M/S INTEGRATED FINANCE CO.LTD. vs. RESERVE BANK OF INDIA ETC.ETC.

1 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

M/s. Integrated Finance Co. Ltd. ...Appellant VERSUS Reserve Bank of India Etc. Etc. ...Respondents J U D G M E N T SURINDER SINGH NIJJAR,J. 1. Leave granted. JUDGMENT 2. I.A. filed by Mr. B. Ramanna Kumar for substitution in place of Late Mr. N. Mani is allowed. 3. These appeals, arising out of S.L.P. (Civil) Nos. 12737-12740 of 2008, are directed against the common order and judgment th dated 30 April 2008 passed by the Division Bench of the High Court of Judicature at Madras. Vide the aforesaid order, the th order/judgment of the learned single judge dated 19 August Page 1 2 2006 passed in Company Petition No. 160 of 2005 was set aside.

of four original side appeals, which were allowed by the Division JUDGMENT th Bench vide the order dated 30 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: Page 2 3 6. The appellant herein was incorporated as a Non-Banking Finance Company (hereinafter referred to as a “NBFC”) under

series of circulars for regulating various activities of the Non JUDGMENT Banking Financial Companies. The RBI also imposed certain conditions on these companies. The companies that did not comply with the aforesaid conditions were directed to stop accepting deposits from the investors and also to repay the deposits immediately. 8. In exercise of its powers under Section 45N of the Reserve Page 3 4 Bank of India Act 1934 (hereinafter “1934 Act”), the RBI inspected the books of accounts of the appellant company in 2005. The inspection report of the RBI disclosed the following violations of the provisions of the 1934 Act:

Page 4 5

powers under Section 45MB(1) of the Reserve Bank of India Act, 1934 issued a circular to the appellant company,

form whether by way of fresh deposits or renewal of the

Page 5 6 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

Page 6 7

Page 7 8 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 matters relating to IFCL. d) This scheme if approved and ordered by this Hon'ble Court shall be binding on the Company and all parties to the scheme.” 11. The aforesaid scheme of compromise was presented under Section 391 of the Companies Act to the High Court. st On 1 July 2005, the appellant company was permitted by the Ld. Single Judge, in Company Application Nos. 854 and 855 of 2005 in C.P.No.160 of 2005, to convene a meeting of its th deposit holders at Chennai on 10 August 2005 at 2.30 p.m. for JUDGMENT the purpose of considering the said scheme of compromise and, if thought fit, approving the same with or without modifications. Also, Mr. B. Ravi, a Practising Company Secretary, was directed to preside over the meeting. In the contingency of the failure of Mr. B. Ravi to preside over the meeting, Mr. George Kuruvilla, Managing Director of the appellant company was directed to step into the shoes of the former. The learned Single Judge also gave some other Page 8 9 directions in the aforesaid order to ensure that the relevant provisions of the Companies Act are complied with while conducting the said meeting.

Judge while disposing of the aforesaid company applications,

pertaining to the Chairmanship of the originally appointed Mr. B. Ravi. However, Mr. R. Guruswamy, retired District Judge, was appointed as the observer for the said meeting. This appears to have been done for ensuring fair and free participation of all deposit holders/bond holders in the said meeting. Page 9 10

st 2005, as per the orders of the learned Single Judge dated 1

appellant company and several other depositors-filed their JUDGMENT 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 Page 10 11 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

the Directors of the appellant company. th 14. The learned Single Judge vide order dated 19 August, 2006 overruled all the objections put forward against or in objection to the said scheme and accorded approval to the same. While granting sanction the learned Single Judge made it clear that sanction of the said scheme “ will not exonerate or protect the Directors and those in charge of the affairs of the Company from any proceeding that may be contemplated JUDGMENT either under the provisions of the Companies Act or under any other Act for any statutory violation. ” 15. The aforesaid order, as noticed earlier, was challenged before the Division Bench of the High Court by way of the following appeals: O.S.A. No. 308 of 2006 was filed by the Reserve Bank of India; Page 11 12 O.S.A. No. 309 of 2006 was filed by the Integrated Finance Company Depositors Association; O.S.A. No. 312 of 2006 was filed by one M/s. Popular Kuries Limited; and O.S.A. No.91 of 2007 was filed by one Mrs. Elizabeth Antony.

