The Bank of New York Mellon, London Branch v/s Zenith Infotech Limited; How a Company Board decision and actions are the cause of dishonesty?

The Companies conduct their business through decision making by its Board of Directors where the Promoters and its top-level executives decide the conduct of the company. The Board gets its power to make a decision as per Section 175 of the Companies Act,2013 and the old Section 289 of the Companies Act, 1956. The controversy arises when the Board never acts to the decision made by its resolution, it questions the conduct of the Promoters/Directors their purpose or vested intent.  This also damages the financial credibility of the persons acting in the decision making that can frame them for an economic offense. The present case deals with a situation that demonstrates a defrauding activity of the Company Directors, who were held dishonest by the order of Bombay High Court.

Facts of the Case.

The Petitioner is a Banking Company Registered in the USA and filed an application, in Bombay High Court to seek the winding up of the Respondent Company because of its indebtedness to the Petitioner Company. The Petitioner is engaged in the corporate trustee services and has incorporated KP-22-CP 28 of 2012 to carry on its business of lending.

 The Petitioner as on 15th September 2006 provided USD 33 million at 3.0% in form of convertible bonds which were to be redeemable by August of 2011 and a second tranch on 14th August 2007 of USD 50 million in convertible bonds redeemable by August 2012 a Foreign Currency Convertible Bond(FCCB). In consequence, the Respondent Company had a debt of USD 36.141 million against the Petitioner.

The Petitioner Company also conveyed a trust deed with the Respondent, that the Respondents shall pay the debts raised as per the bonds to KP-22 CP 28 of 2012 of the Petitioner Company. Thus it was well established the Respondent was in debt to the Petitioner Company.

Issue of the Case

The Respondent company just prior to the maturity period of the Bonds, it passed a resolution on 29th January 2011 in its Company Board Meetings that in short stated:

To Borrow money from the Domestic markets and from ECBs of amount up to Rs.1,500,00,00,000/-

and also announced that it will sell or lease its subsidiaries/undertakings so as to repay the outstanding FCCBs raised by the Company.

In pursuant to the resolution the company decided to sells its Remote Monitoring and Management Business (“the MSD Business”) and made the announcement to BSE and NSE on 26th September 2011. So, the Respondent Company has declared that it will sell its assets or investment to pay off the debts of the Petitioner Company which it defaulted subsequently on the same month it made its declaration on its respected dates of maturity.

The Respondents company further stated on 11th October 2011 about its successful sale of ‘MSD Business’ and also recognized the debt it is owned by the Petitioner Company to BSE through a public announcement.

The Respondent Company in several situations has recognized its debt but never acted upon repayment of the debt. Thereafter, the bondholders filed a Suit against the Company based on the fact that while as per the Explanatory Statement dated 27th December 2010, the Company had acknowledged the debt due under the 2011 Bonds and 2012 Bonds and stated that funds from sale of MSD Business will be utilized for repayment, the Company had defaulted on the Bonds. The Company failed to pay the amounts due under the bonds, despite an unconditional obligation to pay and had sold the MSD Business and the proceeds which were not utilized for repaying the debt under the Bonds, the Petitioner urgently filed a Suit before this Court being Suit No. 2865 of 2011 along with a Notice of Motion seeking various reliefs including attachment of assets and deposit security.

On 15th November 2011, the Company addressed a letter purportedly “terminating” the Petitioner as a Trustee. Whereas the Petitioner contended that as per the Trust Deed for the termination it can only be by way of an extraordinary resolution by three-fourths of the bondholders, and no such resolution has been passed as such to support ‘Termination’ as alleged by the Respondent Company.

The whole contention was the Respondent Company sold its ‘MSD Business’ for USD 54 million but did not pay a single paisa to the Petitioner in regards of the said amount due and payable by the Company to the Petitioner.

Findings of the Court

The Respondent Company has on several occasion has acknowledged its debt liability to KP-22 of 2012 and for this reason, the Petitioner Company sold its ‘MSD business’ for USD 54 million but never intended to repay. The Petitioner Company even raised an issue that the Trust Deed which was binding between the parties is terminated with no valid reason or legal submission supporting the argument, it further contended that the Trust Deed was void as per the English Law, whereas no proof of English Law is been with KP-22 CP 28 of 2012 of the Petitioner Company in support of the argument the Court Pointed out from Malaysian International Trading Corporation SDN BHT and another vs. Mega Safe Deposit Vault Pvt. Ltd. 11, it is held by the Learned Single Judge that if no evidence is adduced as regards foreign law, normally the presumption is that it is the same as the Indian law on the point under consideration. Thus the Court wholly rejected the argument of the Respondent Company.

The Court also find out that the Respondent Company to safeguard its interest made its reference to the Board of Industrial and Financial Reconstruction (BIFR) of the Sick Industries Companies (Special Provisions) Act, 1985 on the basis that the losses have exceeded the net worth of the Company as per the Audited Financial Reports of June 2013. The court accepted the view of the Petitioner that the opinion of the Board must be formed honestly and in a bona fide manner, in the best interests of the Company and its shareholders as a whole. Naturally, such an opinion if motivated by self-interest, or fraudulent interest or on other extraneous grounds, would stand vitiated. If this jurisdictional fact is found wanting and/or is absent for any reason whatsoever including the previous conduct of the Company and its Directors, then the very formation of opinion is bad and the consequent filing of the reference would be ultra vires the first proviso to Section 15 (1), illegal and void.

The Respondent Company alleged that the Petitioner has no authority to recover its 2012 Bonds because per clause 11 of the Offering Letter the approval of RBI has not been taken by the Petitioner Trustee and the notice to the Company is illegal and cannot be acted upon. The court rejected the argument on the fact that the the Company asked the RBI vide its letter dated 9th December 2011 to clarify on this and the RBI by its letter dated 25th January 2012 clarified that the approval is required for making payment to the bondholders before the redemption date. Thus the requirement is on the Company to seek RBI approval prior to payment and not on the Petitioner.

On the sale of its MSD business, the court contended that it made dishonest representation to its shareholders through its various circulars and by an announcement on BSE and on the KPP-23 CP28 of 2012. The Promoters/Directors of the Respondent Company made a false statement that the sale proceeds received by the Company will be applied towards redemption of FCCBs.

Thus, from the above various grounds establishes beyond any doubt that the Promoters of the Company decided not to make any payment to the Petitioner/Bondholders and by making false representations they tend to defraud the Petitioners with their baseless arguments.

Held

The Court held that the Respondent Company was acting in deceit against the Petitioners and did not intend to pay its debt. Though the whole proceeding was a Company Case wherein, the Petitioner demanded Liquidation/winding up of the Company.

The Court also held in reference to the Board (BIFR) as provided under Section 15 of the Sick Industries Company Act. The court set a guiding principle that any beneficial legislation passed for rehabilitating genuinely sick Companies which are actually due to some reasons are sick cannot be brought to the rescue of dishonest Directors which will, in fact, offer a reward of dishonesty, cheating, and fraud which is not countenanced by law. It would be used by the dishonest promoters of the company of beneficial legislation by taking repeated adjournments before the BIFT after registration of their Reference and deprive the small and bona fide creditors of the Company. Though the Court allowed the BIFR to make such inquiry as it deems fit as per the Law it is framed. The Court stepped away from making any interference or trespassing the jurisdiction of BIFR. As quoted from Rishabh Agro Industries Ltd. vs. P.N.B. Capital Services Ltd.  “if a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it by having recourse to appropriate procedure, if deemed necessary”.

The Court in its finality held that the Respondent Company and is Directors/Promoters are dishonest and are liable to pay the Petitioner Bondholders.

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