Reserve Bank of India v. M/s. Integrated Finance Company Ltd.

11. Thomas Mathew12. Mathai Mathews13. Isaac Abraham14. Mammen George15. Ammini Jacob16. K.V.Joseph17. Mathai Mathew18. Joseph A.Thomas19. Mrs.Ammini Jacob20. Mrs. Mary Josey21. Thomas P.A.22. Sally Thomas.. Appellants/Objectors 19 to 24 & 8 to 22vs.M/s. Integrated Finance Company Ltd.,Rep. By its Managing DirectorMr.George Kurivilla,No.112, Thyagaraya Road,T.Nagar, Chennai – 600 017. .. Respondent(Appellants 3 to 7 rep. by theirPower of AttorneyK.K.Thomas @ Vijayan)(Appellants 8 to 22 rep. by theirPower of AttorneyJosey Oommen)O.S.A.No.312 of 2006M/s. Popular Kuries Limited,having its Registered Office atHigh Road,Thrissur – 680 001.Represented by its Authorised Signatory. .. Appellant/objectorvs.M/s. Integrated Finance Company Ltd.,a company incorporated under the Companies Act 1956, and having itsRegistered Office at"Vairams", 112, Thyagaraya Road,T.Nagar, Chennai – 600 017Rep. by Mr.P.B.Appaiah, Director. .. Respondent https://hcservices.ecourts.gov.in/hcservices/ O.S.A.No.91 of 2007Mrs. Elizabeth Antony. .. Appellantvs.M/s. Integrated Finance Company Ltd.,a company incorporated under the Companies Act 1956, and having itsRegistered Office at"Vairams", 112, Thyagaraya Road,T.Nagar, Chennai – 600 017Rep. by Mr.P.B.Appaiah, Director. .. RespondentThese Appeal are filed under Order XXXVI Rule 11 of O.S. Rulesagainst the order of the learned single Judge dated 19.08.2006 passedin C.P.No.160 of 2005.For Appellants : Mr.T.Poornam in O.S.A.No.308 of 2006 Mr.V.Prakash, Senior Counsel for Mr.P.V.Ravichandran in O.S.A.No.309 / 06 Mr.T.Suresh in O.S.A.No.312 of 2006 Mr.K.F.Manavalan in O.S.A.No.91/2007For Respondent: Mr.Arvind P.Datar, Senior Counsel for Mr.P.H.Arvindh Pandian Supporting the Respondent : Mr.K.M.Vijayan, Senior Counsel Mr.Vijay Narayan, Senior Counsel Mr.R. Viduthalai, Senior Counsel Mr.ChandrasekharCOMMON JUDGMENTP.K. MISRA, J.Company Petition No.160 of 2005 was filed under Section 391of the Companies Act, 1956 (hereinafter referred to as “the Act”) byM/s. Integrated Finance Company Limited (hereinafter referred to as“the Company”), a private company incorporated under the CompaniesAct, for getting approval of the Scheme of arrangement / compromisebetween the said company and some of the creditors, namely, thedeposit holders and bond holders.1.1 The Company is a non-banking finance company incorporatedunder the Act and engaged in the business of hire purchase and lease.Expressing its inability to carry on its business on account of https://hcservices.ecourts.gov.in/hcservices/ various factors, the Company presented a Scheme under Section 391 ofthe Act for an arrangement / compromise with the class of creditors,namely, the bond holders and deposit holders.1.2 The salient features of the Scheme as contained in suchpetition are to the following effect :-"4. PAYMENTS TO FIXED DEPOSIT HOLDERS / BONDHOLDERS4.1 The Company would settle all the depositholders up to maturity value of Rs.20,000/- as andwhen it falls due.4.2 The scheme would provide for thefollowing.(a) Conversion of all the deposit holders andbond holders into secured convertible debenturescarrying on interest of 6% p.a. convertible intoequity before the expiry of 1 year from the dateof allotment with an option to the company toprepay the value of debentures before the due dateof conversion. The conversion price will bedetermined taking into account the valuation laiddown by SEBI guidelines. (b) The debentures will be issued withperiodical interets payment option to the deposit/bond holders who are holding regular interestpayment option presently and for those deposit/bond holders holding payment of interest undercumulative option, interest will be added to thevalue of the debenture for conversion at the timeof maturity.(c) By virtue of this scheme, all the depositholders and bond holders would become securedcreditors in the books of IFCL at the first year.The Trustees for the Bonds would be the DebentureTrustees in the post scheme scenario and aDebenture Trust Deed charging the assets of Rs.125crores of receivables, accrued interest,investments, assets and available stock on hirewould also be made so as to comply with all thenorms for the purpose of fully convertibledebentures. https://hcservices.ecourts.gov.in/hcservices/

4.3. By virtue of the conversion, the outflowof the company would be a quarterly payment ofinterest depending upon the type of deposit/ bondheld by the creditors. At the end of the tenurethe debentures would either be redeemed orconverted as equity shares at the givenappropriate exit route as the Company is a listedcompany and a fairly large tradable marketcapitalization being available for the liquidationof these converted shares. The conversion ofdeposit holders/ bond holders into securedconvertible debentures and thereafter into equityshares of the company will ensure their benefitssince the company established new lines ofbusiness such as financial BPO and is in theprocess of expanding the same. 4.4 The reduction in interest rates wouldresult in cash flows from operations. Apart fromthis Rs.125 crores of stock hire being availablewhich would be used for funding the operations.4.5 A detailed cash flow will be furnished asmay be directed by the Hon'ble High Court givingout particulars of amount of recoverable from thestock on hire and through revenue generation fromoperations.4.6 The scheme is not offered to the Bankssince the stock on hire pledged / hypothecated isabout Rs.80 crores as against their dues of Rs.62crores. Since none of the banks interest isprejudiced nor any of the assets charged to them,this scheme is not being offered to them and it isonly the deposit holders and bond holders whoseright are being dealt with in the Scheme ofArrangement and compromise. Thus there is nodirect or indirect interest of the Banks beingprejudiced or affected.5. Since this scheme does not envisage cashoutflow at the first instance and does seek toconvert the depositors and bond over a period oftime into shareholders there is no requirement offresh infusion of cash. https://hcservices.ecourts.gov.in/hcservices/

