M/S Integrated Finance Co.Ltd vs Reserve Bank Of India Etc.Etc

4. The Company Petition No. 160 of 2005 was filed by the appellant company herein under Section 391 of the Companies Act, 1956 (hereinafter referred to as “the Companies Act”), seeking approval for the scheme of arrangement/compromise dated 10th August, 2005. The said agreement was entered into between the appellant company herein and its class of creditors, namely its deposit holders and bond holders. The learned Single Judge, vide order dated 19th August, 2006, was pleased to sanction the said scheme, albeit 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.

5. The relevant facts giving rise to filing of the present appeals as narrated by the parties are as under:

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 conditions on these companies. The companies that did not comply with the aforesaid conditions were directed to stop accepting deposits from the investors and also to repay the deposits immediately.

Resultantly, there was short provisioning to the extent of Rs.12575.33 lakhs. The aforesaid omission on part of the appellant violated the provisions of Paragraph 8 of the Prudential Norms Directions.

9. Subsequently on 20th January, 2005, the RBI, in exercise of its powers under Section 45MB(1) of the Reserve Bank of India Act, 1934 issued a circular to the appellant company, prohibiting it from “accepting deposits from any person, in any form whether by way of fresh deposits or renewal of the existing deposits or otherwise, until further orders.” Further, the appellant company 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:

Also, Mr. B. Ravi, a Practising Company Secretary, was directed to preside over the meeting. In the contingency of the failure of Mr. B. Ravi to preside over the meeting, Mr. George Kuruvilla, Managing Director of the appellant company was directed to step into the shoes of the former. The learned Single Judge also gave some other directions in the aforesaid order to ensure that the relevant provisions of the Companies Act are complied with while conducting the said meeting.

12. However, before the meeting could be held on 10th August, 2008; Company Applications Nos. 1105 to 1110 of 2005 in C.P. No.160 of 2005 came to be preferred before the High Court. In the aforesaid Company Applications, some depositors of the appellant company inter alia sought the appointment of an “independent chairman,” in place of the chairman appointed vide order dated 1st July 2005. The said applicants also made a prayer that police protection should be granted to them during the said meeting. The learned Single Judge while disposing of the aforesaid company applications, vide order dated 5th August, 2005, did not make any change pertaining to the Chairmanship of the originally appointed Mr. B. Ravi. However, Mr. R. Guruswamy, retired District Judge, was appointed as the observer for the said meeting. This appears to have been done for ensuring fair and free participation of all deposit holders/bond holders in the said meeting.

13. The scheduled meeting was conducted on 10th August, 2005, as per the orders of the learned Single Judge dated 1st July 2005 and 5th August, 2005. The report of the meeting was published in various newspapers indicating that the Scheme had been approved by majority of the bond holders and deposit holders. A report concerning the said meeting was filed before the learned Single Judge along with the Observer's report. Thereafter, a petition was preferred before the High Court under Section 391(2) of the Companies Act, seeking sanction for the said scheme of compromise. In the aforesaid proceedings, the Integrated Finance Company Depositors 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.

7. EFFECT OF THE SCHEME 7.1 In view of the above Scheme being offered, all the parties agree that:

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 that “every deposit accepted by a NBFC, unless renewed, shall be repaid in accordance with the terms and conditions of such deposit”. This 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 Companies Act.

59. For the aforesaid reasons, we find no justification to interfere with the judgment and order passed by the High Court. The appeals are accordingly dismissed.

July 16, 2013.