2015 (3) TMI 371 - HC - Companies Law

Winding up application - Loss of substratum of the company- Cancellation of 2G licenses - Held that - On the issue of loss of substratum, the order of the Appeal Court inter alia observes that the Unified Access Services Licenses ( UASLs ) were the most valuable assets of the Company and that the commercial existence of the Company depended on UASLs. It is also observed that the UASLs were undoubtedly the basis on which the Petitioner was persuaded to invest a sum of ₹ 3,500 crores in the Company (paragraph 34). The Appeal Court also observed that the indebtedness of the Company as on 8th April, 2014, is over ₹ 4,500/crores (Paragraph 40) and that the Respondent No.2 has not denied the averment in the Petition that a minimum amount of US 18 million was required to continue the operation of the Company (Paragraph 42). In paragraph 44, the Appeal Court observed that the UASLs having been cancelled, the object for which the Company was incorporated and in any event the object on the basis of which the Petitioner had invested over ₹ 3,500 crores has not merely substantially, but had entirely failed. Further, that there was lack of any prospect of revival of the Company and that it was established beyond doubt that the existing and probable assets are insufficient to meet the existing liability. The Appeal Court also observed that the purported scheme proposed by the Respondent No. 2 for revival of the Company inspired no confidence. Accordingly, the Appeal Court concluded that, it has been established that the substratum of the company has gone. There is no prospect of money being brought in by anyone to make it a commercially viable enterprise. In paragraph 51, the Appeal Court further observed that the Company would be unable to do any business even unrelated to the 2G licenses for it does not have the financial capacity to do so. Any attempt to do any other business, including related to the three subsisting licenses would only result in disastrous consequences plunging the company to a situation far worse than it is today. The Appeal Court dismissed the Respondent No.2's purported scheme by stating that, the Scheme inspires little, if any, confidence. It is vague and without material particulars. and in paragraph 61 concluded that they were in entire agreement with the Single Judge that the Company had lost its substratum and that any revival was unrealistic. As regards the submission of the Respondent No. 2 that the PMLA proceedings are a subsequent event and that subsequent events cannot be a ground for winding up, as set out here in above and in paragraph 100 of the order of the Appeal Court, the subsequent facts can be relied upon by the Company Court while considering a Petition under Section 433 (f) of the Act on just and equitable ground. The subsequent events may be pleaded either by amending the Petition or by filing further affidavits. In any case, the events mentioned in the said charge-sheet are events which in fact took place prior to the filing of the present Petition. The charge-sheet was however filed after the Petition was filed as stated above. In my view, invocation of the Put Option is a contractual right available to Respondent No.2. The exercise of the right under the Put Option Deed would not disentitle Respondent No. 2 from resisting the Petition unless the Petitioner accepts the option exercised by the Respondent No.2. I have independent of the issue qua the Respondent No. 2 unconditionally withdrawing the CLB proceedings and once again reiterating the same in defence to the above Petition, held hereinabove that the said allegations are not acceptable. In any event, from a perusal of the contents of the said letter I am of the view that the Petitioner is correct in its submission that the allegations made in the Petition which were unconditionally withdrawn, were without any substance, since Mr. Balwa has in the said letter attributed the fate meted by Etisalat to other authorities who allegedly had a sinister design to drive away Etisalat from this country. In view of the above facts and circumstances, I am satisfied that the Company has lost its substratum; there exits a deadlock between the main shareholders of the Company; there is complete lack of faith and probity resulting in irretrievable breakdown between the major shareholders of the Company; the liabilities of the Company have far exceeded its assets; the scheme propounded by Respondent No. 2 is unrealistic, speculative and unworkable and therefore a case is made out by the Petitioner to wind up the Company under Section 433 (f) of the Act. The Company Petition is allowed. - Winding up application accepted.

