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M/s. Zylog Systems Limited, Chennai & Another v/s Brainhunter Systems Limited (Formerly Zylog Systems Canada Limited), Canada & Others

    Company Application Nos. 859 of 2017 & 359 of 2019 in C.P.No. 372 of 2013

    Decided On, 18 February 2022

    At, High Court of Judicature at Madras

    By, THE HONOURABLE MR. JUSTICE SENTHILKUMAR RAMAMOORTHY

    For the Applicant: P.H. Aravindh Pandian, Senior Counsel for M/s. Harishankar Mani, Vinod Kumar, Advocates. For the Respondents: R3 & R5, E.Om Prakash, Senior Counsel for M/s. Shivakumar & Suresh, Advocate, B.Dhanraj, learned counsel for Official Liquidator.



Judgment Text

(Prayer in Comp.A.No.859 of 2017:This Application has been filed under Rule 9, 11(b) and 19 of the Companies Court Rules 1959 praying to set aside and declare the transfer of 7,000,100 shares of the 1st Respondent Company by the 3rd Respondent to and in favour of the 2nd Respondent as illegal, unlawful, void and in violation of the provisions of Section 537 of the Companies Act, 1956; Direct the 2nd and 3rd Respondents to disclose and furnish all information, documents, deeds and contracts relating to the impugned transfer of 7,000,100 shares from the 3rd Respondent to and in favour of the 2nd Respondent and pass an order injuncting and restraining the 2nd Respondent from dealing with, encumbering, alienating, selling or disposing off the 7,000,100 shares of the 1st Respondent Company transferred by the 2nd Respondent.

Prayer in Comp.A.No.359 of 2019: This Application has been filed under Order XIV Rule 8 of the Original Side Rules r/w Rule 9,11 and 19 of the Company (Court) Rules,1959 and Section 536 of the Companies Act 1956, praying to validate the purchase of 7,000,100 shares of Respondent No.1 by the Applicant from Respondent No.3 on 23.10.2014.)

Common Order:

Comp.A.No.859 of 2017 was filed by Zylog Systems Limited (Zylog), represented by its Administrator, and Comp.A.No.359 of 2019 by Quess Corporation Limited (Quess Corp or Purchaser) (formerly known as Ikya Human Capital Solutions Limited).

2. In Comp. A. No.859 of 2017, Zylog prays for setting aside the transfer of 7,000,100 shares of Brainhunter Systems Limited (Brainhunter), which were held by Zylog, to and in favour of Quess Corp. Consequential orders are prayed for in respect of the said 7,000,100 shares. In Comp. A.No.359 of 2019, Quess Corp seeks validation of the purchase of 7,000,100 shares of Brainhunter, which were held by Zylog, upon enforcement of the pledge by ICICI Bank Limited, India (ICICI Bank India) on 23.10.2014.

3. A winding up petition was filed against Zylog in C.P.No.372 of 2013. By order dated 03.07.2014, the Official Liquidator was appointed as the Provisional Liquidator. The said order was carried in appeal before the Division Bench. The Division Bench restrained the Official Liquidator from taking steps to close the company but directed that all administrative decisions be taken with the concurrence of the Official Liquidator.

4. Zylog had and has several subsidiaries. Brainhunter was a wholly owned subsidiary of Zylog, which was incorporated in the year 2010, under the name, Zylog Systems Canada Limited. Zylog is stated to have invested about Canadian Dollars (CDN) 35 million by way of equity and loan in Brainhunter. The said investment is said to be reflected under the head -investments- in the balance sheet of Brainhunter for the year ended 31.03.2010.

5. Some time in the year 2010, Brainhunter approached ICICI Bank Limited, Canada (ICICI Bank Canada) for a term loan and working capital loan. Based on the request by Brainhunter, loans were sanctioned by ICICI Bank, Canada. In relation thereto, ICICI Bank Canada required standby letters of credit (SBLCs) from ICICI Bank India. For purposes of providing such SBLCs, ICICI Bank India required that Zylog be involved in the transaction. Therefore, Zylog applied for credit facilities and such facilities were sanctioned by ICICI Bank India on the security of a pledge of its 100% shareholding in Brainhunter. In relation to the pledge, a pledge agreement dated 13.01.2011 (the Pledge Agreement) was executed by Zylog in favour of BNY Trust Company of Canada (BNY Trust or Security Trustee), in its capacity as security trustee for and on behalf of the lender, ICICI Bank India.