aside the judgment of the Learned single Judge vide common th judgment/order dated 30 April, 2008. This judgment is under challenge before us. Submissions: 16. We have heard the learned counsel on behalf of the parties. 17. Mr. Arvind P. Datar, learned senior counsel, appeared for JUDGMENT the appellant company and assailed the validity of the impugned order. Mr. Iqbal Chagla, learned senior counsel, appeared for intervenors in I.A. Nos. 29-32 of 2009 in S.L.P. (C) Nos. 12737-12740 of 2008. Mr. Shyam Divan, learned senior counsel, appeared for the intervenors in I.A. Nos. 33-36 of 2009 in the aforesaid proceedings. Whereas Mr. Parag P. Tripathi, learned senior counsel, appeared for the Respondent/RBI and Page 12 13 Mr. V. Parkash, learned senior counsel appeared for respondent no.1/Integrated Finance Depositors Association in S.L.P.(C) No. 12738 of 2008.

scheme of compromise of the appellant company has been approved by 1708 out of 2177 (79%) deposit holders and 5628 out of 7143 bond holders (77.73%), present and voting; which shows that it was approved by an enormous majority. According to him, the appellant company has complied with all the statutory requirements relating to the said scheme. This, he submits, is evident from the fact that neither the Single Judge nor the Division Bench of the High Court found any procedural irregularity in the arrangement of the said scheme. Thus JUDGMENT 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 Page 13 14 th letter dated 18 January, 2005 before the learned Company Judge as per the provisions of Section 391(1) of the Companies Act, 1956?”

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 th letter dated 18 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. JUDGMENT 20. Mr. Datar has further submitted that a scheme under Sections 391 to 394 is an exception to the rule that a contract can be novated only with the consent of the individual parties. The resolution passed by the requisite majority sanctioning the scheme in question, which gets sanction from the Court will be binding equally on the dissenting minority. In this context, the Page 14 15 learned counsel relied upon J.K. (Bombay) Private Ltd. Vs. New Kaiser-i-hind Spinning and Weaving Co. Ltd. & Ors. 1 Etc. and Administrator of the Specified Undertaking of the 2 Unit Trust of India & Anr. Vs. Garware Polyester Ltd. Mr. Shyam Divan, while explaining the scope of Sections 391-394 of the Companies Act, has drawn our attention to the principle of novation, which allows the parties to a contract to rework or re-agree the terms of the contract. He submits that this principle is recognised in Section 62 of the Contract Act, 1872. Further, Code of Civil Procedure, 1908 allows compromise during the pendency of the proceedings, (See Order 23, CPC); and also by adjustment of a decree (Order 21 Rule 2, CPC). Relying on the provisions contained in Section 22 of the Sick Industrial Companies Act, 1982 and Section 402 of the JUDGMENT Companies Act, Mr. Divan has submitted that Chapter V of the Companies Act provides another statutory method of varying contracts. The Chapter V allows even solemn contractual obligations to be varied by a particular class of similarly placed members/creditors, provided there is requisite majority. The learned senior counsel argued that a Scheme under Sections 391-394 of the Companies Act is not merely a commercial 1 (1969) 2 SCR 866, AIR 1970 SC 1041 2 (2005) 10 SCC 682 Page 15 16 agreement, but it is statutorily binding on all members and creditors of a company.

