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TMI Blog2014 (4) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... hange (NSE) that it intended selling its division so as to redeem / repay the bonds. Two days after the bonds matured for payment, the appellant sold one of its divisions - MSD division for a sum of US$ 55 million. The respondent demanded payment of the 2011 bonds. As the appellant defaulted in making payment, the respondent on 12th October 2011 accelerated the demand for the payment of the 2012 bonds as well, as it was entitled to. Thereupon, the appellant once again made representations to the BSE that it had received all monies due from the sale of the MSD division and would utilize the same for partial repayment of the bonds. In an affidavit filed in a suit filed by some of the bondholders in the Bombay City Civil Court, the appellant expressly stated on affidavit that the sale proceeds received by it would be applied towards buy- back / redemption of the bonds. Contrary to the said representations and in violation of the statements to the Court the appellant admittedly did not pay a cent out of the US$ 55 million to the respondent. Instead, within 24 hours of the respondent's notice of demand, the appellant diverted about US$ 44 million mainly to the members of its grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured that within 24 hours of receiving the notice of demand an amount of about US$ 40 million out of US$ 47 million received (US$ 6 million are still in escrow) had been diverted to various group entities and other vendors and creditors. (F) There is an absolute refusal by the appellant to bring back any money from any of the subsidiaries or group companies. The assets of the appellant are wholly inadequate to meet even the liabilities of the respondent. There is nothing that even remotely suggests that the company can be revived to function as a viable commercial unit. The substratum of the company has gone with no hope for revival. The order for winding up, therefore, is inevitable. (G) Mr. Chagla, the learned senior counsel appearing on behalf of the appellant, apart from trying to establish the main case regarding the alleged offer, made various other submissions such as that there were no pleadings regarding siphoning; that the adverse remarks were made against parties who had not been impleaded; that the appellant had made a "without prejudice" offer to sell the remaining business in a fair manner. THE BONDS: 3(A). By an "Offering Circular" of 15th Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onverted, redeemed or cancelled, were to be redeemed at 128.704% of the principal amount on the maturity date. The bonds were to be issued under the trust deed between the appellant and the Bank of New York, London Branch. On 17th August, 2007, the appellant entered into a trust deed with the respondents in respect of the 2012 bonds. Clause 2.2. thereof was identical to clause 2.2 of the trust deed dated 20th September, 2006. APPELLANTS REPRESENTATION THAT IT PROPOSES SELLING ITS ASSETS TO REDEEM / REPAY THE BONDS : 4. By a notice dated 27th December, 2010, the appellant convened an extra ordinary general meeting (EOGM) on 29th January, 2011 to consider and, if thought fit, to pass a resolution according the consent of the company to its Board of directors, inter-alia, to sell its business divisions upto an amount not exceeding Rs. 1,500 crore. The explanatory statement pursuant to section 173 of the Companies Act annexed to the notice reads as follows : "The Company has issued Foreign Currency 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 Board of Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution must be read with and in the context of the explanatory statement to the notice dated 27th December, 2010, which we quoted earlier. BONDS MATURE - APPELLANT RECEIVES US$ 55 MILLION FOR SALE OF ITS ASSET 8. These four misrepresentations were before the 2011 bonds matured on 21st September, 2011. The appellant defaulted in the repayment on the maturity date. 9(A) On 23rd September, 2011, the 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. We will refer to this agreement in greater detail later. (B) The appellant states that on 27th September, 2011, an amount of about US $54.70 million was paid under the Asset Purchase Agreement. According to the appellant, under this agreement, a sum of US$ 27 million was received by its subsidiary Zenith Infotech (FZE) Dubai (hereinafter referred to as Zenith, Dubai). Whether this amount was illegally diverted to Zenith Dubai or not is one of the disputes in this matter. This agreement, which was not entered into with the respondents consent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Default; or (2) any such indebtedness for borrowed money is not paid when due, as the case maybe, within any applicable grace period originally provided for; or (3) the Company or any of its Subsidiaries fails to pay when due (or within any applicable grace period originally provided for) any amount in excess of US$1,000,000 in aggregate payable by it under any present or future guarantee or indemnity in respect of indebtedness for borrowed money (or its equivalent at the relevant time in any other currency); or ... ... ... ... ..." 