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Introduction
The present case[1] demonstrates a defrauding activity of the Company Directors and the Ultra vires activity by the Registrar and other authorities of the BIFR, which was held to be non-est by Bombay High Court. The article analyse the Bank Of New York Mellon London v. Zenith Infotech Ltd Case.
Background of the case
The background of case is as follows:
In this case, Sick Industrial Companies (Special Provisions) Act (SICA), 1985, was repealed by the SICA Repeal Act, 2003, which came into effect from 1.12.2016. As a result of which all proceedings before BIFR have been brought to a standstill, the company can make a reference according to the provisions of the Companies Act, 1956 within 180 days. The Repeal Act was later revised on account of IBC, ensuring that the appeal would then be rendered to NCLT within 180 days under IBC, which is now being operational.
Facts of the case
On 23. July.2013, the respondent company Zenith Infotech Ltd. filed a reference before the Board for Industrial and Financial Reconstruction (BIFR) under Section 15 of the Sick Industrial Companies (Special Provisions) Act (SICA), 1985 (SICA), which was refused registration by the Registrar of the Board on 12. In August 2013, the respondent was not an industrial company under Section 3(e) and 3(f) of the SICA. The two appeals filed by the respondent to the Secretary and Chairman of BIFR was dismissed.
While the matter was before the BIFR authorities, the petitioner, a Banking Company Registered in the USA, on 30.07.2013 applied to winding up of the respondent company in the High Court of Bombay because of its indebtedness of over USD 36 million to the Petitioner Company.
On 13.12.2013, a winding-up order was passed against the respondent Company, which on 23.04.2014 was again affirmed and upheld by the Bench Division in appeal. After that, the Official Liquidator was appointed by the High Court on 02.09.2014.
Concomitantly, the respondents filed a writ petition before Delhi High Court against the BIFR Secretary and Chairman’s Orders.
The two issues that arose in the writ petition were:
- Whether the Registrar, Secretary and Chairman of the BIFR acted within their jurisdiction by dismissing the respondent company’s application for Reference.
- Whether, in view of the order of winding up passed, there is any further scope for registration of the Reference sought by Zenith Infotech.
For the first issue, the High Court observed that the Registrar and the other authorities of the BIFR are not conferred with any power of adjudication under SICA read with BIFR Regulations to determine whether the respondent company is an industrial company or not. Thereby such orders are non-est in law.
As to the second issue, the Delhi HC relying on Real Value Appliances Ltd. Vs. Canara Bank and Others and Rishabh Agro Industries Ltd. Vs. PNB. Capital Services Ltd. came to the conclusion that the winding-up order would not prevent the proceedings and registration of a Reference under the SICA, and the inquiry under Section 16 can still be made.
Also, the Delhi High Court concluded that any reference made thereunder would not affect the proceedings under SICA to wind up order.
Therefore, aggrieved by the order, an appeal was made to the Apex Court to bar further winding up proceedings before the High Court.
Issues Raised in the case
The issues raised in case:
1. Whether the respondent company is an industrial company as per the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, or not?
2. What is the validity of Section 252 of the Insolvency and Bankruptcy Code (IBC), 2016?
3. Whether the Reference before the BIFR is ruled out by order of winding up and the appointment of liquidator.
Arguments in the case from both the sides
Arguments in case made by the petitioners
The petitioner submits the respondent’s responsibility for paying the Bonds is expressed in many places in the 2009-2010 annual return, which is mirrored in the 2010-2011 annual return. It is only in the notes of account that the respondent made a false statement that the FCC Bonds with current Bondholders were limited. This is an absolutely false and dishonest assertion.
They further argued that there is a lack of bonafide disagreement, which is now being pursued. Zenith Infotech should be wound up in view of the fact that the respondent is unable to pay its debts.
Arguments in case made by the respondents:
The Respondent Company passed a resolution in its Business Board Meetings on 29th January 2011, just before the maturity date of the bonds, which claimed that it would borrow capital from the domestic and ECB markets and also declared that it would sell or lease its subsidiaries in order to repay the company’s outstanding FCCBs.
