2005 (11) TMI 259 - HC - Companies Law

NBFC denied license cannot propose revival scheme; Court emphasizes regulatory compliance for public protection

The court held that a non-banking finance company (NBFC) denied a license by the RBI cannot propose a scheme for revival or arrangement to divert its ... Winding up - Power of Reserve Bank of India to file winding up petition, Compromise and arrangement Issues Involved:1. Whether a non-banking finance company (NBFC) denied a license by the RBI under section 45-IA of the RBI Act can propose a scheme for revival or arrangement to divert its business activity.2. Whether the proposed scheme by the company is feasible enough to be presented to the shareholders and creditors.Detailed Analysis:Issue 1: Whether a non-banking finance company (NBFC) denied a license by the RBI under section 45-IA of the RBI Act can propose a scheme for revival or arrangement to divert its business activity.Legislative History and Intent:The judgment delves into the legislative history and the intent behind the amendments to the RBI Act, particularly the provisions requiring NBFCs to obtain a license from the RBI. The amendments were introduced to curb malpractices by NBFCs and ensure the protection of depositors. The RBI Act was amended to include provisions like compulsory registration of NBFCs, creation of reserve funds, and liquidity requirements to ensure sound and healthy operations.Special Powers of RBI under Section 45MC:Section 45MC of the RBI Act empowers the RBI to file a winding-up petition against an NBFC on specific grounds, including the inability to pay debts, disqualification from carrying on business, prohibition from receiving deposits, and actions detrimental to public interest or depositors. The RBI must be satisfied about the existence of these grounds before filing a petition, following an inquiry and show-cause notice to the company.Court's Interpretation:The court emphasized that the legislative intent was clear that NBFCs violating financial discipline should be wound up. Allowing such companies to propose schemes to divert their business activities would undermine the regulatory regime. The court rejected the interpretation that sections 391 to 394 of the Companies Act automatically apply to winding-up petitions filed under section 45MC of the RBI Act, especially when grounds like disqualification or prohibition from receiving deposits are satisfied.Conclusion on Issue 1:The court concluded that an NBFC denied a license by the RBI cannot propose a scheme for revival or arrangement to divert its business activity. The legislative mandate is to wind up such companies to protect the public interest and depositors.Issue 2: Whether the proposed scheme by the company is feasible enough to be presented to the shareholders and creditors.Proposed Scheme Details:The companies proposed a scheme involving the construction of a group housing project to generate income for paying creditors. The scheme included details of creditors and proposed payments in a phased manner.Feasibility and Workability of the Scheme:The court found several issues with the feasibility and workability of the proposed scheme:- Lack of detailed plans for the housing project.- Insufficient investment and vague strategies for generating funds.- Doubts about the availability of the land for the project.- Incomplete and outdated statement of affairs.- The companies have been defunct for several years, and the proposed scheme postpones repayment for another five years.Court's Role and Duty:The court highlighted its duty to ensure the genuineness, feasibility, and workability of the scheme before allowing it to be presented to shareholders and creditors. The court is not a mere rubber stamp and must be satisfied that the scheme is bona fide and not intended to achieve an oblique purpose.Conclusion on Issue 2:The court concluded that the proposed scheme was neither bona fide nor viable. It lacked completeness and did not address all aspects required for the revival of the company. Therefore, the scheme was not worthy of consideration.Final Judgment:The petition filed by the company was dismissed with costs quantified at Rs. 50,000, as the court found it misconceived and meritless. The court emphasized the importance of adhering to the legislative intent and regulatory framework to protect the interests of depositors and the public.