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2013 (10) TMI 571 - HC - Companies LawWinding up - Inability to pay debts - Held that - The Company offered US 33 million 3.0 % convertible bonds 2011 due for repayment or redemption in August 2011, and on 14th August 2007 it also offered US 50 million 3.0 % convertible bonds 2012 due for repayment or redemption in August 2012. The Petitioner is the Trustee holding the aforesaid bonds in trust for the bondholders, who subscribed to the said bonds. The Petitioner has repeatedly admitted that payment under the said bonds has become due to the bondholders - The Company admitted its liability towards repayment of FCCBs by making an announcement on the BSE dated 13th October, 2011, inter alia, stating that the Company has defaulted on its US 33 million FCCBs which were due on 21st September, 2011 and is in negotiation with the bondholders to extend the time of repayment. The Company also stated that it has 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. If there is no dispute as to the company s liability, the solvency of the Company might not constitute a standalone ground for setting aside a notice under section 434(1)(a), meaning thereby that 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. I am therefore satisfied that the amount as claimed by the Petitioner in the Petition is due and payable by the Company to the Petitioner. However, the Company despite receiving the statutory notice has failed and neglected to make the payment as called upon by the Petitioner. The defence raised by the Company is totally moonshine and completely lacks merits. I am therefore satisfied beyond any doubt that the Company is unable to pay its debts. The Company Petition is therefore admitted and made returnable on 16th September, 2013 - Following decision of IBAHealth (India) Pvt. Ltd. v. Info-Drive Systems Sdn. Bhd. 2010 (9) TMI 229 - SUPREME COURT OF INDIA - Decided in favour of Appellant. Appointment of provisional liquidator - Held that - The Promoters/Directors of the Company after repeatedly stating that they are selling/disposing of the Undertaking/Division to make repayment of FCCBs and even after the sale of the MSD Business stating that the consideration received will be utilised for repayment/partial repayment of the FCCBs, did not make any payments towards FCCBs to the Petitioner/bondholders but instead in the aforestated manner siphoned away the consideration thereby defrauding its shareholders and its creditors including the Petitioners/bondholders - 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 - Administrator of the Company is appointed. The Administrator shall take symbolic possession of the property, effects, actionable claims, books of account, statutory records and other documents of the Company. The Administrator may also retain copies of books of account, 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. Whether reference made to BIFR sustainable - Dishonest conduct of company - Held that - Section 16 of SICA obliges the Board to make such inquiry as it may deem fit for determining whether any industrial company has become a Sick Industrial Company in accordance with the procedure prescribed therein. In view thereof, the decision on the issue as to whether the opinion formed by the Board of Directors is honest and bona fide leading to the filing of a reference before the BIFR also falls within the realm of inquiry by the BIFR under section 16 of the SICA. In my view, any attempt by this Court to determine whether the reference filed by the Company is bona fide or not would tantamount to trespassing on the jurisdiction of the BIFR. In view thereof, though I have expressed my view viz. that the Promoters of the Company are absolutely dishonest and have siphoned away the funds of the Company in the manner set out in detail hereinabove and are responsible for the state of affairs of the Company prevalent as of date, I leave it to the BIFR to decide whether the Reference filed by the Company should be registered and/or further entertained. The only direction by this Court to the office is, to forward a copy of this Order to the BIFR for its independent consideration at the time of registering of the Reference and proceeding with the same, if so registered - Decided in favour of appellant.
Issues Involved:
1. Petition for winding up of the company. 2. Admission of the company's liability. 3. Termination of the trustee's appointment. 4. Allegations of siphoning off funds. 5. Appointment of a Provisional Liquidator. 6. Bona fides of the BIFR reference. Issue-wise Detailed Analysis: 1. Petition for Winding Up of the Company: The Petitioner, a US National Banking Corporation, sought the winding up of Zenith Infotech Limited due to the company's failure to repay its debts under convertible bonds issued in 2006 and 2007. The company had issued $33 million 3.0% convertible bonds due in 2011 and $50 million 3.0% convertible bonds due in 2012, which were not repaid upon maturity. The Petitioner, as the trustee for the bondholders, demanded repayment, but the company defaulted. 2. Admission of the Company's Liability: The company admitted its liability multiple times, including in an Explanatory Statement dated 27th December 2010, an announcement on the Bombay Stock Exchange (BSE) on 13th October 2011, and an affidavit dated 17th October 2011. Despite these admissions, the company did not repay the bonds. The company's failure to utilize the proceeds from the sale of its Remote Monitoring and Management Business (MSD Business) for repayment further demonstrated its inability to pay its debts. 3. Termination of the Trustee's Appointment: The company attempted to terminate the Petitioner's appointment as trustee, citing clause 16.2 of the Trust Deed, which required an extraordinary resolution by three-fourths of the bondholders. No such resolution was passed, making the termination void. The court held that the trustee's role was to act in the best interest of the bondholders, and the company's attempt to terminate the trustee was baseless and untenable. 4. Allegations of Siphoning Off Funds: The company sold its MSD Business for $54,712,461 but did not use the proceeds to repay the bondholders. Instead, significant amounts were siphoned off to related parties and other questionable payments. For instance, $27 million was paid to Zenith FZE, Dubai, a related entity with minimal paid-up capital, without proper disclosure to shareholders. The court found that the company's promoters/directors had dishonestly misrepresented their intentions and defrauded shareholders and bondholders. 5. Appointment of a Provisional Liquidator: Given the company's conduct and the siphoning of funds, the court found it necessary to appoint a Provisional Liquidator to protect the interests of the creditors and shareholders. However, considering the company's sensitive business, an Administrator, Shri Salil Shah, Advocate, was appointed instead. The Administrator was tasked with taking symbolic possession of the company's assets and ensuring that the day-to-day functioning was not hampered. 6. Bona Fides of the BIFR Reference: The company filed a reference with the Board for Industrial and Financial Reconstruction (BIFR) claiming that its accumulated losses had exceeded its net worth. The Petitioner argued that this reference was not bona fide and was intended to stall the winding-up proceedings. The court acknowledged the dishonest conduct of the company's promoters but left the determination of the reference's bona fides to the BIFR. The court directed that a copy of the order be forwarded to the BIFR for its independent consideration. Conclusion: The court admitted the winding-up petition, directed the advertisement of the petition, and appointed an Administrator to oversee the company's affairs. The court also highlighted the dishonest conduct of the company's promoters and left the question of the BIFR reference's bona fides to be determined by the BIFR.
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