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TMI Blog2008 (4) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... t of various factors, the company presented a scheme under section 391 of the Act for an arrangement/compromise with the class of creditors, namely, the bondholders and deposit-holders. The salient features of the scheme as contained in such petition are to the following effect : "4. Payments to fixed deposithotders/bondholders : 4.1 The company would settle all the depositholders up to maturity value of Rs. 20,000 as and when it falls due. 4.2 The scheme would provide for the following. (a)Conversion of all the depositholders and bondholders into secured convertible debentures carrying on interest at 6 per cent, per annum convertible into equity before the expiry of one year from the date of allotment with an option to the company to prepay the value of debentures before the due date of conversion. The conversion price will be determined taking into account the valuation laid down by SEBI guidelines. (b)The debentures will be issued with periodical interests payment option to the deposit/bondholders who are holding regular interest payment option presently and for those deposit/bondholders holding payment of interest under cumulative option, interest will be added to the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 The scheme if approved by the depositholders and bondholders with such modifications, as may be assented by the company, shall be submitted to this hon'ble court for confirmation and if confirmed, shall become binding with all depositholders, bondholders and the company. 6.2 On completion of the scheme, the company shall have discharged all the liability to fixed deposit/bondholders. 7. Effect of the Scheme : 7.1 In view of the above scheme being offered, all the parties agree that: (a)with the terms of the scheme all liabilities of the deposit- holders and bondholders shall be deemed as fully discharged. (b)No claims shall be raised by any depositholders or bond holders to whom this scheme is offered and (c)No claim can be made against any group companies of IFCL their associates or any other person, promoters, directors, past and present in respect of matters relating to IFCL. (d)This scheme if approved and ordered by this hon'ble court shall be binding on the company and all parties to the scheme." In C.A. Nos. 854 and 855 of 2005, arising from C. P. No. 160 of 2005, the learned single judge ordered convening and holding of the meetings of the bondholders and deposith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed O. S. A. No. 309 of 2006, M/s. Popular Kuries Ltd. filed O. S. A. No. 312 of 2006 and Mrs. Elizabeth Antony has filed O. S. A. No. 91 of 2007 against such order dated August 19, 2006. We have heard Mr. V. Prakash, senior counsel appearing for the appellant in O. S. A. No. 309 of 2006, Mr. T. Poornam, counsel appearing for the appellant in O. S. A. No. 308 of 2006, Mr. T. Suresh, counsel appearing for the appellant in O. S. A. No. 312 of 2006 and Mr. K. F. Manavalan, counsel appearing for the appellant in O. S. A. No. 91 of 2007, who have assailed the legality and validity of the. order passed by the learned single judge. Arvind P. Datar, senior counsel appeared for the company, the main contesting respondent in all the appeals, in support of the order passed by the learned single judge. Senior counsel, Mr. K. M. Vijayan, Mr. Vijay Narayan and Mr. R. Viduthalai have also appeared for various associations representing the depositors supporting the scheme. Similarly, Mr. Chan-drasekhar appearing for the employees association has also supported the scheme. The main contention raised by learned counsel appearing in various appeals is to the effect that by sanctioning the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and 393 of the Act and referring to several decisions, the Supreme Court, in the decision reported in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp Cas 792 ; AIR 1997 SC 506, observed (pages 819 and 820 of 87 Comp Cas) : "(1) The sanctioning court has to see to it that all requisite statutory procedure for supporting such a scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held. (2) That the scheme put up for sanction of the court is backed up by the requisite majority vote as required by section 391(2). (3) That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. (4) That all necessary material indicated by section 393(1)(a ) is placed before the voters at the concerned meetings as contemplated by section 391(1). (5) That all the requisite material contemplated by the proviso to section 391(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary circumstances should be slow to interfere with such discretionary order and should interfere only in case of any glaring illegality in the proceedings or material irregularity in the procedure adopted. Keeping in view the scope of section 391 of the Companies Act, we do not think that it is for the appropriate company court dealing with such application under section 391 or for that matter and even far less, for the appellate court to go into the nitty-gritty of the various suggestions in the scheme. It is indeed very difficult for the company court or the appellate court to consider the financial wisdom of a particular proposal because the courts are not equipped with necessary expertise and more particularly when the overwhelming majority of the bondholders and depositors had agreed to a particular proposal. Law is well-settled that a company court in such a scenario is not expected to substitute its own wisdom for that of the stake-holders, who give consent to a particular scheme. Thus, wise or otherwise, a scheme is ordinarily beyond the jurisdiction of the company court and the appellate court except in those rare cases where one can see that the scheme itself on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the following companies were in excess of 15 per cent, of the company's reported owned fund of Rs. 2,877 lakhs as on September 30, 2003. a.Sree Maruti Textiles Ltd. (Rs. 887.34 lakhs). b.Ravishankar Industries P. Ltd. (Rs. 789.96 lakhs). c.Gemini Indus and Imaging Ltd. (Rs. 915.23 lakhs). d.Gomathy Spinners (Rs. 724.98 lakhs). e.ATV Projects India Ltd. (Rs. 998.46 lakhs). f.Krishna Petrochem Ltd. (Rs. 599.20 lakhs). g.Vatan Dyechem Exports Limited (Rs. 471.41 lakhs). The company has thereby