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TMI Blog2013 (7) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... 91 to 393 – court relied upon Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. (1996 (9) TMI 488 - SUPREME COURT OF INDIA). Piercing of corporate veil - Held that:- The Court was not bound to superficially add its seal of approval to the scheme merely because it received the approval of the requisite majority at the meeting held for that purpose - Court has to ensure that the scheme of arrangement was not a camouflage for a purpose other than the ostensible reasons U/s 391 whilst approving the scheme the Company Court does not act as a rubber stamp - the Companies Act had to be satisfied that the concerned meetings of the creditors have been duly held - in the concerned meetings the creditors or members of any class had been provided with relevant material to enable them to take an informed decision as to whether the scheme is just and fair – Court had to be satisfied that the scheme was fair and reasonable from the point of view of a prudent man of business taking commercial decisions which were beneficial to the class represented by them - If any of the aforesaid requirements appear to be found wanting in the scheme, the Court can pierce the veil of apparent corporate purpose u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lbeit with some conditions. This order was challenged in the High Court by way of four original side appeals, which were allowed by the Division Bench vide the order dated 30th April, 2008 which has been challenged in this Court. Summary of Facts: 5. The relevant facts giving rise to filing of the present appeals as narrated by the parties are as under: 6. The appellant herein was incorporated as a Non-Banking Finance Company (hereinafter referred to as a NBFC ) under the Companies Act in 1983, and was engaged inter alia in the business of hire-purchase and leasing. Over the years the appellant company has become one of the leading financial companies. It has 32 branches with over several hundred employees. The shares of the company are listed in two stock exchanges in India. It has 20,000 shareholders. Until 1995- 1996, the appellant company was a profit making company and declared dividends to its shareholders continuously. 7. That the Reserve Bank of India (hereinafter referred to RBI or/and the respondent no.1 ), during 1997-2003, issued a series of circulars for regulating various activities of the Non Banking Financial Companies. The RBI also imposed certain condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any was directed not to sell, transfer, create charge or mortgage, or deal in any manner with its properties, assets, without prior permission of the RBI. The said notice was also advertised in the Indian Express dated 20th January, 2005. 10. Thereafter, the appellant company started facing problems in running its operations because of the drop in its profitability. In order to overcome these problems, the appellant company proposed a Scheme of Compromise with its creditors, viz. the depositors and bond holders, which was approved by the Board of Directors of the appellant company on 19th May, 2005. The relevant part of the aforesaid scheme is as under: 4 PAYMENTS TO FIXED DEPSOIT HOLDERS/BOND HOLDERS 4.1 The Company would settle all the deposit holders 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 deposit holders and bond holders into secured convertible debentures carrying on interest of 6% p.a. convertible into equity before the expiry of 1 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 conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.1 The Scheme if approved by the deposit holders and bond holders 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 deposit holders, bond holders and the Company. 6.2 On completion of the scheme, the Company shall have discharged all the liability to fixed deposit / bond holders. 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 Bond holders shall be deemed as fully discharged. b) No claims shall be raised by any deposit holders or bond holder 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. 11. The aforesaid scheme of compromise was presented under Section 391 of the Companies Act to the High Court. On 1st July 2005, the appellant company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ositors Association - an Association representing the depositors of the appellant company and several other depositors-filed their objections and raised several contentions regarding the validity of the said Scheme. The RBI also filed its objections. At the same time, certain other associations, representing the deposit holders, debenture holders also intervened in the aforesaid proceedings and supported the validity of the said scheme. Similarly, an association of the employees of the appellant company also intervened in the support of the Scheme. It is also relevant to note here that the appellant company, during the pendency of the Company Petition No.160 of 2005, filed Company Applications Nos. 1409 1410 of 2005, inter alia to restrain the respondent Nos. 1 to 6 in such applications from initiating any proceeding either civil or criminal in nature against the Directors of the appellant company. 