IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 30-04-2008 CORAM THE HONOURABLE MR. JUSTICE P.K.MISRA and THE HONOURABLE MR. JUSTICE S.TAMILVANAN O.S.A.Nos.308, 309, 312 of 2006 and O.S.A.No.91 of 2007 and M.P.NOs.1 and 2 of 2006 O.S.A.No.308 of 2006 Reserve Bank of India having its Central Office at Mumbai and Regional Ofice at Fort Glacis, Chennai. .. Appellant/Objector vs. M/s. Integrated Finance Company Ltd., a company incorporated under the Companies Act 1956, and having its Registered Office at "Vairams", 112, Thyagaraya Road, T.Nagar, Chennai – 600 017 Rep. by Mr.P.B.Appaiah, Director. .. Respondent O.S.A.No.309 of 2006 1. Integrated Finance Company Depositors Association (Regn. No.K.471/2005) Rep. By its vice President, Mr.Josey Oommen, Kannothra Guest House, Kanjikuzhi, Kottyam – 686 004. 2. K.K.Thomas @ Vijayan 3. Zaharia Thomas 4. Johnson Thomas 5. Ramadas Panickar 6. Santom Kaloor 7.Trentin John 8. Pillai.P.K.S 9. Saramma George 10. Kurian C.P. https://hcservices.ecourts.gov.in/hcservices/ 11. Thomas Mathew 12. Mathai Mathews 13. Isaac Abraham 14. Mammen George 15. Ammini Jacob 16. K.V.Joseph 17. Mathai Mathew 18. Joseph A.Thomas 19. Mrs.Ammini Jacob 20. Mrs. Mary Josey 21. Thomas P.A. 22. Sally Thomas .. Appellants/Objectors 19 to 24 & 8 to 22 vs. M/s. Integrated Finance Company Ltd., Rep. By its Managing Director Mr.George Kurivilla, No.112, Thyagaraya Road, T.Nagar, Chennai – 600 017. .. Respondent (Appellants 3 to 7 rep. by their Power of Attorney K.K.Thomas @ Vijayan) (Appellants 8 to 22 rep. by their Power of Attorney Josey Oommen) O.S.A.No.312 of 2006 M/s. Popular Kuries Limited, having its Registered Office at High Road, Thrissur – 680 001. Represented by its Authorised Signatory. .. Appellant/objector vs. M/s. Integrated Finance Company Ltd., a company incorporated under the Companies Act 1956, and having its Registered Office at "Vairams", 112, Thyagaraya Road, T.Nagar, Chennai – 600 017 Rep. by Mr.P.B.Appaiah, Director. .. Respondent https://hcservices.ecourts.gov.in/hcservices/ O.S.A.No.91 of 2007 Mrs. Elizabeth Antony. .. Appellant vs. M/s. Integrated Finance Company Ltd., a company incorporated under the Companies Act 1956, and having its Registered Office at "Vairams", 112, Thyagaraya Road, T.Nagar, Chennai – 600 017 Rep. by Mr.P.B.Appaiah, Director. .. Respondent These Appeal are filed under Order XXXVI Rule 11 of O.S. Rules against the order of the learned single Judge dated 19.08.2006 passed in C.P.No.160 of 2005. For Appellants : Mr.T.Poornam in O.S.A.No.308 of 2006 Mr.V.Prakash, Senior Counsel for Mr.P.V.Ravichandran in O.S.A.No.309 / 06 Mr.T.Suresh in O.S.A.No.312 of 2006 Mr.K.F.Manavalan in O.S.A.No.91/2007 For Respondent : Mr.Arvind P.Datar, Senior Counsel for Mr.P.H.Arvindh Pandian Supporting the Respondent : Mr.K.M.Vijayan, Senior Counsel Mr.Vijay Narayan, Senior Counsel Mr.R. Viduthalai, Senior Counsel Mr.Chandrasekhar COMMON 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 Company Limited (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 deposit holders and bond holders. 1.1 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 business on account of https://hcservices.ecourts.gov.in/hcservices/ various factors, the Company presented a Scheme under Section 391 of the Act for an arrangement / compromise with the class of creditors, namely, the bond holders and deposit holders. 1.2 The salient features of the Scheme as contained in such petition are to the following effect :- "4. PAYMENTS TO FIXED DEPOSIT 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 conversion price will be determined taking into account the valuation laid down by SEBI guidelines. (b) The debentures will be issued with periodical interets payment option to the deposit/ bond holders who are holding regular interest payment option presently and for those deposit/ bond holders holding payment of interest under cumulative option, interest will be added to the value of the debenture for conversion at the time of maturity. (c) By virtue of this scheme, all the deposit holders and bond holders would become secured creditors in the books of IFCL at the first year. The Trustees for the Bonds would be the Debenture Trustees in the post scheme scenario and a Debenture Trust Deed charging the assets of Rs.125 crores of receivables, accrued interest, investments, assets and available stock on hire would also be made so as to comply with all the norms for the purpose of fully convertible debentures. https://hcservices.ecourts.gov.in/hcservices/ 4.3. By virtue of the conversion, the outflow of the company would be a quarterly payment of interest depending upon the type of deposit/ bond held by the creditors. At the end of the tenure the debentures would either be redeemed or converted as equity shares at the given appropriate exit route as the Company is a listed company and a fairly large tradable market capitalization being available for the liquidation of these converted shares. The conversion of deposit holders/ bond holders into secured convertible debentures and thereafter into equity shares of the company will ensure their benefits since the company established 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 of 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 deposit holders and bond holders 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 prejudiced 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 cash. https://hcservices.ecourts.gov.in/hcservices/ 6. IMPLEMENTATION OF SCHEME 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.” 