6. IMPLEMENTATION OF SCHEME6.1 The Scheme if approved by the depositholders and bond holders with such modifications,as may be assented by the Company, shall besubmitted to this Hon'ble Court for confirmationand if confirmed, shall become binding with alldeposit holders, bond holders and the Company.6.2 On completion of the scheme, the Companyshall have discharged all the liability to fixeddeposit / bond holders.7. EFFECT OF THE SCHEME7.1 In view of the above Scheme beingoffered, all the parties agree that:a) with the terms of the Scheme allliabilities of the Deposit Holders and Bondholders shall be deemed as fully discharged.b) No claims shall be raised by any depositholders or bond holder to whom this Scheme isoffered andc) No claim can be made against any groupcompanies of IFCL their associates or any otherperson, promoters, directors, past and present, inrespect of matters relating to IFCL.d) This scheme if approved and ordered by thisHon'ble Court shall be binding on the Company andall parties to the scheme.”1.3 In C.A.Nos.854 and 855 of 2005, arising from C.P.No.160 of2005, the learned single Judged ordered convening and holding of themeetings of the bond holders and deposit holders on 10.8.2005separately for the purpose of considering the Scheme of arrangement /compromise. On the basis of Company Appln.Nos.1105 to 1110 of 2005,the learned single Judge nominated a retired District Judge as anObserver of the meeting to ensure fair and free participation of thebond holders and deposit holders. The meetings have been held underthe Chairmanship of the Court appointed Chairman and also theObserver. The Scheme was approved and report was published invarious newspapers indicating that the Scheme had been approved bymajority of the bond holders and deposit holders in accordance withthe provisions of Section 391(2) of the Act. A report was filedbefore the single Judge along with the Observer's report. Pursuantto the notice, the Regional Director, Ministry of Company Affairs,filed a report, wherein it was indicated that since the companyproposes to convert the debentures to equity shares to the bondholders and deposit holders, the Company had to comply with Section81 of the Act. https://hcservices.ecourts.gov.in/hcservices/

2. The Integrated Finance Company Depositors Association,an Association representing the depositors and several otherdepositors, filed objections raising several contentions regardingthe validity of the Scheme. Objections were also raised by theReserve Bank of India (RBI). 2.1 Certain other Associations representing the deposit holders,debenture holders also intervened supporting the Scheme. Similarly,an Association of the employees also intervened supporting theScheme. 3. During pendency of Company Petition No.160 of 2005, thepetitioner had filed Company Appln.Nos.1409 & 1410 of 2005 forbearingRespondents 1 to 6 in such Applications from initiating anyproceeding either civil or criminal in nature against the Directorsof the petitioner company and for granting stay of commencement ofthe suit or proceedings against the company, during pendency of suchC.P.No.160 of 1995.4. Ultimately, the learned single Judge sanctioned theScheme, subject to the condition that the Scheme will not exonerateor protect the Directors and those in charge of the affairs of theCompany from any proceeding that may be contemplated either under theprovisions of the Companies Act or under any other Act for anystatutory violation.5. The Reserve Bank of India has filed O.S.A.No.308 of2006, the Integrated Finance Company Depositors Association filedO.S.A.No.309 of 2006, M/s. Popular Kuries Limited filed O.S.A.No.312of 2006 and Mrs. Elizabeth Antony has filed O.S.A.No.91 of 2007against such order dated 19.8.2006.6. We have heard Mr.V. Prakash, Senior Counsel appearingfor the appellant in OSA.No.309 of 2006, Mr.T. Poornam, Counselappearing for the appellant in OSA.No.308 of 2006, Mr.T. Suresh,Counsel appearing for the appellant in OSA.No.312 of 2006 and Mr.K.F.Manavalan, Counsel appearing for the appellant in OSA.No.91 of 2007,who have assailed the legality and validity of the order passed bythe learned single Judge.Mr. Arvind P. Datar, Senior Counsel appeared for the company,the main contesting respondent in all the appeals, in support of theorder passed by the learned single Judge. Senior Counsels, Mr.K.M.Vijayan, Mr. Vijay Narayan and Mr.R. Viduthalai have also appearedfor various Associations representing the depositors supporting thescheme. Similarly Mr. Chandrasekhar appearing for the employeesAssociation has also supported the scheme. https://hcservices.ecourts.gov.in/hcservices/

