Case: M/S Integrated Finance Co.Ltd Vs. Reserve Bank Of India Etc.Etc

the scheme has been rightly held to be lacking bona fide, as well being contrary to public policy. It has been proposed with the oblique purpose of avoiding the mandate of Section 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 non-compliance 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 conclusion that the scheme of arrangements could not be approved. The Effect of Non-disclosure of the Notice dated 18th January, 2005 57. The aforesaid notice has been sent to the Company under Section 45MB(1). Such notice is only sent if any NBFC violates the provisions of any section or fails to comply with any direction or order given by the RBI under any of the provisions of Chapter IIIB. Under these provisions, the RBI has the power to prohibit the NBFC from accepting any deposit. Under Section 45MB(2), in order to protect the interest of the depositors, RBI is also empowered to direct the Non-Banking Financial Company not to sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior permission of the bank. It is an accepted fact that the orders directing the company not to accept deposits have been duly published in the Indian Express on 20th January, 2005. Learned counsel for the appellant has submitted that it is an accepted fact that on inspection of the books of accounts of the appellant company under Section 45N of the RBI Act, 1934, numerous violations were disclosed. The details of the violations have been extracted in the earlier part of this judgment. Whilst the investigation was being conducted into all the irregularities that have been committed by the company, the scheme of arrangement was presented to the Company Court on or about 19th May, 2005. It is an accepted fact that the notice dated 18th January, 2005 was not disclosed to the shareholders, who were present in the meetings which had been convened on the directions of the Company Court. According to the learned counsel for the appellants, such a non-disclosure was not required under the provisions of the proviso to Section 391(2) of the Companies Act. In any event, according to the learned counsel, the notice dated 18th January, 2005 had been widely advertised by the RBI in various newspapers. Therefore, the whole information was in public domain. Consequently, the requirements of proviso to Section 391(2) would be deemed to be complied with. Furthermore, according to Mr. Datar, proviso to Section 391(2) only requires disclosure to the Court sanctioning to the scheme and not to the creditors or the shareholders with whom the scheme is made. The disclosure requirement to the shareholders or the creditors is specified under Section 393(1) and is much narrower. Learned senior counsel has placed reliance on the judgment 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 Section 47N, which led to the issuance of the notice dated 18th January, 2005. This, in our opinion, would clearly reflect on the lack of bonafide of the company in proposing scheme of arrangement. In our considered opinion, non- disclosure of the action taken and initiated by the RBI as apparent from the letter dated 18th January, 2005, amounted to non-disclosure of material facts which are required to be disclosed under Section 391(1) read with Section 393(1) of the Companies Act. The Company Court whilst examining the fairness and the bonafide of a scheme of arrangement does not act as a rubber stamp. It cannot shut its eyes to blatant non-disclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of the appellant that the non-disclosure of the letter dated 18th January, 2005 was not material.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]The High Court notices the well settled legal positions that whilst examining the scheme under Sections 391-393 of the Companies Act neither the Company Court nor the Appellate Court ought not to go into the nitty-gritty of the various suggestions in the scheme. The High Court recognised that it is difficult for the Company Court or the Appellate Court to consider the financial wisdom of a particular proposal. This is so as the Courts do not have the necessary expertise to examine the commercial wisdom of the scheme of arrangements, especially when it is approved by an overwhelming majority of the bond holders and depositors. The Court is not expected to substitute its own wisdom for that of the stakeholders, who give consent to a particular scheme. The High Court also holds that, by 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 is on the face of it so unreasonable that no man of ordinary prudence can accept it. The High Court concludes thatthe 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 theThe High Court rejected the submission of some of the deposit holders that meetings for approving the scheme should have been held within the State ofthe interpretation of the provisions of Section 45 of the RBI Act, the Division Bench has concluded that by virtue of non-obstante clause in Section 45Q of the RBI Act, Chapter IIIB of the RBI Act will prevail over Sections 391-393 of the Companies Act. It is held that the provision contained in Section 45QA which is intended to protect the depositors must have primacy over any other law inconsistent with such provision. It is further held that the scheme of arrangement of compromise even if presented by a NBFC would have to conform to the provisions contained in the Chapter IIIB of the RBI Act. The Division Bench also 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 Companyour 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 shareholdersview of the aforesaid, it needs to be considered as to whether a scheme which does not comply with the provisions of Section 45QA of the RBI Act can be sanctioned.The High Court on a careful consideration of the entire matter has concluded that the scheme must fail as it does not comply with the provisions contained in Section 45QA(1) of the RBI Act. To get over this difficulty, the learned counsel for the appellant has submitted that Chapter IIIB of the RBI Act is not a complete code. This apart, the RBI Act and the Companies Act must be read in their own sphere since both operate in different fields, altogether. We are unable to agree with the aforesaid submission of the learned senior counsel for theour opinion, Chapter IIIB has been given an overriding effect over all other laws including Companies Act by incorporating Section 45Q with a clear intention to ensure that in a case of NBFC, a scheme under Section 391 of the Companies Act cannot be entertained unless it is in conformity with the provisions of Section 45QA of the RBImay briefly notice here the judgments relied by the learned counsel for the appellant in support of the submission that the non-obstante clause in Section 45Q of the RBI Act will not have an overriding effect over the Sections 391-394 of the Companies Act. Reliance was placed on Aswini Kumar Ghose (supra); Madhav Rao 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 thatnon-obstante 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 anotherSimilar 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 repaying of amount in accordance with the terms and conditions of the deposit, such amount shall be considered as convertible debentures with interest @ 6%, which would be converted into equity shares within a period of one year. Such a provision is clearly contrary to the mandatory requirements under Section 45QA(1) which requires thatdeposit accepted by a NBFC, unless renewed, shall be repaid in accordance with the terms and conditions of suchThis ingenious effort by the appellants in fact justifies the insertion of the amendment, which has been obviously incorporated with a view to protect the depositors and to avoid exploitation of these hapless and poor depositors from exploitation by Non Banking Financial Institutions, such as the appellant. It is for this reason that Chapter IIIB clearly provides that the provisions contained therein shall override all other laws, which are inconsistent with the same. This will also be applicable to Sections 391-394 of the Companiesour 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 approved by the requisite majority and sanctioned by the Court, it is binding on the minority as well. In support of this submission, learned counsel has relied on the observations made by this Court in J.K. (Bombay) Private Ltd. (supra) and Administrator of the Specified Undertaking of the Unit Trust of India (supra). On the basis of the aforesaid, it is submitted that if the parties could have novated the terms and conditions individually, there is no bar on such novation through aview 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 non-compliance 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 conclusion that the scheme of arrangements could not beour 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 Section 47N, which led to the issuance of the notice dated 18th January, 2005. This, in our opinion, would clearly reflect on the lack of bonafide of the company in proposing scheme of arrangement. In our considered opinion, non- disclosure of the action taken and initiated by the RBI as apparent from the letter dated 18th January, 2005, amounted to non-disclosure of material facts which are required to be disclosed under Section 391(1) read with Section 393(1) of the Companies Act. The Company Court whilst examining the fairness and the bonafide of a scheme of arrangement does not act as a rubber stamp. It cannot shut its eyes to blatant non-disclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of the appellant that the non-disclosure of the letter dated 18th January, 2005 was not material.