violated the provisions of paragraph 12 of the NBFC Prudential Norms (Reserve Bank) Directions, 1998 (hereinafter referred to as "the prudential norms directions"). (iii)The company has not classified its assets in accordance with the asset classification norms stipulated by the Reserve Bank of India (details of wrong classification of assets are furnished in annexure-II). The company has thereby violated the provisions of paragraph 7 of the prudential norms directions. (iv)Gross non-performing assets of the company, assessed at Rs. 15603.16 lakhs, were very high and formed 69.31 per cent, of the total credit exposures of the company. (v)The company has not made adequate provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been violated as the company has not accepted any deposit, but had received only bonds. It is submitted that since the respondent-company was exempted from Chapter XII of the Public Deposits (Reserve Bank of India Directions) Act, it cannot be said that by receiving bond, any direction of the RBI had been violated. The submission of senior counsel for the respondent is that there was no flouting of directions and the company had clarified the questions in its correspondence. The core question is not whether the company had flouted some of the directions. The more important question is whether the company should have disclosed the aspects arising out of the order dated January 18, 2005, to enable the depositors and the bondholders to take an informed decision. While seeking permission of the court for compromise, etc., as envisaged under section 391 of the Act, the company is required to act fairly and in a transparent manner. This includes the duty of disclosing all relevant facts and circumstances. It is true that technically speaking there was no investigation pending under sections 235 to 251 of the Act. However, the fact that the RBI had initiated action contemplated u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , specify. Section 45Q provides that the provisions of Chapter III-B shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Section 45QA is as follows : "45QA. Power of Company Law Board to order repayment of deposit.-(1) Every deposit accepted by a non-banking financial company, unless renewed, shall be repaid in accordance with the terms and conditions of such deposit. (2) Where a non-banking financial company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board constituted under section 10E of the Companies Act, 1956 (1 of 1956), may, if it is satisfied, either on its own motion or on an application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order." In the light of the above provisions, it is contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 45Q makes it very dear that the provisions contained in Chapter III-B shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. It is therefore obvious that the provisions contained in section 45QA, which are intended to protect the depositors must have primacy over any other law inconsistent with such provision. It may be that sections 391 to 393, which are the specific provisions regarding scheme of arrangement or compromise relating to any company, can be invoked in respect of a non-banking financial company. However, when such provisions for making a scheme of arrangement or compromise are invoked, it is obvious that the scheme of arrangement or compromise should not contravene any specific provision of law relating to non-banking financial company. As apparent from the decision of the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996} 87 Comp Cas 792 ; AIR 1997 SC 506, a scheme of arrangement/compromise, if it is illegal or opposed to public policy, cannot be sanctioned by the court. The provisions contained in the scheme, whereunder the statutory liability of a company to repay the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er III-B of the RBI Act. Apart from the statutory obligation emphasised in section 45QA of the RBI Act, jurisdiction has been vested with the Company Law Board to pass appropriate orders as contemplated under section 45QA(2). However, that is a discretion exclusively vested with the Company Law Board and cannot be whittled down by taking recourse to section 391 of the Act. By virtue of section 45QA(2), the Company Law Board is now clothed with power to order repayment of the deposits accepted by a non-banking financial company in case of default in making payment of the principal amount with interest thereon. Such discretionary power of a statutory authority cannot be circumvented by the stratagem of an arrangement projected under section 391 of the Act. Mr. Arvind P. Datar, learned senior counsel, has also contended that the provisions similar to those contained in Chapter III-B of the RBI Act had been included in the shape of section 58A in the Companies Act and section 391 of the Companies Act being a specific provision in the very same statute, would be operative even in respect of the companies which are required to follow the provisions contained in section 58A of the Act. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has placed reliance upon a Division Bench decision of the Kerala High Court reported in Mrs. Vilasini Jayaprakash v. St. Mary's Finance Ltd. [2000] 99 Comp Cas 54, in support of the contention that the provisions contained in section 45QA of the RBI Act empowering the Company Law Board to give direction can be considered as subservient to the provisions contained in section 391 of the Act. In the aforesaid case, the Company Law Board in reference to application under section 45QA(2) had indicated that since an application under section 391 of the Companies Act, 1956, was pending, it was not appropriate for the Company Law Board to pass any order on the application filed under section 45QA(2) till the disposal of the application under section 391 of the Act. In the appeal taken to the High Court, the Division Bench held that this order passed by the Company Law Board was on the basis of the relevant consideration and the fact that proceedings under section 391 was pending, cannot be considered as irrelevant. However, in our opinion, this decision does not go to the extent of laying down as a matter of proposition of law that, while dealing with an application under section 391, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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