7. The main contention raised by the learned counselsappearing in various appeals is to the effect that by sanctioning theScheme, many of the provisions of the Reserve Bank of India Act,1934, hereinafter referred to as "the RBI Act", are being violated,which is impermissible in law. Learned Senior Counsel appearing forthe appellant in OSA.No.309 of 2007, while adopting the submissionand supporting such contention of the learned counsel for RBI, hasfurther submitted that if the Scheme is implemented, it would be anindirect approval of the various acts of omissions and commissions onthe part of the persons in charge of the affairs of the Company,which should not be permitted. It has been further submitted by himthat under the Scheme all the bond holders and the deposit holdersthose who had deposited Rs.20,000/- or less, would be left with aconvertible debenture of most uncertain value. It has been furthersubmitted that since many of the working class people had investedtheir entire life saving being lured by various tall promises made,the Scheme, if finalised, would jeopardise their interest, whichshould not be permitted. 8. Learned Senior Counsels appearing for the respondentCompany and some of the depositors have supported the Scheme andcontended that in view of various factors, which are beyond thecontrol of the company, it has become no longer possible for thecompany to carry on its usual business and, therefore, the Schemeshould be adopted so that instead of winding up a company efforts canbe made to revitalise the company as per the terms and conditionscontained in the Scheme.9. Chapter V of the Act contains the relevant provisionsrelating to compromises and arrangements. Sections 391 to 393 arerelevant. On a bare perusal of these provisions, it is obvious thatwhile considering the question as to whether the Scheme should besanctioned or not, the Courts are required to concentrate on theprocedural wisdom, commercial wisdom as well as the legal wisdom.In other words, the Courts are required to find out as to whether theprocedural aspects contained in Sections 391 and 393 of the Act arecomplied with. Once it is found that the procedural requirementshave been fulfilled, the next question is whether the scheme iscommercially just and fair. Apart from the above, the Courts arealso required to find out whether the Scheme is violative of any ofthe provisions of law or opposed to public policy.10. After analysing the relevant provisions contained inSections 391 and 393 of the Act and referring to several decisions,the Supreme Court, in the decision reported in AIR 1997 SC 506(Miheer H.Mafatlal vs. Mafatlal Industries Ltd.,), observed :"28-A . . . (1) The sanctioning court has to see toit that all requisite statutory procedure for supporting https://hcservices.ecourts.gov.in/hcservices/ such a Scheme has been complied with and that the requisitemeetings as contemplated by section 391(1)(a) have beenheld.(2) That sanction put up for sanction of the court isbacked up by the requisite majority vote as required bysection 391(2).(3) That the concerned meetings of he creditors ormembers or any class of them had the relevant material toenable the voters to arrive at an informed decision forapproving the Scheme in question. That the majoritydecision of the concerned class of voters is just and fairto the class as a whole so as to legitimately bind even thedissenting members of that class.(4) That all necessary material indicated by section393(1)(a) is placed before the voters at the concernedmeetings as contemplated by section 391(1).(5) That all the requisite material contemplated bythe proviso to section 391(2) of the Act is placed beforethe court by the concerned applicant seeking sanction forsuch a Scheme and the court gets satisfied about the same.(6) That the proposed Scheme of compromise andarrangement is not found to be violative of any provisionof law and is not contrary to public policy. Forascertaining the real purpose underlying the Scheme with aview to be satisfied on this aspect, the court ifnecessary, can pierce the veil of apparent corporatepurpose underlying the Scheme and can judiciously x-ray theScheme.(7) That the company court has also to satisfy itselfthat members or class of members or creditors or class ofcreditors, as the case may be, were acting bona fide and ingood faith and were not coercing the minority in order topromote any interest adverse to that of the lattercomprising of the same class whom they purported torepresent.(8) That the Scheme as a whole is also found to bejust, fair and reasonable from the point of view of prudentmen of business taking a commercial decision beneficial tothe class represented by them for whom the Scheme is meant.