trial in an ancillary proceeding. Before such an order can be a judgment the adverse effect on the party concerned must be direct and immediate rather than indirect or remote. [Para 113(3)] The Courts must give sufficient allowance to the Trial Judge and raise a presumption that any discretionary order which he passes must be presumed to be correct unless it is ex facie legally erroneous or causes grave and substantial injustice. [Para 119(1)]After giving the illustrative examples of the orders which may be treated as judgments, the Supreme Court made the following pertinentWe have by way of sample laid down various illustrative examples of an order which may amount to judgment but it is not possible to give such an exhaustive list as may cover all possible cases. Law with its dynamism, pragmatism and vastness is such a large ocean that it isApplying the aforesaid principles, we find considerable substance in the submission made on behalf of thethat 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, inspite 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.In the above view of the matter, this Court has no hesitation in holding that the impugned order of the learned trial Judge causes grave and substantial injustice. The learned trial Judge has decided an important aspect of the trial in the Chamber Summons by rejecting the plaintiffs prayer for being supplied with a copy of the valuation report in advance. The adverse effect of the impugned order on the plaintiff as explained above is direct and immediate, rather than indirect or remote.We must also place on record that on 22 March 2012 as well as today when the hearing commenced the learned counsel for the defendants were offered inspection of the valuation report contained in the sealed envelope in order to point out whether the contents of any part of the valuation report (other than page 8) contains, according to the defendants, any confidential information. Learned counsel for the defendants, however, stated that he himself is not an expert. Thereupon the Court has permitted the learned counsel for the defendants to enquire from their clients, but the learned counsel for the defendants has not accepted the said offer also.24. Having heard the learned counsel for the parties and having gone through the valuation report and also having gone through the previous orders of this Court particularly order dated 25 November 2011 whereby this Court had directed that a copy of the affidavit containing disclosure about the sale of MSD business of defendant No.1 company be handed over to the learned Advocate for the plaintiff and that the plaintiff as well as about six bond holders will be permitted to see the report, but they shall not disclose the particulars set out in the said affidavit to any other persons, but if required it may be produced before any Court of Law or Statutory Authority, we are inclined to allow the appeal in the same terms.