Supreme Court of India
M/S. INTEGRATED FINANCE CO. LTD.versusRESERVE BANK OF INDIA ETC. ETC.
- Citation
- 2013 INSC 472
- Decided
- 16 July 2013
- Disposal
- Dismissed
- Bench
- S S NIJJAR
Holding
Chapter III B of the RBI Act, through its non‑obstante clause, prevails over the Companies Act, so a scheme of compromise for an NBFC must conform to Section 45QA, and the appellant’s undisclosed, non‑bonafide scheme was rightly rejected.
Summary
Integrated Finance Co. Ltd., a non‑banking financial company, was inspected by the RBI which found multiple violations and issued a circular prohibiting it from accepting deposits. The company, facing profitability problems, proposed a scheme of compromise under Section 391 of the Companies Act to convert deposits into convertible debentures, which was approved by its creditors and a single judge. The High Court set aside the approval, holding that Chapter III B of the RBI Act, via its non‑obstante clause, overrides the Companies Act and that any scheme for an NBFC must comply with Section 45QA of the RBI Act. The Supreme Court affirmed this view, noting the scheme was not bonafide, contravened public policy, and the company failed to disclose the RBI notice, a material fact required under Sections 391(1) and 393(1). Consequently, the scheme could not be sanctioned. The appeals were dismissed.
Issues considered
- Whether a scheme of compromise under Sections 391‑394 of the Companies Act can be presented for an NBFC when Chapter III B of the RBI Act, particularly Section 45QA, imposes mandatory restrictions.
- Whether the non‑obstante clause in Section 45Q/45QA of the RBI Act overrides the Companies Act provisions relating to schemes of arrangement.
- Whether the appellant’s failure to disclose the RBI notice dated 18 January 2005 violates the disclosure requirements of Sections 391(1) and 393(1) of the Companies Act.
- Whether the proposed scheme is bonafide, not contrary to public policy, and compliant with RBI regulations.
Legislation cited
- Companies Act, 1956s. 235, s. 251, s. 391, s. 392, s. 393, s. 394, s. 47N, s. 58A
- Reserve Bank of India Act, 1934s. 45MB, s. 45N, s. 45Q, s. 45QA
Subjects
NBFCscheme of compromiseCompanies Act 1956RBI Act 1934non‑obstante clauseSection 45QAdisclosurepublic policybonafideregulatory override
Judgment
[2013] 13 S.C.R. 938
A M/S. INTEGRATED FINANCE CO. LTD.
v.
RESERVE BANK OF INDIA ETC. ETC.
(Civil Appeal Nos. 55()5...5500 ot 2013)
8 JULY 16, 2013
[SURINDER SINGH NIJJAR AND
PINAKI CHANDRA GHOSE, JJ.] ,,,,,,,
'
Companies Act, 1956 - s.391 - Appellant, a Non-
c
Banking Finance Company (NBFC) - RBI inspected the
books of accounts of appellant-company- Inspection report
disclosed violations of the provisions of the RBI Act - RBI
issued notice to appellant-company - It started facing
D problems in running its operations because of drop in its -(
profitability - Appellant-company proposed scheme of
compromise with its creditors, viz. the depositors and bond
holders - Petition seeking approval of the compromise
. scheme under the Companies Act - Dismissal of, by High
E Court - Justification - Held: Justified - Chapter JllB of the
RBI Act has-overriding effect over all other laws including
Companies.Act by incorporating s.45 with a clear intention
to ensure that in a case of NBFC, a scheme u/s.391 of the ~
Companies Act cannot be entertained unless it is in
F conformity with the provisions of s. 45QA of the RBI Act -
On facts, there was clear lack of bonafides on the part of
appellant-company in proposing the compromise scheme
- There was non-disclosure of material facts required to be
y .
disclosed u/s. 391(1) rlw s. 393(1) of the 1956 Act - The
G scheme was introduced only with a view to avoid repayment
to the small depositors - It was also contrary to public policy,
and had been proposed with the oblique purpose of avoiding
938
H
INTEGRATED FINANCE CO .. LTD. v. RESERVE 939
BANK OF INDIA
the mandate of s.45QA{i) of the RBI Act - Reserve Bank A
of India Act, 1934 - s.45QA.
Companies Act, 1956 - s.391 - Petition seeking
approval of compromise scheme under the Companies Act
- Duty of Company Court - Held: The Company Court whilst B
examining the fairness and the bonafide of a scheme of
arrangement does not act as a rubber stamp - It cannot
y 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 to be approved C
or not.
Companies. Act, 1956 - s.391 - Schemes submitted
for approval under the Companies Act - Applicability of
provisions of the RBI Act - Held: Chapter 11/B of the RBI D
Act is a self contained code - It cannot be said that the
RBI Act and the Companies Act operate in distinct and
different fields - Also, it cannot be said that the provision
contained in the RBI Act being regulatory in nature will not
apply to cases of schemes submitted for approval under E
the. Companies Act - Reserve Bank of India Act, 1934 -
Chapter 11/B.
Reserve Bank of India Act, 1934 - Chapter JJJB -
Incorporation of - Objects and reasons - Discussed. F
Reserve Bank of India Act, 1934 - s.45Q - Non-
obstante clause in s.45Q - Applicability of - Scope ~
Discussed.
G
Interpretation of Statutes - Two enactments - Over-
riding effect of later enactment - Held: Provisions of the
RBI Act would prevail over the Companies Act, it being a
later enactment - Companies Act, 1956 - Reserve Bank of
India Act, 1934. H
940 SUPREME COURT REPORTS [2013] 13 S.C.R.
A The appellant-company was incorporated as a Non-
Ba n king Finance Company (NBFC) under the
Companies Act, 1956 and engaged in the business of
hire purchase and leasing. ·The Reserve Bank of India
(RBI), in exercise of its powers u/s. 45N of the Reserve
B Bank of India Act, 1934, inspected the books of accounts
of the appellant-company. The inspection report
disclosed violations of the provisions of the 1934 Act.
Subsequently, RBI, on 1_8th January, 2005, issued a
circular to the appellant-company, prohibiting it from
C "accepting deposits from any person, in any form
whether by way of fresh deposits or renewal of the
existing deposits or otherwise, until further orders'.
Further, the appellant-company was directed not to sell,
transfer, create charge or mortgage, or deal in any
0
manner with its properties,. assets, without prior
permission of the RBI. The notice was advertised in the
Indian Express on 20th January, 2005.
Thereafter, the appellant-company started facing
E problems in running its· operations because of drop in
its profitability. In order to overcome these problems,
appellant proposed a Scheme of Compromise with its
creditors, viz. the depositors and bond holders, which
F was approved by the Board of Directors of the appellant
compa'ny. The compromise !iCheme was approved by
majority of the bond holders and deposit holders. A
·petition was preferred before the High Court u/s. 391(2)
of 1956 Act, seeking sanction for the said compromise
G scheme. A Single Judge of the High Court approved the
said scheme.