6. Brainhunter defaulted in the discharge of its obligations under the facilities agreement with ICICI Bank Canada. Therefore, a call was made on the SBLCs. In turn, ICICI Bank India invoked the pledge. For such purpose, by letter dated 16.10.2013, ICICI Bank India informed Zylog that ICICI Bank Canada had invoked the SBLCs. Therefore, Zylog was called upon to make payment. ICICI Bank India, by a separate letter dated 28.10.2013, informed the Security Trustee that certain events of default had occurred. Accordingly, the Security Trustee was called upon to declare that amounts due and payable by Zylog in accordance with Section 3.1 of the Security Trustee Agreement be paid immediately. By notice dated 30.10.2013, the Security Trustee called upon Zylog to pay a sum of CDN $ 6,574,966, which was equivalent to INR 394,237,960. Thereafter, by a notice issued on 01.05.2014, in terms of Section 63(4) and (5) of the Personal Property Security Act (Ontario) (the Canadian PPSA), the Security Trustee informed Zylog that if the amounts due and payable are not paid within 15 days of notice, the collateral would be sold by way of private sale.

7. As stated earlier, the Official Liquidator was appointed as the Provisional Liquidator of Zylog on 03.07.2014. Subsequent thereto, by a communication dated 02.09.2014, the Official Liquidator informed the addressees to such communication, including ICICI Bank India, that the Division Bench of the High Court had directed the Official Liquidator to take over all money transactions and accounts of Zylog. In reply to this communication, ICICI Bank India addressed the Official Liquidator on 23.09.2014 and informed the Official Liquidator that the Security Trustee would shortly complete the sale of shares since Zylog failed to make payments as demanded by the Security Trustee. By a further communication dated 27.11.2014, ICICI Bank India informed the Official Liquidator that it is entitled to stand outside the winding up and enforce the security without obtaining the leave of the Companies Court. In these circumstances, Zylog, represented by the Administrator, filed Comp. A.No.589 of 2017 seeking a declaration that the sale of shares is void. About two years later, the Purchaser, Quess Corp, filed Comp. A.No.359 of 2019 seeking validation of the disposition under Section 536 (2) of the Companies Act, 1956 (CA 1956).

8. Oral submissions were made on behalf of: the Administrator by Mr.P.H.Arvindh Pandian, learned senior counsel, assisted by Mr.Harishankar Mani; the Official Liquidator by Mr.B.Dhanaraj, learned counsel; Quess Corp by Mr.Vinod Kumar, learned counsel; ICICI Bank India by Mr.E.Om Prakash, learned senior counsel, assisted by M/s.Shivakumar & Suresh, learned counsel.

9. The first contention of the Administrator was that the Official Liquidator was appointed as the Provisional Liquidator on 03.07.2014 and the winding up petition was presented on 27.10.2013. Therefore, upon appointment of the Provisional Liquidator, the legal fiction under Section 441(2) of CA 1956 is triggered and the winding up is deemed to have commenced on 27.10.2013. By drawing reference to the relief prayed for in Comp.A.No.359 of 2019, it was submitted on behalf of the Administrator that the said application was filed by Quess Corp in the year 2019 to validate a purchase on 23.10.2014. Therefore, the admitted position is that the sale of shares was subsequent to the order appointing the Provisional Liquidator and much subsequent to the commencement of winding up. The next contention was that the sale was entered into at an aggregate value of CDN $ 100,000, which is minuscule in comparison to the investment of CDN $ 35 million by Zylog in Brainhunter. In support of these contentions, reliance was placed on the following judgments:

(1) Official Liquidator v. Khaja Mohideen, (2022) 230 Company Cases 185 (MAD) (Khaja Mohideen). This judgment was relied upon for the proposition that, in contrast to dispositions between the presentation of a winding up petition and the order of appointment of the Official Liquidator as Provisional Liquidator or the order of winding up, a disposition after the appointment of the Provisional Liquidator would ordinarily not be validated.

