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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.5505-5508 OF 2013
[Arising out of SLP (C) NO.12737-12740 OF 2008]
M/s. Integrated Finance Co. Ltd. ...Appellant
VERSUS
Reserve Bank of India Etc. Etc. ...Respondents
J U D G M E N T
SURINDER SINGH NIJJAR,J.
1. Leave granted.
2. I.A. filed by Mr. B. Ramanna Kumar for substitution in place of Late
Mr. N. Mani is allowed.
3. These appeals, arising out of S.L.P. (Civil) Nos. 12737-12740 of 2008,
are directed against the common order and judgment dated 30th April
2008 passed by the Division Bench of the High Court of Judicature at
Madras.
Vide the aforesaid order, the order/judgment of the learned
single judge dated 19th August 2006 passed in Company Petition No. 160
of 2005 was set aside.
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.
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 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 “1934 Act”), 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
1934 Act:
i) On 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.
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:
“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 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
same.”
x x x
“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 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 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.”
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 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 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.
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 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.”
15. 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.
Submissions:
16. We have heard the learned counsel on behalf of the parties.
17. Mr. Arvind P. Datar, learned senior counsel, appeared for the
appellant company and assailed the validity of the impugned order. Mr.
Iqbal Chagla, learned senior counsel, appeared for intervenors in I.A.
Nos. 29-32 of 2009 in S.L.P. (C) Nos. 12737-12740 of 2008. Mr. Shyam
Divan, learned senior counsel, appeared for the intervenors in I.A.
Nos. 33-36 of 2009 in the aforesaid proceedings. Whereas Mr. Parag P.
Tripathi, learned senior counsel, appeared for the Respondent/RBI and
Mr. V. Parkash, learned senior counsel appeared for respondent
no.1/Integrated Finance Depositors Association in S.L.P.(C) No. 12738
of 2008.
18. Mr. Datar, learned senior counsel, submitted that the scheme of
compromise of the appellant company has been approved by 1708 out of
2177 (79%) deposit holders and 5628 out of 7143 bond holders (77.73%),
present and voting; which shows that it was approved by an enormous
majority.
According to him, the appellant company has complied with
all the statutory requirements relating to the said scheme. This, he
submits, is evident from the fact that neither the Single Judge nor
the Division Bench of the High Court found any procedural irregularity
in the arrangement of the said scheme.
Thus according to Mr. Datar,
the only issues that now require consideration are:
i) “Whether the non-obstante clause in Section 45Q of the RBI
Act, 1934 prohibits the High Court from sanctioning any
scheme for the deposit holders 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
`
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. New Kaiser-i-hind Spinning and Weaving Co.
Ltd. & Ors. Etc.[1] and Administrator of the Specified Undertaking of
the Unit Trust of India & Anr. Vs. Garware Polyester Ltd.[2] Mr.
Shyam Divan,
while explaining the scope of Sections 391-394 of the
Companies Act, has drawn our attention to the principle of novation,
which allows the parties to a contract to rework or re-agree the terms
of the contract.
He submits that this principle is recognised in
Section 62 of the Contract Act, 1872.
Further, Code of Civil
Procedure, 1908 allows compromise during the pendency of the
proceedings, (See Order 23, CPC); and also by adjustment of a decree
(Order 21 Rule 2, CPC).
Relying on the provisions contained in Section
22 of the Sick Industrial Companies Act, 1982 and Section 402 of the
Companies Act, Mr. Divan has submitted that Chapter V of the Companies
Act provides another statutory method of varying contracts.
The
Chapter V allows even solemn contractual obligations to be varied by a
particular class of similarly placed members/creditors, provided there
is requisite majority.
The learned senior counsel argued that a Scheme
under Sections 391-394 of the Companies Act is not merely a commercial
agreement, but it is statutorily binding on all members and creditors
of a company.
21. Mr. Datar, Mr. Chagla and Mr. Divan have unanimously submitted that
Section 45QA of the RBI Act is not a bar to Scheme under Sections 391-
394 of Companies Act.
The learned senior counsel advanced the
following reasons for substantiating the said submission:
First, the RBI Act and the Companies Act must be read in their own spheres
since both operate in different fields, altogether.
Second, Section 45QA of
RBI Act and Sections 391-394 of the Companies Act can be read harmoniously
and there is no inconsistency between the said provisions.
Third, the
legislature did not intend to exclude the application of Sections 391-394
of the Companies Act in relation to the NBFCs.
22. Elaborating these propositions, it was submitted that the RBI Act and
the Companies Act operate in distinct and different fields,
altogether.
Mr. Chagla argued that the RBI Act is regulatory in nature
and is enacted to regulate the operation of the Banking Companies and
NBFCs.
The RBI Act is merely supplementary to the Companies Act and
does not supplant it.
To support the said 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.[3] 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.[4]
In this context, Mr. Chagla relied upon the judgments
of this court reported in Aswini Kumar Ghose & Anr. Vs. Arabinda Ghose
& Anr.[5] and Madhav Rao Jivaji Rao Scindia Vs. Union of India &
Anr.[6]
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 company are concerned, like the provisions relating to
schemes and arrangements of the company.
Thus, it was submitted that
RBI Act has no application in matters covered by the Sections 391-394
of the Companies Act and therefore, Section 45QA of the RBI Act is not
a bar to scheme under Sections 391-394 of Companies Act.
24. Secondly, it was submitted that
since there is no inconsistency
between Section 45QA of the RBI Act and Sections 391-394 of the
Companies Act, it will not be applicable in the present case because
of the non-obstante clause contained in Part IIIB of the RBI Act.
Mr.
Divan has submitted that the ambit of Sections 391-394 of Companies
Act is very wide.
In fact, arrangements with debenture holders
involving (i) extension of time of payment; (ii) accepting
cash payment of lesser face value; and (iii) exchanging debentures for
shares have been accepted since the late 1800’s (See Charlesworth’s
Company Law, 18th Edition, Pg. 772).