14. The learned Single Judge vide order dated 19th August, 2006 overruled all the objections put forward against or in objection to the said scheme and accorded approval to the same. While granting sanction the learned Single Judge made it clear that sanction of the said scheme will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of an NBFC? (ii) Whether the petitioner had failed to disclose the RBI letter dated 18th January, 2005 before the learned Company Judge as per the provisions of Section 391(1) of the Companies Act, 1956? 19. According to Mr. Chagla, the crucial issue which arises for the consideration of this court is as to whether Section 391 of the Companies Act does not apply to NBFCs in view of Section 45QA of the RBI Act. He also supplemented the second issue, as framed by Mr. Datar, by submitting that this Court has to determine that; whether non-disclosure of the letter dated 18th January, 2005 violates the provisions of Section 391(2) and/or Section 393 of the Companies Act. These submissions are reiterated by Mr. Shyam Divan, learned senior counsel. 20. Mr. Datar has further submitted that a scheme under Sections 391 to 394 is an exception to the rule that a contract can be novated only with the consent of the individual parties. The resolution passed by the requisite majority sanctioning the scheme in question, which gets sanction from the Court will be binding equally on the dissenting minority. In this context, the learned counsel relied upon J.K. (Bombay) Private Ltd. Vs. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission, Mr. Datar relied upon Bennion, Interpretation of Statues, s. 288 on Textual Conflicts. Reliance is also placed on Haridas Exports Vs. All India Float Glass Manufacturers' Assn. Ors. (2002) 6 SCC 600 Mr. Datar further pointed out that the special provisions relating to a scheme under the Companies Act will prevail over a special statue, if the special statute has no provisions to deal with the said matter. He relied upon the principle of law laid down in ICICI Bank Ltd. Vs. SIDCO Leathers Ltd. Ors. (2006) 10 SCC 452 In this context, Mr. Chagla relied upon the judgments of this court reported in Aswini Kumar Ghose Anr. Vs. Arabinda Ghose Anr. AIR 1952 SC 369 and Madhav Rao Jivaji Rao Scindia Vs. Union of India Anr. (1971) 1 SCC 85 Further, the RBI Act, according to Mr. Chagla, is not a complete code by itself. 23. Mr. Datar also pointed out that the RBI Act will apply for the regulation of collection of deposits, for minimum net owned funds, terms of deposits, etc. but will not apply to cases of scheme under the Companies Act which are not barred by the former. The latter will continue to apply in the circumstances where matters relating to running of a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistency between the two enactments before giving an overriding effect to the nonobstante clause. But the non-obstante clause need not necessarily and always be co-extensive with the operative part so as to have the effect of cutting down the clear terms of an enactment and if the words of the enactment are clear and are capable of a clear interpretation on a plain and grammatical construction of the words the non-obstante clause cannot cut down the construction and restrict the scope of its operation. It was also submitted that the Court must try to find out the extent to which the legislature had intended to give one provision overriding effect over another. Such intention of the legislature is to be gathered from the enacting part of the section. The counsel relied upon A.G. Vardarajulu Anr. Vs. State of T.N. Ors. (1998) 4 SCC 231. 26. It was further argued by Mr. Chagla that Part IIIB was introduced in the RBI Act by Amendment Act of 1963. The Statement of Objects and Reasons of the said Amendment Act indicates that it was not intended to override the provisions of the Companies Act. Since the legislative intention behind such insertion was to regulate the functioning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning any scheme for the deposit holders of an NBFC. Therefore, the Division Bench of the High Court committed a serious jurisdictional error in setting aside the order of the learned Single Judge. 29. The second issue framed by the learned senior counsel for the appellant company and intervenors is that whether nondisclosure of the letter/notice dated 18th January, 2005 issued by the RBI to the appellant is violative of the provisions of Section 391(2) and/or Section 393 of the Companies Act? Mr. Datar has submitted that the said letter dated 18th January, 2005 was widely advertised by the RBI in various newspapers, including the Indian Express dated 20th January 2005. And, therefore, the contents of this letter were in the public domain. It was also argued that facts that are inconsequential for the approval of the scheme need not be disclosed. The counsel relied upon Bharti Mobinet Limited, Bharti Telenet Limited and Bharti Cellular Limited Vs. DSS Enterprises Pvt. Ltd. 111(2004) DLT 554. 30. The learned counsel further submitted that even otherwise the disclosure under the proviso to Section 391(2) of the Companies Act is to be made only before the Court that sanctions the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interpretation of non-obstante clause contained in Section 45QA, Mr. Tirpathi submitted that the provisions contained in Chapter IIIB have to prevail over the provisions of the Companies Act. He relies on the judgment of this Court in Tata Motors Limited Vs. Pharmaceutical Products of India Limited Anr . (2008) 7 SCC 619. 