Bank of New York Mellon London Branch V. Zenith Infotech Limited

In this through upholding the substantive validity of the provision in the SICA and Insolvency and Bankruptcy Code, 2016, the Supreme Court has given a major sigh of relief to the aggrieved bondholders.
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The Supreme Court in the case of Bank of New York Mellon London Branch v. Zenith Infotech Limited[1] upheld the validity of Section 252 of the Insolvency and Bankruptcy Code (IBC), 2016, so that the parties can seek remedies before the NCLT.

Facts

The Petitioner is a US-based banking company that filed an application in Bombay High Court to seek the winding up of the Respondent Company due to its indebtedness. The Petitioner is engaged in the services of corporate trustees and has incorporated to carry on its lending business.

As of 15th September 2006, the Petitioner received USD 33 million at 3.0 per cent in the form of convertible bonds to be repayable by August 2011 and a second tranche on 14th August, 2007 of USD 50 million in convertible bonds to be repayable by August 2012, in the form of a Foreign Currency Convertible Bond (FCCB). Consequently, the Respondent had a liability against the Petitioner of USD 36.141 million. The Petitioner Company also conveyed a trust deed with the respondent for the payment of the debts raised under the bonds.

The Sick Industrial Companies (Special Provisions) Act (SICA), 1985, was repealed by the SICA Repeal Act, 2003 which came into effect on and from 1.12.2016. As a result of which all proceedings before BIFR have been brought to a standstill and the company can make a reference in accordance with 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.

However, the respondent company filed for reference under SICA before BIFR on 23.07.2013, which was refused by BIFR’s Registrar on the ground that the applicant is not an industrial company as per SICA. The corporation then filed an appeal before BIFR Secretary which was rejected again. An appeal was made to the BIFR Chairman, where it was for the third time rejected. Subsequently, a petition for the winding-up of the respondent company was admitted at the Bombay High Court on 30.07.2013, and a winding-up order was then passed on 13.12.2013 which was upheld in an appeal to the Bench Division of the High Court  on 23.04.2014.

The High Court put a hold on winding up until 31.08.2014. The BIFR Secretary and Chairman’s Orders were challenged by the respondent through a writ petition filed before Delhi High Court. Delhi High Court stated that SICA does not grant adjudication powers to these authorities, such as determining whether or not the respondent is an industrial company. 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.

Issue Raised

  • Whether the respondent company is an industrial company as per the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, or not?
  • What is the validity of Section 252 of the Insolvency and Bankruptcy Code (IBC), 2016?

Arguments from Both the Sides

Arguments 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 Bond holders were limited. This is an absolutely false and dishonest assertion.

They further argued that there is a lack of bona-fide disagreement which is now being pursued. The respondent company should be wound up in view of the fact that the respondent is unable to pay its debts.

Arguments 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 26 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’ and also 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 under the Bonds, 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. Whereas the Petitioner contended that as per the Trust Deed for termination, it can only be passed by three-fourths of the bondholders through an extraordinary resolution, and no such resolution has been passed as such 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.

Decision of the Apex Court

The Hon’ble Supreme Court held that the respondent company was acting in deceit against the petitioners and had no intention of paying their debt. The Court also held, in reference to the Board (BIFR) pursuant to Section 15 of the Sick Industries Company Act, that any beneficial legislation passed to rehabilitate genuinely sick companies that are actually sick for certain reasons cannot be brought to the rescue of dishonest directors who, in fact, will offer a reward for dishonesty, cheating, etc. It will be exploited by the company’s fraudulent proponents of favourable regulations through multiple adjournments before the BIFR until their application has been recorded and depriving the Company’s minor and bona fide creditors. Although the Court permitted the BIFR to investigate as it deems fit as it is framed by law.

The Court distanced itself from allowing any interference or violation of BIFR authority. In its finality, the Court held that the Respondent company and its Directors / Promoters are dishonest and are liable to pay the Bondholders of Petitioners. The Bench ruled that it was open to the parties to seek redress under Section 252 of the IBC before NCLT.

Analysis

With respect to the first issue, powers have been given to the BIFR authorities to ‘scrutinize’ the proposal, but 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, provides for reference to Board –

(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 finalisation 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 had sufficient reasons even before such finalisation 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 sub-section 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, the Petitioner Company sold its ‘MSD business’ for USD 54 million but never intended to repay it. The Plaintiff Corporation also asked a 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.[2], 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 Board of Industrial and Financial Reconstruction (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.

If this fact of jurisdiction is found wanting and/or absent for whatever reason, including the previous conduct of the Company and its Directors, then the very formation of an opinion is bad and the consequent filing of the reference would ultra vires the first provision to Section 15(1), illegal and void.

The Respondent Company alleged 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 and 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 seek RBI approval before payment is made and not the Petitioner.

On the sale of its MSD business, the court contended that through its numerous circulars and an announcement on BSE it had made false reference to its shareholders. The Respondent Company’s Promoters/Directors made a misleading assertion that the Company’s selling proceeds would be added to repayment of FCCBs.

Therefore, it is founded from the above numerous grounds beyond doubt that the Company Promoters agreed not to make any offer to the Petitioner / Bondholders and, 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 major deterrent against the fraudulent company. Through upholding the substantive validity of the provision in the SICA and Insolvency and Bankruptcy Code, 2016, the Supreme Court has given a major sigh of relief to the aggrieved bondholders.


[1] AIR 2017 SC 1735

[2] Malaysian International Trading Corporation v. Mega Safe Deposit Vault Pvt. Ltd., (2006) 3 BomCR 109 (India).

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