On appeal, the Division Bench held that by virtue
of the non-obstante clause in Section 45Q of the RBI
H Act, Chapter 1118 of the RBI Act prevailed over Sections
INTEGRATED FINANCE CO. LTD. v. RESERVE 941
BANK OF INDIA
~
:r 391-393 of the Companies Act; that the scheme of A
arrangement of compromise even if presented by a
NBFC had to conform to the provisions contained in
the Chapter lllB of the RBI Act. The Division Bench
rejected the submission of the appellant that non-
disclosure of the letter dated 18th January, 2005 was B
not material, and declined to approve the compromise
scheme holding that not only was the scheme contrary
to the specific provisions contained in Chapter lllB of
Y the RBI Act; but also it was against pub1ic policy, and
" accordingly set aside the judgment of the Single Judge.
c
The primary issue that arose for consideration ·in
the i_nstant appeals was whether such a scheme of
arrangements could have been presented in view of the
provisions contained in Chapter lllB of the RBI Act; and D
'r even if it could be presented, could it be sanctioned
" without complying with the provisions contained in
Section 45QA of the RBI Act. The further question for
consideration was whether even if no investigation was
E
pending under Section 235-251 of the Companies Act,
it was incumbent on the appellant-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 notice dated 18th January, 2005. F
·Dismissing the. appeals, ·the Court
HELD:1. It cannot be said 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 G
..' '~
Companies Act, whilst approving the scheme, the
Company Court does not act as a rubber stamp. The
Companies Act has to be satisfied that the concerned
meetings of the creditors have been duly held. It has to
H
l
~
942 SUPREME COURT REPORTS [2013) 13 S.C.R.
A 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 to conclude that the proposed
B 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 satisfied that
members or class of members or creditors who may be y
in majority are acting bonafide and have not coerced
c 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. It is true that whilst sanctioning
D
the scheme, the Company Court is not required to act ~ ;
as a Super-Auditor. No doubt whilst considering the t
proposal for approval, the Company Judge is not
required to examine the scheme in the way of a carping
E critic, a hair-splitting expert, a meticulous accountant or
a fastidious Counsel. However at the same time, the
Court is not bound to superficially add its seal of
approval to the scheme merely because it received the
'j(,
approval of the requisite majority at the meeting held
F 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 is not a camouflage for a purpose other
than the ostensible reasons. If any of the aforesaid
G requirements appear to be found wanting in the r
•
scheme, the Court can pierce the veil of apparent
corporate purpose underlying the scheme and can
judiciously X-ray the same. (Para 43] [974-D-H; 975-A-E]
H Miheer H. Mafatlal vs. Mafatlal Industries Ltd. (1997) 1
INTEGRATED FINANCE CO. LTD. v. RESERVE 943
BANK OF INDIA
SCC 579: 1996 (6) Suppl. SCR 1 and Administrator of the A
Specified Undertaking of the Unit Trust of India & Anr. vs.
Garware Polyester Ltd. (2005) 10 SCC 682: 2005 (1) Suppl.
SCR 192 - relied on.
Dhulabhai Etc. vs. State of Madhya Pradesh & Anr. AIR B
1969 SC 78: 1968 SCR 662; JIK Industries Limited & Ors.
vs. Amar/al V. Jumani & Anr. (2012) 3 SCC 255: 2012 (3)
SCR 114; A.G. Vardarajulu & Anr. vs. State of T.N. & Ors.
(1998) 4 SCC 231: 1998 (2) SCR 390; Bharti Mobinet
Limited, Bharti Telenet Limited and Bharti Cellular Limited C
vs. DSS Enterprises Pvt. Ltd. 111(2004) DLT 554; In re:
HCL /nfosystems Limited, HCL lnfinet Limited and HCL
Technologies Limited. (2004)121Comp Cas 861(Delhi);
Tata Motors Limited vs. Pharmaceutical Products of India
Limited & Anr. (2008) 7 SCC 619: 2008 (9) SCR 267 - D
referred to.
Charlesworth's Company Law, 18th Edition - referred
to.
E
2.1. Chapter lllB of the RBI has been incorporated
through RBI (Amendment) Ordinance 1997,
subsequently replaced by the RBI (Amendment) Act,
1997. The Statement of Objects and Reasons make it
abundantly clear that before the amendment, the F
unincorporated bodies circumvented the statutory
restrictions by floating different partnership firms as and
when a firm reached the level of 250 depositors. It was
also reiterated that several unincorporated bodies were
advertising aggressively through various media, G
soliciting deposits from pubfic 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
H
944 SUPREME COURT REPORTS [2013] 13 S.C.R.
A NBFCs with RBI, stipulation of minimum need in the -,,.-
funds requirements, creation of reserved funds and
transfer of certain percentage of profits every year to ~-
the fund; and prescription 6f liquidity requirements. The
RBI has also been vested with powers to issue
B 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,
C prohibited acceptance of deposits by NBFCs and make
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. However by the Amendment,
0 powers have been vested with the Company Law Board
for directing the defaulter NBFCs to 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
E 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.
F [Para 45~ (976-A-H]
2.2. Keeping in view the aforesaid objects and
reasons, it becomes evident that Chapter lllB of the RBI
Act is a self contained code. It is not possible to accept
G the submissions of the appellants that the RBI Act and ..,,.
the Companies Act operate in distinct and different
fields. It cannot be said that the provision contained in
the RBI Act being regulatory in nature will not apply to
cases of schemes submitted for approval under the
H Companies Act. (Para 46] (977-C, DJ
INTEGRATED FINANCE CO. LTD. v. RESERVE 945
BANK OF INDIA
--,.- Haridas Exports vs. All India Float Glass Manufacturers' A
Assn. & Ors. (2002) 6 SCC 600: 2002 (1) Suppl. SCR 229
- held inapplicable.
3.1. It cannot be said that the non-obstante clause
in Section 45QA will not have an overriding effect over B
the provisions contained in the Companies Act in the
Sections 391-394; and further that if overriding effect is
given to Section 45QA, the provisions contained in
y Section 391 would be rendered nugatory so far as
NBFCs are concerned. Also it cannot be stated that the c
./
non-obstante clause contained in Section 45A ought to
be given a limited application. 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 lllB shall D
'1--
have effect notwithstanding 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
E
virtue of having such law. The reasons for giving such
categoric overriding effect are evident from the objects
'
and reasons given in the Amendm.ent Act. The
;7' magnitude of the exploitation of the poor ~ections of the
society, leading to utter destruction of innumerable F
families was the underlying impetus to bring the NBFCs
under strict control. Therefore, Chapter lllB of the RBI
Act is a complete code in itself. The Companies Act is
a prior enactment as the same was enacted in the year
1956, whereas, Chapter lllB was inserted in the RBI Act G
(55 of 1963) w.e.f. 1964. Section 45QA was inserted by
the Act No. 23 of 1997 w.e.f. 9th January, 1997. Thus,
provisions of the RBI Act would prevail over the
Companies Act, it being a later enactment. It is a settled
H
946 SUPREME COURT REPORTS (2013) 13 S.C.R.
A proposition of law that a later enactment will override
the earlier enactment. [Para 47] [977-G-H; 978-A-G]
3.2. Chapter lllB of the RBI Act has been given an
overriding effect over all other laws including
B Companies Act by incorporating Section 45 with a clear
intention to ensure that in a case of NBFC, a scheme
under Section 391 of the Companies Act cannot be
entertained unless it is in conformity with the provisions
of Section 45QA of the RBI Act. [Para 48] [979-F-G]
c
Aswini Kumar Ghose & Anr. vs. Arabinda Ghose & Anr.
AIR 1952 SC 369: 1953 SCR 1; Madhav Rao Jivaji Rao
Scindia vs. Union of India & Anr. (1971) 1 SCC 85: 1971
(3) SCR 9; /CIC/ Bank Ltd. vs. SIDCO Leathers Ltd. & Ors.
D (2006) 10 sec 452: 2006 (1) Suppl. SCR 528; R.S.
Raghunath vs. State of Kamataka & Anr. (1992) 1 SCC 335:
1991 (1) Suppl. SCR 387; and JIK Industries Limited &
Ors. Vs. Amar/al V. Jumani & Anr, (2012) 3 SCC 25 -
referred to.
E
4. The compromise scheme in question 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,~nd
F conditions of the deposit, such amount shall be
considered as 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)
G 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 insertion of
the amendment, which has been obviously incorporated
H
INTEGRATED FlNANCE CO. LTD. v. RESERVE 947
BANK OF INDIA
with a view to protect the depositors and to avoid exploitation A
of these hapless and poor depositors from exploitation by
Non Banking Financial Institutions, such as the appellant.