12(A) On 27th September, 2011, the respondent issued a notice of default to the company. The respondents directed the appellant to make all subsequent payments in respect of the bonds to it as a trustee. (B) On 30th September, 2011, the respondents addressed a notice of cross default under condition 11(D) set out above. (C) By a letter dated 10th October, 2011, the respondents reiterated the above facts and demanded payment of all amounts due under the bonds. (D) The respondents addressed a notice dated 12th October, 2011, of acceleration of the 2012 bonds addressed to the appellant reiterating the above facts and notifying the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onitoring 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." The appellant herein was defendant No.1 to the suit. (B). The appellant and other defendants challenged this order by filing Appeal (Lodg) No.742 of 2011. The appeal was disposed of by an order dated 14th November, 2011. The appellant appears to have contended that the order did not record reasons. The petitioner herein contended that it was at the request of the defendants that the learned Judge did not record reasons. The Division Bench directed the appellant to go back to the learned Judge to consider the rival contentions. (C). The learned Judge disposed of the matter by an order dated 25th November, 2011. An affidavit dated 4th November, 2011, pursuant to the order dated 26th October, 2011, of defendant Nos.2, 3 and 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 4th November, 2011, under sections 433 and 434 of the Companies Act, 1956, calling upon the appellant to pay a sum of US $36,141,167.66 and US$ 53,95,333.33 under the 2011 and 2012 bonds. (B) The appellant, in its replies dated 5th November, 2011 and 18th November, 2011, did not dispute its liability. The appellant, however, contended that the respondent was negligent and guilty of willful misconduct and called upon the respondent to inform the appellant as to how it was protecting the interest of the bondholders and discharging its fiduciary duties. It is not surprising that Mr. Chagla, the learned senior counsel appearing on behalf of the appellant, did not press before us these and other unsustainable contentions raised in the notices. 19(A) The above company petition was admitted by an order and judgment dated 30th July, 2013. Some of the findings and observations of the learned Judge are as follows. The appellant had admitted that it had defaulted in repaying the bonds and its liability in the sum of about US$ 89 million (equivalent to about Rs. 586 crores). The appellant had sold the MSD business for US$ 54,712,461 but despite its representations had not paid a single p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the net worth of the Company has been eroded, there is no doubt that the same is the creation of the Promoters/Directors of the Company who have siphoned away the moneys from the Company with the sole intention of avoiding repayment of the amounts due under the FCCBs. The order passed by this Court on 9th October, 2012 cannot be said to have secured the claim of the Petitioner since as set out in the said order that was the best that could have been done by the Court whilst passing an order under the provisions of Order 38 Rule 5 of the Code of Civil Procedure, 1908. Under the circumstances the 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. However, since Mr. De'vetre has submitted that the Company is engaged in sensitive business viz. the CC Business and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers submitted that forty per cent of the turnover is paid towards the salaries of the employees and many of the employees were engaged in both software and hardware business. As the Learned Single Judge noted, having regard to the track record of the promoters/directors, it was necessary in the interests of employees themselves that an administrator should be appointed in the absence of which, in all likelihood, the business and assets would be wasted and the business would be brought to a standstill. The Learned Company Judge has acted within jurisdiction in issuing this direction." (C) On 24th September, 2013, the appellant filed a petition for special leave to appeal to the Supreme Court against the order and judgment dated 2nd September, 2013. The same was, however, by an order of the Supreme Court dated 30th September, 2013, dismissed as withdrawn. (D) The admission of the petition was ultimately advertised on 2nd October, 2013, in two news-papers and in the 10th October 2013 edition of the Maharashtra Government Gazette. (E) By the impugned order dated 13th December, 2013, the company was ordered to be wound up. The learned Judge also passed detailed directions regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such nature ; (iv) No related party or affiliate of the Promoter or Promoter Group shall be entitled to participate in the bid for the proposed sale of the CC Business. The term 'related party' shall have the same meaning ascribed to it in Section 2(76) of the (Indian) Companies Act, 2013 and also include 'associate' as defined under the Income Tax Act, 1961; (v) The Petitioner, Instructing Bondholders (as such persons are identified to the Company by the Petitioner from time to time) shall also be at liberty to solicit potential buyers and be actively involved in the sale of the CC Business and shall for this purpose have access to due diligence materials and reports produced by the Administrator, Auditors and Investment Bankers and to also attend all meetings with the Administrator, the Investment Banks and the law firm and also to put forth their views. If any other documents/records are required by the Petitioners, Instructing Bondholders, the Petitioner shall be at liberty to apply to this Court and obtain necessary directions; (vi) The CC Business shall be sold as a going concern to the highest bidder; (vii) The costs for the sale of the CC Busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Company Petition, then the order winding up the Company shall forthwith become operative without any further orders and the Official Liquidator shall forthwith take charge of the affairs of the Company; (xiv) The gross proceeds from the sale of the CC Business and the immovable properties and fixed assets shall be deposited with the Prothonotary and Senior Master of this Court, who shall on receipt of the same, forthwith invest the same