34. Mr. V. Prakash, learned senior counsel, appearing on behalf of the respondent No.1 / Integrated Finance Depositors Association in S.L.P. (C) No. 12738 of 2008, submitted that the provisions contained in Section 45QA(1) of the RBI Act are mandatory and cannot be diluted. Elaborating on the factual circumstances, learned senior counsel submitted that the appellant company lead a very aggressive advertising campaign which was aimed to make the general populace believe that it was supported by leading companies such as MRF Ltd., Malayala Manorama, etc for soliciting deposits from public in Kerala. And then suddenly to the shock of the public, the order dated 18th January, 2005 was published in the newspapers, which prohibited the appellant from accepting or renewing any further deposits but the appellant continued to accept deposits even after said notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements 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 the view of the Court there would 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 jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso concluded that not only the scheme is contrary to the specific provisions contained in Chapter IIIB of the RBI Act; it is also against public policy. With these observations the Division Bench had declined to approve the scheme and set aside the order passed by the Company Court. 40. In our opinion, the aforesaid conclusions of the High Court do not require any interference. Even according to the appellant since its incorporation in 1983, the appellant had grown into a gigantic NBFC; it had 20,000 shareholders. Its shares were listed in two Stock Exchanges in India. Till 1995- 1996, it was a profit making company and declared dividends to its shareholders continuously. 41. The RBI issued a series of circulars during 1997-2003 regulating the activities of NBFCs, strict restrictions were placed on the NBFCs for accepting deposits. The Companies which did not comply with the aforesaid directions were directed to stop accepting deposits and to repay the same immediately. It is also an accepted case of the company that the RBI, in exercise of its power under Section 45N, inspected the Books of Accounts of the appellant company in 2005. The inspection report disclosed the violati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an overwhelming majority of the deposit holders have approved this scheme, yet the relief was not been granted to the appellant on the grounds that the scheme does not comply with the provisions contained in Chapter IIIB of the RBI Act. 43. We are unable to accept the submission of the learned counsel that Section 45QA of the RBI Act is not a bar to a scheme under Sections 391-394 of the Companies Act. Under Section 391 of the Companies Act, whilst approving the scheme, the Company Court does not act as a rubber stamp. The Companies Act has to be satisfied that the concerned meetings of the creditors have been duly held. It has to be satisfied that in the concerned meetings, the creditors or members of any class have been provided with relevant material to enable them to take an informed decision as to whether the scheme is just and fair. The Court is also required to conclude that the proposed scheme of compromise or arrangement is not violative of any provision of law and is not contrary to public policy. Furthermore, the Court has to be satisfied that members or class of members or creditors who may be in majority are acting bonafide and have not coerced the minority int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership firms as and when a firm reached the level of 250 depositors. It was also reiterated that several unincorporated bodies were advertising aggressively through various media, soliciting deposits from public by offering high rates of interest and other incentives. The Amendment Act provides several safeguards for NBFCs so as to ensure their viability. This includes compulsory registration of NBFCs with RBI, stipulation of minimum need in the funds requirements, creation of reserved funds and transfer of certain percentage of profits every year to the fund; and prescription of liquidity requirements. The RBI has also been vested with powers to issue guidelines intended to ensure sound and healthy operations and the quality of assets of these companies. The RBI was also empowered to issue directions to Auditors of NBFCs to order special Audits in NBFCs, prohibited acceptance of deposits by NBFCs and make applications for winding up of NBFCs. It is specifically noticed that earlier the only recourse available to the depositors was to approach the Court of Law for redressal of grievances. However by the Amendment, powers have been vested with the Company Law Board for directin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies Act in the Sections 391-394. We are also not able to accept the additional submission of Mr. Chagla that if overriding effect is given to Section 45QA, the provisions contained in Section 391 would be rendered nugatory so far as NBFCs are concerned. We are not persuaded to accept the submissions of the learned senior counsel for the appellant that the non-obstante clause contained in Section 45A ought to be given a limited application. Even applying the ratio of the judgments cited by the learned senior counsel, there is no justification for lessening the scope of the applicability of the non-obstante clause in Section 45Q of the RBI Act. It states in categoric terms that provisions of Chapter IIIB shall have effect notwithstanding anything