TaxTMI 
TaxTMI 
2013 (7) TMI 569
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....ated 10th August, 2005. The said agreement was entered into between the appellant company herein and its class of creditors, namely its deposit holders and bond holders. The learned Single Judge, vide order dated 19th August, 2006, was pleased to sanction the said scheme, albeit with some conditions. This order was challenged in the High Court by way of four original side appeals, which were allowed by the Division Bench vide the order dated 30th April, 2008 which has been challenged in this Court. Summary of Facts: 5. The relevant facts giving rise to filing of the present appeals as narrated by the parties are as under: 6. The appellant herein was incorporated as a Non-Banking Finance Company (hereinafter referred to as a "NBFC") under the Companies Act in 1983, and was engaged inter alia in the business of hire-purchase and leasing. Over the years the appellant company has become one of the leading financial companies. It has 32 branches with over several hundred employees. The shares of the company are listed in two stock exchanges in India. It has 20,000 shareholders. Until 1995- 1996, the appellant company was a profit making company and declared dividends to its sha....
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.... of the Reserve Bank of India Act, 1934 issued a circular to the appellant company, prohibiting it from "accepting deposits from any person, in any form whether by way of fresh deposits or renewal of the existing deposits or otherwise, until further orders." Further, the appellant company was directed not to sell, transfer, create charge or mortgage, or deal in any manner with its properties, assets, without prior permission of the RBI. The said notice was also advertised in the Indian Express dated 20th January, 2005. 10. Thereafter, the appellant company started facing problems in running its operations because of the drop in its profitability. In order to overcome these problems, the appellant company proposed a Scheme of Compromise with its creditors, viz. the depositors and bond holders, which was approved by the Board of Directors of the appellant company on 19th May, 2005. The relevant part of the aforesaid scheme is as under: "4 PAYMENTS TO FIXED DEPSOIT HOLDERS/BOND HOLDERS 4.1 The Company would settle all the deposit holders up to maturity value of Rs.20,000/- as and when it falls due. 4.2 The scheme would provide for the following. (a) Conversion of all th....
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....terest of the Banks being prejudiced or affected. 5. Since this scheme does not envisage cash outflow at the first instance and does seek to convert the depositors and bond over a period of time into shareholders there is no requirement of fresh infusion of cash. 6. IMPLEMENTATION OF SCHEME 6.1 The Scheme if approved by the deposit holders and bond holders with such modifications, as may be assented by the Company, shall be submitted to this Hon'ble Court for confirmation and if confirmed, shall become binding with all deposit holders, bond holders and the Company. 6.2 On completion of the scheme, the Company shall have discharged all the liability to fixed deposit / bond holders. 7. EFFECT OF THE SCHEME 7.1 In view of the above Scheme being offered, all the parties agree that: a) with the terms of the Scheme all liabilities of the Deposit Holders and Bond holders shall be deemed as fully discharged. b) No claims shall be raised by any deposit holders or bond holder to whom this Scheme is offered and c) No claim can be made against any group companies of IFCL their associates or any other person, promoters, directors, past and present, in respect of matte....
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....e said meeting was filed before the learned Single Judge along with the Observer's report. Thereafter, a petition was preferred before the High Court under Section 391(2) of the Companies Act, seeking sanction for the said scheme of compromise. In the aforesaid proceedings, the Integrated Finance Company Depositors Association - an Association representing the depositors of the appellant company and several other depositors-filed their objections and raised several contentions regarding the validity of the said Scheme. The RBI also filed its objections. At the same time, certain other associations, representing the deposit holders, debenture holders also intervened in the aforesaid proceedings and supported the validity of the said scheme. Similarly, an association of the employees of the appellant company also intervened in the support of the Scheme. It is also relevant to note here that the appellant company, during the pendency of the Company Petition No.160 of 2005, filed Company Applications Nos. 1409 & 1410 of 2005, inter alia to restrain the respondent Nos. 1 to 6 in such applications from initiating any proceeding either civil or criminal in nature against the Directors of ....