1.3 In C.A.Nos.854 and 855 of 2005, arising from C.P.No.160 of 2005, the learned single Judged ordered convening and holding of the meetings of the bond holders and deposit holders on 10.8.2005 separately for the purpose of considering the Scheme of arrangement / compromise. On the basis of Company Appln.Nos.1105 to 1110 of 2005, the learned single Judge nominated a retired District Judge as an Observer of the meeting to ensure fair and free participation of the bond holders and deposit holders. The meetings have been held under the Chairmanship of the Court appointed Chairman and also the Observer. The Scheme was approved and report was published in various newspapers indicating that the Scheme had been approved by majority of the bond holders and deposit holders in accordance with the provisions of Section 391(2) of the Act. A report was filed before the single Judge along with the Observer's report. Pursuant to the notice, the Regional Director, Ministry of Company Affairs, filed a report, wherein it was indicated that since the company proposes to convert the debentures to equity shares to the bond holders and deposit holders, the Company had to comply with Section 81 of the Act. https://hcservices.ecourts.gov.in/hcservices/ 2. The Integrated Finance Company Depositors Association, an Association representing the depositors and 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). 2.1 Certain other Associations representing the deposit holders, debenture holders also intervened supporting the Scheme. Similarly, an Association of the employees also intervened supporting the Scheme. 3. During pendency of Company Petition No.160 of 2005, the petitioner had filed Company Appln.Nos.1409 & 1410 of 2005 forbearing Respondents 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 1995. 4. 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. 5. The Reserve Bank of India has filed O.S.A.No.308 of 2006, the Integrated Finance Company Depositors Association filed O.S.A.No.309 of 2006, M/s. Popular Kuries Limited 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 19.8.2006. 6. We have heard Mr.V. Prakash, Senior Counsel appearing for the appellant in OSA.No.309 of 2006, Mr.T. Poornam, Counsel appearing for the appellant in OSA.No.308 of 2006, Mr.T. Suresh, Counsel appearing for the appellant in OSA.No.312 of 2006 and Mr.K.F. Manavalan, Counsel appearing for the appellant in OSA.No.91 of 2007, who have assailed the legality and validity of the order passed by the learned single Judge. Mr. 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 Counsels, 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. Chandrasekhar appearing for the employees Association has also supported the scheme. https://hcservices.ecourts.gov.in/hcservices/ 7. The main contention raised by the learned counsels appearing in various appeals is to the effect that by sanctioning the Scheme, many of the provisions of the Reserve Bank of India Act, 1934, hereinafter referred to as "the RBI Act", are being violated, which is impermissible in law. Learned Senior Counsel appearing for the appellant in OSA.No.309 of 2007, while adopting the submission and supporting such contention of the learned counsel for RBI, has further submitted that if the Scheme is implemented, it would be an indirect approval of the various acts of omissions and commissions on the part of the persons in charge of the affairs of the Company, which should not be permitted. It has been further submitted by him that under the Scheme all the bond holders and the deposit holders those who had deposited Rs.20,000/- or less, would be left with a convertible debenture of most uncertain value. It has been further submitted that since many of the working class people had invested their entire life saving being lured by various tall promises made, the Scheme, if finalised, would jeopardise their interest, which should not be permitted. 8. Learned Senior Counsels appearing for the respondent Company and some of the depositors have supported the 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. 9. 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 policy. 10. After analysing the relevant provisions contained in Sections 391 and 393 of the Act and referring to several decisions, the Supreme Court, in the decision reported in AIR 1997 SC 506 (Miheer H.Mafatlal vs. Mafatlal Industries Ltd.,), observed : "28-A . . . (1) The sanctioning court has to see to it that all requisite statutory procedure for supporting https://hcservices.ecourts.gov.in/hcservices/ such a Scheme has been complied with and that the requisite meetings as contemplated by section 391(1)(a) have been held. (2) That sanction 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 he 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 the Act is placed before the court by the concerned applicant seeking sanction for such a Scheme and the court gets satisfied about the same. (6) That the proposed Scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the Scheme with a view to be satisfied on this aspect, the court if necessary, can pierce the veil of apparent corporate purpose underlying the Scheme and can judiciously x-ray the Scheme. (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 of 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 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 https://hcservices.ecourts.gov.in/hcservices/ 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." 