(2) Administrator, MCC Finance v. Ramesh Gandhi, (2005) 127 Company Case 85 (MAD), wherein the court held the transfer of shares to be void since such transaction was not bona fide.

(3) Poddar Finance P. Ltd. v. Official Liquidator, (2012) 179 Company Case 169 (RAJ).

10. Brief submissions were made on behalf of the Official Liquidator. The first contention was that the Official Liquidator is required to take into custody all the properties and effects of the company concerned immediately upon an order being passed for the appointment of a provisional liquidator. In fact, it was contended that the assets of the company are deemed to be in the custody of the court upon commencement of winding up. The second contention was that it is not in the interest of other creditors and stakeholders that one secured creditor be permitted to enforce a pledge after the winding up commenced and, thereafter, seek validation several years down the line.

11. The Purchaser made submissions to the contrary. The first contention of the Purchaser was that credit facilities were availed of by both by Brainhunter and Zylog. As security for the grant of facilities to Zylog, the lender demanded that a security be created by Zylog. The pledge was provided as security. All the following events: the creation of the security by way of pledge; default by Brainhunter and Zylog; and the invocation of the pledge, preceded the order of appointment of the Provisional Liquidator. Therefore, it was submitted that this is a bona fide transaction by a secured creditor to enforce its security. The Purchaser also submitted that dispositions by a secured creditor stand on a different footing from dispositions by the company concerned after the commencement of winding up, or even dispositions by ordinary creditors.

12. The next contention of the Purchaser was that a secured creditor is ordinarily entitled to stand outside the winding up, and that the only change made by Act 35 of 1985 to CA 1956 was that a pari passu charge was created in favour of the workmen of the company in liquidation. In the case at hand, it was submitted that the company is engaged in IT staffing services. Consequently, the company has employees but not workmen as defined in the Industrial Disputes Act, 1947. Therefore, there is no pari passu charge on the facts of this case. Hence, it was not necessary to associate the Official Liquidator with the sale process. The next contention was that there is no collusion between the lender, ICICI Bank India, and the Purchaser. As regards valuation, the Purchaser relied upon the valuation report and pointed out that the valuation was done as per the discounted free cash flow method [DCF], which is an internationally recognised method of valuation of the shares of companies. Such method is in consonance with Canadian law which is the law governing the pledge and the enforcement thereof. The next contention was that the Official Liquidator was informed on 23.09.2014 that the pledge was invoked. Zylog and its wholly owned subsidiary, Brainhunter, were in financial stress at the relevant point of time. As a result of the transaction, the liabilities of Brainhunter were considerably reduced. As the holding company, indirect benefit flowed to Zylog.

13. The Purchaser further submitted that it consummated the transaction in 2014. Subsequently, it made significant investments in Brainhunter. By drawing reference to the financial statements of Brainhunter, the Purchaser emphasised that the financial position of Brainhunter had improved dramatically over this period on account of the financial and other resources deployed in Brainhunter by the Purchaser. For all these reasons, the Purchaser contended that the transaction warranted validation. The Purchaser submitted, in conclusion, that the power of validation is wide, as held in Khaja Mohideen, and that fetters should not be read into the power of validation and that such power may be exercised both with regard to dispositions that were made in the interregnum between the presentation of a winding up petition and the order appointing a provisional liquidator and dispositions made thereafter. It was also highlighted that a winding up order has not been issued in this case till date, and that, therefore, the case for validation is fortified.

14. In support of these submissions, the Purchaser referred to and relied upon the following judgments:

(1) M.K.Ranganathan v. Government of Madras and others, AIR 1955 SC 604 (M.K.Ranganathan).

(2) Official Liquidator v. Khaja Mohideen, (2022) 230 Company Cases 185 (MAD).

(3) International Coach Builders v. Karnataka State Financial Corporation, 2003 10 SCC 482 (International Coach Builders).