inconsistent therewith contained in any other law. The overriding effect extends not only to any other law for the time being in force but also to any instrument having effect by virtue of having such law. The reasons for giving such categoric overriding effect are evident from the objects and reasons given in the Amendment Act. The magnitude of the exploitation of the poor sections of the society, leading to utter destruction of innumerabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jivaji Rao Scindia (supra); A.G. Vardarajulu (supra); ICICI Bank Ltd. (supra); R.S. Raghunath and JIK Industries Limited (supra). The said cases undoubtedly reiterate the settled law on the manner in which a particular non-obstante clause ought to be interpreted. In Aswini Kumar Ghose (supra), this court held that a nonobstante clause must be construed strictly and the Court must try to find the extent to which the legislature had intended to give one provision overriding effect over another provision. Similar observations were reiterated by this Court in the other cases relied by the appellant. Since it has been already noticed by us that the Parliament clearly intended to give an overriding effect to Chapter IIIB of the RBI Act over Sections 391-394 of the Companies Act, the aforesaid observations will not be of any help to the appellants in support of their submission that Section 45Q and/or Section 45QA of the RBI Act will not override Sections 391-394 of the Companies Act. 50. We, therefore, endorse the opinion expressed by the High Court that the scheme has been introduced only with a view to avoid repayment to the small depositors as it contemplates that instead of repa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchanging their debentures for shares in the company, or in a new company, or having the rights attached to their debentures varied in some other respect. Creditors may take cash in part payment of their claims and the balance in shares or debentures in the company. Preference shareholders may give up their rights to arrears of dividends, agree to accept a reduced rate of dividend in the future, or have their class rights otherwise varied. In our opinion, these observations would be of no avail to the appellants in view of our conclusions recorded earlier that the present arrangement is not bona fide. 53. We are further of the opinion that there can be no question of novation in the face of the categoric provisions contained in Section 45Q, which has an overriding effect over all other laws, which would necessarily negate the principle of novation contained in the Contract Act also. Since we have already negated the submission of the learned counsel for the appellant that it was open to each individual depositor to vary the contract, i.e., novate the contract, it would not be possible to accept the subsequent submission of the learned counsel that since the scheme has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 45QA(1) of RBI Act. 55. We are also not inclined to accept the submission of the appellant that Section 45QA of RBI Act is pari materia if not identical with Section 58A of the Companies Act. It was further argued that if a scheme of arrangement is not prohibited under the latter section; it cannot be prohibited under the former, i.e., Section 45QA of the RBI Act. The issue concerning Section 45QA being para materia with Section 58A of the Companies Act does not arise since, in our considered opinion, the provisions of the RBI Act will override the provisions of the Companies Act. Thus, this submission is also rejected. 56. In view of the aforesaid, we reject the submission of the learned counsel for the appellant that the scheme of arrangement could be approved even though there is a noncompliance with the provisions of Chapter IIIB of the RBI Act in particular Section 45QA(1). We may notice here that the appellants had an opportunity to approach the Company Court under Section 45QA(1) to seek further time for making payment. It appears that no such application was made and, therefore, there is a complete infringement of Section 45QA(1). This would lead to an inevitable con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) and is much narrower. Learned senior counsel has placed reliance on the judgement of this Court in Hindustan Lever Employees Union Vs. Hindustan Lever Ltd. Ors. (supra) in support of this submission. This case is, however, distinguishable from the present case and circumstances. It was held therein that: In the facts of this case, considering the overwhelming manner in which the shareholders, the creditors, the debenture holders, the financial institutions, who had 41% shares in TOMCO, have supported the Scheme and have not complained about any lack of notice or lack of understanding of what the Scheme was about, we are of the view, it will not be right to hold that the explanatory statement was not proper or was lacking in material particulars. The preceding excerpt makes it clear that the scheme therein was not objected to by any of the interested persons. Thus, the reliance on the said case is misconceived. 58. In our opinion, the High Court has correctly concluded that even if no investigation was pending under Section 235- 251 of the Companies Act, it was incumbent on the company to disclose the violations pointed out by the RBI on inspection of its books under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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