from time to time in fixed deposit(s) of a nationalized bank, initially for a period of two months and thereafter renew the same as directed by this Court; (xv) In the event of the sale proceeds received from the sale of the CC Business and/or the sale of the immovable properties and fixed assets being sufficient to fully satisfy the claim raised in the Company Petition by the Petitioner, the Administrator shall through publication in local newspapers viz. Free Press Journal (in English) and Nav Shakti (in Marathi) invite claims from the creditors of the Company; (xvi) In the event of the Administrator receiving claims which along with the claim of the Petitioner exceeds the amount received by way of sale consideration of the sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controlled by them in blatant disregard of the approvals. The conduct of the appellant and its promoters/directors was fraudulent and deceitful and attracted the prohibitions contained in the SEBI Act. The promoters and the entities controlled by them were restrained from accessing the securities market and from buying, selling or dealing in securities directly or indirectly till further orders. The Board of directors of the appellant was directed to furnish within thirty days, a bank guarantee of a minimum tenure of one year for US$ 33.93 million. (B) The appellant filed an appeal before the Securities Appellate Tribunal (SAT). On 17th June, 2013, the appellant made a settlement proposal before the SAT in respect of the said bonds. By an order dated 23rd July, 2013, SAT set aside the order passed by SEBI on 25th March, 2013, and remanded the matter to SEBI for fresh hearing on the ground that the appellant had not been heard and that there was a violation of the principles of natural justice. (C) On 26th July, 2013, SEBI filed an appeal to the Supreme Court, challenging the order of SAT. By an order dated 27th August, 2013, the Supreme Court stayed the operation of the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the learned Judge that the appellant, its promoters and directors had siphoned the proceeds from the sale of the MSD business ought not to have been rendered for five reasons. Firstly, the findings are incorrect. Secondly, the sale proceeds were utilized for legitimate purposes and could not, therefore, be held to have been siphoned. Thirdly, there were no pleadings to this effect. There are no allegations in the petition that the appellant had siphoned the amounts or that the utilization of the amounts received under the APA were to defraud the respondent. Fourthly, the adverse findings are also against persons or entities not before the Court. Lastly, the findings were not necessary for the purpose of deciding the issues. The orders passed at the stage of admission by the learned single Judge or by the appeal court are not binding and are irrelevant at the final hearing of the petition for winding up. The court ought not to have exercised its jurisdiction by winding up the company in view of a "without prejudice" offer made by the appellant. A company is not bound to be wound up merely because it is insolvent. The appellant ought not to have been wound up as it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent that in view of the respondent's refusal to withdraw the acceleration it intended using the amount for purposes other than making payment under the 2011 bonds. The diversion of the funds upon the alleged refusal of the respondent to withdraw the acceleration of the 2012 bonds was, therefore, in any event, unjustified. 25. Thus, even assuming that the appellant establishes it's case that it made an offer to make payment against the 2011 bonds from the proceeds of the sale of the MSD business subject to the respondent withdrawing the acceleration of the 2012 bonds and that the respondent refused the offer, it would make no difference whatsoever to the liability of the appellant which stands established. 26. On the appellant's own case its resources are insufficient to discharge the liability of over US$100 million in respect of the bonds. We use the opening words "On the petitioner's case" to indicate that, that is the appellant's case. The respondent or the Official Liquidator may well be able to succeed in tracing other amounts belonging to the appellant in the hands of third parties, including an amount of US$ 27 million paid by Zenith RMM to Ze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013. This affidavit was filed only after strictures had been passed by the order admitting the petition and the order of the Appeal Court dismissing the appeal against the order. Prior thereto, there was not even a whisper of the alleged offer in even one of the over eighteen affidavits filed over a period of ten months in the above company petition and in the said suits filed in the Bombay City Civil Court and in this Court. The affidavits were filed from about 24th October, 2011, to about 5th August, 2012. In Suit No.2865 of 2011, two promoters filed over a dozen affidavits, including affidavits dated 24th October, 2011, 7th November, 2011, 7th November, 2011, 21st November, 2011, 21st November, 2011, 28th November, 2011. 2nd December, 2011, 23rd January, 2012, 2nd February 2012, 10th May, 2012, 8th August, 2012 and 5th August, 2012. There was not a whisper of the alleged offer in any of these affidavits. Nor was the alleged offer referred to in the pleadings filed in the above petition prior to the said affidavit dated 7th November, 2013. Prior to the said affidavit, the promoters had filed two affidavits dated 20th March, 2012, and affidavits dated 24th April, 2012, 13th Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondent stated that the 2011 bonds were immediately due and payable. (B) If the offer had actually been made, the respondent would, without a doubt, have referred to it at some stage in the correspondence. Their failure to do so is contrary to the normal course of conduct especially of parties such as these and in transactions as important as the ones under consideration. 