2014 (1) TMI 1476 - HC - Companies Law

Winding up of company - Inability to pay debts - Failure to pay the amounts due under the bonds - Held that - advertisements have been placed in the two local newspapers as well as in the Maharashtra Government Gazette. Furthermore, though the returnable date of hearing the Company Petition was scheduled as 21st October, 2013, in fact, the Company Petition was ultimately taken up by this Court for final hearing only on 11th November, 2013 (i.e. beyond a period of 14 days). Thus the hearing of the Company Petition finally took place more than a month after the advertisement was published in the newspapers and the Maharashtra Government Gazette. No person, creditor or contributory has come forth to oppose or challenge the winding up of the Company. In the facts and circumstances of the case, it cannot be gainsaid that the Company did not have notice of the returnable date of the Company Petition. ZIL and its promoters/director through their decision and announcement dated December 27, 2010 made a promise to the shareholders without intending to perform the same. They diverted the monies realized from the sale of the MSD Division for the benefits/interests of promoters and/or Directors and subsidiaries I also do not see any compelling reasons to use the monies realized from sale of MSD Division for any purpose not the least for paying to group entities for various purposes other than for redemption of FCCBs, which was not only the sole purpose for which approval of shareholders was taken but was also very crucial for protecting the shareholders value - prima facie, ZIL and its promoters/directors employed a device or artifice to fraudulently divert the sale proceeds of its MSD Division. Promoters/directors of ZIL have in a devious manner attempted to take away the assets of a listed company directly and indirectly for their own benefit or for benefit of entities owned and controlled by them. Such conduct of promoters/directors not only defeats the whole purpose of seeking shareholders approval for crucial decisions but also jeopardizes the integrity of the securities market - Company has failed to rebut the presumption of its insolvency and is therefore liable to be wound up. In the present case where the Company is unable to pay its debts as and when due, has admittedly committed a default in the payment of the amounts due under the 2011 Bond and the 2012 Bonds and is admittedly insolvent, an order for winding up of the Company must follow as a matter of course - it is futile for the Company to distance itself from the actions of the Promoters and Directors who admittedly hold almost 65% of the shareholding of the Company and who have been found by the SEBI and this Court to have diverted large sums of the money realized from the sale of MSD Business to corporate entities situated in Dubai and Singapore. Consequently the illegal and mala fide acts of the Promoters and the Directors of the Company are relevant and material to determine whether to pass an order for winding up of the Company. Administrator receiving claims which along with the claim of the Petitioner exceeds the amount received by way of sale consideration of the sale of the CC Business and the sale of the immovable properties and fixed assets of the Company, then the present order of winding up of the Company shall forthwith be made operative without any further orders and the Official Liquidator shall forthwith take charge of the affairs of the Company. However, if the Petitioner s present claim along with the other claims received can be satisfied from the sale proceeds of the CC Business and the sale proceeds of the immovable properties and fixed assets of the Company, the same shall be disbursed to the Petitioner as well as other creditors to the extent of their claim, and the order of winding up of the Company shall stand set aside and the surplus if any shall be handed over to the Company - Decided in favour of Petitioner.

Issues Involved:
1. Winding up of the Company.
2. Debt owed to the Petitioner.
3. Default on bond repayments.
4. Misuse of sale proceeds.
5. Termination of Petitioner as Trustee.
6. Valuation of Company's assets.
7. Reference to BIFR.
8. Compliance with procedural rules.
9. Sale of Cloud Computing Business.
10. Impact on employees and shareholders.
11. Siphoning of funds.
12. SEBI's investigation and orders.

Detailed Analysis:

1. Winding up of the Company:
The Petitioner sought the winding up of Zenith Infotech Limited ("the Company") due to its failure to repay debts. The Court admitted the winding up petition, citing the Company's insolvency and inability to pay its debts.

2. Debt owed to the Petitioner:
The Petitioner, a US National Banking Corporation, claimed the Company owed it US $36,141,167.66 under 2011 Bonds and US $53,915,333.33 under 2012 Bonds. The Company had issued convertible bonds in 2006 and 2007, which were due for repayment in 2011 and 2012, respectively.

3. Default on bond repayments:
The Company failed to repay the 2011 Bonds on the maturity date of 21st September 2011, leading to the Petitioner issuing an Event of Default Notice. The Company acknowledged the default in its announcement on the Bombay Stock Exchange (BSE).

4. Misuse of sale proceeds:
The Company sold its Remote Monitoring and Management Business (MSD Business) for US $54,712,461 but did not use the proceeds to repay the bonds as promised. Instead, significant amounts were transferred to related entities in Dubai and Singapore, indicating a misuse of funds.

5. Termination of Petitioner as Trustee:
The Company attempted to terminate the Petitioner as Trustee, claiming the Petitioner acted against its interests. The Petitioner challenged this termination, stating it was contrary to the Trust Deed, which required an extraordinary resolution by three-fourths of the bondholders.

6. Valuation of Company's assets:
The Court appointed Ernst and Young (E & Y) to value the Company's Cloud Computing Business (CC Business), which was initially valued at INR 598 million and later revised to INR 194-211 crores. The Petitioner also engaged Grant Thornton, which valued the CC Business at INR 198-239 crores.

7. Reference to BIFR:
The Company made a reference to the Board for Industrial and Financial Reconstruction (BIFR), claiming its accumulated losses exceeded its net worth. The Court noted that the promoters/directors acted dishonestly and left it to the BIFR to decide on the reference's registration.

8. Compliance with procedural rules:
The Company argued that the Petitioner did not comply with Rules 24 and 30 of the Companies (Court) Rules, 1959, regarding the advertisement of the petition. The Court found that the advertisements were placed in newspapers and the Maharashtra Government Gazette, and any procedural defects were curable.

9. Sale of Cloud Computing Business:
The Court directed the sale of the CC Business as a going concern to ensure employees retained their jobs. The Administrator was tasked with overseeing the sale, with the proceeds to be used to satisfy the Petitioner's claim.

10. Impact on employees and shareholders:
The Company argued that winding up would affect employees and shareholders. The Court acknowledged this concern but emphasized the need to protect the interests of creditors and ensure the Company's assets were used to repay debts.

11. Siphoning of funds:
The Court found that the promoters/directors siphoned funds to related entities in Dubai and Singapore, defrauding shareholders and creditors. SEBI's investigation corroborated these findings, noting fraudulent diversion of sale proceeds.

12. SEBI's investigation and orders:
SEBI directed the promoters to furnish a bank guarantee for US $33.93 million, which they failed to provide. The Court noted SEBI's findings and emphasized the need to consider the promoters' conduct in deciding the winding up petition.

Conclusion:
The Court ordered the winding up of Zenith Infotech Limited, appointing the Official Liquidator with specific directions for the sale of the CC Business and other assets. The winding up order was stayed until 16th April 2014 to facilitate the sale, ensuring employees' interests were considered. The Court emphasized the promoters' dishonest conduct and the need to protect creditors' interests.

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