It is for this reason that Chapter lllB clearly provides
that the provisions contained therein shall override all
other laws, which are inconsiste11t with the same. This B
will also be applicable to Sections 391-394 of the
Companies Act. [Para 50] [980-E-H; 981-A, BJ
y 5. In the present case, the scheme is in the teeth of
Section 45Q and it has rightly not been approved by C
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
RB.I Act. [Para 54] [983-F-G] D
J.K. (Bombay) Private Ltd. vs. New Kaiser-i-hind
Spinning and W-eaving. Co. Ltd. & Ors. Etc. (1969) 2 SCR
866: AIR 1970 SC 1041 - referred to.
E
. 6. The subm~ssion of the appellant that the scheme
of arrangement could be approved even though there.
is a non-compliance with the provisions of Chapter lllB
of ~he· RBI Act in particular Section 45QA(1), is rejected.
The appellants ha~. an opportunity to approach the F
Company .Court under Section 45QA(1) to seek further
time fQr ·making payment. It appears that no such
appHcation was made and, therefore, there is a complete
infringement of Section 45QA(1). Th~s would lead to an
inevitable conclusion that the scheme of arrangements G
could not be approv~d. [Para 56] [984-C-E]
Hindustan Lever Employees' Union vs. Hindustan Lever
Ltd. & Ors. 1995 Supp (1) SCC 499: 1994 (4) Suppl. SCR
723. - distinguished. H
948 SUPREME COURT REPORTS (2013] 13 S.C.R.
A 7. 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
B led to the issuance of the notice dated 18th January,
2005. This would clearly reflect on the lack of bonafide
of the company in proposing scheme of arrangement.
Non-disclosure of the action taken and initiated by the
RBI as apparent from the letter dated 18th J~nuary,
C 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
D rubber stamp. It cannot shut its eyes to blatant non-
disclosure of material information, which could have ·a
major innuence/impact on the .decision as to whether
the scheme has to be approved or not. Thir High Court
E has not committed any error of jurisdiction-·in rejecting
the submission of the appellant that the non:disclosure
of the letter dated 18th January, 2005 was n·ot material.
[Para 58] [986-D:..H; 987-A] _ )o::.
Case Law Reference:
F
(1969) 2 SCR 866 referred to Paras 20, 53
2005 (1) Suppl. SCR 192relied on Paras ·20, 53
2002 (1) Suppl. SCR 229held Paras 22;.46 r
G inapplicable
2006 (1) Suppl. SCR 528 referred to Para 22, 49
1953 SCR 1 referred to Para 22, 49
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 949
BANK OF INDIA
:-r· 19_71 (3) SCR 9 referred to Para 22, 49 A
1968 SCR 662 referred to Para 24
2012 (3) SCR 114 referred to Paras 25, 53
1.991 (1) Suppl. SCR 387 referred to Para 25, 49 B
1998 (2) SCR 390 referred· to Paras 25, 49
y 111(2004) DLT 554 referred to Para 29
1994. (4) Suppl. distinguished Paras 30, 57 c
SCR 723
·{2004) 121Comp Cas referred to Para 30
861(Delhi).
2008 (9) SCR 267 referred to Paras 33, 47 D
· 1996 (6) Suppl. SCR 1 relied on Paras 36, 43
. ·CIVIL APPELLATE JURISDICTION : Civil Appeal No.
5505-5508 of 2013.
E
From the Judgment & Order dated 30.04.2008 .. of the
·High .i:ourt of Judicature at Madras in OSA Nos. 308, 309 &
~ 312 of 2006 and OSA No. 91 of 2007.
.Arvind Datar, V. Prakash, Iqbal Chagla, Parag P. Tripathi, F
Shyam Divan, lmran Sharma, Nakul Mohta, Mahesh Agarwal,
Rishi Agrawala, E.C. Agrawala, Abhinav Agrawala, Manju
Jaria,.S.R..Setia 1 N. Ganpathy, Naval Agarwal, Ramesh Babu
M.R., SWati Setia, Manish Nair, Kunal, Krishna Dev, Senthil
Jagadeesah, Romy Chacko, C.K. Sasi, Abhay Kumar for the G
appearing parties.
The Judgment of the Court was delivered by
SURINDER SINGH NIJJAR, J. 1. Leave granted.
H
950 SUPREME COURT REPORTS [2013] 13 S.C.R.
A 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
B and judgment dated 30th April 2008 passed by th·e Division
Bench of the High Court of Judicature at Madras . .Vide the
aforesaid order, the order/judgment of the lea~nec;I single judge
dated 19th August 2006 passed in Company Petition No. 160
of 2005 was set aside.
r
c
4. The Company Petition No. 160 of _2005 was filed by
the appellant company herein under Section 391 of the
Companies Act, 1956 (hereinafter referred to as ~the
Companies Act"}, seeking approval for the scheme of
D arrangemenUcompromise dated 10th August, 2005. The said
agreement was entered into between the appellant company
herein and its class of creditors, namely its deposit holders
and bond holders. The learned Single Judge, vide order dafed ·
19th August, 200Q, was pleased to sanction the said scheme, ,
E albeit with some donditions. This order was challenged in the :
High Court by way of four original side appeals, which were
allowed by the .Division Bench vide the order dated 30th April, ·
2008 which has been challenged in this Court.
F Summary of Facts:
5. The relevant facts giving rise to filing of the· present
appeals as narrated by the parties a're as under:
G 6. The appellant herein was incorporated as a Non- r ··
Banking Finance Company (hereinafter referred to, as· a
"NBFC") under the Companies Act in 1983, and was engaged
inter alia in the business of hire-purchase and leasing. Over
the years the appellant company has become one of the
H leading financial companies. It has 32 branches with over
INTSGRATED FINANCE CO. LTD. v. RESERVE 951
BANK OF INOIA [SURINDER SINGH NIJJAR, J.]
several hundred employees. The shares of the company are A
listed in two ·stock· exchanges in India. It has 20,000
shareholders. Until 1995-1996, the appellant company was a
profit making company and declared dividends to its
sharefiolders continuously.
B
·1. That the Reserve Bank of India (hereinafter referred
tO "RBI" or/and the "respondent no.1 "), during 1997-2003,
issued a series of circulars for regulating various activities of
1
the Non Banking Financial Companies. The RBI also imposed
certain conditions on these companies. The companies that c
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 D
Reserve Bank of India Act 1934 (hereinafter "1934 Act"), the
RBI inspected the books of accounts of t~e appellant company
in 2005. The inspection report of the RBI disclosed the
following violations of the provisions of the 1934 Act:
E
(i) On 31st March 2004, the Net Owned Fund (NOF)
of the appellant company herein stood at negative
::<( (-) Rs.10666.06 lakh, which was in excess of the
reported NOF at Rs.2194.00 lakh;
F
(ii) The credit exposure of the appellant company, as
on 31st March 2004, to some of the companies
was found to be in excess of 15% of its reported
owned fund of Rs.2877.00 lakh as on September
30, 2003. Thus, it violated the provisions of Para G
12 of the NBFC Prudential Norms (Reserve Bank)
Directions, 1998 (hereinafter referred to as the
Prudential Norms Directions).
(iii) The appellant company did not classify its assets H
952 SUPREME COURT REPORTS [2013] 13 s.c.R:
A . in accordance with the asset classification norms'
stipulated by RBI and the·reby, violated· fhe
provisions of Paragraph 7 of the Prudential Norms
directions.
B (iv) The Gross Non~Performing Assets of the appellant
company, assessed at Rs.15603.16 lakh, stood
at a very high level and constituted .69.31% of the
total credit exposures of the appellant company., r
c (v) The appellant company was found to have not
made adequate provision in respect of its Non-
Performing Assets. Resultantly, there..was short·
provisioning to the extent of Rs.12575.33 lakhs.
