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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 ..... her law. The Companies Act as well as the RBI Act are Central Acts. Chapter III-B, which was inserted by Act 55 of 1963 with effect from December 1, 1964, is obviously a later legislative provision. - O.S.A. NOS. 308, 309 AND 312 OF 2006, 91 OF 2007 AND M.P. NOS. 1 AND 2 OF 2006 - - - Dated:- 30-4-2008 - P.K. MISRA AND S. TAMILVANAN, JJ. T. Poornam, V. Prakash, P.V. Ravichandran, T. Suresh and K.F. Manavalan for the Appellant. Arvind P. Datar, P.H. Arvindh Pandian, K.M. Vijayan, Vijay Narayan, R. Viduthalai and Chandrasekhar for the Respondent. JUDGMENT P.K. Misra, J. Company Petition No. 160 of 2005 was filed under section 391 of the Companies Act, 1956 (hereinafter referred to as "the Act") by M/s. Integrated Finance Co. Ltd. (hereinafter referred to as "the company"), a private company incorporated under the Companies Act, for getting approval of the scheme of arrangement/compromise between the said company and some of the creditors, namely, the depositholders and bondholders. The company is a non-banking finance company incorporated under the Act and engaged in the business of hire purchase and lease. Expressing its inability to carry on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed new lines of business such as financial BPO and is in the process of expanding the same. 4.4 The reduction in interest rates would result in cash flows from operations. Apart from this Rs. 125 crores of stock hire being available which would be used for funding the operations. 4.5 A detailed cash flow will be furnished as may be directed by the hon'ble High Court giving out particulars of amount recoverable from the stock on hire and through revenue generation from operations. 4.6 The scheme is not offered to the banks since the stock on hire pledged/hypothecated is about Rs. 80 crores as against their dues of Rs. 62 crores. Since none of the banks interest is prejudiced nor any of the assets charged to them, this scheme is not being offered to them and it is only the depositholders and bondholders whose right are being dealt with in the scheme of arrangement and compromise. Thus, there is no direct or indirect interest of the banks being pre judiced or affected. 5. Since this scheme does not envisage cash outflow at the first instance and does seek to convert the depositors and bond over a period ;of time into shareholders there is no requirement of fresh infusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... several other depositors, filed objections raising several contentions regarding the validity of the scheme. Objections were also raised by the Reserve Bank of India (RBI). Certain other associations representing the depositholders, debenture-holders also intervened supporting the scheme. Similarly, an association of the employees also intervened supporting the scheme. During pendency of Company Petition No. 160 of 2005, the petitioner had filed Company Application Nos. 1409 and 1410 of 2005 forbearing respondents Nos. 1 to 6 in such applications from initiating any proceeding either civil or criminal in nature against the directors of the petitioner-company and for granting stay of commencement of the suit or proceedings against the company, during pendency of such C. P. No. 160 of 2005. Ultimately, the learned single judge sanctioned the scheme, subject to the condition that the scheme will not exonerate or protect the directors and those in charge of the affairs of the company from any proceeding that may be contemplated either under the provisions of the Companies Act or under any other Act for any statutory violation. The Reserve Bank of India has filed O. S. A. No. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme and contended that in view of various factors, which are beyond the control of the company, it has become no longer possible for the company to carry on its usual business and, therefore, the scheme should be adopted so that instead of winding up a company, efforts can be made to revitalise the company as per the terms and conditions contained in the scheme. Chapter V of the Act contains the relevant provisions relating to compromises and arrangements. Sections 391 to 393 are relevant. On a bare perusal of these provisions, it is obvious that while considering the question as to whether the scheme should be sanctioned or not, the courts are required to concentrate on the procedural wisdom, commercial wisdom as well as the legal wisdom. In other words, the courts are required to find out as to whether the procedural aspects contained in sections 391 and 393 of the Act are complied with. Once it is found that the procedural requirements have been fulfilled, the next question is whether the scheme is commercially just and fair. Apart from the above, the courts are also required to find out whether the scheme is violative of any of the provisions of law or opposed to public po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Once the aforesaid broad parameters about the requirement of a scheme for getting sanction of the court are found to have been met, the court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in view of the court there could be a better scheme for the company and its members or creditors for whom the scheme is framed. The court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction." Mr. V. Prakash, learned senior counsel appearing for the appellant in O. S. A. No. 309 of 2006, on behalf of Integrated Finance Company Depositors Association has raised several questions touching upon the pros and cons of the scheme and has submitted that it would have been more appropriate for the company to come out with any better offering as most of the depositholders or the bondholders had practically invested their life time saving. He has painted a very dismal picture of the projections highlighted in the scheme. Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate on our part to set the scheme at naught merely because the meetings were held at Chennai, more particularly when there is no acceptable materials on record to indicate that the depositors and the bondholders within the State of Kerala found it difficult to attend the meetings at Chennai. One other contention regarding procedural irregularity, however, requires serious consideration, revolves round the order passed by the RBI vide letter dated January 18, 2005 and the effect of non-disclosure. Such letter refers to the fact that the RBI had conducted an inspection of the books of account in exercise of power under section 45N of the RBI Act. The relevant portion of the letter is as follows : ". . . The inspection revealed that the company has violated the provisions of the Reserve Bank of India Act, 1934 and the directions issued thereunder as detailed below : ( i )Net Owned Fund (NOF) of your company was negative at (-) Rs. 10,666.06 lakhs as on March 31, 2004, as against the reported NOF at Rs. 2,194 lakhs. The working of the assessed NOF is furnished in annexure-1. The company has thereby violated the provisions of section 45-IA( l ) of the RBI Act by not maintaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 235 to 251 and the like. According to learned counsel for the