Summary

Issues Involved:
1. Loss of substratum of the Respondent No. 1 Company.
2. Dysfunctional Board of Directors.
3. Insolvency of the Respondent No. 1 Company.
4. Complete lack of probity, loss of faith, and breakdown of relations between shareholders.
5. Allegations of misconduct and mismanagement by the Petitioner.
6. Alleged collusion with banks by the Petitioner.
7. Alleged illegal acts of the Petitioner's nominees.
8. Invocation of Put Option by Respondent No. 2.
9. Failure to obtain FIPB approval.
10. Subsequent events and their consideration in the Petition.

Detailed Analysis:

1. Loss of Substratum:
The Petitioner argued that the Company lost its substratum due to the quashing of the 2G licenses by the Supreme Court, rendering it unable to carry on its principal business. The Respondent No. 2 contended that the Company still held valid licenses for ILD, NLD, and ISP and could potentially revive its business. However, the Court found that the Company had indeed lost its substratum as it was unable to operate its principal business, and the purported revival scheme proposed by Respondent No. 2 was unrealistic and speculative.

2. Dysfunctional Board of Directors:
The Petitioner highlighted that the Board became dysfunctional after the resignation of Respondent No. 2's nominee directors, leading to a halt in decision-making operations. The Court agreed, noting that the Board could not function effectively due to the lack of a majority of Indian citizens as required under the FDI scheme.

3. Insolvency:
The Company's liabilities far exceeded its assets, with debts amounting to over Rs. 4,500 crores. The Court observed that the Company was unable to pay its debts and had no realistic prospect of revival, confirming its insolvency.

4. Complete Lack of Probity, Loss of Faith, and Breakdown of Relations:
The Court found a complete breakdown of relations between the principal shareholders, exacerbated by the involvement of Respondent No. 2's promoters in the 2G scam. This destroyed the Company's reputation and made it impossible for the Petitioner to continue the joint venture.

5. Allegations of Misconduct and Mismanagement by the Petitioner:
Respondent No. 2 alleged that the Petitioner mismanaged the Company, causing financial losses and failing to comply with roll-out obligations. The Court rejected these allegations, noting that both parties were equally involved in decision-making and that Respondent No. 2 had previously made similar allegations before the CLB, which were later withdrawn unconditionally.

6. Alleged Collusion with Banks by the Petitioner:
Respondent No. 2 alleged collusion between the Petitioner and SCB/Citi Bank to the detriment of the Company. The Court found no evidence of collusion, noting that the loans were approved by the Company's Board, including Respondent No. 2's nominees, and that the debts were undisputed.

7. Alleged Illegal Acts of the Petitioner's Nominees:
Respondent No. 2 claimed that the Petitioner's nominees unilaterally shut down the Company's operations, leading to penalties. The Court found that the decision to shut down was consensual and necessary due to the Supreme Court's cancellation of the 2G licenses and the Company's dire financial position.

8. Invocation of Put Option by Respondent No. 2:
Respondent No. 2 exercised the Put Option to exit the Company. The Court noted that this was inconsistent with Respondent No. 2's claim that the Company could be revived. However, the exercise of the Put Option did not disentitle Respondent No. 2 from resisting the Petition unless accepted by the Petitioner.

9. Failure to Obtain FIPB Approval:
Respondent No. 2 alleged that the Petitioner deliberately failed to obtain FIPB approval, causing financial loss to the Company. The Court found that the FIPB approval was rejected due to concerns about Respondent No. 2's promoters, and the Petitioner was not responsible for the failure to obtain approval.

10. Subsequent Events:
The Court held that subsequent events could be considered in a winding-up petition under Section 433(f) of the Companies Act. The PMLA charge-sheet filed against the Company and its promoters further compounded the loss of mutual faith and confidence, supporting the case for winding up.

Conclusion:
The Court concluded that the Company had lost its substratum, there was a deadlock and breakdown of relations between the shareholders, and the Company was insolvent with no realistic prospect of revival. The Petition for winding up the Company was allowed, and the Official Liquidator was appointed with liberty to seek the Court's sanction to engage a legal practitioner to assist in the performance of his duties. The application for stay of the order was rejected.