The aforesaid omission on part of the appellant
D violated the provisions of Paragraph 8 of the
Prudential Norms Directions.
(vi) The appellant company was also found to be in
violation of the provisiorl'S of Paragraph 10 of the
E Prudential Norms Directions because the NOF of
the appellant company was negative and it did not
maintain the minimum capital adequacy ratio.
9. Subsequently on 20th January, 2005, the RBI, in
F exercise of its powers under Section 4~MB(1)of the Reserve
Bank of India Act, 1934 issued a circular to the appellant
company, prohibiting it from "accepting deposits from any
person, in any form whether by way of fresh deposits or
renewal of the existing deposits or otherwise, until further
G orders." Further, the appellant company was directed not to
sell, transfer, create charge or mortgage, or deal in any
manner with its properties, assets, without prior permission
of the RBI. The said notice was also advertised in the Indian
Express dated 20th January, 2005
INTEGRATED FINANCE CO. LTD. v. RESERVE 953
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
~ 10. Thereafter, the appellant company started facing A
problems in running its operations because of the drop in its
profitability. In order to overcome these problems, the
--:t appellant company proposed a Scheme of Compromise with
its creditors, viz. the depositors and bond holders, which was
approved by the Board of Directors of the appellant company B
on 19th May, 2005. The relevant part of the aforesaid scheme
is as under:
y
"4 PAYMENTS TO FIXED DEPSOIT HOLDERS/
BOND HOLDERS c
4.1. The Company would settle all the deposit holders
up to maturity value of Rs.20,000/- as and when it
falls due.
D
4.2 The scheme would provide for the following.
(a) Conversion of all the deposit holders and
bond holders into secured convertible
debentures carrying on interest. of 6% p.a.
E
convertible into equity before the expiry of
1 year from the date of allotment with an
option to the company to prepay the value
~ of debentures before the due date of
conversion. The conversion price will be F
•
determined taking .into account the valuation
laid down by SEBI guidelines.
(b) The debentures will be issued with
-......; periodical interest payment option to the
G
deposit/ bond holders who are holding
regular interest payment option presently
and for those deposit/ bond holders holding
payment of interest under cumulative option,
interest will be added to the value of the H
954 SUPREME COURT REPORTS [2013] 13 S.C.R.
A debenture for conversion at the time of
maturity.
(c) By virtue of this scheme, all the deposit
holders and bond holders would become
B secured creditors in the books of IFCL at
the first year. The Trustees for the Bonds
would be the Debenture Trustees in the post
scheme scenario and a Debenture Trust
Deed charging the assets of Rs.125 crores
c of receivables, accrued interest,
investments, assets and available stock on
hire would also be made so as to comply
with all the norms for the purpose of fully
convertible debentures.
D
4.3. By virtue of the conversion, the outflow of the
company would be a quarterly payment of interest
depending upon the type of deposiU bond held
by the creditors. At the end of the tenure the
E debentures would either be redeemed or
converted as equity shares at the given
appropriate exit route as the Company is a listed
company and a fairly large tradable market
capitalization being available for the liquidation of
F these converted shares. The conversion of deposit
holders/ bond holders into secured convertible
debentures and thereafter into equity shares of the
company will ensure their benefits since the
company established new lines of business such
G
as financial BPO and is in the ·process of
expanding the same."
x x x x
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 955
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
' "4.6 The scheme is not offered to the Banks since the A
'l
stock on hire pledged I hypothecated is about
. Rs.80 crores as against their dues of Rs.62
crores. Since none of the banks interest is
prejudiced nor any of the assets charged to them,
this.scheme is not being offered to them and it is B
only the deposit holders and bond holders whose
rights are being dealt with in the Scheme of
y Arrangement and compromise. Thus there is no
direct or indirect interest of the Banks being
prejudiced or affected.
c
5. Since this scheme does not envisage cash outflow
at the first instance and does seek to convert the
depositors and bond over a period of time into
shareholders there is no requirement of fresh D
'--r infusion of cash.
6. IMPLEMENTATION OF SCHEME
6.1 The Scheme if approved by the deposit holders E
and bond holders with such modifications, as may
be assented by the Company, shall be submitted
to this Hon'ble Court for confirmation and if
~
confirmed, shall become binding with all deposit
holders, bond holders and the Company. 6.2 On F
completion of the scheme, the Company shall have
discharged all the liability to fixed deposit I bond
holders.
-"f( 7 EFFECT OF THE SCHEME G
7.1 In view of the above Scheme being offered, all
the parties agree that:
(a) with the terms of the Scheme all liabilities of the
H
956 SUPREME COURT REPORTt> [2013] 13 S.C.R.
A Deposit Holders and Bond holders shall be
deemed as fully discharged.
r-•
(b) No claims shall be raised by any deposit holders
or bond holder to whom this Scheme is offered ·
B 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
c 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."
D 11. The aforesaid scheme of compromise was presented
under Section 391 of the Companies Act to the High Court.
On 1st July 2005, the appellant company was permitted by
the Ld. Single Judge, in Company Application Nos. 854 and
E 855 of 2005 in C.P.No.160 of 2005, to convene a meeting
of its deposit holders at Chennai on 10th August 2005 at
2.30 p.m. for 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
F 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
G some other directions in the aforesaid order to ensure that
the relevant provisions of the Companies Act are complied
with while conducting the said meeting.
12. However, before tile meeting could be held on 10th
H August, 2008; Company Applications Nos. 1105 to 1110 of
INTEGRATED FINANCE CO. LTD. v. RESERVE 957
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
2005 in C. P. No.160 of 2005 came to be preferred before A
the High Court. In the aforesaid Company Applications, some
depositors of the appellant company inter alia sought the
appointment of an "independent· chairman," in place of the
\
I chairman appointed vide order dated 1st July 2005. The said
applicants also made a prayer that police protection should B
be granted to them during the said meeting. The learned
Single Judge while disposing of the aforesaid company
applications, vide order dated 5th August, 2005, did not make
any change pertaining to the Chairmanship of the originally C
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.
D
13. The scheduled meeting was conducted on 10th
August, 2005, as per the orders of the learned Single Judge
dated 1st July 2005 and 5th August, 2005. The report of the
meeting was published in various newspapers indicating that E
the Scheme had been approved by majority of the bond
holders and deposit holders .. A report concerning the said
, meeting was filed before the learned Single Judge along with
the Observer's report. Thereafter, a petition was preferred
before the High Court under Section 391 (2) of the Companies F
Act, seeking sanction for the said scheme of compromise. In
the aforesaid proceedings, the Integrated Finance Company
Depositors Association - an Association representing the
depositors of the appellant company and several other
depositors-filed their objections and raised several G
contentions regarding the validity of the said Scheme. The
RBI also filed its objections. At the same time, certain other
associations, representing t~e deposit holders, debenture
holders also intervened in the aforesaid proceedings and
supported the validity of the said scheme. Similarly, an H
958 SUPREME COURT REPORTS [2013] 13 S.C.R.
A association of the employees of the appellant company also '
interv~ned in the support of the Scheme. It is also relevant to
·1
note here that the appellant company, during the pendency of '
the Company Petition No.160 of 2005, filed Company
Applications Nos. 1409 & 1410 of 2005, inter alia to restrain
B the respondent Nos. 1 to 6 in such applications from initiating I-
any proceeding either civil or criminal in nature against the
Directors of the appellant company. t
y
14. The learned Single Judge vide order dated 19th
c 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
D the affairs of the Company from any proceeding that may y
be contemplated either under the provisions of the
Companies Act or under any other Act for any statutory
violation."