On the other hand, Chapter IIIB
of the RBI Act contains whole set of detailed provisions pertaining to
regulation of NBFCs.
Mr. Chagla added that the object of the 1997
amendment to the RBI Act which added section 45Q indicates that a
remedy was to be granted to deposit holders for approaching the
Company Law Board for repayment of deposits held by a NBFC when the
same are not repaid in accordance with the terms and conditions of the
deposit.
However, the jurisdiction of the Company Law Board is not
exclusive and the jurisdiction of a civil court or, for that matter,
of a company court is not ousted. Reliance was placed upon the law
laid down in Dhulabhai Etc. Vs. State of Madhya Pradesh & Anr.[7]
25. Further, learned senior counsel relied heavily on the principles laid
down by this court in relation to
the interpretation of a non-obstante
clause to argue that the Section 45QA is neither applicable in the
facts and circumstances of the case nor is it a bar to a Scheme under
Sections 391-394 of the Companies Act.
Mr. Datar relied upon the case
of JIK Industries Limited & Ors. Vs. Amarlal V. Jumani & Anr,[8]
wherein it was held that “under the scheme of the modern legislation,
non-obstante clause has a contextual and limited application.”
Reliance was also placed upon the case of R.S. Raghunath Vs. State of
Karnataka & Anr.[9]
wherein it was held that “there should be a clear
inconsistency between the two enactments before giving an overriding
effect to the non-obstante 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.[10]
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 of NBFCs in general and to prohibit multiple partnership
firms from taking deposits from the general public, in particular; it
cannot be interpreted in the manner so as to exclude the application
of Sections 391-394 of the Companies Act. According to
Mr. Chagla, Section 45QA simply states in general terms that
every loan shall be repaid in accordance with the terms and conditions
of such loan.
This provision does not prohibit a depositor from
agreeing to accept the full amount of principal without interest or an
amount less than the full amount of principal or to accept in kind
rather than in cash.
In other words, novation of the contract entered
into between the company and the depositor is not prohibited.
27. Further, it was submitted that the provision of Section 45QA is pari
materia if not identical with Section 58A of the Companies Act.
Schemes under Section 391 of the Companies Act are presented and
approved by the Company Court in respect of deposits under Section 58A
of the Companies Act.
Premising on the aforesaid submission, Mr. Datar
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. This submission has also been reiterated and
elaborated by Mr. Chagla.
28. It was further submitted that wherever the applicability of Section
391 of the Companies Act was excluded by the legislature, it was done
so expressly.
To illustrate, Learned Senior counsel relied upon
Section 38 of the Banking Regulation Act, 1949 which provides that
Section 391 of the companies Act will not be applicable in winding up
of a banking company by High Court. It was further submitted that the
legislative intent cannot be interpreted in the manner which will
discriminate against the depositors of NBFCs as against the depositors
of public limited companies and depositors of banking companies.
Section 391 of the Companies Act can be availed of in case a NBFC is
going into liquidation but if the interpretation given in the impugned
order is accepted, the same provision would not be available for
revival of the same company. This, it was argued, would lead to an
anomalous situation.
In the light of the aforesaid, it was
collectively argued by the learned senior counsel that the non-
obstante clause in Section 45Q of the RBI Act, 1934 does not prohibit
the High Court from sanctioning 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 non-disclosure 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.[11]
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 scheme and not to
the creditors or the shareholders with whom the scheme is entered
into.
The counsel relied upon Hindustan Lever Employees’ Union Vs.
Hindustan Lever Ltd. & Ors.[12] and In re: HCL Infosystems Limited,
HCL Infinet Limited and HCL Technologies Limited.[13]
31. Mr. Chagla was at pains to emphasise that Section 391(2) of the
Companies Act requires a company to disclose to the Court all material
facts relating to the company “such as the latest financial position
of the company, the latest Auditor’s Report on the accounts of the
company, the pendency of any investigation proceedings in relation to
the company under the Sections 235 to 251, and the like” (emphasis
supplied by the learned senior counsel).
He argued that the order of
the RBI dated 18th January, 2005 is not akin to the provisions of
Sections 235 to 251 of the Companies Act.
Thus, it was argued that the
Division Bench erroneously held that the appellant company should have
disclosed the letter/order issued by the RBI before the creditors.
Respondents’ Submissions
32. Mr. Tirpathi, learned senior counsel, appearing for the RBI submits
that the Division Bench of the High Court has correctly interpreted
the provisions of Chapter IIIB of the RBI Act.
He emphasised that an
amendment was required to strengthen the regulatory mechanism in
relation to the NBFCs.
The said Chapter IIIB has evolved an elaborate
scheme of regulations, enabling the RBI even to seek winding up of a
NBFC in appropriate circumstances.
Section 45Q of the RBI Act
provides that Chapter IIIB thereof shall override any other law
inconsistent therewith.
Section 45QA gives a statutory right which
cannot be waived by anyone.
Under this provision, every deposit
accepted by NBFC has to be renewed and repaid in accordance with the
terms and conditions of such deposit.
No subsequent
agreement can permit the conditions to be waived of or varied.
Section 45QA(2) enables NBFCs to seek extension in time for repayment
before the Company Law Board.
There is no other provision in Chapter
IIIB which can dilute the effect of Section 45QA.
The High Court,
according to Mr. Tirpathi, has rightly held that the scheme in
question of the appellant company is not in compliance with Chapter
IIIB and, therefore, cannot be approved.
33. Countering the submissions of the appellants with regard to 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.[14]
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.
The
learned senior counsel further submitted that the scheme of
arrangement presented before the Company Law Board was not bonafide;
it failed to disclose various directions issued by the RBI restricting
the functioning of the appellant as a NBFC.
The High Court has
correctly held that the scheme proposed by the appellant is not
bonafide and is in fact contrary to public policy.