The corporation agreed to sell its Remote Monitoring and Control Business (MSD Business), according to the resolution and made the announcement to BSE and NSE on 26th September 2011. Therefore, the Respondent Company announced that it would sell its properties or investment to pay off the Petitioner Company’s debts which it subsequently defaulted on the same month it made its declaration on its valued maturity dates.
On 11th October 2011, the Respondents Company further stated its successful sale of ‘MSD Business’. Also, it acknowledged the debt it is owned by the Petitioner Company to BSE through a public announcement.
The Respondent Company has acknowledged its debt on several occasions but never acted upon debt repayment. The bondholders consequently filed a suit against the company on the grounds that while the company accepted the debt due under the 2011 bonds and 2012 bonds in compliance with the Explanatory Statement of 27th December 2010 and confirmed that proceeds from the selling of MSD Limited would be used for repayment, the company had defaulted on the Bonds.
Notwithstanding an unconditional obligation to pay, the company failed to pay the amounts due under the bonds and sold the MSD Business and the proceeds not used to repay the debt. The petitioner urgently filed a suit with this Court in conjunction with a Notice of Motion seeking various reliefs, including attachment of assets and security of deposit.
The company addressed a letter allegedly terminating the petitioner as a Trustee on 15th November 2011. Simultaneously, the petitioner argued that as per the Trust Deed for termination, it can only be passed by three-fourths of the bondholders through an extraordinary resolution that has not been passed as to support ‘Termination’ as alleged by the company responsible.
The entire contention was that the Respondent Company sold its ‘MSD Business’ for USD 54 million but did not pay the petitioner any amount in respect of that amount due and payable to them.
Held
On the first issue, the Court reminded its observations made in the case of Jamal Uddin Ahmad Vs. Abu Saleh Najmuddin and Another and held that the Delhi HC was correct, stating that the order of refusal of registration of the respondent company’s Reference sought by the Registrar, Secretary and Chairman of the BIFR was non-est. The Reference must be understood to be pending before the BIFR on the concerned date under the provisions of the Insolvency & Bankruptcy Code (Section 252).
The Court also held the Respondent Company was acting in deceit against the Petitioners and did not intend to pay its debt.
With regard to the issue on whether the Reference before the BIFR stands ruled out by order of winding up and the appointment of the liquidator, the Court set a guiding proposition that any welfare legislation passed for rehabilitating genuinely sick companies which due to some reasons are actually sick become an escape mechanism for dishonest Directors offering a reward for cheating, dishonesty and fraud which law never countenanced. It would be utilized by the dishonest promoters of the company of welfare legislation by taking repeated adjournments before the BIFR after registration of their Reference, and the bona fide creditors of the company will be deprived. Although the Court permitted the BIFR to make such inquiry as it deems fit as per the legal provisions. The Court refrained from making any interference or trespassing the jurisdiction of BIFR as quoted from “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 conclusion, held that the Respondent Company and its Directors/Promoters are dishonest and are liable to pay the Petitioner Bondholders and disposed of the appeal by holding that it would still be open to the respondents to seek its remedies under the provisions of Section 252 of the Insolvency and Bankruptcy and that the adjudicating authority, that is NCLT would be free to decide on the said questions in such manner as may be considered appropriate.
Analysis
With respect to the first issue, powers have been given to the BIFR authorities to ‘scrutinize’ the proposal. Still, these rights do not provide rights to adjudicate whether or not the company is a manufacturing enterprise. Such powers are conferred solely in a Board Bench. The denial by these officials is, in fact, non-free. The refusal made by such authorities is non-east in law.