E 15. The aforesaid order, as noticed earlier, was
challenged before the Division Bench of the High Court by
way of the following appeals:
,:C
O.S.A. No. 308 of 2006 was filed by the Reserve
F Bank of India; 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.
G
While allowing the aforesaid appeals, the Division Bench
set aside the judgment of the Learned single Judge vide
common judgment/order dated 30th April, 2008. This
judgment is under challenge before us.
·H
. >'
t
INTEGRATED FINANCE CO. LTD. v. RESERVE 959
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
Submissions: A
•,
16. We have heard the learned counsel on behalf of the
parties.
17. Mr. Arvind P. Datar, learned senior counsel, B
appeared for 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
'"f in S.L.P. (C) Nos. 12737-12740 of 2008. Mr. Shyam Divan,
learned senior co1.msel, appeared for the intervenors in I.A. c
Nos.""33-36 of 2009 in the aforesaid proceedings. Whereas
Mr. Parag P. Tripathi, learned senior counsel, appeared for
the Resp6ndenURBI and Mr. V. Parkash, learned senior
counsel· appeared for respondent no.1/lntegrated Finance
Depositors Association in S.L.P.(C) No. 12738 of 2008. D
18. Mr. Datar, learned senior counsel: submitted that the
s9heme of compromise of the appellant company has been
approved by 1.708 out of 2177 (79%) deposit holders and
5628 O\Jt of 7143 bond holders (77.73%), present and voting; E
which shows that it was approved by an enormous majority.
According.to him, the appellant company has complied with
\
all_ t~e statutory requi~ements relating to the said scheme. This,
he sub!'lits, is evident from the fact that neither the Single
Judge· nor the Div,ision Bench of the High Court found any F
proceoural irregularity in the arrangement of the said scheme.
Thus according to Mr. Datar, the only issues that now require
consideration are:
(i) "Whether the non-obstante clause in Section 45Q G
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 H
960 SUPREME COURT REPORTS [2013) 13 S,C.R.
A RBI letter dated 18th January, 2005 before the
learned Company Judge as per the provisions of
Section 391 (1) of the Companies Act, 1956?"
19. According to Mr. Chagla, the crucial issue which
B arises for the consideration of this court is as to whether
Section 391 of the Companies Act does not apply to NBFCs
in view of Section 45QA of the RBI Act.. He also
supplemented the second issue, as framed by Mr. Datar, by "'
submitting that this Court has to determine that; whether: non-
e disclosure of the letter dated 18th January, 2005 violates the
provisions of Section 391 (2) and/or Section 393 of the
Companies Act. These submissions are reiterated by Mr.
Shyam Divan, learned senior counsel.
D 20. Mr. Datar has further submitted that a scheme under y
Sections 391 to 394 is an exception to the rl!le 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·trom the Court
E will be binding equally on the dissenting mir,iority. In this
context, the learned counsel relied upon J.K. (Bombay) Private
Ltd. Vs. New Kaiser-i-hind Spinning and Weaving Co. Ltd.
& Ors. Etc. 1 and Administrator of the Specified Uni:Jertak~ng
of the Unit Trust of India & Anr. Vs. Garware Polyester Ltd. 2
F 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
G 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
1. (1969) 2 SCR 866, AIR 1970 SC 1041.
H 2. c2oos) 10 sec 682.
INTEGRATED FINANCE CO. LTD. v. RESERVE 961
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
Ord~r 23, CPC); and also by adjustment of a decree (Order A
21 Rule 2, CPC). Relying on the provisions contained in
Section 22 of the.Sick Industrial Companies Act, 1982 and
Section 402 of the Companies Act, Mr. Divan has submitted
that Chapter V of the Companies Act provides another
statutory method of varying contracts. The Chapter V allows B
even solemn contractual obligations to be varied by a particular
class of similarly placed members/creditors, provided there
Y. is requisite majority. The learned senior counsel argued that
a Scheme under Sections 391-394 of the Companies Actis
not merely a commercial agreement, but it is statutorily binding C
on all members and creditors of a company.
21. Mr.· Datar, Mr. Chagla and Mr. Divan. have
un.animously submitted that Section 45QA of the RBI Act is
not a bar to Scheme under Sections 391-394 of Companies D
'T 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, E
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
s.aid provisions. Third, the legislature did not intend to
exclude the application of Sections 391-394 of the F
Companies Act in relation to the NBFCs.
22. Elaborating these propositions, it was submitted that
the RBI Act and the Companies Act operate in distinct and
-f .different fields, altogether. Mr. Chagla argued that the RBI Act G
is regulatory in nature and is enc~cted to regulate the operation
of the Banking Companies and NBFCs. The RBI Act is merely
supplementary to the Companies Act and does not supplant
it. To_.support the said submission, Mr. Datar relied upon
H
962 SUPREME COURT REPORTS [2013] 13 S.C.R.
A Bennion, Interpretation of Statues, s. 288 on "Textual
Conflicts." Reliance is also pla.:;ed on Haridas Exports Vs.
All India Float Glass Manufacturers' Assn. & Ors. 3 Mr. Datar
further pointed out that the special provisions relating to a
scheme under the Companies Act will prevail over a special
B statue, if the special statute has no provisions to deal with
the said matter. He relied upon the principle of law· laid down
in /CIC/ Bank Ltd. Vs. S/OCO Leathers Ltd. & Ors. 4 In this
context, Mr. Chagla relied upon the judgments of this court '"'(
· reported in Aswini Kumar Ghose & Anr. ·Vs. Arabinda Ghose·
C & Anr. 5 and Madhav Rao Jivaji Rao Scindia Vs. Union of
India & Anr. 6 Further, the RBI Act, according to Mr. Chagla,
is not a complete code by itself.
23. Mr. Datar also pointed out that the RBI Act will apply
D 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 former. The latter will continue to apply in the·
circumstances where matters relating to running of a company
E are concerned, like the provisions relating to schemes and
arrangements of the company. Thus, it was submitted that
RBI Act has no application in matters cov~red by the Sections
391-394 of the Companies Act and therefore, Section 45QA .
F 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
G applicable in the present case because of the non-obstante
3. (2002) 6 sec 600.
4. (2006) 10 sec 452.
5. AIR 1952 SC 369.
·H 6. (1971) 1 sec 85.
INTEGRATED FINANCE CO. LTD. v. RESERVE 963
BANK OF- INDIA [SURINDER SINGH NIJJAR, J.]
clause contained in Part 1118 of the RBI Act. Mr. Divan has A
submitted that the ambit of Sections 391-394 of Companies
Act is very wide. In fact, arrangements 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 B
Charlesworth's Company Law, 18th Edition, Pg. 772). On the
other hand, Chapter lllB of the RBI Act contains whole set of
detailed provisions pertaining to regulation of NBFCs. Mr.
Chagla added that the object of the 1997 amendment to the C
RBI Act which added section 450 indicates that a remedy
was to be granted to deposit holders for approaching the
Company Law Board for repayment of deposits held by a
.
NBFC when the same. are not repaid in accordance with the
terms and conditions of the deposit. However, the jurisdiction 0
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 Pradesh & Anr. 7
E
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
neither applicable in the facts and circumstances of the case
nor is it a bar to a Scheme under Sections 391-394 of the F
Companies Act. Mr. Datar relied upon the case of JIK
Industries Limited & Ors. Vs. Amar/al V. Jumani & Anr, 8
wherein it was held that "under the scheme of the modem
legislation, non-obstante clause has a contextual and limited
application." Reliance was also placed upon 'the case of R.S. G
Raghunath Vs. State of Kamataka & Anr. 9 wherein it was
7. AIR 1969 SC 78.
8. (2012) 3 sec 255.