35. We have considered the submissions made by the learned counsel for the
parties. We may here briefly notice the conclusions that have been
arrived by the High Court:
Findings of the High Court
36. Whilst examining the scope of Sections 391 to 393 of the Companies
Act,
the High Court relied on the analysis of the aforesaid sections
as rendered by this Court in the case of Miheer H. Mafatlal Vs.
Mafatlal Industries Ltd.[15]
The analysis given in the aforesaid
judgment are as under:-
“28-A. 1. The sanctioning court has to see to it that all the requisite
statutory procedure for supporting such a scheme has been complied with and
that the requisite meetings as contemplated by Section 391(1)(a) have been
held.
2. That the scheme 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 the 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 meetings concerned as contemplated by Section 391
sub-section (1).
5. That all the requisite material contemplated by the proviso of sub-
section (2) of Section 391 of the Act is placed before the Court by the
applicant concerned 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 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 jurisdiction over the scheme rather than its
supervisory jurisdiction.”
37. 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 that “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.”
The High Court rejected the
submission of some of the deposit holders that meetings for approving
the scheme should have been held within the State of Kerala.
38. Upon examination of the question as to
whether the company should have
disclosed the aspects arising out of the order dated 18th January,
2005 to enable the depositors and the bond holders to take an informed
decision.
The High Court has concluded that the company is guilty of
such non-disclosure.
39. On the 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 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 violations of the RBI Act, 1934,
committed by the company which we have noticed in the earlier part of
the judgment. It is also accepted that on 18th January, 2005, RBI in
exercise of its powers under Section 45MB(1) of the RBI Act, 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.” The appellant company was also directed not to sell,
transfer, create charge of mortgage or deal in any manner with its
properties, assets, without prior permission of the RBI. It is also
accepted that the aforesaid notice was advertised in the Indian
Express on 20th January, 2005. The Notice highlights the purpose of
the notice as “Integrated Finance Company Limited, Chennai prohibition
for accepting of deposits and alienation of assets”. The appellant
claimed that NBFC started facing problems in running its operations as
a direct consequence of the restrictions and the publicity generated
by the notice dated 18th/20th January, 2005. Since the company was
facing severe problems in running its operations because of the drop
in its profitability, it proposed a scheme of compromise with its
creditors, viz. the depositors and bond holders. This scheme was
approved by the Board of Directors of the appellant company on 19th
May, 2005. We have reproduced earlier the salient features of the
scheme, which was presented to the Company Court under Section 391 of
the Companies Act in the High Court of Madras.
Our Conclusions:
42. The primary issue that arises before us is as to whether such a scheme
of arrangements could have been presented in view of the provisions
contained in Chapter IIIB of the RBI Act. Even if it could be
presented, could it be sanctioned without complying with the
provisions contained in Section 45QA of the RBI Act? The learned
counsel for the appellant submitted that the High Court has in terms
concluded that the scheme cannot be characterised “as so outrageously
improper as to invite the wrath of the Court.” The High Court also
rightly concluded that the Company Court is not expected to substitute
its own wisdom for that of the stakeholders. The High Court has also
found that all the procedural requirements for sanctioning a scheme
under Sections 391-394 have been complied with. The High Court also
accepts 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 into
agreement. Above all, the Court has to be satisfied that the scheme
is fair and reasonable from the point of view of a prudent man of
business taking commercial decisions, which are beneficial to the
class represented by them. [See Miheer H. Mafatlal (supra)] It is
true that whilst sanctioning the scheme, the Company Court is not
required to act as a Super-Auditor. No doubt whilst considering the
proposal for approval, the Company Judge is not required to examine
the scheme in the way of a carping critic, a hair-splitting expert, a
meticulous accountant or a fastidious Counsel. However at the same
time, the Court is 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. The Court is required
to see that all legal requirements have been complied with. At the
same time, the Court has to ensure that the scheme of arrangement is
not a camouflage for a purpose other than the ostensible reasons. [See
Administrator of the Specified Undertaking of the Unit Trust of India
(supra), Para 32]. If any of the aforesaid requirements appear to be
found wanting in the scheme, the Court can pierce the veil of apparent
corporate purpose underlying the scheme and can judiciously X-ray the
same. (See Miheer H. Mafatlal (supra)]
44. In view 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 the parties.
45. Chapter IIIB of the RBI has been incorporated through RBI (Amendment)
Ordinance 1997, subsequently replaced by the RBI (Amendment) Act,
1997. The Statement of Objects and Reasons make it abundantly clear
that before the amendment, the unincorporated bodies circumvented the
statutory restrictions by floating different 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 directing the defaulter NBFCs to make
repayment for the deposit interest with a view to protect the interest
of depositors. The NBFCs have been totally prohibited from accepting
deposits for the purpose other than for personal use, if
unincorporated. They have been permitted to continue to take deposit
after incorporating themselves within the regulatory framework. The
unincorporated bodies have also been specifically prohibited for
issuing any advertisements in any form. The real intent is set out in
Paragraph 6, which is as under:-
“6. There are reports of several finance companies and incorporated bodies
having failed to repay the deposits collected from unsuspecting depositors
who have been tempted by the attractive returns and incentives offered.
Concern has been expressed in several quarters on the need to take urgent
steps to regulate the activities of such companies and unincorporated
bodies.”
46. Keeping in view the aforesaid objects and reasons, it becomes evident
that Chapter IIIB of the RBI Act is a self contained code. It is not
possible for us to accept the submissions of the learned counsel for
the appellants that the RBI Act and the Companies Act operate in
distinct and different fields. We are unable to accept the submission
of the learned counsel for the appellants that the provision contained
in the RBI Act being regulatory in nature will not apply to cases of
schemes submitted for approval under the Companies Act. We may also
notice here that the learned senior counsel for the appellant relied
on Haridas Exports (supra) in this context. In the aforesaid case,
this Court upon a comprehensive analysis of the Monopolies and
Restrictive Trade Practices Act, 1969 and Customs Tariff Act, 1975
concluded that the said two Acts substantially operate in different
fields and, therefore, the provisions of Section 9-A of Customs Tariff
Act cannot be implied to repeal the provisions of Section 33(1)(j) of
the MRTP Act, 1969. Since the main issue involved in the matter before
us is different from the case of Haridas Exports (supra), the said
case is of no assistance to the appellant company.