(4) Pankaj Mehra and Another v. State of Maharashtra and Others, 2000 2 SCC 756)(Pankaj Mehra).

(5) Iftex Oil & Chemicals Pvt. Ltd. v. Official Liquidator of Dhake Dyes & Chemicals Pvt. Ltd. and others, (1998 SCC Online Bom 516).

(6) V.G.P. Finance Limited v. The Official Liquidator (2013 SCC Online Mad 2914)(VGP Finance).

(7) Henkel Chemicals (I) Ltd. v. Garware Nylons Limited, 2015 SCC online 8715.

15. On behalf of ICICI Bank India, the first contention was that the enforcement of security interest is distinguishable from a disposition. The second contention was that such enforcement took place prior to the appointment of the Provisional Liquidator. The third contention was that Zylog is a borrower and not a guarantor of ICICI Bank India. Therefore, it was submitted that leave under Section 537 of CA 1956 was not necessary for the enforcement of the pledge. In support of these contentions, the sanction letter and the SBLCs were adverted to. The fourth contention was that the board of directors was not superseded when the Provisional Liquidator was appointed. By drawing reference to both clause 6.1 and 8.1 of the Pledge Agreement, ICICI Bank India submitted that the power of attorney remained valid and enforceable even after the appointment of the Provisional Liquidator. For all these reasons, it was submitted that leave of the Court was not required under Section 537 of CA 1956.

16. In support of these contentions, ICICI Bank India relied upon the following judgments:

(1) M.K.Ranganathan v. Government of Madras and others, AIR 1955 SC 604.

(2) ICICI Bank Ltd v. SIDCO Leathers Ltd. & Others,(2006) 10 Supreme Court Cases 452.

17. In light of the rival contentions, the first question that arises for consideration is whether a secured creditor requires leave under Section 537 of CA 1956. The discussion and analysis, in such regard, should commence by examining Sections 536 & 537 of CA 1956, which are set out below:

536. Avoidance of transfers, etc. after commencement of winding up:

(1) In the case of a voluntary winding up, any transfer of shares in the company, not being a transfer made to or with the sanction of the liquidator, and any alternation in the status of the members of the company, made after the commencement of the winding up, shall be void.

(2) In the case of a winding up by the court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alternation in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.”

537. Avoidance of certain attachments, executions, etc., in winding up by court~~ (1) Where any company is being wound up by the court~

(a) any attachment, distress or execution put in force, without leave of the court against the estate or effects of the company, after the commencement of the winding up; or

(b) any sale held, without leave of the court of any of the properties or effects of the company after such commencement, shall be void.

(2) Nothing in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government.]”

18. Upon perusal of Section 537, it is evident that it deals with attachment, distress, execution and sale of the estate, properties and effects of a company after commencement of winding up. It further prescribes that any of the above, if undertaken without the leave of the court, after the commencement of winding up, is void. On a textual reading, Section 537 does not exclude secured creditors from its ambit. However, in M.K.Ranganathan, the Hon-ble Supreme Court interpreted Section 232 of the Indian Companies Act, 1913, which is in pari materia with Section 537 of CA 1956. Upon interpreting Section 232, the Hon-ble Supreme Court concluded that it does not apply to a secured creditor and that, therefore, a secured creditor does not require leave under Section 232. The law underwent a significant change, thereafter, through Act 35 of 1985. By Act 35 of 1985, the proviso to Section 529(1) was inserted and a pari passu charge was created in favour of the workmen of a company to the extent of the workmen-s portion in every secured asset of the company in liquidation. Indeed, by virtue of Clauses (a) and (b) of such proviso, the official liquidator concerned was conferred the statutory right of representing the workmen for purposes of asserting and enforcing the rights of the pari passu charge holder. Besides, Section 529A was introduced in the statute and workmen-s dues became entitled to priority over all other debts. These aspects were dealt with extensively in International Coach Builders, wherein the Hon-ble Supreme Court took note of the evolution of the law and concluded that a secured creditor can no longer bring secured assets for sale without involving the official liquidator concerned in the process.