. s. (1992) 1 sec 335 H
964 SUPREME COURT REPORTS [2013] 13 ?.C.R.
A he.Id that "there should be a clear inconsistency between the, ~
two enactments before giving an overriding effect to the non-
obstante clause. But the non-obstante clause need not
necessarily and always be co-extensive with the operative part
so as to have the effect of cutting down the clear terms of an
B 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."
c
, It was also submitted that the Court must tiy to find out
the extent to which the legislature had intended to give one
provision overriding effect over another. Such intention of the
legislature is to be gathered from the enacting part of the
D section. The counsel relied upon A.G. Vardarajulu & Anr. Vs.
State of T. N. & Ors. 10
26. It was further argued by Mr. Chagla that Part lllB was
introduced in the RBI Act by Amendment Act of 1963. The
E Statement of Objects and Reasons of the said Amendment
Act indicates that it was not intended to override the provisions .
of the Companies Act. Since the legi61ative intention behind ·
such insertion was to regulate the functioning of NBFCs in
general and to prohibit multiple partnership firms from taking
F deposits from the general public, in particular; it cannot bE:
interpreted in the manner so as to exclude the application of
Sections 391-394 of the Companies Act. According to Mr.
Chagla, Section 45QA simply states in general terms that
G 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 o(
i
H 10. (1998) 4 sec 231.
INTEGRATED FINANCE CO. LTD. v. RESERVE 965
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
~ words,
principal or to accept in kind rather than in cash. In other A
novation of the contract entered into between the
company and the depositor is not prohibited.
27. Further, it was submitted that the provision of Section
45QA is pari materia if not identical with Seation 58A of the B
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 tfle
~ Companies Act. Premising on the aforesaid submission, Mr.
Datar argued that if a scheme of arrangement is not c
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 and elaborated by Mr. Chagla.
28. It was further submitted that wherever the applicability D
"t 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 E
banking company by High Court. It was further submitted that
the legislative intent ca.nnot be interpreted in the manner which
,,.. will discriminate against the depositors of NBFCs as against
the depositors of public limited companies and depositors of
banking companies. Section 391 of the Companies Act can F
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
-~ G
anomalous situation. In the light of the aforesaid, it was
collectively argued by the learned senior counsel that the non-
obstante clause in Section 450 of the RBI Act, 1934 does
not prohibit the High Court from sanctioning any scheme for
the deposit holders of an NBFC. Therefore, the Division H
966 SU~REME COURT REPORTS [2013] 13 S.C.R.
A Bench ot the High Court committed a serious jurisdictional ~
error in setting aside the order of the learned Single Judge.
29. The second issue framed by the learned senior
counsel for the appellant company and intervenors is that
B whether non-disclosure of the letter/notice dated 18th January,
2005 issued by the RBI to the appellant is violative of the
provisions of Section 391 (2) and/or Section 393 of the
Companies Act? Mr. Datar has submitted that the said letter
dated 18th January,' 2005 was widely advertised by the RBI T
C in various newspapers, including the Indian Express dated
20th January 2005. And, therefore, the contents of this letter
were in the public domain. It was also argued that facts that
are inconsequential for the approval of the scheme need not
be disclosed. The counsel relied upon Bharti Mobinet
D Limited, Bharti Telenet Limited and Bharti Cellular Limited
Vs. DSS Enterprises Pvt. Ltd. 11 "1"
30. The learned counsel further submitted that even
otherwise the disclosure under the proviso to Section 391 (2)
E of the Companies Act is to be made only before the Court
that sanctions the scheme and not to the creditors or the
. shareholders with whom the scheme is entered into. The
counsel relied upon Hindustan Lever Employees' Union _vs.
Hindustan Lever Ltd. & Ors. 12 and In re: HCL lnfosystems
F Limited, HCL lnfinet Limited and HCL Technologies
Limited. 13
31. Mr. Chagla was at pains to emphasise that Section
391(2) of the Companies Act requires a company to disclose
G to the Court all material facts relating to the company "such
as the latest financial position of the company, the lat~st
11. 111(2004) DLT 554.
12. 1995 Supp (1) sec 499.
H 13. (2004)121 CompCas861 (Delhi).
INTEGRATED FINANCE CO. LTD. v. RESERVE 967
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
Auditor's Report on the accounts of the company, the A
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 dated 18th January, 2005 is not
akin to the· provisions of Sections 235 to 251 of the B
Companies Act. Thus, it was argued that the Division Bench
erroneously held that the appellant company should have
disclosed the letter/order issued by the RBI before the
creditors.
c
Responden~ Submissions
32. Mr. Tirpathi, learned senior counsel, appearing for
the RBI submits that the Division Bench of the High Court
has correctly interpreted the provisions of Chapter lllB of the D
RBI Act. He emphasised that an amendment was required to
strengthen the regulatory mechanism in relation to the NBFCs.
The said Chapter lllB has evolved an elaborate scheme of
regulations, enabling the RBI even to seek winding up of a
NBFC in appropriate circumstances. Section 450 of the RBI E
Act provides that Chapter lllB thereof shall override any other
law inconsistent therewith. Section 45QA gives a statutory right
·:x- which cannot be waived by anyone. Un~er this provision, every
deposit accepted by NBFC has to be renewed and repaid in
accordance with the terms and conditions of such deposit. F
No subsequent agreement can permit the conditions to be
waived of or varied. Section 45QA(2) enables NBFCs fo seek
extension in time for repayment before the Company Law
Board. There is no other provision in Chapter 1118 which can G
dilute the effect of Section 45QA. The High Court, according
to Mr. Tirpathi, .has rightly held that the scheme in question of
the appellant company is not in compliance with Chapter 1118
and, therefore, cannot be approved.
H
968 SUPREME COURT RE.PORTS [2013] 13 S.C.R.
A 33. Countering the submissions of the appellants with
regard to the interpretation of non-obstante clause contained
in Section 45QA, Mr. Tirpathi submitted that the provisions
contained in Chapter lllB have to prevail over the provisions
of the Companies Act. He relies on the judgment of this Court
B in Tata Motors Limited Vs. Pharmaceutical Products of India
Limited & Anr. 14
34. Mr. V. Prakash, learned senior counsel, appearing
on behalf of the respondent No.1 I Integrated Finance
C Depositors Association in S.L.P. (C) No. 12738 of 2008,
submitted that the provisions contained in Section 45QA(1)
of the RBI Act are mandatory and cannot be diluted.
Elaborating on the factual circumstances, learned senior
counsel submitted that the appellant company lead a very
D aggressive advertising campaign which was aimed to make
the general populace believe that it was supported by leading
companies such as MRF Ltd., Malayala Manorama, etc for
soliciting deposits from public in Kerala. And then suddenly
E to the shock of the public, the order dated 18th January, 2005
was published in the newspapers, which prohibited the
appellant from accepting or renewing any further deposits but
the appellant continued to accept deposits even after said
notice. The learned senior counsel further submitted that the
F 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
G contrary to public policy.
35. We have considered the submissions made by the
learned counsel for the parties. We may here briefly notice
the conclusions that have been arrived by the High Court:
H 14. (200B) 7 sec 619
INTEGRATED FINANCE CO. LTD. v. RESERVE 969
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
·-~
Findings of the High Court A
36. Whilst examining the scope of Sections 391 to 393
of the Companies Act, the High Court relied on the analysis
of the aforesaid sections as rendered by this Court in the
case of Miheer H. Mafatlal Vs. Mafatlal Industries Ltd. 15 The B
analysis given in the aforesaid judgment are as under:-
"28-A. 1. The sanctioning court has to see to it that all
the requisite statutory procedure for supporting such a
scheme has been complied with and that the requisite
meetings as contemplated by Section 391 (1 )(a) have
c
been held.
2. That the scheme put up for sanction of the Court
is backed up by the requisite majority vote as
."'r D
. 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 E
question. That the majority decision of the
concerned class of voters is just and fair to the
';y
class as a whole so as to legitimately bind even
the· dissenting members of that class.