47. We are also not able to accept the submission of the learned senior
counsel for the appellant and the intervenors in support of the
appellant that the non-obstante clause in Section 45QA will not have
an overriding effect over the provisions contained in the Companies
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 innumerable families was the
underlying impetus to bring the NBFCs under strict control. Therefore,
we have no hesitation in concluding that Chapter IIIB of the RBI Act
is a complete code in itself. The Companies Act is a prior enactment
as the same was enacted in the year 1956, whereas, Chapter IIIB was
inserted in the RBI Act (55 of 1963) w.e.f. 1964. Section 45QA was
inserted by the Act No. 23 of 1997 w.e.f. 9th January, 1997. Thus,
provisions of the RBI Act would prevail over the Companies Act, it
being a later enactment. It is a settled proposition of law that a
later enactment will override the earlier enactment. We may usefully
make a reference here to the relevant paragraphs of Tata Motors
Limited (supra),which are as under:-
“21. It was conceded by Mr Sundaram SICA being a special law vis-à-vis the
1956 Act, it shall prevail over the latter. The learned counsel, however,
qualifies his submission by contending that SICA only excludes the
provisions of the Companies Act when they are inconsistent with each other.
22. The provisions of a special Act will override the provisions of a
general Act. The latter of it (sic Act) will override an earlier Act. The
1956 Act is a general Act. It consolidates and restates the law relating to
companies and certain other associations. It is prior in point of time to
SICA.
23. Wherever any inconstancy (sic inconsistency) is seen in the provisions
of the two Acts, SICA would prevail. SICA furthermore is a complete code.
It contains a non obstante clause in Section 32.
24. SICA is a special statute. It is a self-contained code. The
jurisdiction of the Company Judge in a case where reference had been made
to BIFR would be subject to the provisions of SICA.”
48. In our 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 RBI Act.
49. We may 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 that “a non-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 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 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.
51. The Companies Act as well as the RBI Act are Central Acts. Chapter
IIIB, which was inserted by Act No. 55 of 1963 w.e.f. 1st December,
1964 being a later enactment clearly has to prevail. We are unable to
agree with the submissions of the learned counsel for the appellant
that if such an interpretation is given to Section 45QA, it would
render Sections 391-394 nugatory.
52. Faced with this situation, Mr. Shyam Divan learned counsel for the
appellant had submitted that in fact there is no inconsistency between
Section 45QA of the RBI Act and Sections 391-394 of the Companies Act.
It is submitted that scheme of arrangements under Sections 391 to 394
is a form of novation of a contract. Under the Contract Act, each
individual party is entitled to vary the terms and conditions of the
Contract. Therefore, debenture holders accepting cash payment of
lesser face value or exchanging debentures for shares would only be
continuance of a practice which has been vogue since late 1800s. He
makes this submission relying on Charlesworth’s Company Law 18th Ed.
771-72, which are as follows:
“The word “arrangement” has a very wide meaning, and is wider than the word
“compromise”. An arrangement may involve debenture holders giving an
extension of time for payment accepting a cash payment less than the face
value of their debentures, giving up their security in whole or in part,
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 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 a scheme. The
observations relied upon are as follows:-
“28. ……………………….The principle is that a scheme sanctioned by the court does
not operate as a mere agreement between the parties: it becomes binding on
the Company, the creditors and the shareholders and the statutory force,
and therefore, the joint-debtor could not invoke the principle of accord
and satisfaction. By virtue of the provisions of Section 391 of the Act, a
scheme is statutorily binding even on creditors and shareholders who
dismanted from or opposed to its being sanctioned. It has statutory force
in that sense and therefore cannot be altered except with the sanction of
the Court even if the shareholders and the creditors acquiesce in such
alteration, (cf. Premila Devi v. Peoples Bank). The effect of the scheme is
“to supply by recourse to the procedure thereby prescribed the absence of
that individual agreement by every member of the class to be bound by the
scheme which would otherwise be necessary to give it validity”. (Palmer's
Company Law, 20th Edn. 664) Sub-Section (2) of Section 391 of the Act
allows the decision of the majority prescribed therein to bind the minority
of creditors and shareholders and it is for that reason that a scheme is
said to have statutory operation cannot be varied by the shareholders or
the creditors unless such variation is sanctioned by the court.”
54. We are unable to accept the aforesaid submission. The aforesaid
observations reiterate the settled position of law that a scheme duly
sanctioned after fulfilling all the legal formalities would be binding
on all the shareholders. In the present case, the scheme is in the
teeth of Section 45Q and it has rightly not been approved by the High
Court. This apart, 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 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 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.
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.
…..…….…………………J.
[Surinder Singh Nijjar]
…..……………………….J.
[Pinaki Chandra
Ghose]
New Delhi;
July 16, 2013.
-----------------------
[1] (1969) 2 SCR 866, AIR 1970 SC 1041
[2] (2005) 10 SCC 682
[3] (2002) 6 SCC 600
[4] (2006) 10 SCC 452
[5] AIR 1952 SC 369
[6] (1971) 1 SCC 85
[7] AIR 1969 SC 78
[8] (2012) 3 SCC 255
[9] (1992) 1 SCC 335
[10] (1998) 4 SCC 231
[11] 111(2004) DLT 554
[12] 1995 Supp (1) SCC 499
[13] (2004)121CompCas861(Delhi)
[14] (2008) 7 SCC 619
[15] (1997) 1 SCC 579
-----------------------
52
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.5505-5508 OF 2013
[Arising out of SLP (C) NO.12737-12740 OF 2008]
M/s. Integrated Finance Co. Ltd. ...Appellant
VERSUS
Reserve Bank of India Etc. Etc. ...Respondents
J U D G M E N T
SURINDER SINGH NIJJAR,J.