(9) Once the aforesaid broad parameters about therequirement of a Scheme for getting sanction of the courtare found to have been met, the court will have no furtherjurisdiction to sit in appeal over the commercial wisdom of https://hcservices.ecourts.gov.in/hcservices/ the majority of the class of persons who with their openeyes have given their approval to the Scheme even if inview of the court there could be a better Scheme for thecompany and its members or creditors for whom the Scheme isframed. The court cannot refuse to sanction such a Schemeon that ground as it would otherwise amount to the courtexercising appellate jurisdiction over the Scheme ratherthan its supervisory jurisdiction."11. Mr.V. Prakash, learned Senior Counsel appearing for theappellant in O.S.A.No.309 of 2006, on behalf of Integrated FinanceCompany Depositors Association has raised several questions touchingupon the pros and cons of the Scheme and has submitted that it wouldhave been more appropriate for the Company to come out with anybetter offering as most of the deposit holders or the bond holdershad practically invested their life time saving. He has painted avery dismal picture of the projections highlighted in the Scheme.12. Since the Scheme has been approved by the learnedsingle Judge, obviously the appellate court under ordinarycircumstances should be slow to interfere with such discretionaryorder and should interfere only in case of any glaring illegality inthe proceedings or material irregularity in the procedure adopted.12.1 Keeping in view the scope of Section 391 of the CompaniesAct, we do not think that it is for the appropriate Company Courtdealing with such application under Section 391 or for that matterand even far less, for the appellate court to go into the nitty-gritty of the various suggestions in the Scheme. It is indeed verydifficult for the Company Court or the Appellate Court to considerthe financial wisdom of a particular proposal because the courts arenot equipped with necessary expertise and more particularly when theoverwhelming majority of the bond holders and depositors had agreedto a particular proposal.12.2 Law is well settled that a Company Court in such ascenario is not expected to substitute its own wisdom for that of thestake-holders, who give consent to a particular Scheme. Thus, wiseor otherwise, a Scheme is ordinarily beyond the jurisdiction of theCompany Court and the Appellate Court except in those rare caseswhere one can see that the Scheme itself on the face of it sounreasonable that no man of ordinary prudence can accept such ascheme.12.3 In the facts of the present case, we do not think that wecan characterise the Scheme as so outrageously improper as to invitethe wrath of the Court. https://hcservices.ecourts.gov.in/hcservices/

13. While considering the question as to whether there hasbeen procedural irregularity or not, Mr.V. Prakash, learned SeniorCounsel, submitted that since most of the depositors were residentsof the State of Kerala, it would have been more convenient for suchdepositors if the meetings of the depositors and the bond holderswould have been held within the State of Kerala rather than at adistant place like Chennai.13.1 Learned single Judge, while considering such submission,has observed that since the Registered Office of the Company is atChennai, there was nothing illegal in directing the meetings to beheld at Chennai and to ensure proper holding of the meetings, theCourt had appointed an Observer.13.2 Though it may be true that possibly any suitable placewithin the State of Kerala would have been more convenient, we do notthink it would be appropriate on our part to set the scheme at naughtmerely because the meetings were held at Chennai, more particularlywhen there is no acceptable materials on record to indicate that thedepositors and the bond holders within the State of Kerala found itdifficult to attend the meetings at Chennai.14. One other contention regarding procedural irregularity,however,which requires serious consideration, revolves round theorder passed by the RBI vide letter dated 18.1.2005 and the effect ofnon-disclosure. Such letter refers to the fact that the RBI hadconducted an inspection of the books of accounts in exercise of powerunder Section 45N of the RBI Act. The relevant portion of the letteris as follows :-"... The inspection revealed that the company hasviolated the provisions of the Reserve Bank of India Act,1934 and the Directions issued thereunder as detailed below:i) Net Owned Fund (NOF) of your company was negative at(-) Rs.10666.06 lakh as on March 31, 2004 as against thereported NOF at Rs.2194.00 lakh. The working of theassessed NOF is furnished in Annexure-1. The company hasthereby violated the provisions of Section 41-1A(1) of theRBI Act by not maintaining the statutory minimum requiredNOF of Rs.25 lakh.ii) As on March 31, 2004, the company's credit exposureto the following companies were in excess of 15% of thecompany's reported owned fund of Rs.2877.00 lakh as onSeptember 30,2003. a. Sree Maruti Textiles Ltd (Rs.887.34 lakh)b. Ravishankar Industries Pvt Ltd. (Rs.789.96 lakh)c. Gemini Indus and Imaging Ltd (Rs.915.23 lakh)d. Gomathy spinners (Rs.724.98 lakh) https://hcservices.ecourts.gov.in/hcservices/ e. ATV Projects India Limited (Rs.998.46 lakh)f. Krishna Petrochem Ltd (Rs.599.20 lakh)g. Vatan Dyechem Exports Limited (Rs.471.41 lakh)The company has thereby violated the provisions of Para12 of the NBFC Prudential Norms (Reserve Bank) Directions,1998 (hereinafter referred to as the Prudential NormsDirections).iii) The company has not classified its assets inaccordance with the asset classification norms stipulated byReserve Bank of India (details of wrong classification ofassets are furnished in Annexure-II). The company hasthereby violated the provisions of paragraph 7 of thePrudential Norms directions.