34. Further, as Mr. Seervai rightly pointed out, if the appellant had any intention to pay the amounts in respect of the 2011 bonds and to avoid a cross default, it could have easily done so. It could have paid the amounts upon the receipt of the proceeds of the sale of the MSD business. The proceeds were received on 27th September, 2011. Although an event of default had occurred on 21st September, 2011, in respect of the 2011 bonds, the normal course of conduct would have been for the appellant to inform the respondent that it expected payments under the APA within less than a week and would have requested a grace period. The appellant would thereby have averted the event of a cross-default. Even assuming that the respondent was not bound to accept the same it is inconceivable that the appellant would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so significant that the case of the alleged offer is vague and devoid, not merely of material particulars, but of any particulars. On an issue as important as this, the appellant has not stated when the offer was made, how it was made and to whom it was made. Even before us, there was not even an attempt to the identify the bondholder to whom the alleged offer was made. It is not unknown that even at the appellate stage, applications are made to furnish facts that may have remained to be mentioned. It is indeed for the appeal court to decide whether the party ought to be permitted to bring fresh material on record or not. What is significant, however, is that there was not even an attempt made by the appellant to bring such facts on record even after the strong observations of the learned single Judge and the Division Bench and the arguments in this regard before us. 41. The reason for the appellant not attempting to furnish particulars even now regarding the offer is evident. It is virtually impossible for the appellant to establish this case. The case, in view of what we said earlier, is inherently improbable. The appellant's difficulties are enhanced as this case is belied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. USA were shown in the appellant's annual reports as related parties. On 11th/12th October, 2011, Vu Dubai and Zenith Cloud Computing FZC UAE (hereinafter referred to as "Cloud Dubai") became subsidiaries of Zenith Dubai, Zenith Dubai having been allotted at par 95.58% and 99.20% shares respectively of these companies. Prior to 11th/12th October, 2011, the shares in these subsidiaries of Zenith Dubai were owned and controlled by the promoters and/or members of their group . After 11th/12th October, 2011, they continued to hold shares in these subsidiaries but at a reduced percentage. Zenith Infotech Singapore Pte. Ltd. is a wholly owned subsidiary of the appellant. Vu Technologies Private Limited is an independent company. 45. Under the Asset Purchase Agreement, Zenith RMM, LLC paid (i) Zenith Dubai an amount of US$ 27 million plus 15% equity of Zenith RMM, LLC and (ii) a sum of US$ 21 million to the appellant. A further amount of US$ 6 million to be paid to the appellant is kept in escrow. (A) The appellant states that it utilized the sale proceeds received by it under the APA as follows :- (i) On 11th October, 2011, the appellant paid an amount of US$ 6 milli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... averments in the petition itself deny the offer alleged to have been made. In the petition, the petitioner set out the facts that we have already adverted to. Paragraphs 23, 24 and 25 of the petition deal with the appellant's announcement dated 13th October, 2011. Paragraph 25 of the petition reads as under : "25. The Petitioner submits that the Exchange Announcement contains the following false representation by the Company "the company was and [sic] in negotiations with the bondholders to extend the time for repayment." The Petitioner has learned from the Instructing Bondholders that this representation is a clear misrepresentation to the BSE and the Company's investors, because the last communication of the Company with the Instructing Bondholders was a completely unproductive meeting on 4th October, 2011, in which the Company's management presented no concrete plan or proposal in relation to repayment of the defaulted 2011 Bonds and the 2012 Bonds, despite the Instructing Bondholders making numerous attempts to contact the Company's management after the said meeting and prior to such statement, without any response from the Company post the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50. We will presume that the payment of tax dues despite the representations does not constitute a fraudulent payment as the tax dues, in any event, would have a priority over those of the respondent for the bonds that were unsecured. There is, however, no justification for the payments to non- statutory persons and bodies, including to vendors and banks in view of the representations to the contrary viz. that the proceeds were to be used to redeem the said bonds. By making false representations, the appellant succeeded in lulling the respondent into a state of inaction. Had such a misrepresentation not been made, the respondent may well have considered adopting proceedings to restrain the appellant from disposing off its assets, both movable and immovable and, in any event, to ensure that any disposal of the assets was genuine and in accordance with law. The facts, seen as a whole, lead to an inescapable conclusion that the appellant's aim was to ensure that the sale of the MSD business is not objected to and the diversion of funds thereafter is complete without any hindrance from the bondholders. This aim was achieved by misrepresenting that the sale was only with a view to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, it is reasonable to presume that the money was diverted for the benefit of the appellant and/or its promoters and/or directors. 