1. Leave granted.
2. I.A. filed by Mr. B. Ramanna Kumar for substitution in place of Late
Mr. N. Mani is allowed.
3. These appeals, arising out of S.L.P. (Civil) Nos. 12737-12740 of 2008,
are directed against the common order and judgment dated 30th April
2008 passed by the Division Bench of the High Court of Judicature at
Madras.
Vide the aforesaid order, the order/judgment of the learned
single judge dated 19th August 2006 passed in Company Petition No. 160
of 2005 was set aside.
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.
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 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 “1934 Act”), 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
1934 Act:
i) On 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.
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:
“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 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
same.”
x x x
“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 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 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.”
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 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 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.
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 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.”
15. 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.
Submissions:
16. We have heard the learned counsel on behalf of the parties.
17. Mr. Arvind P. Datar, learned senior counsel, appeared for the
appellant company and assailed the validity of the impugned order. Mr.
Iqbal Chagla, learned senior counsel, appeared for intervenors in I.A.
Nos. 29-32 of 2009 in S.L.P. (C) Nos. 12737-12740 of 2008. Mr. Shyam
Divan, learned senior counsel, appeared for the intervenors in I.A.
Nos. 33-36 of 2009 in the aforesaid proceedings. Whereas Mr. Parag P.
Tripathi, learned senior counsel, appeared for the Respondent/RBI and
Mr. V. Parkash, learned senior counsel appeared for respondent
no.1/Integrated Finance Depositors Association in S.L.P.(C) No. 12738
of 2008.
18. Mr. Datar, learned senior counsel, submitted that the scheme of
compromise of the appellant company has been approved by 1708 out of
2177 (79%) deposit holders and 5628 out of 7143 bond holders (77.73%),
present and voting; which shows that it was approved by an enormous
majority.
According to him, the appellant company has complied with
all the statutory requirements relating to the said scheme. This, he
submits, is evident from the fact that neither the Single Judge nor
the Division Bench of the High Court found any procedural irregularity
in the arrangement of the said scheme.
Thus according to Mr. Datar,
the only issues that now require consideration are:
i) “Whether the non-obstante clause in Section 45Q of the RBI
Act, 1934 prohibits the High Court from sanctioning any
scheme for the deposit holders 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
`
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. New Kaiser-i-hind Spinning and Weaving Co.
Ltd. & Ors. Etc.[1] and Administrator of the Specified Undertaking of
the Unit Trust of India & Anr. Vs. Garware Polyester Ltd.[2] Mr.
Shyam Divan,
while explaining the scope of Sections 391-394 of the
Companies Act, has drawn our attention to the principle of novation,
which allows the parties to a contract to rework or re-agree the terms
of the contract.
He submits that this principle is recognised in
Section 62 of the Contract Act, 1872.
Further, Code of Civil
Procedure, 1908 allows compromise during the pendency of the
proceedings, (See Order 23, CPC); and also by adjustment of a decree
(Order 21 Rule 2, CPC).
Relying on the provisions contained in Section
22 of the Sick Industrial Companies Act, 1982 and Section 402 of the
Companies Act, Mr. Divan has submitted that Chapter V of the Companies
Act provides another statutory method of varying contracts.
The
Chapter V allows even solemn contractual obligations to be varied by a
particular class of similarly placed members/creditors, provided there
is requisite majority.
The learned senior counsel argued that a Scheme
under Sections 391-394 of the Companies Act is not merely a commercial
agreement, but it is statutorily binding on all members and creditors
of a company.
21. Mr. Datar, Mr. Chagla and Mr. Divan have unanimously submitted that
Section 45QA of the RBI Act is not a bar to Scheme under Sections 391-
394 of Companies Act.
The learned senior counsel advanced the
following reasons for substantiating the said submission:
First, the RBI Act and the Companies Act must be read in their own spheres
since both operate in different fields, altogether.
Second, Section 45QA of
RBI Act and Sections 391-394 of the Companies Act can be read harmoniously
and there is no inconsistency between the said provisions.
Third, the
legislature did not intend to exclude the application of Sections 391-394
of the Companies Act in relation to the NBFCs.
22. Elaborating these propositions, it was submitted that the RBI Act and
the Companies Act operate in distinct and different fields,
altogether.
Mr. Chagla argued that the RBI Act is regulatory in nature
and is enacted to regulate the operation of the Banking Companies and
NBFCs.
The RBI Act is merely supplementary to the Companies Act and
does not supplant it.
To support the said 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.[3] 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.[4]
In this context, Mr. Chagla relied upon the judgments
of this court reported in Aswini Kumar Ghose & Anr. Vs. Arabinda Ghose
& Anr.[5] and Madhav Rao Jivaji Rao Scindia Vs. Union of India &
Anr.[6]
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 company are concerned, like the provisions relating to
schemes and arrangements of the company.
Thus, it was submitted that
RBI Act has no application in matters covered by the Sections 391-394
of the Companies Act and therefore, Section 45QA of the RBI Act is not
a bar to scheme under Sections 391-394 of Companies Act.
24. Secondly, it was submitted that
since there is no inconsistency
between Section 45QA of the RBI Act and Sections 391-394 of the
Companies Act, it will not be applicable in the present case because
of the non-obstante clause contained in Part IIIB of the RBI Act.
Mr.
Divan has submitted that the ambit of Sections 391-394 of Companies
Act is very wide.
In fact, arrangements with debenture holders
involving (i) extension of time of payment; (ii) accepting
cash payment of lesser face value; and (iii) exchanging debentures for
shares have been accepted since the late 1800’s (See Charlesworth’s
Company Law, 18th Edition, Pg. 772).
