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TMI Blog2010 (4) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... . Tulunadu Finance and Developments Ltd., ("the company") was incorporated on February 2, 1985, under the provisions of the Companies Act, 1956. The company filed an application under section 45-IA of the Reserve Bank of India Act, 1934 (hereinafter referred to as "the RBI Act" for short) dated June 24, 1987, seeking certificate of registration from the RBI to run a non-banking financial corporation (in short "NBFC"). The RBI issued Certificate of Registration No. 02.00012 under section 45-IA of the RBI Act on February 10, 1998. On April 19, 2000, the RBI conducted scrutiny of books of account under section 45-N of the RBI Act. The scrutiny revealed that the financial position of the company was unsatisfactory and that it had defaulted in re-payment of deposits and also violated certain provisions of the RBI Act and the directions issued by the RBI. By its order dated May 11, 2000, the RBI prohibited the company under section 45-K(4) read with section 45-MB(1) of the RBI Act from accepting the deposits from the public until further orders and directed the company under section 45-MB(2) of the RBI Act not to sell, transfer, create charge or mortgage or deal in any manner with its pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petition in the news papers i.e., Vijaya Times, Mangalore edition and in Udayavani (Kannada daily news paper), on or before August 24, 2005, fixing the date of hearing as September 16,,2005. The publications were carried out in both the news papers on August 19,, 2005. 6. Sri Jayaram, learned senior counsel appearing on behalf of the RBI and Sri Mahesh, learned counsel appearing on behalf of the company and other learned advocates on record have taken me through the records of both the matters and submitted their arguments. 7. Learned counsel appearing on behalf of the RBI, relying upon the reply sent by the company vide annexure E dated December 14, 2001 (filed in Company Petition No. 108 of 2002) submitted that the company has admitted that it would not oppose the winding up petition and that if on merits, the hon'ble High Court considers that in the public interest the affairs of the company must be taken over by the liquidator or the official receiver, the company will not come in the way. In the very reply, the company expressed its helplessness. Based on these averments made in the reply filed by the company, it is argued on behalf of the RBI that the company has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the company shall not be allowed to contend that it should be given a chance of revival to carry on the ancillary objects of the company. 10. Sri Mahesh, learned counsel appearing on behalf of the company submits that the RBI has no locus standi to question the scheme pro-, pounded by the company, particularly when the secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders have agreed whole heartedly for the scheme ; that the commercial wisdom of the shareholders and the creditors, etc., should be respected; that the company has not suppressed any material before the secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders in the meetings convened pursuant to the order of this court to discuss regarding the scheme ; and that, even if the object of non-banking finance business of the company cannot be carried out by the company, the other objects of the company can be carried out by the company. He further submits that, according to the company, one of the main object of the company is to do the real estate business apart from non-banking financial business. 11. Sri R.V. Nayak, learned counsel appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare capital of the company is Rs. 3 crores, divided into Rs. 30 lakhs equity shares of Rs. 10 each. The share capital of the company is Rs. 1,38,60,000 divided into Rs. 13,86,000 equity shares of Rs. 10 each (fully paid-up). The details of the issued, subscribed and paid-up share capital of the company as on March 31, 2002, are set out in paragraphs 6 and 7 of the Company Petition No. 215 of 2003. The balance-sheet and the profit and loss account for the year ending March 31, 2003, with comparative figures of the previous year ending March 31, 2002, is set down in paragraph 9 of Company Petition No. 215 of 2003. 14. Before proceeding further, it is relevant to note the main objects of the company as contained in the memorandum of association of the company, which read thus : "(A) The main objects to be persued by the company on its incorporation : 1. To do the business of hire-purchase, finance and leasing of all durable, industrial and commercial goods and vehicles of all descriptions, motor boats, trawlers, launches, plant and machinery, equipment, tools and instruments of all descriptions, refrigerators, air-conditioners, washing machines and other equipments of personal use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962] 32 Comp Cas 514 ; AIR 1962 SC 1371, it is observed that it is desirable that between the court and the Reserve Bank, the momentous decision to wind up a tottering or unsafe banking company in the interests of the depositors may reasonably be left to the Reserve Bank. The apex court further observes that, if the court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. 17. In the case of Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India [1992] 75 Comp Cas 12 ;. AIR 1992 SC 1033, the Supreme Court observed that the Reserve Bank of India is a banker's bank. It is a creature of the statute. It has a large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the directions. It plays an important role in the economy and the financial affairs of India and one of its important functions is to regulate the banking system in the country. It is the duty of the Reserve Bank of India to safeguard the economy and the financial stabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of repayment of interest and matured amounts to its creditors on its contractual terms. 