(iv) Gross Non-Performing Assets of the company,assessed at Rs.15603.16 lakh, were very high and formed69.31% of the total credit exposures of the company.v) The company has not made adequate provision inrespect of its Non Performing Assets as detailed in AnnexureIII. As a result, there is short provisioning to the extentof Rs.12575.33 lakhs. The company has thereby violated theprovisions of paragraph 8 of the NBFCs Prudential Norms(Reserve Bank) Directions.vi) As the NOF of the company is negative, it has notmaintained the minimum capital adequacy ratio and hasthereby violated the provisions of Paragraph 10 of theprudential Norms Directions. ..."15. The contention raised by the learned counsel for RBIand the Senior Counsel for the appellant in OSA.No.309 of 2006 is tothe effect that this vital aspect relating to the affairs of thecompany, which was under the scrutiny of the RBI had not beendisclosed, even though under Section 391(2), the Company is requiredto disclose all relevant factors.16. Section 391(2) of the Act envisages that if the Companyfiles an application under Section 391(1), it should disclose in itsaffidavit the latest financial position, auditor's report and anyinvestigation pending under Sections 235 to 251 and the like.According to the learned counsels for the appellants and moreparticularly the counsel for RBI, the appellant in OSA.No.308 of2006, non-disclosure of an order relating to Section 45MB andregarding other aspects highlighted in the letter dated 18.1.2005,amounted to non-disclosure of an investigation initiated underSection 45MB of the RBI Act. It is further contended that at anyrate since recording of compromise or agreement under Section 391 has https://hcservices.ecourts.gov.in/hcservices/ got far reaching consequences, the company is required to discloseall relevant factors which reflect upon its financial position sothat the persons required to consider such scheme of arrangement orcompromise would be in a position to take an informed decision basedon the facts and circumstances. 17. Learned Senior Counsel appearing for the Company, onthe other hand, submitted that as per the provisions contained inSection 391(2) of the Act, the company is required to disclose aboutany investigation pending under Sections 235 to 251 of the Act and itcannot be said that non-disclosure of a matter pertaining to Section45MB of the RBI Act was in any way violative of the mandatescontemplated under Section 391(2). It has been further contendedthat the direction of the RBI to the effect that the company shouldnot receive any further deposit, has not been violated as the companyhas not accepted any deposit, but had received only bonds. It issubmitted that since the respondent company was exempted from ChapterXII of the Public Deposits (Reserve Bank of India Directions) Act, itcannot be said that by receiving bond, any direction of the RBI hadbeen violated.17.1 The submission of the Senior Counsel for the Respondent isthat there was no flouting of directions and the Company hadclarified the questions in its correspondence. 17.2 The core question is not whether the Company had floutedsome of the directions. The more important question is whether theCompany should have disclosed the aspects arising out of the orderdated 18.1.2005 to enable the depositors and the bond holders to takean informed decision.18. While seeking permission of the Court for compromise,etc., as envisaged under Section 391 of the Act, the Company isrequired to act fairly and in a transparent manner. This includesthe duty of disclosing all relevant facts and circumstances. It istrue that technically speaking there was no investigation pendingunder Sections 235 to 251 of the Act. However, the fact that the RBIhad initiated action contemplated under Section 45MB of the RBI Actand had issued several directions in the letter dated 18.1.2005, therelevant portion of which has already been extracted, was animportant and relevant aspect which ought to have been disclosed inorder to enable the depositors or the creditors to take anappropriate decision after being aware of all the relevant facts andcircumstances. The requirement is for disclosure of anyinvestigation pending under Section 235 to 251 and the like. Thislatter expression is indicative of the fact that the company isrequired to disclose about all relevant investigation or enquiry,even though such investigation may not be strictly under Sections 235to 251 of the Companies Act. https://hcservices.ecourts.gov.in/hcservices/

19. In our considered opinion, non-disclosure of the actiontaken and initiated by the RBI as apparent from the letter dated18.1.2005 amounted to non-disclosure of relevant facts required to bedisclosed under Section 391(1) read with Section 393(1) of the Act,thus vitiating the bonafides of the Company and thereby violating theprocedural safeguards.20. The contention raised by Mr.T. Poornam on behalf of RBIand also supplemented by Mr.V. Prakash relating to the allegedillegality of the Scheme, however, stands on a still strongerfooting. We now proceed to deal with such contention in greaterdetail.21. Learned counsels have invited our attention to ChapterIII-B of the RBI Act. This Chapter was inserted by way of amendmentvide Act 55 of 1963. The heading of the Chapter is "Provisionsrelating to Non-Banking Institutions receiving deposits and financialinstitutions". As per Section 45-I(aa) "company" means a company