On the other hand, Chapter IIIB
of the RBI Act contains whole set of detailed provisions pertaining to
regulation of NBFCs.
Mr. Chagla added that the object of the 1997
amendment to the RBI Act which added section 45Q indicates that a
remedy was to be granted to deposit holders for approaching the
Company Law Board for repayment of deposits held by a NBFC when the
same are not repaid in accordance with the terms and conditions of the
deposit.
However, the jurisdiction of the Company Law Board is not
exclusive and the jurisdiction of a civil court or, for that matter,
of a company court is not ousted. Reliance was placed upon the law
laid down in Dhulabhai Etc. Vs. State of Madhya Pradesh & Anr.[7]
25. Further, learned senior counsel relied heavily on the principles laid
down by this court in relation to
the interpretation of a non-obstante
clause to argue that the Section 45QA is neither applicable in the
facts and circumstances of the case nor is it a bar to a Scheme under
Sections 391-394 of the Companies Act.
Mr. Datar relied upon the case
of JIK Industries Limited & Ors. Vs. Amarlal V. Jumani & Anr,[8]
wherein it was held that “under the scheme of the modern legislation,
non-obstante clause has a contextual and limited application.”
Reliance was also placed upon the case of R.S. Raghunath Vs. State of
Karnataka & Anr.[9]
wherein it was held that “there should be a clear
inconsistency between the two enactments before giving an overriding
effect to the non-obstante 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.[10]
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 of NBFCs in general and to prohibit multiple partnership
firms from taking deposits from the general public, in particular; it
cannot be interpreted in the manner so as to exclude the application
of Sections 391-394 of the Companies Act. According to
Mr. Chagla, Section 45QA simply states in general terms that
every loan shall be repaid in accordance with the terms and conditions
of such loan.
This provision does not prohibit a depositor from
agreeing to accept the full amount of principal without interest or an
amount less than the full amount of principal or to accept in kind
rather than in cash.
In other words, novation of the contract entered
into between the company and the depositor is not prohibited.
27. Further, it was submitted that the provision of Section 45QA is pari
materia if not identical with Section 58A of the Companies Act.
Schemes under Section 391 of the Companies Act are presented and
approved by the Company Court in respect of deposits under Section 58A
of the Companies Act.
Premising on the aforesaid submission, Mr. Datar
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. This submission has also been reiterated and
elaborated by Mr. Chagla.
28. It was further submitted that wherever the applicability of Section
391 of the Companies Act was excluded by the legislature, it was done
so expressly.
To illustrate, Learned Senior counsel relied upon
Section 38 of the Banking Regulation Act, 1949 which provides that
Section 391 of the companies Act will not be applicable in winding up
of a banking company by High Court. It was further submitted that the
legislative intent cannot be interpreted in the manner which will
discriminate against the depositors of NBFCs as against the depositors
of public limited companies and depositors of banking companies.
Section 391 of the Companies Act can be availed of in case a NBFC is
going into liquidation but if the interpretation given in the impugned
order is accepted, the same provision would not be available for
revival of the same company. This, it was argued, would lead to an
anomalous situation.
In the light of the aforesaid, it was
collectively argued by the learned senior counsel that the non-
obstante clause in Section 45Q of the RBI Act, 1934 does not prohibit
the High Court from sanctioning 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 non-disclosure 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.[11]
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 scheme and not to
the creditors or the shareholders with whom the scheme is entered
into.
The counsel relied upon Hindustan Lever Employees’ Union Vs.
Hindustan Lever Ltd. & Ors.[12] and In re: HCL Infosystems Limited,
HCL Infinet Limited and HCL Technologies Limited.[13]
31. Mr. Chagla was at pains to emphasise that Section 391(2) of the
Companies Act requires a company to disclose to the Court all material
facts relating to the company “such as the latest financial position
of the company, the latest Auditor’s Report on the accounts of the
company, the pendency of any investigation proceedings in relation to
the company under the Sections 235 to 251, and the like” (emphasis
supplied by the learned senior counsel).
He argued that the order of
the RBI dated 18th January, 2005 is not akin to the provisions of
Sections 235 to 251 of the Companies Act.
Thus, it was argued that the
Division Bench erroneously held that the appellant company should have
disclosed the letter/order issued by the RBI before the creditors.
Respondents’ Submissions
32. Mr. Tirpathi, learned senior counsel, appearing for the RBI submits
that the Division Bench of the High Court has correctly interpreted
the provisions of Chapter IIIB of the RBI Act.
He emphasised that an
amendment was required to strengthen the regulatory mechanism in
relation to the NBFCs.
The said Chapter IIIB has evolved an elaborate
scheme of regulations, enabling the RBI even to seek winding up of a
NBFC in appropriate circumstances.
Section 45Q of the RBI Act
provides that Chapter IIIB thereof shall override any other law
inconsistent therewith.
Section 45QA gives a statutory right which
cannot be waived by anyone.
Under this provision, every deposit
accepted by NBFC has to be renewed and repaid in accordance with the
terms and conditions of such deposit.
No subsequent
agreement can permit the conditions to be waived of or varied.
Section 45QA(2) enables NBFCs to seek extension in time for repayment
before the Company Law Board.
There is no other provision in Chapter
IIIB which can dilute the effect of Section 45QA.
The High Court,
according to Mr. Tirpathi, has rightly held that the scheme in
question of the appellant company is not in compliance with Chapter
IIIB and, therefore, cannot be approved.
33. Countering the submissions of the appellants with regard to 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.[14]
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.
The
learned senior counsel further submitted that the scheme of
arrangement presented before the Company Law Board was not bonafide;
it failed to disclose various directions issued by the RBI restricting
the functioning of the appellant as a NBFC.
The High Court has
correctly held that the scheme proposed by the appellant is not
bonafide and is in fact contrary to public policy.