54. Mr. Chagla submitted that the payment to vendors, payment for capital goods, investment in subsidiaries are all payment for legitimate purposes. We will assume they are. A payment for a legitimate purpose is, however, not necessarily legitimate. Payment, even for a legitimate purpose, with somebody else's money is not legitimate. The "investment" in the subsidiaries was not even a payment for a legitimate purpose. 55. This brings us to the appellant's case that a part of the software and intellectual property relating to the MSD business belonged to its wholly owned subsidiary Zenith Infotech (FZE) Dubai, being a Free Zone Establishment with limited liability formed in Dubai. The appellant's case is that under the Asset Purchase Agreement, an amount of US$ 27 million was to be paid to Zenith Dubai and only an amount of US$ 21 million was to be paid to the appellant. Mr. Chagla submitted that Zenith Dubai is a separate legal entity and was and is entitled to deal with its assets as it pleased. It's share of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total consideration. (A). We referred earlier to the various representations made by the appellant before the APA was entered into and even thereafter. Not one of these representations / announcements indicated even remotely that the appellant had only a 50% share in the MSD business and that the balance interest vested in Zenith, Dubai. The asset purchase agreement is dated 23rd September, 2011. It would be useful to reproduce again, the announcement made by the appellant on the BSE and NSE on 26th September, 2011, regarding the sale of the MSD division. It was as under : "Zenith Infotech Ltd has informed BSE that the Company have spun off one Division of its Business known as MSD Division to M/s. Zenith Monitoring Services Pvt Ltd Mumbai which will be a Subsidiary of Zenith RMM LLC, by way of an Asset Purchase Agreement. However, Zenith Infotech Ltd is going to be a major shareholder." The plain language of the announcement indicates that the appellant owned the MSD division - that the MSD division was one of the appellant's divisions. There is not even a suggestion that the appellant had only a limited interest in the MSD division. There is no explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conclusion that the case regarding the interest of Zenith Dubai in the MSD division is an after thought. 59. Let us now assume the appellant's case that it had only a share in the MSD business and that the balance share therein vested in Zenith Dubai is correct. The appellant's conduct in not disclosing the same throws it, it's directors and promoters in an equally bad light. The appellant must be held to have suppressed this fact with the mala fide intention of lulling the respondent into a state of inaction believing that the business would be sold and the sale proceeds would be handed over to it. Had the appellant disclosed that Zenith Dubai had an interest in the business, the respondent could well have taken steps firstly to ascertain whether Zenith Dubai in fact had an interest in the MSD business and, assuming it had, the respondent could have taken steps to ensure that the same is not, in turn, siphoned out by Zenith Dubai which it, in fact, did. The respondents, the bondholders and shareholders could have adopted proceedings to ensure that the amount of US$ 27 million coming to the appellant's wholly owned subsidiary is safeguarded. 60. Thirdly, in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 bonds could have been redeemed (the 2012 bonds, albeit only partly), was by applying the entire proceeds received towards the sale of the MSD business. (C) That the appellant represented that the amounts paid to Zenith Dubai would be used to repay / redeem the bonds is, in fact, admitted on affidavit by the appellant. It would be useful to quote again the averments from paragraph 32 of the affidavit-in-reply dated 7th November, 2013. The appellant's case regarding the offer made by it having been rejected by the Instructing Bondholders is as follows : "The Company's offer that the bondholders accept the dues against the 2011 Bonds and withdraw the acceleration of the 2012 Bonds was refused by (sic) the Instructing Bondholders. The Instructing Bondholders made it clear that it would not accept part- payment. In these circumstances, the Company and Zenith Dubai were justified in utilizing the sale proceeds of the MSD business for its other legitimate purposes." [emphasis supplied] The last sentence quoted above which is the appellant's justification not merely for itself but even for Zenith Dubai utilizing the sale proceeds of the MSD business for its oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of its group companies. 64. The respondent, therefore, has made out more than just a strong prima facie case that the APA was a structured deal - structured with an intention to divert an amount of US$ 27.8 million from the appellant to its wholly owned subsidiary Zenith Dubai. Assuming that the amount was legitimately due to Zenith Dubai it would still make no difference. The suppression of that fact was with the intention to lead the respondent into a state of inaction with a view to ensuring that the respondent did not take any action to prevent the appellant from diverting the amounts and putting them out of the reach of the respondent and the Court. It was not merely a coincidence that this diversion took place on the same day. 65. Mr. Chagla then submitted that there was no allegation of siphoning by the company or its directors or promoters. Accordingly, he submitted that the respondent is not entitled to contend that there was any siphoning by the company, its directors or promoters. 