19. Another dimension to the above question is whether a secured creditor requires leave in spite of subsequent legislations such as the Recovery of Debts and Bankruptcy Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. In such context, the Hon-ble Supreme Court, in cases such as Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, and Rajasthan State Financial Corporation v. Official Liquidator, (2005) 8 SCC 190, held that the jurisdictional Debts Recovery Tribunal (DRT) may, in exercise of overriding powers under the statute, sell the assets albeit after issuing notice to the Official Liquidator. However, those cases dealt with sales under specific enabling statutes, which contain non~obstante clauses and also provide an in~built mechanism to provide a notice to the Official Liquidator so as to involve him in the process. By contrast, in this case, the sale was a private sale in exercise of pure contractual rights by the secured creditor. Therefore, there is little doubt that ICICI Bank India required the leave of this Court after the amendments to CA 1956 by Act 35 of 1985.

20. An ancillary issue was raised that such leave is purely for purposes of enabling the Official Liquidator to represent the workmen and that Zylog does not have workmen. This contention is liable to be rejected for more than one reason. At this juncture, claims have not been invited by the Official Liquidator from creditors, including workmen. Therefore, there is no basis to draw the definitive conclusion that there are no workmen. Moreover, in a winding up, the Official Liquidator represents the interest of all the stakeholders of a company, except the secured creditor seeking to enforce the security by standing outside the winding up. For instance, if a suit or other legal proceeding were to be instituted or proceeded with against a company in liquidation, in order to enforce a security or otherwise, the Official Liquidator would represent the company and be entitled to be heard, whether with regard to the valuation of the security interest or otherwise. Even the special legislations referred to in the preceding paragraphs provide for the same. This process cannot be circumvented or bypassed by undertaking a private sale, whether by using a power of attorney or through the Security Trustee, as in this case. Therefore, in the context of a private sale, even de hors the pari passu charge in favour of workmen, in my view, the leave of this Court was necessary.

21. CA 1956 prescribes the leave requirement not only in Section 537 but also in Section 446 (1) of CA 1956. Leave under Section 446(1) is for the institution or continued prosecution, as the case may be, of suits or other legal proceedings against a company in respect of which a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator. Leave under Section 537, on the other hand, is required for effecting attachment, distress, execution or sale of the estate, properties or effects of a company after the commencement of winding up in a winding up by or subject to the supervision of court. One of the distinctions between the texts of Sections 446(1) and 537(1) is that the leave requirement under Section 446(1) is triggered when a winding up order is made or when the Official Liquidator is appointed as provisional liquidator, whereas the leave requirement under Section 537(1) is triggered upon commencement of winding up. Is this a distinction without a difference? Section 441 deals with commencement of winding up and sub~section (2), which deals with winding up other than voluntary winding up, provides that the winding up of a company shall be deemed to commence at the time of presentation of the petition for winding up of the company concerned. Since this is a legal fiction, does it get triggered only upon a final winding up order or even upon appointment of the Official Liquidator as provisional liquidator? In Sudarsan Chits (I) Ltd. v. O.Sukumaran Pillai, (1984) 4 SCC 657, the Supreme Court held that the powers under Section 446(2) of CA 1956 may be exercised upon appointment of the Official Liquidator as provisional liquidator, and not only upon a winding up order being passed. In paragraph 45 of Orkay Industries Ltd. v. State of Maharashtra 1998 SCC Online Bom 248, a Division Bench of the Bombay High Court held that Sections 536 and 537 of CA 1956 would get triggered either upon a winding up order being passed or upon appointment of the Official Liquidator as provisional liquidator. Section 450 of CA 1956, which deals with the powers of a provisional liquidator, prescribes in sub~section (3) thereof that he exercises the same powers as the Official Liquidator except to the extent limited or restricted by the court. On the facts of this case, the Official Liquidator was restrained from taking steps to close the company, but all administrative decisions were required to be taken with his concurrence and he was directed to take over all money transactions and the accounts pertaining thereto. The consequence of appointing the Official Liquidator as the provisional liquidator is that he takes charge of the assets and affairs of the company concerned. When all the above factors are concerned, the only reasonable conclusion is that the legal fiction also gets triggered upon the appointment of the Official Liquidator as provisional liquidator.