Scheme under Sections 391-394 of Companies Act. The learned senior counsel advanced the following reasons for substantiating the said submission: First , the RBI Act and the Companies Act must be read in their own spheres since both operate in different fields, altogether. Second , Section 45QA of RBI Act and Sections 391-394 of the Companies Act can be read harmoniously and there is no inconsistency between the said provisions. Third, the legislature did not intend to exclude the application of Sections 391-394 of the Companies Act in relation to JUDGMENT the NBFCs. 22. Elaborating these propositions , it was submitted that the 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 Page 16 17 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 3 Manufacturers' Assn. & Ors. 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. 4 SIDCO Leathers Ltd. & Ors. In this context, Mr. Chagla relied upon the judgments of this court reported in Aswini Kumar 5 Ghose & Anr. Vs. Arabinda Ghose & Anr. and Madhav Rao 6 Jivaji Rao Scindia Vs. Union of India & Anr. Further, the RBI Act, according to Mr. Chagla, is not a complete code by JUDGMENT itself. 23. Mr. Datar also pointed out that the RBI Act will apply for the regulation of collection of deposits, for minimum net owned funds, terms of deposits, etc. but will not apply to cases of scheme under the Companies Act which are not barred by the 3 (2002) 6 SCC 600 4 (2006) 10 SCC 452 5 AIR 1952 SC 369 6 (1971) 1 SCC 85 Page 17 18 former. The latter will continue to apply in the circumstances where matters relating to running of a company are concerned, like the provisions relating to schemes and arrangements of the

Companies Act and therefore, Section 45QA of the RBI Act is not a bar to scheme under Sections 391-394 of Companies Act. 24. Secondly, it was submitted that since there is no inconsistency between Section 45QA of the RBI Act and Sections 391-394 of the Companies Act, it will not be applicable in the present case because of the non-obstante clause contained in Part IIIB of the RBI Act. Mr. Divan has submitted that the ambit of Sections 391-394 of Companies Act is very wide. In fact, arrangements JUDGMENT with debenture holders involving (i) extension of time of payment; (ii) accepting cash payment of lesser face value; and (iii) exchanging debentures for shares have been accepted since the late 1800’s ( See Charlesworth’s Company Law, th 18 Edition, Pg. 772 ) . On the other hand, Chapter IIIB of the RBI Act contains whole set of detailed provisions pertaining to regulation of NBFCs. Mr. Chagla added that the object of the Page 18 19 1997 amendment to the RBI Act which added section 45Q indicates that a remedy was to be granted to deposit holders for approaching the Company Law Board for repayment of

However, the jurisdiction of the Company Law Board is not exclusive and the jurisdiction of a civil court or, for that matter, of a company court is not ousted. Reliance was placed upon the law laid down in Dhulabhai Etc. Vs. State of Madhya 7 Pradesh & Anr. 25. Further, learned senior counsel relied heavily on the principles laid down by this court in relation to the interpretation of a non-obstante clause to argue that the Section 45QA is JUDGMENT neither applicable in the facts and circumstances of the case nor is it a bar to a Scheme under Sections 391-394 of the Companies Act. Mr. Datar relied upon the case of JIK 8 Industries Limited & Ors. Vs. Amarlal V. Jumani & Anr, 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. 7 AIR 1969 SC 78 8 (2012) 3 SCC 255 Page 19 20 9 Raghunath Vs. State of Karnataka & Anr. wherein it was held that “there should be a clear inconsistency between the two enactments before giving an overriding effect to the non-

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 JUDGMENT from the enacting part of the section. The counsel relied upon A.G. 10 Vardarajulu & Anr. Vs. State of T.N. & Ors. 26. It was further argued by Mr. Chagla that Part IIIB was introduced in the RBI Act by Amendment Act of 1963. The Statement of Objects and Reasons of the said Amendment Act indicates that it was not intended to override the provisions of 9 (1992) 1 SCC 335 10 (1998) 4 SCC 231 Page 20 21 the Companies Act. Since the legislative intention behind such insertion was to regulate the functioning of NBFCs in general and to prohibit multiple partnership firms from taking deposits

Sections 391-394 of the Companies Act. According to Mr. Chagla, Section 45QA simply states in general terms that every loan shall be repaid in accordance with the terms and conditions of such loan. This provision does not prohibit a depositor from agreeing to accept the full amount of principal without interest or an amount less than the full amount of principal or to accept in kind rather than in cash. In other words, novation of the contract entered into between the company and the depositor is not prohibited. JUDGMENT 27. Further, it was submitted that the provision of Section 45QA is pari materia if not identical with Section 58A of the Companies Act. Schemes under Section 391 of the Companies Act are presented and approved by the Company Court in respect of deposits under Section 58A of the Companies Act. Premising on the aforesaid submission, Mr. Datar argued that if Page 21 22 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. This submission has also been reiterated

