Material non-disclosure and conflict with mandatory deposit-repayment law barred sanction of the company's scheme.

A scheme of compromise or arrangement under the Companies Act, 1956 requires full and fair disclosure of all material facts, and non-disclosure of the Reserve Bank of India's action and directions concerning the company amounted to suppression of relevant facts, vitiating the approval process. The scheme also could not be sanctioned because its terms would have diluted the mandatory repayment regime under Chapter III-B of the Reserve Bank of India Act, 1934, which has overriding effect and protects depositors. A section 391 scheme cannot be used to circumvent a special statutory repayment obligation or render its enforcement provisions ineffective. The sanction order was therefore unsustainable.

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Issues: (i) Whether non-disclosure of the Reserve Bank of India's action and directions concerning the company vitiated the requirement of fair disclosure for sanction of the scheme under the Companies Act, 1956; (ii) Whether a scheme of arrangement under section 391 of the Companies Act, 1956 could be sanctioned when its effect was to dilute or defeat the mandatory repayment regime under Chapter III-B of the Reserve Bank of India Act, 1934.

Issue (i): Whether non-disclosure of the Reserve Bank of India's action and directions concerning the company vitiated the requirement of fair disclosure for sanction of the scheme under the Companies Act, 1956.

Analysis: A company seeking sanction of a compromise or arrangement must act fairly and transparently and place before the stakeholders all relevant facts necessary for an informed decision. Although there was no pending investigation strictly under sections 235 to 251 of the Companies Act, 1956, the action initiated by the Reserve Bank of India under section 45MB of the Reserve Bank of India Act, 1934 and the directions contained in the letter dated 18 January 2005 were material facts affecting the financial position and regulatory status of the company. Such matters ought to have been disclosed along with the scheme materials.

Conclusion: The non-disclosure amounted to suppression of relevant facts and vitiated the procedural safeguards for approval of the scheme, against the company.

Issue (ii): Whether a scheme of arrangement under section 391 of the Companies Act, 1956 could be sanctioned when its effect was to dilute or defeat the mandatory repayment regime under Chapter III-B of the Reserve Bank of India Act, 1934.

Analysis: Chapter III-B of the Reserve Bank of India Act, 1934 was held to have overriding effect by reason of section 45Q, and section 45QA mandated repayment of deposits in accordance with the terms of the deposit, with enforcement powers vested in the Company Law Board under section 45QA(2). A compromise that converted the statutory repayment obligation into convertible debentures and equity would make the protective regime under section 45QA and the penal consequence under section 58B(4AAA) nugatory. A scheme under section 391 must conform to mandatory statutory provisions and cannot be used to circumvent a special protective legislation.

Conclusion: The scheme was contrary to the Reserve Bank of India Act, 1934 and could not be sanctioned, against the company.

Final Conclusion: The appellate court held that the scheme suffered from material non-disclosure and substantive illegality, and therefore the order sanctioning the scheme could not stand.

Ratio Decidendi: A compromise or arrangement under section 391 of the Companies Act, 1956 cannot be sanctioned if it is founded on material non-disclosure or if its terms conflict with a mandatory statutory regime having overriding effect, particularly where the scheme would nullify the protections conferred on depositors by special legislation.

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