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....the High Court found any procedural irregularity in the arrangement of the said scheme. Thus according to Mr. Datar, the only issues that now require consideration are: (i) "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 an NBFC? (ii) Whether the petitioner had 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?" 19. According to Mr. Chagla, the crucial issue which arises for the consideration of this court is as to whether Section 391 of the Companies Act does not apply to NBFCs in view of Section 45QA of the RBI Act. He also supplemented the second issue, as framed by Mr. Datar, by submitting that this Court has to determine that; whether non-disclosure of the letter dated 18th January, 2005 violates the provisions of Section 391(2) and/or Section 393 of the Companies Act. These submissions are reiterated by Mr. Shyam Divan, learned senior counsel. 20. Mr. Datar has further submitted that a scheme under Sections 391 to 394 is an exception to the rule that a contr....
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.... RBI Act and the Companies Act operate in distinct and different fields, altogether. Mr. Chagla argued that the RBI Act is regulatory in nature and is enacted to regulate the operation of the Banking Companies and NBFCs. The RBI Act is merely supplementary to the Companies Act and does not supplant it. To support the said submission, Mr. Datar relied upon Bennion, Interpretation of Statues, s. 288 on "Textual Conflicts." Reliance is also placed on Haridas Exports Vs. All India Float Glass Manufacturers' Assn. & Ors. (2002) 6 SCC 600 Mr. Datar further pointed out that the special provisions relating to a scheme under the Companies Act will prevail over a special statue, if the special statute has no provisions to deal with the said matter. He relied upon the principle of law laid down in ICICI Bank Ltd. Vs. SIDCO Leathers Ltd. & Ors. (2006) 10 SCC 452 In this context, Mr. Chagla relied upon the judgments of this court reported in Aswini Kumar Ghose & Anr. Vs. Arabinda Ghose & Anr. AIR 1952 SC 369 and Madhav Rao Jivaji Rao Scindia Vs. Union of India & Anr. (1971) 1 SCC 85 Further, the RBI Act, according to Mr. Chagla, is not a complete code by itself. 23. Mr. Datar also pointed ou....
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....al V. Jumani & Anr, (2012) 3 SCC 255 wherein it was held that "under the scheme of the modern legislation, non-obstante clause has a contextual and limited application." Reliance was also placed upon the case of R.S. Raghunath Vs. State of Karnataka & Anr. (1992) 1 SCC 335 wherein it was held that "there should be a clear inconsistency between the two enactments before giving an overriding effect to the nonobstante clause. But the non-obstante clause need not necessarily and always be co-extensive with the operative part so as to have the effect of cutting down the clear terms of an enactment and if the words of the enactment are clear and are capable of a clear interpretation on a plain and grammatical construction of the words the non-obstante clause cannot cut down the construction and restrict the scope of its operation." It was also submitted that the Court must try to find out the extent to which the legislature had intended to give one provision overriding effect over another. Such intention of the legislature is to be gathered from the enacting part of the section. The counsel relied upon A.G. Vardarajulu & Anr. Vs. State of T.N. & Ors. (1998) 4 SCC 231. 26. It was furth....
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....he same provision would not be available for revival of the same company. This, it was argued, would lead to an anomalous situation. In the light of the aforesaid, it was collectively argued by the learned senior counsel that the non-obstante clause in Section 45Q of the RBI Act, 1934 does not prohibit the High Court from sanctioning any scheme for the deposit holders of an NBFC. Therefore, the Division Bench of the High Court committed a serious jurisdictional error in setting aside the order of the learned Single Judge. 29. The second issue framed by the learned senior counsel for the appellant company and intervenors is that 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 of the Companies Act? Mr. Datar has submitted that the said letter dated 18th January, 2005 was widely advertised by the RBI in various newspapers, including the Indian Express dated 20th January 2005. And, therefore, the contents of this letter were in the public domain. It was also argued that facts that are inconsequential for the approval of the scheme need not be disclosed. The coun....