35. We have considered the submissions made by the learned counsel for the
parties. We may here briefly notice the conclusions that have been
arrived by the High Court:
Findings of the High Court
36. Whilst examining the scope of Sections 391 to 393 of the Companies
Act,
the High Court relied on the analysis of the aforesaid sections
as rendered by this Court in the case of Miheer H. Mafatlal Vs.
Mafatlal Industries Ltd.[15]
The analysis given in the aforesaid
judgment are as under:-
“28-A. 1. The sanctioning court has to see to it that all the requisite
statutory procedure for supporting such a scheme has been complied with and
that the requisite meetings as contemplated by Section 391(1)(a) have been
held.
2. That the scheme 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 the 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 meetings concerned as contemplated by Section 391
sub-section (1).
5. That all the requisite material contemplated by the proviso of sub-
section (2) of Section 391 of the Act is placed before the Court by the
applicant concerned 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 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 jurisdiction over the scheme rather than its
supervisory jurisdiction.”
37. 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 that “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.”
The High Court rejected the
submission of some of the deposit holders that meetings for approving
the scheme should have been held within the State of Kerala.
38. Upon examination of the question as to
whether the company should have
disclosed the aspects arising out of the order dated 18th January,
2005 to enable the depositors and the bond holders to take an informed
decision.
The High Court has concluded that the company is guilty of
such non-disclosure.
39. On the 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 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 violations of the RBI Act, 1934,
committed by the company which we have noticed in the earlier part of
the judgment. It is also accepted that on 18th January, 2005, RBI in
exercise of its powers under Section 45MB(1) of the RBI Act, 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.” The appellant company was also directed not to sell,
transfer, create charge of mortgage or deal in any manner with its
properties, assets, without prior permission of the RBI. It is also
accepted that the aforesaid notice was advertised in the Indian
Express on 20th January, 2005. The Notice highlights the purpose of
the notice as “Integrated Finance Company Limited, Chennai prohibition
for accepting of deposits and alienation of assets”. The appellant
claimed that NBFC started facing problems in running its operations as
a direct consequence of the restrictions and the publicity generated
by the notice dated 18th/20th January, 2005. Since the company was
facing severe problems in running its operations because of the drop
in its profitability, it proposed a scheme of compromise with its
creditors, viz. the depositors and bond holders. This scheme was
approved by the Board of Directors of the appellant company on 19th
May, 2005. We have reproduced earlier the salient features of the
scheme, which was presented to the Company Court under Section 391 of
the Companies Act in the High Court of Madras.
Our Conclusions:
42. The primary issue that arises before us is as to whether such a scheme
of arrangements could have been presented in view of the provisions
contained in Chapter IIIB of the RBI Act. Even if it could be
presented, could it be sanctioned without complying with the
provisions contained in Section 45QA of the RBI Act? The learned
counsel for the appellant submitted that the High Court has in terms
concluded that the scheme cannot be characterised “as so outrageously
improper as to invite the wrath of the Court.” The High Court also
rightly concluded that the Company Court is not expected to substitute
its own wisdom for that of the stakeholders. The High Court has also
found that all the procedural requirements for sanctioning a scheme
under Sections 391-394 have been complied with. The High Court also
accepts 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 into
agreement. Above all, the Court has to be satisfied that the scheme
is fair and reasonable from the point of view of a prudent man of
business taking commercial decisions, which are beneficial to the
class represented by them. [See Miheer H. Mafatlal (supra)] It is
true that whilst sanctioning the scheme, the Company Court is not
required to act as a Super-Auditor. No doubt whilst considering the
proposal for approval, the Company Judge is not required to examine
the scheme in the way of a carping critic, a hair-splitting expert, a
meticulous accountant or a fastidious Counsel. However at the same
time, the Court is 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. The Court is required
to see that all legal requirements have been complied with. At the
same time, the Court has to ensure that the scheme of arrangement is
not a camouflage for a purpose other than the ostensible reasons. [See
Administrator of the Specified Undertaking of the Unit Trust of India
(supra), Para 32]. If any of the aforesaid requirements appear to be
found wanting in the scheme, the Court can pierce the veil of apparent
corporate purpose underlying the scheme and can judiciously X-ray the
same. (See Miheer H. Mafatlal (supra)]
44. In view 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 the parties.
45. Chapter IIIB of the RBI has been incorporated through RBI (Amendment)
Ordinance 1997, subsequently replaced by the RBI (Amendment) Act,
1997. The Statement of Objects and Reasons make it abundantly clear
that before the amendment, the unincorporated bodies circumvented the
statutory restrictions by floating different 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 directing the defaulter NBFCs to make
repayment for the deposit interest with a view to protect the interest
of depositors. The NBFCs have been totally prohibited from accepting
deposits for the purpose other than for personal use, if
unincorporated. They have been permitted to continue to take deposit
after incorporating themselves within the regulatory framework. The
unincorporated bodies have also been specifically prohibited for
issuing any advertisements in any form. The real intent is set out in
Paragraph 6, which is as under:-
“6. There are reports of several finance companies and incorporated bodies
having failed to repay the deposits collected from unsuspecting depositors
who have been tempted by the attractive returns and incentives offered.
Concern has been expressed in several quarters on the need to take urgent
steps to regulate the activities of such companies and unincorporated
bodies.”
46. Keeping in view the aforesaid objects and reasons, it becomes evident
that Chapter IIIB of the RBI Act is a self contained code. It is not
possible for us to accept the submissions of the learned counsel for
the appellants that the RBI Act and the Companies Act operate in
distinct and different fields. We are unable to accept the submission
of the learned counsel for the appellants that the provision contained
in the RBI Act being regulatory in nature will not apply to cases of
schemes submitted for approval under the Companies Act. We may also
notice here that the learned senior counsel for the appellant relied
on Haridas Exports (supra) in this context. In the aforesaid case,
this Court upon a comprehensive analysis of the Monopolies and
Restrictive Trade Practices Act, 1969 and Customs Tariff Act, 1975
concluded that the said two Acts substantially operate in different
fields and, therefore, the provisions of Section 9-A of Customs Tariff
Act cannot be implied to repeal the provisions of Section 33(1)(j) of
the MRTP Act, 1969. Since the main issue involved in the matter before
us is different from the case of Haridas Exports (supra), the said
case is of no assistance to the appellant company.