Section 15 of the SICA, 1985[5], provides for Reference to BIFR –
“(1) When an industrial company has become a sick industrial company, the Board of Directors of the company, shall, within sixty days from the date of finalization of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the Board for determination of the measures which shall be adopted with respect to the company: Provided that if the Board of Directors has sufficient reasons even before such finalization to form the opinion that the company had become a sick industrial company, the Board of Directors shall, within sixty days after it has formed such opinion, make a reference to the Board for the determination of the measures which shall be adopted with respect to the company;
(2) Without prejudice to the provisions of sub-section (1), the Central Government or the Reserve Bank or a State Government or a public financial institution or a State level institution or a scheduled bank may, if it has sufficient reasons to believe that any industrial company has become, for the purposes of this Act, a sick industrial company, make a reference in respect of such company to the Board for determination of the measures which may be adopted with respect to such company: Provided that a reference shall not be made under this subsection in respect of any industrial company by—
(a) the Government of any State unless all or any of the industrial undertakings belonging to such company are situated in such State;
(b) a public financial institution or a State level institution or a scheduled bank unless it has, by reason of any financial assistance or obligation rendered by it, or undertaken by it, with respect to, such company, an interest in such company.”
The respondent has acknowledged its debt liability on several occasions, and for this reason, they sold its ‘MSD business’ for 54 million dollars but never intended to repay it. The Plaintiff Corporation also asked concern whether the Trust Deed, which was binding between the parties, was broken without any legitimate justification or legal reasoning justifying the argument. It further argued that the Trust Deed was invalid in compliance with English law, although there was no evidence of English law supporting the argument. However, the Court pointed out from Malaysian International Trading Corporation v. Mega Safe Deposit Vault Pvt. Ltd[6]. It is held that if no evidence is adduced in respect of international law, the inference is usually that it is the same as the Indian statute in respect of the matter under consideration. And the Court completely dismissed the Respondent Company’s claim.
The Court also finds that the respondent company referred to the BIFR of the Sick Industries Companies (Special Provisions) Act, 1985, in order to safeguard its interest, on the basis that the losses exceeded the company’s net worth as per the June 2013 Audited Financial Reports. The Court accepted the petitioner’s view that in the best interests of the company and its shareholders as a whole, the Board’s opinion must be formed honestly and in a bona fide manner. Such a view will, of course, be vitiated if driven by self-interest or false motive or on other extraneous grounds.
Suppose this fact of jurisdiction is found wanting and/or absent for whatever reason, including the company’s previous behaviour and its Directors. In that case, the very formation of an opinion is ill, and the consequent filing of the Reference would ultra vires the first provision to Section 15(1) of SICA making it void and illegal.
The Respondent Company contended that the petitioner has no authority to recover its 2012 Bonds since RBI’s approval was not taken by the Petitioner Trustee pursuant to clause 11 of the Offering Letter, and the notice to the company is illegal and cannot be acted upon. The Court dismissed the argument that the company had asked the RBI to vide its letter of 9th December 2011 to clarify this. The RBI had clarified in its letter of 25th January 2012 that approval is required to make payment to the bondholders before the date of redemption. Thus, the requirement is that the company seeks RBI approval before payment is made and not the Petitioners.
On the sale of its business, the Court observed that it had made false Reference to its shareholders through its numerous circulars and an announcement on BSE. The Respondent Company’s Promoters/Directors made a misleading assertion that the company’s selling proceeds would be added to the repayment of FCCBs.
Therefore, it is founded from the above numerous grounds beyond doubt that the Company Promoters agreed not to make an offer to the Petitioner / Bondholders. By making false claims, they continue to defraud the Petitioners with their groundless claim.
Conclusion
Hence, it can be concluded after reviewing the above judgment that this landmark judgment would undoubtedly prove to be a significant deterrent against the fraudulent company. By upholding the provision’s substantive validity in the SICA and Insolvency and Bankruptcy Code, 2016, the Supreme Court has given a significant sigh of relief to the aggrieved Bondholders.
[1] Bank Of New York Mellon London Branch v. Zenith Infotech Ltd., Civil Appeal no..3055 of 2017.
[2] Real Value Appliances Ltd. v. Canara Bank and Others, (1998) 5 SCC 554.
[3] Rishabh Agro Industries Ltd. v. PNB. Capital Services Ltd, 101 CompCas 245 P H.
[4] Jamal Uddin Ahmad v.. Abu Saleh Najmuddin and Another, 4 SCC 257.
[5] The Sick Industrial Companies (Special Provisions) Act, 1985, s. 15.
[6] Malaysian International Trading Corporation v. Mega Safe Deposit Vault Pvt. Ltd., (2006) 3 BomCR 109 (India).
