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Zenith Infotech Appeals Liquidation Order

On the second anniversary of its bond default, embattled Zenith Infotech is making a last ditch effort before the India Supreme Court to stave off liquidation and pay its massive $85 million debt, according to foreign press reports.

Last month, a lower court ordered the liquidation of the cloud and backup vendor. The court agreed with creditors that Zenith Infotech no longer had the cash flow or assets to fully pay off its debts. Liquidation, they argued, would recover a portion of the tab.

Working in favor of creditors’ arguments is Zenith Infotech’s admission earlier this year that its assets and cash flow were less than its outstanding debt.

Since defaulting on its foreign currency convertible bonds in September 2011, Zenith Infotech has maintained its intent to repay the $85 million debt, preferably in installments. The company proposed to the court that it would pay $4 million to creditors now and the balance over the next two to three years.

In a sign liquidation could be averted, the court suggested Zenith Infotech pay $8 million now and $8 million a month until the debt is paid off. Under this plan, the debt would be settled in 10 or 11 months.

Zenith Infotech is considering the court’s proposal and will reply with a decision today.

Creditors, mostly U.S. banks and investment firms, haven’t weighed in on court deliberations.

The willingness of the India high court to cut Zenith Infotech a deal does not come without conditions. The court already told the company’s lawyers that Zenith Infotech will have to demonstrate an ability to repay its debts before the court will approve a non-liquidation plan.

The India courts and regulatory agencies have been critical of how Zenith Infotech handled its debt situation. The company bond default happened a week after the sale of its remote monitoring and management (RMM) division to Summit Partners for $55 million.

Summit Partners took the RMM assets to form a new company, Continuum, which has transformed itself into a thriving managed services provider. While operationally separate, Zenith Infotech maintains a minority share of Continuum. Continuum is not attached to the debt litigation or potential consequences.

The lower court found Zenith Infotech diverted the proceeds from that sale to a subsidiary with little fiduciary interest in the company. Additional funds were siphoned to support a sister company, Vu Technologies. In the final analysis, the lower courts charged Zenith Infotech with trying to skirt its debt obligations.

Since the bond default, Zenith Infotech has lost considerable business in its U.S. operations. Partners have defected to competing brands and support staff has shrunk. Nevertheless, Zenith Infotech hasn’t given up; it continues to market at events, launch products and ply partners with new offers.

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