47. We are also not able to accept the submission of the learned senior
counsel for the appellant and the intervenors in support of the
appellant that the non-obstante clause in Section 45QA will not have
an overriding effect over the provisions contained in the Companies
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 innumerable families was the
underlying impetus to bring the NBFCs under strict control. Therefore,
we have no hesitation in concluding that Chapter IIIB of the RBI Act
is a complete code in itself. The Companies Act is a prior enactment
as the same was enacted in the year 1956, whereas, Chapter IIIB was
inserted in the RBI Act (55 of 1963) w.e.f. 1964. Section 45QA was
inserted by the Act No. 23 of 1997 w.e.f. 9th January, 1997. Thus,
provisions of the RBI Act would prevail over the Companies Act, it
being a later enactment. It is a settled proposition of law that a
later enactment will override the earlier enactment. We may usefully
make a reference here to the relevant paragraphs of Tata Motors
Limited (supra),which are as under:-
“21. It was conceded by Mr Sundaram SICA being a special law vis-à-vis the
1956 Act, it shall prevail over the latter. The learned counsel, however,
qualifies his submission by contending that SICA only excludes the
provisions of the Companies Act when they are inconsistent with each other.
22. The provisions of a special Act will override the provisions of a
general Act. The latter of it (sic Act) will override an earlier Act. The
1956 Act is a general Act. It consolidates and restates the law relating to
companies and certain other associations. It is prior in point of time to
SICA.
23. Wherever any inconstancy (sic inconsistency) is seen in the provisions
of the two Acts, SICA would prevail. SICA furthermore is a complete code.
It contains a non obstante clause in Section 32.
24. SICA is a special statute. It is a self-contained code. The
jurisdiction of the Company Judge in a case where reference had been made
to BIFR would be subject to the provisions of SICA.”
48. In our 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 RBI Act.
49. We may 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 that “a non-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 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 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.
51. The Companies Act as well as the RBI Act are Central Acts. Chapter
IIIB, which was inserted by Act No. 55 of 1963 w.e.f. 1st December,
1964 being a later enactment clearly has to prevail. We are unable to
agree with the submissions of the learned counsel for the appellant
that if such an interpretation is given to Section 45QA, it would
render Sections 391-394 nugatory.
52. Faced with this situation, Mr. Shyam Divan learned counsel for the
appellant had submitted that in fact there is no inconsistency between
Section 45QA of the RBI Act and Sections 391-394 of the Companies Act.
It is submitted that scheme of arrangements under Sections 391 to 394
is a form of novation of a contract. Under the Contract Act, each
individual party is entitled to vary the terms and conditions of the
Contract. Therefore, debenture holders accepting cash payment of
lesser face value or exchanging debentures for shares would only be
continuance of a practice which has been vogue since late 1800s. He
makes this submission relying on Charlesworth’s Company Law 18th Ed.
771-72, which are as follows:
“The word “arrangement” has a very wide meaning, and is wider than the word
“compromise”. An arrangement may involve debenture holders giving an
extension of time for payment accepting a cash payment less than the face
value of their debentures, giving up their security in whole or in part,
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 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 a scheme. The
observations relied upon are as follows:-
“28. ……………………….The principle is that a scheme sanctioned by the court does
not operate as a mere agreement between the parties: it becomes binding on
the Company, the creditors and the shareholders and the statutory force,
and therefore, the joint-debtor could not invoke the principle of accord
and satisfaction. By virtue of the provisions of Section 391 of the Act, a
scheme is statutorily binding even on creditors and shareholders who
dismanted from or opposed to its being sanctioned. It has statutory force
in that sense and therefore cannot be altered except with the sanction of
the Court even if the shareholders and the creditors acquiesce in such
alteration, (cf. Premila Devi v. Peoples Bank). The effect of the scheme is
“to supply by recourse to the procedure thereby prescribed the absence of
that individual agreement by every member of the class to be bound by the
scheme which would otherwise be necessary to give it validity”. (Palmer's
Company Law, 20th Edn. 664) Sub-Section (2) of Section 391 of the Act
allows the decision of the majority prescribed therein to bind the minority
of creditors and shareholders and it is for that reason that a scheme is
said to have statutory operation cannot be varied by the shareholders or
the creditors unless such variation is sanctioned by the court.”
54. We are unable to accept the aforesaid submission. The aforesaid
observations reiterate the settled position of law that a scheme duly
sanctioned after fulfilling all the legal formalities would be binding
on all the shareholders. In the present case, the scheme is in the
teeth of Section 45Q and it has rightly not been approved by the High
Court. This apart, 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 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 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.
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.
…..…….…………………J.
[Surinder Singh Nijjar]
…..……………………….J.
[Pinaki Chandra
Ghose]
New Delhi;
July 16, 2013.
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[1] (1969) 2 SCR 866, AIR 1970 SC 1041
[2] (2005) 10 SCC 682
[3] (2002) 6 SCC 600
[4] (2006) 10 SCC 452
[5] AIR 1952 SC 369
[6] (1971) 1 SCC 85
[7] AIR 1969 SC 78
[8] (2012) 3 SCC 255
[9] (1992) 1 SCC 335
[10] (1998) 4 SCC 231
[11] 111(2004) DLT 554
[12] 1995 Supp (1) SCC 499
[13] (2004)121CompCas861(Delhi)
[14] (2008) 7 SCC 619
[15] (1997) 1 SCC 579
-----------------------
52