28. It was further submitted that wherever the applicability of Section 391 of the Companies Act was excluded by the legislature, it was done so expressly. To illustrate, Learned Senior counsel relied upon Section 38 of the Banking Regulation Act, 1949 which provides that Section 391 of the companies Act will not be applicable in winding up of a banking company by High Court. It was further submitted that the legislative intent cannot be interpreted in the manner which will discriminate against the depositors of NBFCs as against the JUDGMENT depositors of public limited companies and depositors of banking companies. Section 391 of the Companies Act can be availed of in case a NBFC is going into liquidation but if the interpretation given in the impugned order is accepted, the 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 Page 22 23 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

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 non- th disclosure of the letter/notice dated 18 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? th Mr. Datar has submitted that the said letter dated 18 January, 2005 was widely advertised by the RBI in various newspapers, JUDGMENT th including the Indian Express dated 20 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 counsel relied upon Bharti Mobinet Limited, Bharti Telenet Limited 11 and Bharti Cellular Limited Vs. DSS Enterprises Pvt. Ltd. 11 111(2004) DLT 554 Page 23 24 30. The learned counsel further submitted that even otherwise the disclosure under the proviso to Section 391(2) of the Companies Act is to be made only before the Court that

counsel relied upon Hindustan Lever Employees’ Union Vs. 12 Hindustan Lever Ltd. & Ors. and In re: HCL Infosystems Limited, HCL Infinet Limited and HCL Technologies 13 Limited. 31. Mr. Chagla was at pains to emphasise that Section 391(2) of the Companies Act requires a company to disclose to the Court all material facts relating to the company “such as the latest financial position of the company, the latest Auditor’s JUDGMENT Report on the accounts of the company, the pendency of any investigation proceedings in relation to the company under the Sections 235 to 251, and the like” (emphasis supplied by the learned senior counsel). He argued that the order of the RBI th dated 18 January, 2005 is not akin to the provisions of Sections 235 to 251 of the Companies Act. Thus, it was argued that the Division Bench erroneously held that the appellant 12 1995 Supp (1) SCC 499 13 (2004)121CompCas861(Delhi) Page 24 25 company should have disclosed the letter/order issued by the RBI before the creditors. Respondents’ Submissions

RBI submits that the Division Bench of the High Court has correctly interpreted the provisions of Chapter IIIB of the RBI Act. He emphasised that an amendment was required to strengthen the regulatory mechanism in relation to the NBFCs. The said Chapter IIIB has evolved an elaborate scheme of regulations, enabling the RBI even to seek winding up of a NBFC in appropriate circumstances. Section 45Q of the RBI Act provides that Chapter IIIB thereof shall override any other law inconsistent therewith. Section 45QA gives a statutory right JUDGMENT which cannot be waived by anyone. Under this provision, every deposit accepted by NBFC has to be renewed and repaid in accordance with the terms and conditions of such deposit. No subsequent agreement can permit the conditions to be waived of or varied. Section 45QA(2) enables NBFCs to seek extension in time for repayment before the Company Law Board. There is no other provision in Chapter IIIB which can dilute the effect of Section 45QA. The High Court, according to Page 25 26 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.

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 14 Limited & Anr. 34. Mr. V. Prakash, learned senior counsel, appearing on behalf of the respondent No.1 / Integrated Finance Depositors JUDGMENT 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 14 (2008) 7 SCC 619 Page 26 27 MRF Ltd., Malayala Manorama, etc for soliciting deposits from public in Kerala. And then suddenly to the shock of the public, th the order dated 18 January, 2005 was published in the

accept deposits even after said notice. The learned senior counsel further submitted that 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 has correctly held that the scheme proposed by the appellant is not bonafide and is in fact contrary to public policy. 35. We have considered the submissions made by the JUDGMENT learned counsel for the parties. We may here briefly notice the conclusions that have been arrived by the High Court: Findings of the High Court 36. Whilst examining the scope of Sections 391 to 393 of the Companies Act, the High Court relied on the analysis of the Page 27 28 aforesaid sections as rendered by this Court in the case of 15 Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. The analysis given in the aforesaid judgment are as under:-