22. The next question to be considered is the consequence of not obtaining leave under Section 537. Section 537 provides that the attachment, distress, execution or sale of the estate, properties and effects of the company in liquidation after commencement of winding up, without leave of the court, is void. In Pankaj Mehra, the Hon-ble Supreme Court held that the sale is not void ab initio by referring to and relying upon the judgment in Kamani Metallic Oxides Ltd. v. Kamani Tubes Ltd, 1982 SCC online Bombay 396. The rationale for concluding that such dispositions are not void ab initio is that the court is conferred with the power of validation and leave, respectively, under Sections 536(2) and 537 of CA 1956. In turn, the rationale for such power is that the company concerned may have undertaken legitimate obligations or incurred legitimate liabilities prior to the presentation of the winding up petition, and dispositions may be necessary and even inevitable in relation thereto. Besides, a company does not cease to carry on business because a winding up petition is presented against such company. In course of carrying on business after the presentation of the petition, the company would make dispositions either in the ordinary course of business or otherwise. By way of illustration, a company would be required to procure raw materials and components if it engages in the manufacture and sale of products. Upon manufacturing the relevant products, the company would be required to sell such products. Even bona fide transactions outside the ordinary course of business may be undertaken, such as the sale of a valuable but under used or unused asset or even the sale of the business as a going concern to a suitor. In relation to prior obligations and liabilities, secured creditors may also undertake actions to enforce their securities. Without the power of validation or the power of granting leave, the relevant transactions cannot be salvaged. The texts of Sections 536 and 537 of CA 1956 do not impose fetters on such power and, therefore, such power may be exercised, in appropriate cases, prior to or after the Official Liquidator was appointed either as provisional liquidator or even after a winding up order was passed. The threshold for validation would, however, be set at a higher level if a party seeks validation of a disposition that took place after the Official Liquidator was appointed provisionally or otherwise.

23. In order to decide whether a particular disposition warrants validation, courts have evolved various criteria. In VGP Finance, this Court formulated several questions to be taken note of while deciding whether a transaction should be validated. In my view, the foremost criterion is whether the relevant transaction was bona fide. Some of the other considerations are whether the transaction was in the ordinary course of business or otherwise, whether the valuation was appropriate, whether the transaction was in exercise of legitimate prior rights of a secured creditor, whether the transaction was in the interest of the company in liquidation and whether the court would have been approved of such transaction, on the same terms or otherwise, if its approval had been sought before the transaction was concluded. Indeed, it may not be advisable to exhaustively catalogue the criteria for validation or the situations in which such power would be exercised as it may not be feasible to foresee all contingencies. Nonetheless, the above may serve as guiding principles.

24. If the above tests were applied to the case at hand, the documents on record reveal that the Facility Agreement between ICICI Bank India and Zylog was executed on 22.12.2010, much before the winding up petition was presented. Such loan was in relation to the grant of credit facilities to its wholly owned subsidiary by ICICI Bank Canada. The Pledge Agreement also preceded the presentation of the winding up petition. The default by Brainhunter, the consequential call on the SBLCs and the demand on Zylog to make payment occurred on or before 16.10.2013. The communication to the Security Trustee dated 28.10.2013 enclosing the acceleration notice was issued one day prior to the presentation of the winding up petition. However, all subsequent communications are subsequent to the presentation of the winding up petition. The notice dated 01.05.2014 from the Security Trustee to, inter alia, Brainhunter and Zylog under Sections 63(4) and 63(5) of the Canadian PPSA ~ by which it was communicated that the collateral would be sold, if the demand was not discharged within 15 days ~ was issued a couple of months prior to the order appointing the Official Liquidator as the Provisional Liquidator. A share purchase agreement appears to have been executed by the Security Trustee and the Purchaser on 17.09.2014. A valuation report dated 30.09.2014 was issued to the Purchaser by SJ & Co., Chartered Accountants, Bangalore, India. By such report, the shares were valued by the DCF method at CDN $ 100,000 to 125,000. Eventually, the sale took place on 13.10.2014 at the price of CDN $ 100,000. The last three key events took place after the order appointing the Official Liquidator as the Provisional Liquidator. When these facts are considered cumulatively, it cannot be concluded that the creation of the security by way of pledge was not bona fide. Indeed, it cannot be said that the call on the pledge was not bona fide. However, the enforcement of the pledge was undoubtedly completed subsequent to the order of appointment of the Official Liquidator as Provisional Liquidator. This leads to the question whether the Purchaser was aware of the appointment of the Provisional Liquidator. From the communication dated 02.09.2014 from the Official Liquidator to ICICI Bank India, it is beyond doubt that ICICI Bank India was informed about the appointment of the Official Liquidator as the Provisional Liquidator. Such information was evidently provided before the enforcement of the pledge was concluded. Thus, the pledgee was fully aware of the commencement of winding up. In fact, the subsequent communication dated 27.11.2014 from ICICI Bank India to the Official Liquidator makes it abundantly clear that ICICI Bank India was of the view that it did not require the leave of the Court to enforce the security, and, therefore, did not approach this Court for leave.