66. The submission is not well founded. It is in fact contrary to the appellant's understanding of the averment in the petition. After referring to the averments in the petition w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd two of the directors of the company conducted the identical business of remote monitoring of data. These promoters and directors also owned 60% of Zenith Monitoring in their personal capacity and 40% of the shares of Zenith Monitoring were held by the company. The appellant and the promoters also failed to disclose to the bondholders and shareholders that substantial assets were transferred from the company to Zenith Dubai and that more than half the sale proceeds from the sale of the MSD business were paid to Zenith Dubai. The appellant and its promoters colluded with Zenith RMM, LLC, Summit and Zenith Monitoring to structure the transactions relating to the MSD business intentionally. The appellant failed to disclose any useful information relating to the sale of the MSD business either to the shareholders or the respondent acting on behalf of the bondholders, including the consideration received or paid by the appellant and its promoters which were supposed to be used for the repayment to the bondholders. A very substantial part of the business of the company was spun off to Zenith Monitoring and sold to Zenith RMM with a substantial portion of the proceeds being delivered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pleading of siphoning, mala fides etc. An analysis of the averments in the petition are unnecessary. 68. The suggestion that this pleading is not one of siphoning is unsustainable. The appellant itself considered the averments to be allegations of siphoning. This is clear from the fact that in paragraph 42 of the affidavit-in-reply, the appellant has denied that there was collusion and has denied that the promoters were trying to or have siphoned off any of the funds. Mr. Chagla's submission is, therefore, contrary to the appellant's understanding of the allegations in the petition. 69. The contention that the respondent had not pleaded that the appellant had siphoned the monies, that the appellant had defrauded the respondent and that the appellant acted dishonestly etc. is, therefore, rejected. 70. Mr. Chagla submitted that the learned Judge has rendered findings of far reaching consequences against third parties who were not impleaded. Mr. Chagla submitted that allegations of siphoning and of fraud have been made against the directors and the promoters despite the fact that neither the promoters nor the directors have been impleaded. Mr. Chagla submitted that the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular director / promoter would be heard with reference to specific allegation against them. 73. Absent anything else, it is reasonable for a company Court to presume that the directors were responsible for the acts found to be dishonest and mala fide. The learned Judge has indeed passed strictures against the company and its promoters and directors. There is, however, no particular director or promoter against whom the adverse remarks have been made. The directors and the promoters have been referred to generally. In the course of the winding up, it will be necessary for the Official Liquidator to take suitable action and file proceedings including for misfeasance and malfeasance on the part of the director or the promoter concerned. It is at that stage that the director or promoter concerned would have to be identified and proceeded against. It is not necessary to do so at the hearing of the petition, whether at the admission stage or at the final hearing of the petition. The adverse remarks, however, do not necessarily apply to every director and/or promoter irrespective of whether the promoter is also a director of the appellant or not. Merely because a promoter is also on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Dubai, including justifying the manner in which Zenith Dubai utilized the amounts received under the APA. The appellant was aware of the conduct, management and dealings of Zenith Dubai throughout including as to its alleged interest in the MSD business and its entitlement to the receipt of about 50% of the consideration under the APA. The appellant has not even contended to the contrary in the affidavits. Nor was it contended before us that the appellant was not in active management of Zenith Dubai and was unaware of its dealings. The appellant has failed to disclose any particulars regarding the manner in which Zenith Dubai acquired the alleged interest in the MSD division despite knowing all the details regarding Zenith Dubai. We are not inclined to expunge the adverse remarks. However, with a view not to leave no cause for grievance and out of abundant caution, we leave it to Zenith Dubai to make any application in this regard if it so desires. 79. As far as the apprehension regarding the adverse remarks affecting Zenith RMM, LLC is concerned, it was clarified by Mr. Seervai that for the purpose of these proceedings, the respondent will not press its contention that Zenith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find no reason, however, to expunge the remarks. 82. Mr. Chagla relied upon the judgments of the Supreme Court in State of Uttar Pradesh v. Mohd. Naim AIR 1964 SC, 703 and in State of Maharashtra v. Public Concern For Governance Trust & Ors. (2007) 3 SCC 587 in support of his contention that adverse remarks ought not to be made against parties who are not before the Court. 