2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391(2). 3. That the concerned meetings of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class. 4. That all necessary material indicated by Section 393(1)( a ) is placed before the voters at the meetings concerned as contemplated by Section 391 sub-section (1). 5. That all the requisite material contemplated by the proviso of sub- section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same. JUDGMENT 6. That the proposed 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 15 (1997) 1 SCC 579 Page 28 29 commercial decision beneficial to the class represented by them for whom the scheme is meant.

37. The High Court notices the well settled legal positions that whilst examining the scheme under Sections 391-393 of the Companies Act neither the Company Court nor the Appellate Court ought not to go into the nitty-gritty of the various suggestions in the scheme. The High Court recognised that it is difficult for the Company Court or the Appellate Court to JUDGMENT consider the financial wisdom of a particular proposal. This is so as the Courts do not have the necessary expertise to examine the commercial wisdom of the scheme of arrangements, especially when it is approved by an overwhelming majority of the bond holders and depositors. The Court is not expected to substitute its own wisdom for that of the stakeholders, who give consent to a particular scheme. The High Court also holds that, by or otherwise, a scheme is Page 29 30 ordinarily beyond the jurisdiction of the Company Court and the Appellate Court except in those rare cases where one can see that the scheme itself is on the face of it so unreasonable that no man of ordinary prudence can accept it. The High Court concludes that “ in the facts of the present case, we do not think that we can characterise the Scheme as so outrageously improper as to invite the wrath of the Court.” The High Court rejected the submission of some of the deposit holders that meetings for approving the scheme should have been held within the State of Kerala. 38. Upon examination of the question as to whether the company should have disclosed the aspects arising out of the th order dated 18 January, 2005 to enable the depositors and the bond holders to take an informed decision. The High Court has JUDGMENT concluded that the company is guilty of such non-disclosure. 39. On the interpretation of the provisions of Section 45 of the RBI Act, the Division Bench has concluded that by virtue of non-obstante clause in Section 45Q of the RBI Act, Chapter IIIB of the RBI Act will prevail over Sections 391-393 of the Companies Act. It is held that the provision contained in Page 30 31 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

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 JUDGMENT 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 Page 31 32 regulating the activities of NBFCs, strict restrictions were placed on the NBFCs for accepting deposits. The Companies which did not comply with the aforesaid directions were directed to stop accepting deposits and to repay the same immediately. It is also an accepted case of the company that the RBI, in exercise of its power under Section 45N, inspected the Books of Accounts of the appellant company in 2005. The inspection report disclosed the violations of the RBI Act, 1934, committed by the company which we have noticed in the earlier part of the th judgment. It is also accepted that on 18 January, 2005, RBI in exercise of its powers under Section 45MB(1) of the RBI Act, 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 JUDGMENT otherwise until further orders.” The appellant company was also directed not to sell, transfer, create charge of mortgage or deal in any manner with its properties, assets, without prior permission of the RBI. It is also accepted that the aforesaid th notice was advertised in the Indian Express on 20 January, 2005. The Notice highlights the purpose of the notice as “Integrated Finance Company Limited, Chennai prohibition Page 32 33 for accepting of deposits and alienation of assets”. The appellant claimed that NBFC started facing problems in running its operations as a direct consequence of the restrictions and

running its operations because of the drop in its profitability, it proposed a scheme of compromise with its creditors, viz. the depositors and bond holders. This scheme was approved by th the Board of Directors of the appellant company on 19 May, 2005. We have reproduced earlier the salient features of the scheme, which was presented to the Company Court under Section 391 of the Companies Act in the High Court of Madras. Our Conclusions: JUDGMENT 42. The primary issue that arises before us is as to whether such a scheme of arrangements could have been presented in view of the provisions contained in Chapter IIIB of the RBI Act. Even if it could be presented, could it be sanctioned without complying with the provisions contained in Section 45QA of the RBI Act? The learned counsel for the appellant submitted that the High Court has in terms concluded that the scheme cannot be characterised “as so outrageously improper as to invite the Page 33 34 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