as defined insection 3 of the Companies Act, 1956 (1 of 1956), and includes aforeign company within the meaning of Section 591 of that Act.As per Section 45-I(e) "non-banking institution" means acompany, corporation or co-operative society.As per Section 45-I(f) "non-banking financial company" means -(i) a financial institution which is a company;(ii) a non-banking institution which is a company and which hasas its principal business the receiving of deposits, under any Schemeor arrangement or in any other matter, or lending in any manner;(iii) such other non-banking institution or class of suchinstitutions, as the Bank may, with the previous approval of theCentral Government and by notification in the Official Gazette,specify.21.1 Section 45-Q provides that the provisions of Chapter III-Bshall have effect notwithstanding anything inconsistent therewithcontained in any other law for the time being in force or anyinstrument having effect by virtue of any such law.21.2 Section 45-QA is as follows :-"45-QA. Power of Company Law Board to order repaymentof deposit.- (1) Every deposit accepted by a non-bankingfinancial company, unless renewed, shall be repaid inaccordance with the terms and conditions of such deposit. https://hcservices.ecourts.gov.in/hcservices/ (2) Where a non-banking financial company has failedto repay any deposit or part thereof in accordance with theterms and conditions of such deposit, the Company Law Boardconstituted under Section 10-E of the Companies Act, 1956(1 of 1956), may, if it is satisfied, either on its ownmotion or on an application of the depositor, that it isnecessary so to do to safeguard the interests of thecompany, the depositors or in the public interest, direct,by order, the non-banking financial company to makerepayment of such deposit or part thereof forthwith orwithin such time and subject to such conditions as may bespecified in the order."22. In the light of the above provisions, it is contendedby the learned counsels appearing for the appellants that as perSection 45QA(1), every deposit accepted by a non-banking financialcompany is required to be repaid in accordance with the terms andconditions of such deposit, unless it is renewed. Learned counselshave further submitted that in the present case the Scheme has beenmooted only with a view to avoiding repayment of the deposits and theScheme contemplates that instead of repaying the amount in accordancewith the terms and conditions of the deposit, such amount shall beconsidered as convertible debentures with interest at the rate of 6%which would be converted as equity shares within a period of oneyear. Such a provision contained in the Scheme or arrangement isagainst the provisions of Section 45QA(1) as the company is notrepaying the amount, but issuing convertible debentures which has tobe converted into equity shares.23. Mr.Arvind P. Datar, learned Senior Counsel appearingfor the Company, submitted that even under the Scheme, deposits arebeing repaid, though not in cash, but, in another form inasmuch asconvertible debentures are being issued to them. He has furthersubmitted that the expression "repaid" in Section 45QA does not meanthat it must be repaid in cash and not by any other method and, inthe present case, the repayment is contemplated in the shape of aconvertible debenture. Mr.K.M. Vijayan, Mr.R. Viduthalai, Mr. VijayNarayan, learned Senior Counsels appearing for various depositors'Associations, and Mr. Chandrasekhar, appearing for the employees'Association, have supplemented such submission.24. On a careful consideration of the submissions made bythe learned counsels of either side on this score, we are unable toaccept such ingenious submission made by the learned counsels for theCompany and others supporting the Scheme. Chapter III-B, which wasinserted by way of amendment, has been obviously incorporated with aview to protect the depositors and to avoid exploitation by non-banking financial institutions. Section 45Q itself makes it veryclear that the provisions of the Chapter III-B shall have effect https://hcservices.ecourts.gov.in/hcservices/ notwithstanding anything inconsistent therewith in any other law.The Companies Act as well as the RBI Act are Central Acts. ChapterIII-B, which was inserted by Act 55 of 1963 with effect from1.12.1964 is obviously a later legislative provision. 25. That apart, Section 45Q makes it very clear that theprovisions contained in Chapter III-B shall have effectnotwithstanding anything inconsistent therewith contained in anyother law for the time being in force. It is therefore obvious thatthe provisions contained in Section 45QA, which are intended toprotect the depositors must have primacy over any other lawinconsistent with such provision. It may be that Sections 391 to393, which are the specific provisions regarding Scheme ofarrangement or compromise relating to any company, can be invoked inrespect of a non-banking financial company. However, when suchprovisions for making a scheme of arrangement or compromise areinvoked, it is obvious that the scheme of arrangement or compromiseshould not contravene any specific provision of law relating to non-banking financial company. As apparent from the decision of theSupreme Court in AIR 1997 SC 506 (cited supra), a scheme ofarrangement / compromise, if it is illegal or opposed to publicpolicy, cannot be