83. In State of Uttar Pradesh v. Mohd. Naim, the Supreme Court held that in the matter of making disparaging remarks against persons or authorities whose conduct comes into consideration, it is relevant to consider whether the party whose conduct is in question is before the Court or has an opportunity of explaining or defending himself. The impugned judgment in that case made sweeping and general observations against the entire Police force of the State of Uttar Pradesh, although the case related only to one Police officer. Nor were they necessary for the disposal of the case. The judgment is clearly distinguishable from the case before us. The company i.e. the appellant is before us. The allegations are made against the company. Adverse remarks as against the conduct of the company that has come into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n drawn by us in respect of the judgment in State of Uttar Pradesh v. Mohd. Naim, applies equally in the present case. 85. Mr. Chagla then submitted that it was not necessary to pass adverse remarks as the only question before the Court is whether the appellant ought to be wound up or not. 86. We have no hesitation in rejecting this submission. 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 import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r its existence so probable that a prudent man ought under the circumstances of the particular case, to act upon the supposition that it exists." "Disproved. - A fact is said to be disproved when, after considering the matters before it, the Court either believes that it does not exist, or considers its non- existence so probable that, a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it does not exist." "Not proved.- A fact is said not to be proved when it is neither proved nor disproved." It is apparent from the above definitions that the Indian Evidence Act applies the same standard of proof in all civil cases. It makes no difference between cases in which charges of a fraudulent or criminal character are made and cases in which such charges are not made. But this is not to say that the Court will not, while striking the balance of probability, keep in mind the presumption of honesty or innocence or the nature of the crime or fraud charged. In our opinion, Woodroffe, J., was wrong in insisting that such charges must be proved clearly and beyond reasonable doubt. ... ... ... ... 13. Mr. Agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der : "12. Counsel for Mohan Singh challenged the finding of the High Court that Mohan Singh was instrumental in publishing the leaflets annexures 'D' and 'E'. He urged that in the trial of an election petition approach to the evidence must be as in a criminal trial and no fact may be held proved unless it is established beyond reasonable doubt. The onus of establishing a corrupt practice is undoubtedly on the person who sets it up, and the onus is not discharged on proof of mere preponderance of probability, as in the trial of a civil suit; the corrupt practice must be established beyond reasonable doubt by evidence which is clear and unambiguous. But the testimony of Rameshchandra corroborated by the circumstances set out in detail in the judgments of the Tribunal and the High Court was accepted and the testimony of witnesses for Mohan Singh who claimed that other persons without his consent or connivance were responsible for getting the leaflets printed was disbelieved. The evidence about the distribution of the leaflets to question by the appellant and his agents was also accepted by the Tribunal and the High Court. It was also found that these leaflets w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst whom the charge of corrupt practice is levelled, is presumed to be innocent unless proved guilty. A grave and heavy onus therefore, rests on the accuser to establish each and every ingredient of the peachable evidence beyond reasonable doubt. It is true that there is no difference between the general rules of evidence in civil and criminal cases, and the definition of "proved" in Section 3 of the Evidence Act does not draw a distinction between civil and criminal cases. Nor does this definition insist on perfect proof because absolute certainly amounting to demonstration is rarely to be had in the affairs of life. Nevertheless, the standard of measuring proof prescribed by the definition, is that of a person of prudence and practical good sense. 'Proof' means the effect of the evidence adduced in the case. Judged by the standard of prudent man, in the light of the nature of onus cast by law, the probative effect of evidence in civil and criminal proceedings is markedly different. The same evidence which may be sufficient to regard a fact as proved in a civil suit, may be considered insufficient for a conviction in a criminal action. While in the former, a mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iplinary Committee of the Bar Council of India dismissed the appeal. The Supreme Court held : "6. A charge of professional misconduct is in the nature of a quasi-criminal charge. Such a charge requires to be proved in the manner of proving a criminal charge and the nature of proof required to prove it is that of beyond a reasonable doubt. Both, the State Bar Council as also the Bar Council of India, on the basis of material on the record, found that the charge against the respondent had not been proved. In our opinion, the findings recorded by both, the State Bar Council and the Bar Council of India, are on correct and proper appreciation of evidence available on the record. The findings do not suffer from any infirmity. Even if we were to overlook the assertions made on behalf of the respondent regarding conduct of the appellant as disclosed in the counter affidavit filed by him in this Court on 14-10-1997, to which the appellant has filed no rejoinder, we find that the appellant has miserably failed to establish that the respondent committed any professional misconduct. We are not persuaded to accept the submission made by the learned counsel for the appellant that applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different matter. It is possible that in those proceedings the conduct alleged may have to be proved beyond reasonable doubt as those proceedings may well result in penal consequences. That would not lead to the conclusion that even in the proceedings for winding up, the conduct complained of must be proved beyond reasonable doubt. 