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 JUDGMENT 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 just and fair. The Court is also required Page 34 35 to conclude that the proposed scheme of compromise or arrangement is not violative of any provision of law and is not contrary to public policy. Furthermore, the Court has to be

the minority into agreement. Above all, the Court has to be satisfied that the scheme is fair and reasonable from the point of view of a prudent man of business taking commercial decisions, which are beneficial to the class represented by them. [ See Miheer H. Mafatlal (supra) ] It is true that whilst sanctioning the scheme, the Company Court is not required to act as a Super-Auditor . No doubt whilst considering the proposal for approval, the Company Judge is not required to examine the scheme in the way of a carping critic, a hair- JUDGMENT splitting expert, a meticulous accountant or a fastidious

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. The Court is required to see that all legal requirements have been complied with. At the same time, the Court has to ensure that the scheme of arrangement Page 35 36 is not a camouflage for a purpose other than the ostensible reasons. [ See Administrator of the Specified Undertaking of the Unit Trust of India (supra), Para 32 ]. If any of the

purpose underlying the scheme and can judiciously X-ray the same. ( See Miheer H. Mafatlal (supra) ] 44. In view of the aforesaid, it needs to be considered as to 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. To JUDGMENT get over this difficulty, the learned counsel for the appellant has submitted that Chapter IIIB of the RBI Act is not a complete code. This apart, the RBI Act and the Companies Act must be read in their own sphere since both operate in different fields, altogether. We are unable to agree with the aforesaid submission of the learned senior counsel for the parties. Page 36 37 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

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 JUDGMENT 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 order special Audits in NBFCs, prohibited acceptance of deposits by NBFCs and make Page 37 38 applications for winding up of NBFCs. It is specifically noticed that earlier the only recourse available to the depositors was to approach the Court of Law for redressal of grievances.

make repayment for the deposit interest with a view to protect the interest of depositors. The NBFCs have been totally prohibited from accepting deposits for the purpose other than for personal use, if unincorporated. They have been permitted to continue to take deposit after incorporating themselves within the regulatory framework. The unincorporated bodies have also been specifically prohibited for issuing any advertisements in any form. The real intent is set out in Paragraph 6, which is as under:- JUDGMENT “ 6. There are reports of several finance companies and incorporated bodies having failed to repay the deposits collected from unsuspecting depositors who have been tempted by the attractive returns and incentives offered. Concern has been expressed in several quarters on the need to take urgent steps to regulate the activities of such companies and unincorporated bodies.” 46. Keeping in view the aforesaid objects and reasons, it becomes evident that Chapter IIIB of the RBI Act is a self contained code. It is not possible for us to accept the submissions of the learned Page 38 39 counsel for the appellants that the RBI Act and the Companies Act operate in distinct and different fields. We are unable to accept the submission of the learned counsel for the appellants

approval under the Companies Act. We may also notice here that the learned senior counsel for the appellant relied on Haridas Exports (supra) in this context . In the aforesaid case, this Court upon a comprehensive analysis of the Monopolies and Restrictive Trade Practices Act, 1969 and Customs Tariff Act, 1975 concluded that the said two Acts substantially operate in different fields and, therefore, the provisions of Section 9-A of Customs Tariff Act cannot be implied to repeal the provisions of Section 33(1)( j) of the MRTP Act, 1969 . Since JUDGMENT the main issue involved in the matter before us is different from the case 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 Page 39 40 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