25. Although there is no documentary evidence to establish the direct knowledge of the Purchaser, the Purchaser was clearly under an obligation to undertake due diligence before acquiring 100% of the paid up share capital of Brainhunter especially when such transaction involved enforcement of a pledge. Indeed, the documents on record include communications from the Purchaser to the Reserve Bank of India (the RBI) and to the Bombay Stock Exchange (BSE) and the National Stock Exchange (the NSE). In its report dated 05.01.2022, the Official Liquidator states that the Purchaser disclosed, in its draft red herring prospectus, that an objection had been raised to the acquisition of Brainhunter on the ground that it was subsequent to the commencement of winding up, but the relevant document is not on record. It should also be borne in mind that the Purchaser is a company incorporated in and carrying on business in India. When these facts and circumstances are considered holistically, the only reasonable inference is that the Purchaser was probably aware that the pledgor was a company in liquidation and, without doubt, had the means to discover the same on exercise of reasonable due diligence. Therefore, either the pledgee or the Purchaser should have requested for leave before enforcing the pledge.

26. Another aspect of significance is that the enforcement of the pledge would ordinarily have entailed the direct involvement of the pledgor. In this case, the necessity to involve the pledgor was obviated by having a power of attorney executed in favour of the Security Trustee. Indeed, even the share purchase agreement dated 17.09.2014, which is not on record, appears to have been executed on such basis. Although the Pledge Agreement indicates that such power of attorney is coupled with interest and, therefore, cannot be revoked, it cannot be inferred from such clause that the agent under such power of attorney is entitled to exercise powers as an agent, without the leave of this Court, notwithstanding the fact that the principal is a company in liquidation. To put it differently, if Zylog required the leave of this Court to permit the sale of its shares after commencement of winding up, so did its agent whether acting for and on behalf of the principal or the pledgee.

27. For the reasons set out above, it bears repetition that ICICI Bank India or the Purchaser was required to obtain leave of this Court before enforcing the pledge. Moreover, the Security Trustee should not have acted without the leave of this Court while enforcing the pledge. This leads to the question whether the transaction is liable to be validated, notwithstanding the above conclusions, in view of the earlier conclusion that the transaction is bona fide.