93. The suggestion that the impugned order was passed in anger is less than fair to the learned Judge. The learned Judge indeed adversely commented upon the conduct of the appellant in the proceedings before the BIFR. That, however, was by no means the basis on which the impugned order was passed. It was certainly not the main basis on which the impugned order was passed. The impugned order was passed in view of the default of the appellant in the repayment of a sum of over US$ 100 million and in view of the conduct of the appellant. We do not intend making any observations regarding the proceedings before the BIFR. It is not necessary for us to consider Mr. Seervai's submission that the application before the BIFR under the Sick Industrial Companies Act, 1985, is unsustainable. The authorities under the Act have held that the Reference is not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found the respondent case to be much stronger than what is indicated in the earlier orders. Mr. Seervai has indeed succeeded in making out a much stronger case against the appellant than was made out at the stage of admission. 96. Mr. Chagla submitted that it is not necessary that the company court is bound to wind up the company merely because it is insolvent at a given point of time. We agree. The company court has the discretion while dealing with a winding up petition to ensure and safeguard the interests of all the parties concerned including the company itself, its shareholders and employees. 97. There are, however, no circumstances which pursuade us not to wind up the company in the present case. The debt to the extent of over US$ 100 million is admitted. The company's assets are wholly inadequate to repay this debt. There is nothing to indicate that the appellant will be able to repay the debt ever. There never was and there is no intention to repay/redeem the bonds. The aim is, in fact, to avoid payment. We repeatedly asked Mr. Chagla whether the appellant would "pursuade" its subsidiaries and group companies to bring back the money that was diverted by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken by the learned Judge only staying the winding up order to enable the Cloud Computing business to be sold for the benefit of the employees. Secondly, the offer is conditional upon all the adverse remarks and observations made against the promoters / directors of the appellant- company being expunged from the admission order and the order impugned in this appeal. There is no justification for this demand. Once we come to the conclusion that the remarks were justified, there is no question of expunging the same merely because an offer is made for the sale of the properties. 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. (c) There is yet another reason why we are not inclined to accept the offer. The same would unnecessarily delay the winding up proceedings. This is a matter where it will be necessary for the Official Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the learned Judge appreciated the stand taken on behalf of the respondent accepting the suggestion made by the learned counsel appearing on behalf of the employees that the Court while passing an order of winding up of the company may consider a stay of the said order for a particular period with necessary safeguards and directions to the Administrator already appointed by this Court to dispose of the Cloud Computing business of the company as a going concern within such period. 101. It is clear, therefore, that the order was passed at the behest of the appellant and the employees. It was passed in the interest of the employees. In the circumstances, there is no warrant for setting aside the order. We hasten to add that even if that part of the order were to be set aside, the order of winding up would, in any event, remain. 102. In this view of the matter, it is not even necessary to consider various other facts and aspects relied upon by Mr. Seervai in this regard which were accepted by the learned single Judge. 103. We must, however, mention that merely because the paid up capital of Zenith Dubai was only AED 100,000/- it would not lead to the conclusion that it could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the transaction relating to the appellant, Zenith Monitoring and Zenith RMM, LLC. 107. We had kept the matter for pronouncement on 21st April, 2014, The respondents, at that stage, applied to bring further facts on record. The respondent wanted to bring on record an order of the Chairman of the BIFR dated 3rd April, 2014, rejecting the appeal. The appeal was against the order holding the Reference to be not maintainable. The respondent also wanted to bring on record the order dated 11th April, 2014, passed by the SEBI, confirming the ex-parte order dated 25th March, 2013, after a full hearing. Lastly, the respondent wanted to bring on record certain further facts regarding the conduct of the appellant. We did not permit the respondent to bring these facts on record as we have, in any event, decided to dismiss the appeal. The respondent is always at liberty to rely upon these facts in future in any other proceedings, including in the course of winding up. 108. In the circumstances, the appeal is disposed of by the following order : (i) The appeal is dismissed. However, the winding up order is stayed upto and including 31st August, 2014, in order to facilitate the possible sal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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