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 JUDGMENT anything inconsistent therewith contained in any other law . The overriding effect extends not only to any other law for the time being in force but also to any instrument having effect by virtue of having such law. The reasons for giving such categoric overriding effect are evident from the objects and reasons given in the Amendment Act . The magnitude of the exploitation of the poor sections of the society, leading to utter destruction of Page 40 41 innumerable families was the underlying impetus to bring the NBFCs under strict control. Therefore, we have no hesitation in concluding that Chapter IIIB of the RBI Act is a complete code

inserted in the RBI Act (55 of 1963) w.e.f. 1964. Section 45QA th was inserted by the Act No. 23 of 1997 w.e.f. 9 January, 1997. Thus, provisions of the RBI Act would prevail over the Companies Act, it being a later enactment. It is a settled proposition of law that a later enactment will override the earlier enactment. We may usefully make a reference here to the relevant paragraphs of Tata Motors Limited (supra) ,which are as under:- “21. It was conceded by Mr Sundaram SICA being a special law vis-à-vis the 1956 Act, it shall prevail over the latter. The learned counsel, however, qualifies his submission by contending that SICA only excludes the provisions of the Companies Act when they are inconsistent with each other. JUDGMENT 22. The provisions of a special Act will override the provisions of a general Act. The latter of it ( sic Act) will override an earlier Act. The 1956 Act is a general Act. It consolidates and restates the law relating to companies and certain other associations. It is prior in point of time to SICA. 23. Wherever any inconstancy ( sic inconsistency) is seen in the provisions of the two Acts, SICA would prevail. SICA furthermore is a complete code. It contains a non obstante clause in Section 32. 24. SICA is a special statute. It is a self-contained code. The jurisdiction of the Company Judge in a case where reference had been made to BIFR would be subject to the provisions of SICA.” Page 41 42 48. In our opinion, Chapter IIIB has been given an overriding effect over all other laws including Companies Act by

Companies Act cannot be entertained unless it is in conformity with the 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. JUDGMENT 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 non- obstante 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.” Page 42 43 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

any help to the appellants in support of their submission that Section 45Q and/or Section 45QA of the RBI Act will not override Sections 391-394 of the Companies Act. 50. We, therefore, endorse the opinion expressed by the High Court that the scheme has been introduced only with a view to avoid repayment to the small depositors as it contemplates that instead of repaying of amount in accordance with the terms and conditions of the deposit, such amount shall be considered as JUDGMENT convertible debentures with interest @ 6%, which would be converted into equity shares within a period of one year. Such a provision is clearly contrary to the mandatory requirements under Section 45QA(1) which requires that “every deposit accepted by a NBFC, unless renewed, shall be repaid in accordance with the terms and conditions of such deposit”. This ingenious effort by the appellants in fact justifies the Page 43 44 insertion of the amendment, which has been obviously incorporated with a view to protect the depositors and to avoid exploitation of these hapless and poor depositors from

that the provisions contained therein shall override all other laws, which are inconsistent with the same. This will also be applicable to Sections 391-394 of the Companies Act. 51. The Companies Act as well as the RBI Act are Central Acts. Chapter IIIB, which was inserted by Act No. 55 of 1963 st w.e.f. 1 December, 1964 being a later enactment clearly has to prevail. We are unable to agree with the submissions of the learned counsel for the appellant that if such an interpretation is JUDGMENT given to Section 45QA, it would render Sections 391-394 nugatory. 52. Faced with this situation, Mr. Shyam Divan learned counsel for the appellant had submitted that in fact there is no inconsistency between Section 45QA of the RBI Act and Sections 391-394 of the Companies Act. It is submitted that Page 44 45 scheme of arrangements under Sections 391 to 394 is a form of novation of a contract. Under the Contract Act, each individual party is entitled to vary the terms and conditions of the

shares would only be continuance of a practice which has been vogue since late 1800s. He makes this submission relying on th Charlesworth’s Company Law 18 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.” JUDGMENT 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 Page 45 46 all other laws, which would necessarily negate the principle of novation contained in the Contract Act also. Since we have already negated the submission of the learned counsel for the

accept the subsequent submission of the learned counsel that since the scheme has been approved by the requisite majority and sanctioned by the Court, it is binding on the minority as well. In support of this submission, learned counsel has relied on the observations made by this Court in J.K. (Bombay) Private Ltd. (supra) and Administrator of the Specified Undertaking of the Unit Trust of India (supra) . On the basis of the aforesaid, it is submitted that if the parties could have novated the terms and conditions individually, there is no bar on JUDGMENT such novation through a scheme. The observations relied upon are as follows:- “28. ……………………….The principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties: it becomes binding on the Company, the creditors and the shareholders and the statutory force, and therefore, the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of Section 391 of the Act, a scheme is statutorily binding even on creditors and shareholders who dismanted from or opposed to its being sanctioned. It has statutory force in that sense and therefore cannot be altered except with the sanction of the Court even if the shareholders and the creditors acquiesce in such alteration, (cf. Premila Devi v. Peoples Bank ). The effect of the scheme is “to supply by recourse to the procedure thereby Page 46 47