sanctioned by the Court. The provisions containedin the Scheme, whereunder the statutory liability of a company torepay the depositors in accordance with the terms and conditions ofthe deposit is being flouted, cannot be considered as a legal clausemeriting acceptance by the Court.26. It appears that even if such an objection was raisedbefore the learned single Judge as apparent from para 44 of thejudgment, no specific answer had been furnished. It is of coursetrue that while dealing with an allied contention raised by thecounsel for the RBI regarding the violation committed by the Companyin accepting the deposit in violation of the provisions of the Act,the learned single Judge has referred to Section 45QA, whichrecognises the power of the Company Law Board to order repayment ofany such deposit, if it is necessary to safeguard the interest of thecompany.27. In para 83 of the judgment, the learned single Judgehas concluded :-"83. In this connection the learned counsel made areference to the decision of the Karnataka High Courtreported in (2005) 5 CLJ 78 (MAHARASHTRA APEX CORPORATIONLT., Inre.) on the question of violation of the RBI Actwhile considering the plea for approval to the Scheme. Itwas decided therein that the provisions of Section 391 ofthe Companies Act being a complete code by itself, theviolations projected as such could not stand in the way ofgranting the approval to the Scheme once the statutory https://hcservices.ecourts.gov.in/hcservices/ formalities stated in the Act are complied with. While itcannot be denied that the Court while granting approval to aScheme does not sit as a Court of appeal, and once theformalities are complied with in the matter of grantingapproval, any violation spoken of as regards otherenactments are matters which deserve consideration under therelevant provisions of that statute and on that score theapproval to a settlement reached cannot be negatived. Theseprovisions operate on different field. Consequently, theobjection by the RBI is overruled."28. As already indicated, the provisions contained inChapter III-B shall have effect notwithstanding any other law to thecontrary. This would obviously include Section 391 of the CompaniesAct. If the direct impact of a scheme of arrangement / compromiseunder Section 391 would be offending the provisions contained inChapter III-B, to that extent, the Scheme under Section 391 must giveway. Axiomatically any scheme of arrangement / compromise sought tobe approved must be consistent with Chapter III-B of the RBI Act.Apart from the statutory obligation emphasised in Section 45QA of theRBI Act, jurisdiction has been vested with the Company Law Board topass appropriate orders as contemplated under Section 45QA(2).However, that is a discretion exclusively vested with the Company LawBoard and cannot be whittled down by taking recourse to Section 391of the Act. By virtue of Section 45QA(2), the Company Law Board isnow clothed with power to order repayment of the deposits accepted bya non-banking financial company in case of default in making paymentof the principal amount with interest thereon. Such discretionarypower of a statutory authority cannot be circumvented by thestratagem of an arrangement projected under Section 391 of the Act.29. Mr. Arvind P. Datar, learned Senior Counsel, has alsocontended that the provisions similar to those contained in ChapterIII-B of the RBI Act had been included in the shape of Section 58A inthe Companies Act and Section 391 of the Companies Act being aspecific provision in the very same statute, would be operative evenin respect of the companies which are required to follow theprovisions contained in Section 58A of the Act. Similarly, accordingto him, notwithstanding the provisions contained in Chapter III-B ofthe RBI Act, a scheme under Section 391 of the Act can be approvedeven in respect of non-banking financial companies.29.1 We are not suggesting that Section 391 of the Act is notapplicable to a non-banking financial company. What has beenemphasised by us in the present judgment is that while entering intoan arrangement or compromise under Section 391, such arrangement orcompromise should be consistent with the statutory provisions, whichmay be contained in the very same Companies Act or may be containedin any other statute. In our considered opinion, if any schemecontaining the arrangement or compromise is accorded sanction under https://hcservices.ecourts.gov.in/hcservices/ Section 391 of the Act, such scheme should be consistent with themandatory statutory provisions. As already emphasised, in view ofthe provisions contained in Section 45Q, the provisions contained inChapter III-B of the RBI Act including the provisions contained inSection 45QA(1) and (2) must be given their due importance.30. Learned single Judge appears to have relied upon (2005)5 CLJ 78 (cited supra) to come to a conclusion that Section 391 ofthe Act being a complete Code by itself, violation of any otherprovision cannot stand in the way of granting approval to the schemeonce the statutory formalities are complied with.31. We are unable to subscribe to such a view. The duty ofthe Court dealing with a matter under Section 391 of the Act is notconfined to ensuring compliance with the procedural safeguards ascontemplated under Section 391 and Section 393 of the Act. The Courtmust see whether the scheme of