22. Earlier, the company was managed by eight board of directors under the chairmanship of Mr. Kalbavi Venkat Rao. Since the creditors, deposit holders and shareholders were of the opinion that the funds of the company were being mismanaged, the said board of directors was changed during May, 2000. The new management found that the earlier management had committed lot of irregularities in the deployment of funds. Thus, criminal complaints were initiated against the ex-managing director and ex-chairman, besides initiating action against certain officials of the company for their illegitimate action during their tenure of office. The complaints are at various stages. The new management is of the firm opinion that it would do its best to proceed against the managerial personnel, as well as, its officers who had involved themselves in the mismanagement of the funds and also initiate action for recovery of the amounts for repaying the same to the creditors. 23. In order to settle the claims of all the creditors of the company, the newly formed board of directors of the company at a meeting held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in dispute. Thus, it is clear that, equity shareholders, debenture holders and depositors have whole heartedly supported the scheme. The bankers will have no grievance any more about the scheme in question since the company has repaid the entire dues of the bankers. 25. The contention of the RBI that the factum of cancellation of certificate of registration and the factum of restraining the company from meddling with the assets of the company in whatsoever manner is suppressed in the meetings, cannot be accepted. The scheme of arrangement/compromise and explanatory statement is served along with the notices on the secured creditors, unsecured creditors, etc. The same clearly reveals that the company has not suppressed anything before equity shareholders, secured creditors (bankers of the company), secured creditors (debenture holders) and unsecured creditors (deposit holders). Clause 22 of the explanatory statement under section 393 of the Companies Act, which forms part of the scheme clearly reveals that since the company could not fulfil all the norms set by the RBI, the RBI vide its letter dated May 11, 2000, has prohibited the company from accepting of fresh public depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has issued no due certificate on February 23, 2006. 29. The company has repaid to Vijaya Bank, K. M. Marg, Udupi, to the tune of Rs. 4,50,000 and the Vijaya Bank, has issued no due certificate on March 13, 2006. 30. The company has repaid to Corporation Bank, Udupi, to the tune of Rs. 1,25,000 and the Corporation Bank, has issued no due certificate on April 18, 2006. 31. The company has repaid to Shamrao Vittal Co-operative Bank Ltd., to the tune of Rs. 3.88 lakhs towards full and final settlement of accounts. 32. Thus, after settling all the dues by the company with their respective banks, (secured creditors) "no due certificates" are issued by those banks in favour of the company. Copies of no due certificates are produced by the company in the compilation produced along with the additional statement of objections dated December 15, 2002. 33. With the introduction of new regulation in January, 1998 by the RBI the company all of a sudden had to face grave and unprecedented difficulties by virtual ban on acceptance of fresh deposits which seriously jeopardised the resource mobilisation of the company. 34. Due to the defaults committed by the borrowers, the petitioner-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the RBI Act. Thus, it was concluded that it has no right to exist as NBFC and it has to be wound up. But, in the matter on hand, the company's object is not only to do non-banking finance business, but also the real estate business. It is no doubt true that the company in question which was having registration certificate issued by the RBI for doing non-banking financial business has violated financial discipline provided under the RBI Act. Thus, it has no right to exist as NBFC. But, it has the right to exist as non-banking non-finance company. 37. Section 45MC of the RBI Act lists the circumstances under which the RBI can file a petition. Apart from (a) the ground of inability to pay the debts, other grounds are peculiar to non-banking financial institutions. These grounds relate to mal-functioning of NBFC, viz., as (b) by virtue of the provisions of section 45-IA it becomes disqualified to carry on the business of a non-banking financial institution, (c) has been prohibited by the bank from receiving deposits by an order and such order has been in force for a period of not less than three months, and (d) the continuance of the non-banking financial company is detrimental to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that the RBI has decided that the companies whose certificates of registration have been cancelled should continue to pay the deposits on due dates and dispose of the financial assets within three years from the date of cancellation of certificate of registration or such company may convert itself into non-banking non-financial company within the same period of three years. The subsequent policy of the RBI as mentioned above, changes the entire scenario. The RBI itself has permitted the NBFCs, to repay the deposits on due dates and to dispose of their financial assets within three years from the date of rejection of certificates of registration or an option is given to such NBFCs, to convert into non-banking non-financial companies within the same period of three years. In the matter on hand, the company does not wish to continue as a non-banking financial company. Its certificate of registration issued by the RBI is cancelled. The same has attained finality. Therefore, the company cannot and shall not carry on the non-banking finance business any more. It has no right to exist as a NBFC. Therefore, it cannot be called as non-banking finance company any more. However, it can c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd interest thereon, exceeding outstanding value of Rs. 5,000 as on the effective value, will be paid only up to 80 per cent, of the outstanding debenture/deposit value respectively and such payment will be paid in six equal instalments and the first of the said instalment will be made within six months of the approval of the scheme by the members and creditors and the subsequent five instalment within 12th, 24th, 36th 48th, 60th month of the effective date respectively. (g)The amount of loan and/or advance if any, availed