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Tuesday, July 23, 2013

Sec.391 of company Act - seeking approval for compromise scheme - rejected = 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.= 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?” 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.= 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.- 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. 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.

                  published in     http://judis.nic.in/supremecourt/imgst.aspx?filename=40566                                   

        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

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