11. 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 deposit holders or the bond holders had practically invested their life time saving. He has painted a very dismal picture of the projections highlighted in the Scheme. 12. Since the Scheme has been approved by the learned single Judge, obviously the appellate court under 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. 12.1 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 bond holders and depositors had agreed to a particular proposal. 12.2 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 the face of it so unreasonable that no man of ordinary prudence can accept such a scheme. 12.3 In the facts of the present case, we do not think that we can characterise the Scheme as so outrageously improper as to invite the wrath of the Court. https://hcservices.ecourts.gov.in/hcservices/ 13. While considering the question as to whether there has been procedural irregularity or not, Mr.V. Prakash, learned Senior Counsel, submitted that since most of the depositors were residents of the State of Kerala, it would have been more convenient for such depositors if the meetings of the depositors and the bond holders would have been held within the State of Kerala rather than at a distant place like Chennai. 13.1 Learned single Judge, while considering such submission, has observed that since the Registered Office of the Company is at Chennai, there was nothing illegal in directing the meetings to be held at Chennai and to ensure proper holding of the meetings, the Court had appointed an Observer. 13.2 Though it may be true that possibly any suitable place within the State of Kerala would have been more convenient, we do not think it would be appropriate 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 bond holders within the State of Kerala found it difficult to attend the meetings at Chennai. 14. One other contention regarding procedural irregularity, however,which requires serious consideration, revolves round the order passed by the RBI vide letter dated 18.1.2005 and the effect of non-disclosure. Such letter refers to the fact that the RBI had conducted an inspection of the books of accounts 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.10666.06 lakh as on March 31, 2004 as against the reported NOF at Rs.2194.00 lakh. The working of the assessed NOF is furnished in Annexure-1. The company has thereby violated the provisions of Section 41-1A(1) of the RBI Act by not maintaining the statutory minimum required NOF of Rs.25 lakh. ii) As on March 31, 2004, the company's credit exposure to the following companies were in excess of 15% of the company's reported owned fund of Rs.2877.00 lakh as on September 30,2003. a. Sree Maruti Textiles Ltd (Rs.887.34 lakh) b. Ravishankar Industries Pvt Ltd. (Rs.789.96 lakh) c. Gemini Indus and Imaging Ltd (Rs.915.23 lakh) d. Gomathy spinners (Rs.724.98 lakh) https://hcservices.ecourts.gov.in/hcservices/ e. ATV Projects India Limited (Rs.998.46 lakh) f. Krishna Petrochem Ltd (Rs.599.20 lakh) g. Vatan Dyechem Exports Limited (Rs.471.41 lakh) The company has thereby violated the provisions of Para 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 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 lakh, were very high and formed 69.31% of the total credit exposures of the company. v) The company has not made adequate provision in respect of its Non Performing Assets as detailed in Annexure III. As a result, there is short provisioning to the extent of Rs.12575.33 lakhs. The company has thereby violated the provisions of paragraph 8 of the NBFCs Prudential Norms (Reserve Bank) Directions. vi) As the NOF of the company is negative, it has not maintained the minimum capital adequacy ratio and has thereby violated the provisions of Paragraph 10 of the prudential Norms Directions. ..." 15. The contention raised by the learned counsel for RBI and the Senior Counsel for the appellant in OSA.No.309 of 2006 is to the effect that this vital aspect relating to the affairs of the company, which was under the scrutiny of the RBI had not been disclosed, even though under Section 391(2), the Company is required to disclose all relevant factors. 16. Section 391(2) of the Act envisages that if the Company files an application under Section 391(1), it should disclose in its affidavit the latest financial position, auditor's report and any investigation pending under Sections 235 to 251 and the like. According to the learned counsels for the appellants and more particularly the counsel for RBI, the appellant in OSA.No.308 of 2006, non-disclosure of an order relating to Section 45MB and regarding other aspects highlighted in the letter dated 18.1.2005, 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 https://hcservices.ecourts.gov.in/hcservices/ 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