of or granted to any debenture holders or deposit holders, and remaining outstanding together with interest payable on such loan/advance shall be set off and adjusted and accordingly the outstanding debts payable by the company shall be reduced by the said outstanding loan/advance amount along with the interest due thereon up to the appointed date. (h)Upon the scheme becoming effective, the board of directors of the company shall, within 180 days of effective date, appoint a trustee for the deposit holders and accordingly the said appointee shall act as trustees for the unsecured creditors (deposit holders) in respect of the outstanding' deposits payable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be culled out from the provisions of section 392 of the Companies Act. In exercising its power of sanction, the court will see firstly that the provisions of the statute have been complied with, secondly that the class was fairly represented by those who attended the meeting and that the statutory majority are acting bona fide and are not coercing the minority in order to promote interests adverse to those of the class whom they purport to represent, and, thirdly, that the arrangement is such as a man of business would reasonably approve. The apex court in the aforementioned judgment, after discussing the legal position, framed the following broad contours of the jurisdiction of the company court in sanctioning the scheme as under (page 819) : "(1)The sanctioning court has to see to it that all the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the court's jurisdiction." 43. In the matter on hand, 98 per cent. - 99 per cent, of the equity shareholders, secured creditors (debenture holders), unsecured creditors (depositors) have approved the scheme. Hence, this court will not sit in appeal over the commercial wisdom of the concerned. This court also does not find anything in the scheme proposed, which contradicts the interests of the creditors and shareholders. 44. Though the court has power under sections 391 and 394 of the Companies Act to accord sanction for a scheme, the court has to see before granting such sanction as to whether such a scheme contravenes any of the provisions of law. According to the RBI, since the company has contravened the provisions of the RBI Act, the scheme cannot be sanctioned. 45. The scheme does not contravene any of the provisions of the Companies Act. In a case of scheme of compromise or arrangement between the company and its members and creditors, it is the proviso to section 391(2) which has to be complied with. Before the court can accord sanction to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal statement of objections filed by the company shows that non-banking finance institution is directed to close down its business of which certificate of registration is cancelled. As a consequence thereof, such non-banking finance institutions are directed to continue to repay the deposits on due dates and dispose of their financial assets, within three years from date of rejection/cancellation or convert into non-banking non-financial companies within the same period. 48. I am satisfied that the terms of the scheme which provide for waiver of interest and deferred payment do not have the effect of contravening the aforesaid provisions of law which compels the company to repay the entire amount received, essentially when the members and the creditors of the company have approved such a scheme by a statutory majority. 49. The 23rd annual report and accounts for the years 2007-08 and 2008-09 are filed before the court during the course of arguments by the company. Certain other material is also placed before the court by filing the memos from time to time by the company. From the records, it is clear that the company has as aforementioned repaid all its six secured creditors (ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have received in one instalment and sought for some more instalments and also they have pleaded their inability to pay the interest. Under the terms of the scheme, what has been agreed is that all the deposit holders and creditors would get back the entire principle amount paid to the company, but in certain instalments. 52. It is relevant to note that the company has made recoveries of Rs. 119.94 lakhs from October, 2003 to April, 2006. Apart from the same, certain of the borrowers have deposited in Udupi court to the tune of Rs. 10.50 lakhs to be disbursed in favour of the company. So also an amount of Rs. 8.31 lakhs is deposited in Bangalore courts. The annual reports and accounts for the year 2008-09 reveal that the loss carried to schedule was Rs. 12,44,64,601, whereas, the loans carried to schedule for the year ending on March 31, 2009, is Rs. 11,97,81,377. Basic earning per share as it stood on March 31, 2008, was Rs. 0.15, whereas, the basic earning per share as on March 31, 2009, was Rs. 3.34. The total collection of dues under hire purchase, lease, loans and advances and other receivables was Rs. 12.46 lakhs in the year 2008, whereas, it is Rs. 13.80 lakhs, in the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Companies Act. After sanction of the scheme, the court has the power to supervise and carry out the compromise or arrangement. In the course of such supervision or at the time of making the order sanctioning the scheme or at any time later, the court can give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for proper working of the compromise or arrangement. In fact, sub-section (2) of section 392 of the Companies Act confers wide powers on the court. After the scheme is sanctioned if the court is of the opinion that the scheme cannot work satisfactorily with or without modifications, it may either on its own motion or on the application of any person interested in the affairs of the company, make an order of winding up of the company and such order shall be deemed to be an order made under section 433 of the Act. 56. In view of the same, I accord sanction of the scheme subject to conditions and amendments mentioned hereunder : (1)The company shall not carry on business of non-banking finance since certificate of registration is cancelled by the RBI. (2)The time stipulated for repayment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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