2014 (4) TMI 1327 - HC - SEBI

Diversion of funds to subsidiaries - appellant defaulted on repaying bonds amounting to over US 100 million - admission of a petition for winding up - appellant and its wholly owned subsidiary Zenith Infotech FZE Dubai entered into an Asset Purchase Agreement (APA) for the sale of the remote monitoring and management business (MSD division) to Zenith RMM LLC for a sum of about US 55 million - 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. HELD THAT - The appellant sought to justify its failure to comply with the representations made by it to the bondholders shareholders the Bombay Stock Exchange the National Stock Exchange and the Bombay City Civil Court. It sought to do so on the basis of the alleged offer. It was necessary therefore to consider the case. Had the learned Judge failed to do so the appellant would have been justified in raising a grievance that it s case had not been considered. It was also necessary to consider the conduct of the respondent as the appellant sought to resist the order of winding up. One of the important factors for a court to consider such an argument is the bona fides of the persons in the management. This is especially so when the company is admittedly insolvent on the date on which the petition is heard. This aspect becomes even more important when the company refuses to discharge its obligations and fails to come up with any viable scheme for its revival. Appellant made a strong plea for the mode in which the only existing business ought to be sold. It was necessary therefore for the court to consider whether any suggestion by such an appellant ought to be considered. We in fact do not see how the learned Judge could have avoided considering the conduct of the appellant in these circumstances. Had the appellant come forward honestly admitting its liability expressing its regret for having failed to not merely honour its obligations but also its representations and indicated a genuine intention to repay / redeem the bonds a lenient view could have been pressed for. The appellant has however supported its stand shown no remorse and expressed no regret for its failure to pay over US 100 million and not offered to bring back the US 44 million diverted by it to Zenith Dubai and others. It is therefore not open to the appellant to contend that the observations insofar as they are adverse to the appellant were 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. 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. Winding up petition - The Official Liquidator would also have to bring the assets of the appellant to sale in a fair open and transparent manner. The appellant is always at liberty to apply to the company Judge for any directions to ensure 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. The appellant does the respondent no favour by repaying / redeeming the bonds. It is bound to do so. The appellant does not do any one a favour by making the offer. In any event the assets of the company must be sold in a fair and proper manner and in accordance with law. Any party including the appellant would be entitled to have the same ensured by making a proper application before the company court. The appeal is dismissed. However the winding up order is stayed upto and including 31st August 2014 in order to facilitate the possible sale of the Cloud Computing business of the appellant as a going concern as directed by the impugned order. (ii) The application for expunging the remarks is rejected. The findings of the learned Judge and the adverse remarks except to the extent indicated above are confirmed.

Summary

Issues Involved:
1. Whether the appellant company ought to be wound up.
2. Whether the adverse remarks against the appellant, its promoters, and directors should be expunged.

Detailed Analysis:

1. Whether the appellant company ought to be wound up:

The court analyzed the appellant's financial situation and conduct, noting that the appellant defaulted on repaying bonds amounting to over US$ 100 million. The court highlighted that the company had sold its MSD division for US$ 55 million, promising to use the proceeds to repay bondholders, but failed to do so. Instead, the funds were diverted to subsidiaries and group entities, leaving the company unable to meet its liabilities. The court found that the company's assets were inadequate to repay the debt, and there was no viable plan for revival. The appellant's refusal to bring back diverted funds further demonstrated a lack of intention to repay its debts. Consequently, the court deemed the winding-up order inevitable, as the company's substratum had eroded with no hope of revival.

2. Whether the adverse remarks against the appellant, its promoters, and directors should be expunged:

The court considered the appellant's request to expunge adverse remarks made against its promoters and directors, arguing that they were not impleaded in the proceedings. The court held that in a winding-up petition, adverse findings against directors or promoters in general can be made without their specific impleadment. The court found that the appellant's conduct, including false representations and diversion of funds, justified the adverse remarks. The court emphasized that the appellant's actions were fraudulent and deceitful, aiming to mislead bondholders and divert funds beyond the court's reach. Therefore, the court refused to expunge the remarks, affirming that the findings were necessary and justified based on the appellant's conduct.

Conclusion:

The appeal was dismissed, and the winding-up order was upheld. The court stayed the winding-up order until a specified date to facilitate the sale of the appellant's Cloud Computing business as a going concern. The adverse remarks against the appellant, its promoters, and directors were confirmed, with the court rejecting the application to expunge them. The respondent was awarded costs to be recovered in the winding-up proceedings.