F
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 ).
G
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
15. (1997) 1 sec 579. H
970 SUPREME COURT REPORTS [2013] 13 S.C.R.
-~
A concerned seeking sanction for such a scheme
and the Court gets satisfied about the same.
6. That the proposed scheme of compromise and
arrangement is not found to be violative of any
B 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
c 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 .
D acting bona fide and in good faith and were not
-f..
coercing the minority in order to promote any
interest adverse to that of the latter comprising the
same class whom they purported to represent.
E 8 That the scheme as a whole is also found to be
just, fair and reasonable from the point of view of
prudent men of business taking a commercial
decision beneficial to the class represented by
them for whom the scheme is meant.
F
9. Once the aforesaid broad parameters about the
requirements of a scheme for getting sanction of
the Court are found to have been met, the Court
will have no further jurisdiction to sit in appeal over
G the commercial wisdom of the majority of the class r -
of persons who with their open eyes have given
their approval to the scheme even if in the view
of the Court there would be a better scheme for
the company and its members or creditors for'
H whom the scheme is framed. The Court cannot
INTEGRATED FINANCE CO. LTD. v. RESERVE 971
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
-~-~
refuse to sanction such a scheme on. th~t ground A
as it would otherwise amount to the Court
exercising appellate jurisdiction over the scheme
rather than its supervisory jurisdiction."
37. The High Court notices the well settled legal positions B
that whilst examining the scheme under Sections 391-393 of
the Companies Act neither the Company Court nor the
y 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 c
Appellate Court to 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 . D
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 ordinarily b~yond the jurisdiction of the Company
E
Co.urt 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
)r
[t. The High Court concludes that "in the facts of the present
case, we do not think- that we can characterise the Scheme F
as so outrageously improper as to invite the wrath _of the
Court." The High Court rejected the submission of some of
the deposit holder_s that meetings for approving the scheme
should have been held within the State of Kerala.
---.(
G
38. Upon examination of the question as to whether the
company should have disclosed the aspects arising out of
the order dated 18th January, 2005 to enable the depositors
and the bond holders to take an informed decision. The High
H
972 SUPREME COURT REPORTS [2013] 13 S.C.R.
A Court has 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
B of non-obstante clause in Section 450 of the RBI Act, Chapter
lllB of the RBI Act will prevail over Sections 391-393 of the
Companies Act. It is held that the provision contained in
Section 45QA which is intended to protect the depositors y·
must have primacy over any other law inconsistent with such
C provision. It is further held that the scheme of arrangement of
compromise even if presented by a NBFC would have to
conform to the provisions contained in the Chapter lllB of the
RBI Act. The Division Bench also concluded that not only the
scheme is contrary to the specific provisions contained in
D Chapter lllB 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.
E 40. In our opinion, the aforesqid conclusions of the High
Court do not require any interference. Even according to the
appellant since its incorporation in 1983, the appellant had
grown into a gigantic NBFC; it had 20,000 shareholders. Its
shares were listed in two Stock Exchanges in India. Till 1995-
F 1996, it was a profit making company and declared dividends
to its shareholders continuously.
41. The RBI issued a series of circulars during 1997-
2003 regulating the activities of NBFCs, strict restrictions were r-
G 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
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 973
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
~ the Books of Accounts of the appellant company in 2005. A
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 judgment. It is also accepted that on
18th January, 2005, RBI in exercise of its powers under
Section 45MB(1) of ttie RBI Act, issued a circular to the B
appellant company prohibiting it from "accepting deposits
from ariy person, in any form whether by way of fresh deposits
y or renewal of the existing deposits or otherwise until further
orders." The appellant company was also directed not to sell,
transfer, create charge of mortgage or deal in any manner
c
with its properties, assets, without prior permission of .the RBI.
It is also accepted that the aforesaid notice was advertised
in the Indian Express on 20th January, 2005. The Notice
highlights the purpose of the notice as "Integrated Finance D
r- Company Limited, Chennai prohibition for accepting of
Qeposits and alienation of assets". The appellant claimed
that NBFC started facing problems in running its operations
as a direct consequence of the restrictions and the publicity
generated by the notice dated 18th/20th January, 2005. Since E
the company was facing severe problems in 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 the Board
of Directors of the appellant company on 19th May, 2005. F
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.
• G
Our Conclusions:
42. The primary issue that arises before us is as to
whether such a scheme of arrangements could have been
presented in vi·ew of the provisions contained in Chapter lllB H
974 SUPREME COURT REPORTS [2013] 13 S.C.R.
A 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
B improper as to invite the wrath of the Court." The High Court
also rightly concluded that the Company Court is not expected
to substitute its own wisdom for that of the stakeholders. The
High Court has also found that all the procedural requirements
C for sanctioning a scheme under Sections 391-394 have been
complied with. The High Court also accepts that an
overwhelming majority of the deposit holders have approved
this scheme, yet the relief was not been granted to the
appellant on the grounds that the scheme does not comply
with the provisions contained in Chapter lllB of the RBI Act.
0
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
E approving the scheme, the Company Court does not act as
a rubber stamp. The Companies Act has to be satisfied that
the concerned meetings of the creditors have been duly held.
It has to be satisfied that in the concerned meetings, the
. creditors or members of any class 'have been provided with
F
relevant material to enable them to take an informed decision
as to whether the scheme is just and fair. The Court is also
required to conclude that the proposed scheme of compromise
or arrangement is not violative of any provision of law and is
G not contrary to public policy. Furthermore, the Court has to
b13 satisfied that members or class of members or creditors
who .may be in majority are acting bonafide and have not
coerced the minority into agreement. Above all, the Court has
to be satisfied that the scheme is fair and reasonable from
H the point of view of a prudent man of business taking
INTEGRATED FINANCE CO. LTD. v. RESERVE 975
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
commercial decisions, which are beneficial to the class A
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 B
critic, a hair-splitting expert, a meticulous accountant or a
fastidious Counsel. However at the same time, the Court is
not bound to superficially add its seal of approval to the
scheme merely because it received the approval of the C
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 is not a camouflage for a
purpose other than the ostensible reasons. [See Administrator 0
of the Specified Undertaking of the Unit Trust of India
(supra), Para 32]. If any of the aforesaid requirements appear
to be found wanting in the scheme, the Court can pierce the
veil of apparent corporate purpose underlying the schem~ and
can judiciously X-ray the same. (See Miheer H. Mafatlal E
(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. F
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 get over this difficulty, the learned counsel for the
appellant has submitted that Chapter lllB of the RBI Act is G
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. H
976 SUPREME COURT REPORTS [2013] 13 ·s.c.R.
A 45. Chapter lllB of the RBI has been incorporated through
RBI (Amendment) Ordinance 1997, subsequently replaced by
the RBI (Amendment) Act, 1997. The Statement of Objects
and Reasons make it abundantly clear that before the
amendment, the unincorporated bodies circumvented the
B statutory restrictions by floating different partnership firms as
and when a firm reached the level of 250 depositors. It was
also reiterated that several unincorporated bodies were
advertising aggressively through various media, soliciting
C deposits from public by offering high rates of interest and other
incentives. The Amendment Act provides several safeguards
for NBFCs so as to ensure their viability. This includes
compulsory registration of NBFCs with RBI, stipulation of
minimum need in the funds requirements, creation of reserved
funds and transfer of certain percentage of profits every year
0
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
E to issue directions to Auditors of NBFCs to order special
Audits in·. .