appellants and more particularly counsel for RBI, the appellant in O. S. A. No. 308 of 2006, non-disclosure of an order relating to section 45MB and regarding other aspects highlighted in the letter dated January 18, 2005, amounted to non-disclosure of an investigation initiated under section 45MB of the RBI Act. It is further contended that at any rate since recording of compromise or agreement under section 391 has got far reaching consequences, the company is required to disclose all relevant factors which reflect upon its financial position so that the persons required to consider such scheme of arrangement or compromise would be in a position to take an informed decision based on the facts and circumstances. Learned senior counsel appearing for the company, on the other hand, submitted that as per the provisions contained in section 391(2) of the Act, the company is required to disclose about any investigation pending under sections 235 to 251 of the Act and it cannot be said that non-disclosure of a matter pertaining to section 45MB of the RBI Act was in any way violative of the mandates contemplated under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... violating the procedural safeguards. The contention raised by Mr. T. Poornam on behalf of RBI and also supplemented by Mr. V. Prakash relating to the alleged illegality of the scheme, however, stands on a still stronger footing. We now proceed to deal with such contention in greater detail. Learned counsel have invited our attention to Chapter III-B of the RBI Act. This chapter was inserted by way of amendment vide Act 55 of 1963. The heading of the chapter is "Provisions relating to non-banking institutions receiving deposits and financial institutions". As per section 45-I( aa ) "company" means a company as defined in section 3 of the Companies Act, 1956 (1 of 1956), and includes a foreign company within the meaning of section 591 of that Act. As per section 45-I( e ) "non-banking institution" means a company, corporation or co-operative society. As per section 45-I( f ) "non-banking financial company'' means ( i )a financial institution which is a company; ( ii )a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other matter, or lending in any manner; ( iii ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme, deposits are being repaid, though not in cash, but, in another form inasmuch as convertible debentures are being issued to them. He has further submitted that the expression "repaid" in section 45QA does not mean that it must be repaid in cash and not by any other method and, in the present case, the repayment is contemplated in the shape of a convertible debenture. Mr. K. M. Vijayan, Mr. R. Viduthalai, Mr. Vijay Narayan, learned senior counsel appearing for various depositors' associations, and Mr. Chandrasekhar, appearing for the employees' association, have supplemented such submission. On a careful consideration of the submissions made by learned counsel of either side on this score, we are unable to accept such ingenious submission made by learned counsel for the company and others supporting the scheme. Chapter III-B, which was inserted by way of amendment, has been obviously incorporated with a view to protect the depositors and to avoid exploitation by non-banking financial institutions. Section 45Q itself makes it very clear that the provisions of the Chapter III-B shall have effect notwithstanding anything inconsistent therewith in any other law. The Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 ; [2005] 5 CLJ 78 on the question of violation of the RBI Act while considering the plea for approval to the scheme. It was decided therein that the provisions of section 391 of the Companies Act being a complete code by itself, the violations projected as such could not stand in the way of granting the approval to the scheme once the statutory formalities stated in the Act are complied with. While it cannot be denied that the court while granting approval to a scheme does not sit as a court of appeal, and once the formalities are complied with in the matter of granting approval, any violation spoken of as regards other enactments are matters which deserve consideration under the relevant provisions of that statute and on that score the approval to a settlement reached cannot be negatived. These provisions operate on different field. Consequently, the objection by the RBI is overruled." As already indicated, the provisions contained in Chapter III-B shall have effect notwithstanding any other law to the contrary. This would obviously include section 391 of the Companies Act. If the direct impact of a scheme of arrangement/compromise under section 391 would be offending the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 45QA(1) and (2) must be given their due importance. Learned single judge appears to have relied upon Maharashtra Apex Corporation Ltd., In re [2005] 124 Comp Cas 637 (Kar); [2005] 5 CLJ 78, to come to .a conclusion that section 391 of the Act being a complete code by itself, violation of any other provision cannot stand in the way of granting approval to the scheme once the statutory formalities are complied with. We are unable to subscribe to such a view. The duty of the court dealing with a matter under section 391 of the Act is not confined to ensuring compliance with the procedural safeguards as contemplated under section 391 and section 393 of the Act. The court must see whether the scheme of arrangement/compromise is not opposed to public policy or opposed to any law. In the present case, the scheme, being contrary to the provisions contained in section 45QA of the RBI Act, could not have been accepted. It may be true that the Company Law Board has jurisdiction to direct repayment of the deposit, but that is a matter which comes exclusively within the jurisdiction of the Company Law Board and cannot be abrogated or abridged by incorporating terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er under section 45QA(2), has to take into account the relevant facts and circumstances and an order is required to be passed. At that stage, if such order is not complied with, prosecution is contemplated. The relevant factor to be considered here is, by virtue of the agreement the entire provisions contained in section 45QA read with section 58B(4AAA) become practically redundant so far as the present company is concerned. Keeping in view the overriding nature of the provisions contained in Chapter III-B of the RBI Act and the necessity felt by Parliament to enact a specific provision for non-banking financial institutions, in our considered opinion, a compromise under section 391 of the Act has to be in consonance of the provisions contained in Chapter III-B of the RBI Act including the provisions contained in sections 45QA(2) and 58B(4AAA) of the RBI Act. Learned senior counsel representing some of the employees and the depositors have contended that by virtue of the action now approved by the learned single judge, the company can continue to exist thereby protecting the interest of numerous employees as well as majority of the depositors, who had supported the scheme. We ..... X X X X Extracts X X X X X X X X Extracts X X X X
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