Court-supervised depositor repayment scheme upheld, with creditor proceedings restrained and asset sales allowed only under safeguards.

Protection of small fixed depositors in a distressed non-banking finance company was given priority under the court-supervised repayment scheme, which was accepted with modifications to the distribution formula and phased repayment of smaller depositors. The protective stay on civil and criminal proceedings by secured creditors was maintained because separate enforcement would have frustrated the scheme and depleted the only practical source of repayment. A prima facie contempt case was found for filing proceedings in breach of stay orders, and contempt notice was directed. Sale of the company's office premises was permitted only with safeguards, including deposit of sale proceeds in a separate account for later adjustment.

---

---

Issues: (i) Whether the scheme proposed for repayment of small fixed deposit holders should be approved with modifications; (ii) whether the blanket stay on civil and criminal proceedings initiated by secured creditors should be vacated; (iii) whether contempt action should be initiated for filing proceedings in breach of the court's stay orders; (iv) whether the company's office premises should be permitted to be sold subject to safeguards.

Issue (i): Whether the scheme proposed for repayment of small fixed deposit holders should be approved with modifications.

Analysis: The repayment arrangement was framed to protect small depositors whose funds had been placed with a non-banking finance company. The court treated the protection of depositors as the dominant consideration, noted the earlier regulatory orders favouring repayment out of realizations, and relied on the overriding force of Chapter IIIB of the Reserve Bank of India Act, 1934, particularly section 45Q. The proposed scheme was accepted, but its distribution formula was modified to allocate the available monthly income between operating expenses, repayment of smaller depositors, and a limited payment to secured creditors.

Conclusion: The scheme for repayment of depositors below Rs. 5,000 was approved with modifications, and the next slab of depositors was to be paid after completion of the first slab.

Issue (ii): Whether the blanket stay on civil and criminal proceedings initiated by secured creditors should be vacated.

Analysis: The stay had been granted to preserve the court-framed repayment scheme, which depended on continued realization of lease rentals and other receivables. Permitting secured creditors to pursue separate proceedings and enforce securities would have frustrated the scheme and deprived small depositors of the only practical source of repayment. The court also noted that the secured creditors were not left wholly without protection, since a limited mechanism for their participation and settlement was preserved.

Conclusion: The request to vacate the stay was rejected, and the stay on proceedings was maintained.

Issue (iii): Whether contempt action should be initiated for filing proceedings in breach of the court's stay orders.

Analysis: A criminal complaint had been filed despite existing stay orders and despite notice that a court-supervised repayment scheme was under formulation. The court treated the act as interference with the administration of justice and held that a prima facie case existed for contempt proceedings. Notice was therefore warranted under the Contempt of Courts Act, 1971 and the constitutional contempt jurisdiction of the High Court.

Conclusion: Contempt notice was directed to be issued against the concerned advocate.

Issue (iv): Whether the company's office premises should be permitted to be sold subject to safeguards.

Analysis: The premises had been partly paid for, remained undelivered, and were generating avoidable maintenance and society charges. The court found disposal of the property to be reasonable, but since it constituted security for secured creditors, the sale proceeds were required to be kept in a separate account and preserved for future adjustment under further court directions.

Conclusion: Sale of the premises was permitted subject to deposit of the proceeds in a separate account and subject to further directions.

Final Conclusion: The court preserved the depositor-repayment scheme, declined to lift the protective stay in favour of secured creditors, issued contempt notice for disobedience of the stay orders, and allowed asset disposal only with safeguards to protect competing claims.

Ratio Decidendi: Where repayment of small depositors in a financially distressed non-banking company is being supervised through a court-framed scheme supported by regulatory orders, the court may maintain restraints on creditor proceedings and regulate asset realizations to prevent frustration of the scheme, while applying the overriding effect of the special statutory framework governing such deposits.

---