54. We are unable to accept the aforesaid submission. The aforesaid observations reiterate the settled position of law that a scheme duly sanctioned 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. JUDGMENT 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 Page 47 48 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.

learned counsel for the appellant that the scheme of arrangement could be approved even though there is a non- compliance with the provisions of Chapter IIIB of the RBI Act in particular Section 45QA(1). We may notice here that the appellants had an opportunity to approach the Company Court under Section 45QA(1) to seek further time for making payment. It appears that no such application was made and, therefore, there is a complete infringement of Section 45QA(1). This would lead to an inevitable conclusion that the scheme of JUDGMENT arrangements could not be approved. The Effect of Non-disclosure of the Notice th dated 18 January, 2005 57. The aforesaid notice has been sent to the Company under Section 45MB(1). Such notice is only sent if any NBFC violates the provisions of any section or fails to comply with any direction or order given by the RBI under any of the provisions Page 48 49 of Chapter IIIB. Under these provisions, the RBI has the power to prohibit the NBFC from accepting any deposit. Under Section 45MB(2), in order to protect the interest of the

mortgage or deal in any manner with its property and assets without prior permission of the bank. It is an accepted fact that the orders directing the company not to accept deposits have th been duly published in the Indian Express on 20 January, 2005. Learned counsel for the appellant has submitted that it is an accepted fact that on inspection of the books of accounts of the appellant company under Section 45N of the RBI Act, 1934, numerous violations were disclosed. The details of the violations have been extracted in the earlier part of this JUDGMENT judgment. Whilst the investigation was being conducted into all the irregularities that have been committed by the company, the scheme of arrangement was presented to the Company Court th on or about 19 May, 2005. It is an accepted fact that the th notice dated 18 January, 2005 was not disclosed to the shareholders, who were present in the meetings which had been convened on the directions of the Company Court. Page 49 50 According to the learned counsel for the appellants, such a non-disclosure was not required under the provisions of the proviso to Section 391(2) of the Companies Act. In any event,

newspapers. Therefore, the whole information was in public 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 JUDGMENT 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:

Page 50 51

The preceding excerpt makes it clear that the scheme therein was not objected to by any of the interested persons. Thus, the

58. In our opinion, the High Court has correctly concluded that even if no investigation was pending under Section 235- 251 of the Companies Act, it was incumbent on the company to disclose the violations pointed out by the RBI on inspection of its books under Section 47N, which led to the issuance of the th notice dated 18 January, 2005. This, in our opinion, would clearly reflect on the lack of bonafide of the company in proposing scheme of arrangement. In our considered opinion, non-disclosure of the action taken and initiated by the RBI as JUDGMENT th apparent from the letter dated 18 January, 2005, amounted to non-disclosure of material facts which are required to be disclosed under Section 391(1) read with Section 393(1) of the Companies Act. The Company Court whilst examining the fairness and the bonafide of a scheme of arrangement does not act as a rubber stamp. It cannot shut its eyes to blatant non- disclosure of material information, which could have a major influence/impact on the decision as to whether the scheme has Page 51 52 to be approved or not. In our opinion, the High Court has not committed any error of jurisdiction in rejecting the submission of th the appellant that the non-disclosure of the letter dated 18

59. For the aforesaid reasons, we find no justification to interfere with the judgment and order passed by the High Court. The appeals are accordingly dismissed. …..…….…………………J. [Surinder Singh Nijjar] …..……………………….J. [Pinaki Chandra Ghose] New Delhi; July 16, 2013. JUDGMENT Page 52