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.... no other provision in Chapter IIIB which can dilute the effect of Section 45QA. The High Court, according to Mr. Tirpathi, has rightly held that the scheme in question of the appellant company is not in compliance with Chapter IIIB and, therefore, cannot be approved. 33. Countering the submissions of the appellants with regard to the interpretation of non-obstante clause contained in Section 45QA, Mr. Tirpathi submitted that the provisions contained in Chapter IIIB have to prevail over the provisions of the Companies Act. He relies on the judgment of this Court in Tata Motors Limited Vs. Pharmaceutical Products of India Limited & Anr . (2008) 7 SCC 619. 34. Mr. V. Prakash, learned senior counsel, appearing on behalf of the respondent No.1 / Integrated Finance Depositors Association in S.L.P. (C) No. 12738 of 2008, submitted that the provisions contained in Section 45QA(1) of the RBI Act are mandatory and cannot be diluted. Elaborating on the factual circumstances, learned senior counsel submitted that the appellant company lead a very aggressive advertising campaign which was aimed to make the general populace believe that it was supported by leading companies such as MRF Lt....
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.... scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same. 7. That the Company Court has also to satisfy itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. 8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. 9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of pers....
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....e provision contained in Section 45QA which is intended to protect the depositors must have primacy over any other law inconsistent with such provision. It is further held that the scheme of arrangement of compromise even if presented by a NBFC would have to conform to the provisions contained in the Chapter IIIB of the RBI Act. The Division Bench also concluded that not only the scheme is contrary to the specific provisions contained in Chapter IIIB of the RBI Act; it is also against public policy. With these observations the Division Bench had declined to approve the scheme and set aside the order passed by the Company Court. 40. In our opinion, the aforesaid conclusions of the High Court do not require any interference. Even according to the appellant since its incorporation in 1983, the appellant had grown into a gigantic NBFC; it had 20,000 shareholders. Its shares were listed in two Stock Exchanges in India. Till 1995- 1996, it was a profit making company and declared dividends to its shareholders continuously. 41. The RBI issued a series of circulars during 1997-2003 regulating the activities of NBFCs, strict restrictions were placed on the NBFCs for accepting deposits....
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....usly improper as to invite the wrath of the Court." The High Court also rightly concluded that the Company Court is not expected to substitute its own wisdom for that of the stakeholders. The High Court has also found that all the procedural requirements for sanctioning a scheme under Sections 391-394 have been complied with. The High Court also accepts that 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. 43. We are unable to accept the submission of the learned counsel that Section 45QA of the RBI Act is not a bar to a scheme under Sections 391-394 of the Companies Act. Under Section 391 of the Companies Act, whilst approving the scheme, the Company Court does not act as a rubber stamp. The Companies Act has to be satisfied that the concerned meetings of the creditors have been duly held. It has to be satisfied that in the concerned meetings, the creditors or members of any class have been provided with relevant material to enable them to take an informed decision as to whether the scheme is ....
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....senior counsel for the parties. 45. Chapter IIIB of the RBI has been incorporated through RBI (Amendment) Ordinance 1997, subsequently replaced by the RBI (Amendment) Act, 1997. The Statement of Objects and Reasons make it abundantly clear that before the amendment, the unincorporated bodies circumvented the statutory restrictions by floating different partnership firms as and when a firm reached the level of 250 depositors. It was also reiterated that several unincorporated bodies were advertising aggressively through various media, soliciting deposits from public by offering high rates of interest and other incentives. The Amendment Act provides several safeguards for NBFCs so as to ensure their viability. This includes compulsory registration of NBFCs with RBI, stipulation of minimum need in the funds requirements, creation of reserved funds and transfer of certain percentage of profits every year to the fund; and prescription of liquidity requirements. The RBI has also been vested with powers to issue guidelines intended to ensure sound and healthy operations and the quality of assets of these companies. The RBI was also empowered to issue directions to Auditors of NBFCs to ....
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....e of Haridas Exports (supra), the said case is of no assistance to the appellant company. 47. We are also not able to accept the submission of the learned senior counsel for the appellant and the intervenors in support of the appellant that the non-obstante clause in Section 45QA will not have an overriding effect over the provisions contained in the Companies Act in the Sections 391-394. We are also not able to accept the additional submission of Mr. Chagla that if overriding effect is given to Section 45QA, the provisions contained in Section 391 would be rendered nugatory so far as NBFCs are concerned. We are not persuaded to accept the submissions of the learned senior counsel for the appellant that the non-obstante clause contained in Section 45A ought to be given a limited application. Even applying the ratio of the judgments cited by the learned senior counsel, there is no justification for lessening the scope of the applicability of the non-obstante clause in Section 45Q of the RBI Act. It states in categoric terms that provisions of Chapter IIIB shall have effect notwithstanding anything inconsistent therewith contained in any other law. The overriding effect extends no....