arrangement / compromise is notopposed to public policy or opposed to any law. In the present case,the Scheme, being contrary to the provisions contained in Section45QA of the RBI Act, could not have been accepted. It may be truethat the Company Law Board has jurisdiction to direct repayment ofthe deposit, but that is a matter which comes exclusively within thejurisdiction of the Company Law Board and cannot be abrogated orabridged by incorporating terms and conditions in a petition underSection 391 of the Act, which have the effect of nullifying thewholesome provisions contained in Chapter III-B of the RBI Act. 32. Learned counsel appearing for the contesting respondenthas placed reliance upon a Division Bench decision of the Kerala HighCourt reported in Vol.99 Company Cases 2000 Page 54 (MRS. VILASINIJAYAPRAKSH v. ST. MARY'S FINANCE LTD.) in support of the contentionthat the provisions contained in Section 45QA of the RBI Actempowering the Company Law Board to give direction can be consideredas subservient to the provisions contained in Section 391 of the Act.33. In the aforesaid case, the Company Law Board inreference to application under Section 45QA(2) had indicated thatsince an application under Section 391 of the Companies Act, 1956 waspending, it was not appropriate for the Company Law Board to pass anyorder on the application filed under Section 45QA(2) till thedisposal of the application under Section 391 of the Act. In theappeal taken to the High Court, the Division Bench held that thisorder passed by the Company Law Board was on the basis of therelevant consideration and the fact that proceedings under Section391 was pending, cannot be considered as irrelevant. However, in ouropinion, this decision does not go to the extent of laying down as amatter of proposition of law that, while dealing with an applicationunder Section 391, the order recording an arrangement which iscontrary to any statutory provision, can be accepted. https://hcservices.ecourts.gov.in/hcservices/

34. The importance of the jurisdiction vested with theCompany Law Board under Section 45QA can also be gauged from the factthat if the order passed by the Company Law Board under Section 45QA(2) of the RBI Act is not complied with, the defaulting person can beprosecuted under Section 58B(4-AAA). It is of course true that underSection 58B(4-AAA) only the violation of the order passed by theCompany Law Board is considered as punishable, but mere non-paymentof the deposit within the time stipulated per se is not punishable.Though this fine distinction between 45QA(1) and an order underSection 45QA(2) is there, in our opinion, the ultimate effect in thepresent compromise is to render the provisions contained in Section45QA nugatory.35. It is no doubt true that the Company Law Board hascertain discretion in the matter but, ultimately the Company LawBoard, while deciding the matter under Section 45QA(2), has to takeinto account the relevant facts and circumstances and an order isrequired to be passed. At that stage, if such order is not compliedwith, prosecution is contemplated. The relevant factor to beconsidered here is, by virtue of the agreement the entire provisionscontained in Section 45QA read with Section 58B(4-AAA) becomepractically redundant so far as the present company is concerned.36. Keeping in view the over riding nature of theprovisions contained in Chapter III-B of the RBI Act and thenecessity felt by the Parliament to enact a specific provision fornon-banking financial institutions, in our considered opinion, acompromise under Section 391 of the Act has to be in consonance ofthe provisions contained in Chapter III-B of the RBI Act includingthe provisions contained in Sections 45QA(2) and 58B(4-AAA) of theRBI Act.37.The learned Senior Counsels representing some of theemployees and the depositors have contended that by virtue of theaction now approved by the learned single Judge, the company cancontinue to exist thereby protecting the interest of numerousemployees as well as majority of the depositors, who had supportedthe Scheme.38. We are afraid that in view of our conclusion that theScheme being contrary to the statutory provisions and to some extentcan even be said to be opposed to pubic policy, cannot be approved. https://hcservices.ecourts.gov.in/hcservices/

39. For the aforesaid reasons, the Original Side Appealsare allowed and the order of the learned Single Judge is set aside.Consequently, the connected miscellaneous petitions are closed. Nocosts.Learned counsel for Respondent No.1 has prayed that heintends to file an appeal against this judgment before the SupremeCourt and, therefore, operation of this judgment may be suspended fora reasonable period. Learned counsel appearing for the appellant objected to thisrequest stating that necessary prayer should be made before theappellate court.In the peculiar facts and circumstances of the case, we suspendthe operation of the judgment for a period of three weeks from to-day.sd/-Asst.Registrar/true copy/Sub Asst.RegistrardpkToThe Sub. Asst. Registrar, O.S., High Court, Madras.+2 ccs To Mr.T.Suresh, Advocate, SR.25925+2 ccs To Mr.P.V. Ravi Chandran, Advocate, SR.25763 & 26471+4 ccs To Mr.P.H.Aravindh Pandian, Advocate, SR.26520 & 25940+2 ccs To Mr.T.Poornam, Advocate, SR.25924 O.S.A.Nos.308, 309, 312 of 2006 and O.S.A.No.91 of 2007 ra [co]gkg/8.5