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A division bench of the Bombay High Court has dismissed an appeal by Zenith Infotech against the winding-up proceedings initiated by holders of foreign currency convertible bond (FCCB) of the company. Zenith owed $90 million (Rs 586 crore) to the FCCB holders.
The appeal was against a single-bench order in July that allowed the winding-up of the company on the grounds that the company was unable to pay and the promoters had no intention to do so.
The division bench also upheld the earlier court’s appointment of an administrator, when the request was for a provisional liquidator. The judgement is stayed for a period of four weeks, during which Zenith might appeal in the Supreme Court.
Holding that the single judge had acted within his powers, the division bench said, “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.”
In its appeal, Zenith had said: “The court while entertaining a petition for winding-up has the power to appoint a provisional liquidator but no power is conferred upon the court to appoint an administrator. In any event, an administrator should not have been appointed in the present case since the appellant is a going concern which is commercially viable, with one thousand employees on its roll.”
It added that, “The Company has a turnover as on 30 June 2013 of Rs 66 crore and has paid its outstanding taxes and its creditors, save and except the Respondent. The effect of appointing an administrator would be to bring the business to a standstill, and would impede the carrying on of business.”
Zenith also contended that the single Judge “has incorrectly proceeded on the premise that there was a siphoning of, of the funds of the Company by the promoters, following the sale of the MSD Division.”
Zenith had in December 2010, won shareholder approval to sell some of its subsidiaries to facilitate redemption of the above FCCBs. In September 2011, after defaulting FCCBs, Zenith sold its remote infrastructure management business to Summit Partners, a US-based private equity fund for $ 55 million. The bondholders allege that they were not shared with the full value and structure of the deal with Summit Partners. In addition to the financial consideration, Zenith also got a 15% stake in the SPV that Summit created to acquire the asset.
However, even this money was not used to repay the bondholders. When court directed Zenith to give further details of the transaction and the use of proceeds, the company said it had moved $ 15 million or Rs 75 crore to related party transactions including in Vu Technologies, owned by Devita Saraf, sister of Akash Saraf. The court took a serious view of this track record.
Bondholders had moved the Bombay High court with a plea to liquidate the company for the recovery last February. At that point, Zenith’s shares were trading at Rs 42. They closed 4.9% higher on Tuesday at Rs 11.74 a piece.
The first tranche of FCCBs worth $ 33 million at a conversion price of Rs 310 issued in 2006 came up for repayment in September 2011. Since the stock price was well below this level, the lenders demanded repayment. But the company cited cash flow issues and did not arrange payment. In an exchange filing, the company said it had defaulted. This failure triggered a cross default provision under which the second tranche of bonds issued in 2007 at a conversion rate of Rs 522 and due to mature in August 2012 was also considered as default. The second tranche, which was for $ 50 million, has taken the total claims of creditors to over Rs 580 crore together with penal interests and other charges.