28. One of the significant considerations while deciding whether to validate a disposition is to ask the question whether the valuation is reasonable, and whether this Court would have granted leave on the same terms if leave had been sought at the time of the transaction. In the present case, the documents indicate that the investment of Zylog in Brainhunter was of the order of about 35~40 million CDN $ in the form of equity and debt. From the financial statement of Brainhunter for the financial year ended 31.03.2014, there is definite indication that the financial position of Brainhunter was not sound in 2014 when the disposition took place. It appears from the valuation report produced by the Purchaser that the valuation was done as per the DCF method. The DCF valuation was in a valuation band of 100,000 to 125,000 CDN $, and the purchase was made at the lower end of the valuation band. If the leave of this Court had been requested for, at a minimum, this Court would have insisted that the transaction be consummated at the upper end of the valuation band. Besides, the Official Liquidator and the learned Administrator were not involved in the process of appointing the valuer or deciding on the valuation methodology or principles so as to protect the interest of the company in liquidation.29. The status of Zylog, as on date, is significant while deciding on the request for validation. The learned Administrator filed a rejoinder affidavit dated 20.01.2022. In such rejoinder affidavit, it is stated that a final report dated 30.06.2019 was filed by the learned Administrator communicating that options for revival of Zylog were exhausted. In addition, it is stated that it is in the best interests of Zylog that its assets be sold at the earliest by the Official Liquidator. Thus, it is evident that the original plan to revive Zylog did not fructify. 30. The Purchaser says that it invested considerable sums to revive Brainhunter after the acquisition by relying upon the financial statement for the financial year ended 31.03.2021 in contradistinction to the financial statement for the financial year ended 31.03.2014 when the acquisition took place. While the accumulated losses have reduced and the share capital has increased, no definitive conclusions may be drawn since too many variables are at play. Nonetheless, th

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e undisputed position that emerges is that more than seven years have elapsed after the transaction. More importantly, from the perspective of Zylog, a conclusion was reached by the learned Administrator that the company cannot be revived and should be liquidated. When all these elements are thrown into the mix, I am of the view that the disposition is deserving of contingent validation subject to conditions precedent. Ordinarily, a private sale without following a sealed tender or public auction process would not be validated, but in the unique circumstances of this case involving a private sale by a pledgee, in terms of and pursuant to the Pledge Agreement, I am inclined to do so on stringent terms.31. Towards such end, the shares should be subject to fresh valuation. The valuation of the shares of Brainhunter shall be arrived at as on the date of acquisition by the Purchaser. As regards the pledgee, ICICI Bank India, it was satisfied with the price realised on the basis of the earlier valuation. Therefore, it is just and necessary that ICICI Bank India should not be entitled to any additional consideration even if the shares are found to be of higher value on revaluation. Instead, the entire additional consideration, if any, should accrue to the benefit of Zylog. For purposes of carrying out such valuation, the Purchaser should obtain the concurrence of the learned Administrator and the Official Liquidator and appoint two renowned chartered accountants as valuers. The valuers should adopt any internationally recognised valuation methodology, which is also valid under Canadian law, since the shares of a Canadian company are being sold. Such methodology, any models of capital asset pricing in relation thereto, the relevant assumptions, principles, considerations and the like should also be decided with the concurrence of the learned Administrator and the Official Liquidator. All material documents shall be shared by the Purchaser with the learned Administrator and the Official Liquidator in this connection. The entire cost of such valuation shall be borne by the Purchaser. Upon submission of valuation reports by the two valuers, the higher of the two values should be taken as the value for the transaction. The differential consideration, without deductions, including, if necessary, by topping~up towards statutory deductions, if any, shall be remitted into the account of the company in liquidation by the Purchaser within 60 days from the date of receipt of the valuation reports. For avoidance of doubt, it is clarified that any additional costs, taxes, and any other expenses as a result of the revaluation and payments pursuant thereto, whether in Canada or India, shall be to the Purchaser-s account and no adjustments in relation thereto are permissible. This is, however, without prejudice to the Purchaser-s right to raise disputes, if so advised, with ICICI Bank India in view of this order and its implications, financial or otherwise. Zylog shall be fully indemnified in respect thereof by the Purchaser. The disposition in favour of the Purchaser is validated subject to and contingent on the fulfillment of the above requirements. If the above requirements are not fulfilled, the disposition stands declared ipso facto void. In such event, it is open to the Administrator and the Official Liquidator to file any consequential applications. In order to verify whether the conditions precedent have been fulfilled, upon receipt of the two valuation reports and after arranging for the differential consideration in terms thereof, the Purchaser shall file an application before this Court seeking permission to proceed to conclude the transaction in terms of this order. 32. Both these applications are disposed of on the above terms by granting leave to all parties to approach this Court subsequently, if necessary. There shall be no order to costs.
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