NBFC scheme of arrangement cannot defeat statutory deposit-repayment rules and material regulatory non-disclosure bars sanction.

A scheme of arrangement for a non-banking financial company could not override Chapter IIIB of the Reserve Bank of India Act, 1934, because that chapter operates as a special, self-contained regulatory code with overriding effect. Section 45QA(1) requires deposit liabilities to be repaid in accordance with the deposit terms, so a scheme that converts those liabilities into debentures and equity is inconsistent with the statute and cannot be sanctioned under the Companies Act, 1956. Non-disclosure of the Reserve Bank notice and the underlying regulatory violations was also material, because those facts affected creditor and depositor assessment of the scheme's fairness and bona fides. Sanction was therefore refused.

---

---

Issues: (i) Whether a scheme of arrangement under Section 391 of the Companies Act, 1956 could be sanctioned for a non-banking financial company in the face of the overriding effect of Chapter IIIB of the Reserve Bank of India Act, 1934, particularly Section 45QA(1); (ii) Whether non-disclosure of the Reserve Bank of India notice dated 18 January 2005 and the underlying regulatory violations amounted to material non-disclosure for the purpose of sanction under Section 391(1) read with Section 393(1) of the Companies Act, 1956.

Issue (i): Whether a scheme of arrangement under Section 391 of the Companies Act, 1956 could be sanctioned for a non-banking financial company in the face of the overriding effect of Chapter IIIB of the Reserve Bank of India Act, 1934, particularly Section 45QA(1).

Analysis: Chapter IIIB of the Reserve Bank of India Act, 1934 was enacted as a self-contained regulatory code for non-banking financial companies. Section 45Q gives overriding effect to that Chapter over any inconsistent law. Section 45QA(1) requires deposits accepted by an NBFC to be repaid in accordance with the terms and conditions of the deposit, and the statutory mandate cannot be defeated by a scheme which converts deposit liabilities into convertible debentures and equity. The Court held that the Companies Act, 1956 cannot be used to sanction an arrangement that is inconsistent with the later and special regulatory regime under the Reserve Bank of India Act, 1934.

Conclusion: The scheme could not be sanctioned and the contention that Section 45QA does not bar such a scheme was rejected.

Issue (ii): Whether non-disclosure of the Reserve Bank of India notice dated 18 January 2005 and the underlying regulatory violations amounted to material non-disclosure for the purpose of sanction under Section 391(1) read with Section 393(1) of the Companies Act, 1956.

Analysis: The notice issued by the Reserve Bank of India under Section 45MB(1) followed inspection findings of serious regulatory violations and prohibited acceptance of deposits and dealing with assets without permission. These facts were material to the creditors' and depositors' decision on the proposed scheme. The Court held that the company was bound to disclose the notice and the underlying regulatory action, and that publication in newspapers did not cure the omission. Non-disclosure of such material facts went to the fairness and bona fides of the scheme.

Conclusion: The non-disclosure was material and supported refusal of sanction.

Final Conclusion: The scheme of arrangement was held to be incompatible with the statutory deposit-repayment regime governing NBFCs and was also vitiated by material non-disclosure, so the High Court's refusal to sanction the scheme was upheld.

Ratio Decidendi: A scheme of arrangement for an NBFC cannot be sanctioned if it is inconsistent with the mandatory deposit-repayment provisions of Chapter IIIB of the Reserve Bank of India Act, 1934, and all material regulatory restrictions affecting the company's financial position must be disclosed before sanction is sought.

---