2013 (7) TMI 569 - SC - Companies Law

Supreme Court affirms High Court ruling on non-compliant scheme under RBI Act

M/s. Integrated Finance Co. Ltd. Versus Reserve Bank of India Etc. Etc.

The Supreme Court upheld the High Court's decision, ruling that the scheme proposed by the appellant was non-compliant with Section 45QA of the RBI Act ... Whether nondisclosure 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 – Held that:- The Company Court was not expected to substitute its own wisdom for that of the stakeholders - all the procedural requirements for sanctioning a scheme under Sections 391-394 have been complied with - 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 - Held that:- The scheme proposed by the appellant is not bonafide and is in fact contrary to public policy - 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 had correctly held that Whilst examining the scope of Sections 391 to 393 – court relied upon Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. (1996 (9) TMI 488 - SUPREME COURT OF INDIA). Piercing of corporate veil - Held that:- The Court was 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 - Court has to ensure that the scheme of arrangement was not a camouflage for a purpose other than the ostensible reasons U/s 391 whilst approving the scheme the Company Court does not act as a rubber stamp - the Companies Act had to be satisfied that the concerned meetings of the creditors have been duly held - in the concerned meetings the creditors or members of any class had been provided with relevant material to enable them to take an informed decision as to whether the scheme is just and fair – Court had to be satisfied that the scheme was fair and reasonable from the point of view of a prudent man of business taking commercial decisions which were beneficial to the class represented by them - 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. 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 -a later enactment will override the earlier enactment - Chapter IIIB of the RBI Act is a complete code in itself - The Companies Act is a prior enactment whereas Chapter IIIB was inserted in the RBI Act later on - provisions of the RBI Act would prevail over the Companies Act, it being a later enactment – section 45Q was incorporated with a clear intention to ensure that in a case of NBFC a scheme u/s 391 cannot be entertained unless it was in conformity with the provisions of Section 45QA - the scheme was in the teeth of Section 45Q and it had rightly not been approved by the High Court - 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) – appeal decided against petitioner. Issues Involved:1. 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 a Non-Banking Finance Company (NBFC).2. Whether the petitioner 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.Issue-wise Detailed Analysis:1. Non-Obstante Clause in Section 45Q of the RBI Act:The primary issue was whether Section 45QA of the RBI Act bars the sanctioning of a scheme under Sections 391-394 of the Companies Act for NBFCs. The court held that Chapter IIIB of the RBI Act, which includes Section 45QA, is a complete code and has an overriding effect over the Companies Act due to the non-obstante clause in Section 45Q. This clause ensures that the provisions of Chapter IIIB prevail over any other law, including the Companies Act. The court concluded that the scheme proposed by the appellant, which sought to convert deposits into secured convertible debentures, was contrary to the mandatory requirement under Section 45QA(1) that 'every deposit accepted by a NBFC, unless renewed, shall be repaid in accordance with the terms and conditions of such deposit.' The court emphasized that the RBI Act and the Companies Act operate in distinct fields, and the former's regulatory provisions must be adhered to, especially when it comes to protecting the interests of depositors. Therefore, the scheme could not be sanctioned as it did not comply with Section 45QA of the RBI Act.2. Non-Disclosure of RBI Letter:The second issue was whether the non-disclosure of the RBI letter dated 18th January, 2005 violated Sections 391(2) and 393 of the Companies Act. The court found that the appellant failed to disclose material facts, including the RBI's prohibitory order, which was crucial for the creditors and shareholders to make an informed decision. The court noted that the notice from the RBI, which prohibited the company from accepting further deposits and required prior permission for dealing with its properties, was a critical piece of information that should have been disclosed. The non-disclosure of such material facts reflected a lack of bonafides on the part of the company in proposing the scheme. The court held that the Company Court is not a rubber stamp and must ensure that all relevant information is disclosed to assess the fairness and reasonableness of the proposed scheme. Consequently, the non-disclosure amounted to a violation of Sections 391(1) and 393(1) of the Companies Act, justifying the High Court's decision to set aside the scheme.Conclusion:The Supreme Court upheld the High Court's decision, concluding that the scheme proposed by the appellant was not in compliance with the mandatory provisions of Section 45QA of the RBI Act and that the non-disclosure of the RBI's prohibitory order was a material omission that invalidated the scheme. The appeals were dismissed, affirming the High Court's judgment.