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

The appellant herein was incorporated as a Non-Banking Finance Company (hereinafter referred to as aunder 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, 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.8. In exercise of its powers under Section 45N of the Reserve Bank of India Act 1934 (hereinafter, the RBI inspected the books of accounts of the appellant company in 2005. The inspection report of the RBI disclosed the following violations of the provisions of the 1934On 31st March 2004, the Net Owned Fund (NOF) of the appellant company herein stood at negative (-) Rs.10666.06 lakh, which was in excess of the reported NOF at Rs.2194.00 lakh;ii) The credit exposure of the appellant company, as on 31st March 2004, to some of the companies was found to be in excess of 15% of its reported owned fund of Rs.2877.00 lakh as on September 30, 2003. Thus, it 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 appellant company did not classify its assets in accordance with the asset classification norms stipulated by RBI and thereby, violated the provisions of Paragraph 7 of the Prudential Norms directions.iv) The Gross Non-Performing Assets of the appellant company, assessed at Rs.15603.16 lakh, stood at a very high level and constituted 69.31% of the total credit exposures of the appellant company.v) The appellant company was found to have not made adequate provision in respect of its Non-Performing Assets. 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.vi) The appellant company was also found to be in violation of the provisions of Paragraph 10 of the Prudential Norms Directions because the NOF of the appellant company was negative and it did not maintain the minimum capital adequacy ratio.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 fromdeposits from any person, in any form whether by way of fresh deposits or renewal of the existing deposits or otherwise, until furtherFurther, 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 asPAYMENTS TO FIXED DEPSOIT HOLDERS/BOND HOLDERS4.1 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 interest 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.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.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 rights 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.6. IMPLEMENTATION OF SCHEME6.1 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 Honble 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 SCHEME7.1 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 andc) 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 Honble Court shall be binding on the Company and all parties to the scheme.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 permitted by the Ld. Single Judge, in Company Application Nos. 854 and 855 of 2005 in C.P.No.160 of 2005, to convene a meeting of its deposit holders at Chennai on 10th August 2005 at 2.30 p.m. for the purpose of considering the said scheme of compromise and, if thought fit, approving the same with or without modifications. 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 anin 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 Observers 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.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 schemenot 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.The aforesaid order, as noticed earlier, was challenged before the Division Bench of the High Court by way of the following appeals: O.S.A. No. 308 of 2006 was filed by the Reserve Bank of India; O.S.A. No. 309 of 2006 was filed by the Integrated Finance Company Depositors Association; O.S.A. No. 312 of 2006 was filed by one M/s. Popular Kuries Limited; and O.S.A. No.91 of 2007 was filed by one Mrs. Elizabeth Antony. While allowing the aforesaid appeals, the Division Bench set aside the judgment of the Learned single Judge vide common judgment/order dated 30th April, 2008. This judgment is under challenge before us.

Court's reasoning:
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.