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....he provisions of Section 45QA of the RBI Act. 49. We may briefly notice here the judgments relied by the learned counsel for the appellant in support of the submission that the non-obstante clause in Section 45Q of the RBI Act will not have an overriding effect over the Sections 391-394 of the Companies Act. Reliance was placed on Aswini Kumar Ghose (supra); Madhav Rao Jivaji Rao Scindia (supra); A.G. Vardarajulu (supra); ICICI Bank Ltd. (supra); R.S. Raghunath and JIK Industries Limited (supra). The said cases undoubtedly reiterate the settled law on the manner in which a particular non-obstante clause ought to be interpreted. In Aswini Kumar Ghose (supra), this court held that "a nonobstante clause must be construed strictly and the Court must try to find the extent to which the legislature had intended to give one provision overriding effect over another provision." Similar observations were reiterated by this Court in the other cases relied by the appellant. Since it has been already noticed by us that the Parliament clearly intended to give an overriding effect to Chapter IIIB of the RBI Act over Sections 391-394 of the Companies Act, the aforesaid observations will not be ....
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....ission relying on Charlesworth's Company Law 18th Ed. 771-72, which are as follows: "The word "arrangement" has a very wide meaning, and is wider than the word "compromise". An arrangement may involve debenture holders giving an extension of time for payment accepting a cash payment less than the face value of their debentures, giving up their security in whole or in part, exchanging their debentures for shares in the company, or in a new company, or having the rights attached to their debentures varied in some other respect. Creditors may take cash in part payment of their claims and the balance in shares or debentures in the company. Preference shareholders may give up their rights to arrears of dividends, agree to accept a reduced rate of dividend in the future, or have their class rights otherwise varied." In our opinion, these observations would be of no avail to the appellants in view of our conclusions recorded earlier that the present arrangement is not bona fide. 53. We are further of the opinion that there can be no question of novation in the face of the categoric provisions contained in Section 45Q, which has an overriding effect over all other laws, which woul....
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....nctioned after fulfilling all the legal formalities would be binding on all the shareholders. In the present case, the scheme is in the teeth of Section 45Q and it has rightly not been approved by the High Court. This apart, 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) of RBI Act. 55. We are also not inclined to accept the submission of the appellant that Section 45QA of RBI Act is pari materia if not identical with Section 58A of the Companies Act. It was further argued that if a scheme of arrangement is not prohibited under the latter section; it cannot be prohibited under the former, i.e., Section 45QA of the RBI Act. The issue concerning Section 45QA being para materia with Section 58A of the Companies Act does not arise since, in our considered opinion, the provisions of the RBI Act will override the provisions of the Companies Act. Thus, this submission is also rejected. 56. In view of the aforesaid, we reject the submission of the learned counsel for the appellant that the scheme of arrangement could be approved even though there i....
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.... domain. Consequently, the requirements of proviso to Section 391(2) would be deemed to be complied with. Furthermore, according to Mr. Datar, proviso to Section 391(2) only requires disclosure to the Court sanctioning to the scheme and not to the creditors or the shareholders with whom the scheme is made. The disclosure requirement to the shareholders or the creditors is specified under Section 393(1) and is much narrower. Learned senior counsel has placed reliance on the judgement of this Court in Hindustan Lever Employees' Union Vs. Hindustan Lever Ltd. & Ors. (supra) in support of this submission. This case is, however, distinguishable from the present case and circumstances. It was held therein that: "In the facts of this case, considering the overwhelming manner in which the shareholders, the creditors, the debenture holders, the financial institutions, who had 41% shares in TOMCO, have supported the Scheme and have not complained about any lack of notice or lack of understanding of what the Scheme was about, we are of the view, it will not be right to hold that the explanatory statement was not proper or was lacking in material particulars." The preceding excerpt makes....