NBFCs, prohibited acceptance of deposits by
NBFCs and make 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
F redressal of grievances. However by the Amendment, powers
have been vested with the Company Law Board for directing
the defaulter NBFCs to make repayment for the deposit
interest with a view to protect the interest of depositors. The
NBFCs have been totally prohibited from accepting deposits
G 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 intentis
H set out in Paragraph 6, which is as under:-
INTEGRATED FINANCE CO. LTD. v. RESERVE 977
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
"6. There are reports of several finance companies and A
~
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· B
such companies and unincorporated bodies."
46. Keeping in view the aforesaid objects and reasons,
y it becomes evident that Chapter lllB of the RBI Act is a self
contained code. It is not possible for us to accept the c
submissions of the learned 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 that the provision
contained in the RBI Act being regulatory in nature will not D
' -";- apply to cases of schemes submitted for 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. I~ the aforesaid case, this Court upon
E
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
"r
of Customs Tariff Act cannot be implied to repeal the
F
provisions of Section 33(1)UJ of the MRTP Act, 1969. Since
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.
-..(' G
47. We are also not able to accept the submission of
the learned senior counsel for the appellant a·nd the intervenors
in support of the appellant that the non-obstante clause in
Section 45QA will not have an overriding effect over the
provisions contained in the Companies Act in the Sections H
978 SUPREME COURT REPORTS [2013) 13 S.C.R.
A 391-394. We are also not able to accept the additional
submission of Mr. Chagla that if overriding effect is given to
Section 45QA, the provisions contained in Section 391 would
be rendered nugatory so far as NBFCs are concerned. We
are not persuaded to accept the submissions of the learned
B 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
C clause in Section 45Q of the RBI Act. It states in categoric
terms that provisions of Chapter lllB shall have effect
notwithstanding anything inconsistent therewith contained in
any other law. The overriding effect extends not only to any
other Jaw for the time being in force but also to any
0
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
E the society, leading to utter destruction of innumerable
families was the underlying impetus to bring the NBFCs
under strict control. Therefore, we have no hesitation In
concluding that Chapter lllB of the RBI Act is a complete code
in itself. The Companies Act is a prior enactment as the same
F was enacted in the year 1956, whereas, Chapter 111 B was
inserted in the RBI Act (55 of 1963) w.e.f. 1964. Section 45QA
was inserted by the Act No. 23 of 1997 w.e.f. 9th January,
1997: Thus, provisions of the RBI Act would prevail over the
Companies Act, it being a later enactment. It is a settled
G 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:-
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 979
BANK OF.INDIA [SURINDER SINGH NIJJAR, J.]
"21. It was conceded by Mr Sundaram SICA being a A
-.,..
special law vis-a-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. B
22. The provisions of ~ 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 c
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. D
•).- 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 E
reference had been made to BIFR would be subject to
the provisions of SICA."
48. In our opinion, Chapter ,lllB has been given an
y
overriding effect over all other laws including Companies Act F
by incorporating Section 45Q with a clear intention to ensure
that in a case of NBFC, a scheme under Section 391 of the
Companies Act cannot be entertained unless it is in conformity
with the provisions of Section 45QA of the RBI Act.
G
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 H
980 SUPREME COURT REPORTS [2013] 13 S.C.R.
A Aswini Kumar Ghose (supra); Madhav Rao. Jivaji Rao "r'"'
Scindia (supra); A.G. Vardarajulu (supra); /CIC/ 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
B 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
C provision." Similar observations were reiterated by this Court
in the other cases relied by the appellant. Since it has been
already noticed by us that the Parliament clearly intended to
give an overriding effect to Chapter lllB of the RBI Act over
Sections 391-394 of the Companies Act, the aforesaid
observations will not be of any help to the appellants in
0
support of their submission that Section 450 and/or Section -f·
45QA of the RBI Act will not override Sections 391-394 of
the Companies Act.
E 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 irt
accordance with the terms and conditions of the deposit, such
F amount shall be considered as 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 requirem~nts under Section 45QA(1) which
requires that "every deposit accepted by a NBFC, unles:s
G renewed, shall be repaid in accordance with the terms and
conditions of such deposit". This ingenious effort by tht3
. appellants in fact justifies the insertion of the amendment,
which has been obviously incorporated with a view to protect
the depositors and to avoid exploitation of these hapless
H and poor depositors from exploitation by Non Banking
INTEGRATED FINANCE CO. LTD. v. RESERVE 981
BANK OF !NOIA [SURINDER SINGH NIJJAR, J.]
----r Financial Institutions, such as the appellant. It is for this A
reason that Chapter lllB clearly provides that the provisions
contained therein shall override all other laws, which are
inconsistent with the same. This will also be ~pplicable to
Sections 391-394 of the Companies Act.
B
51. The Companies Act as well as the RBI Act are
Central Acts. Chapter 1118, which was inserted by Act No. 55
of 1963 w.e.f. 1st December, 1964 being a later enactment
y clearly has to prevail. We are unable to agree with the
submissions of the learned counsel for the appellant that if c
such an interpretation is 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 0
')- no inconsistency between Section 45QA of the RBI Act and
Sections 391-394 of the Companies Act. It is submitted that
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 E
the Contract. Therefore, debenture holders accepting cash
· payment of lesser face value or exchanging debentures for
shares would only be continuance of a practice which has
'Y • been vogue since late 1800s. He makes this submission
relying on Charlesworth's Company Law 18th Ed. 771-72, F
which are as follows:
"The word "arrangement" has a very wide mE:!aning, and
is wider than the word "compromise". An arrangement
, . --<" may involve debe~ture holders giving an extension of time' G
for payment accepting a cash payment less than the face
value of their debentures, giving up their securrity in whole
or in part, exchanging their debentures for shares in the
company, or in a new company, or having the rights
H
attached to their debentures varied in some other respect.
982 SUPREME COURT REPORTS [2013] 13 S.C.R.
A 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
B varied."
In our opinion, these observations would be of no avail
to the appellants in view of our conclusions recorded earlier
that the present arrangement is not bona fide. '"'(
c
53. We are further of the opinion that there can be no
que.~tion of novation in the face of the categoric provisions
contained in Section 450, which has an overriding effect over
all other laws, which would necessarily negate the principle
D of novation contained in the Contract Act also. Since we have
already negated the submission of the learned counsel for -(·
the appellant that it was open to each individual depositor to
vary the contract, i.e., novate the contract, it would not be
possible to accept the subsequent submission of the learned
E 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
F 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 such novation through a scheme. The
observations relied upon are as follows:- ~-
G
"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
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 983
BANK OF INDIA (SURINDER SINGH NIJJAR, J.]
statutory force, and therefore, the joint-debtor couJd not A
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 cmditors and shareholders
who dismanted from or opposed to its being sanctioned.
It has statutory force in that sense and therefore cannot B
be altered except with the sanction of the Court even if
the shareholders and the creditors acquiesce in such
'r' alteration, (cf. Premila Devi v. Peoples Bank). The effect
of the s-cheme is "to St,Jpply by recourse to the procedure
thereby prescribed. the absence of that individual
c
agreement by every member of the class to be bound
by the scheme which would otherwise be necessary to
give it validity". (Palmer's Company Law, 20th Edn. 664)
Sub-Secti'on (2) of Section 391 of the Act allows the D
--., decision of the majority prescribed therein to bind the
minority of creditors and shareholders and it is for that
reason that a scheme is said to have statutory operation
cannot be varied by the shareholders or the creditors
unless such variation is sanctioned by the court." E
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 F
present case, the scheme is in the teeth of Section 450 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
t
"'I( with the oblique purpose of avoiding the mandate of Section G.
45QA(1) of RBI Act.
55. We are also not inclined to accept the submission
of the appellant that Section 45QA of RBI Act is pari materia
H
984 SUPREME COURT REPORTS [2013] 13 S.C.R.
A 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
B 58A of the Companies Act does not arise since, in our
considered opinion, the provisions of the RBI Act'will override
the provisions of the Companies Act. Thus, this submission
is also rejected. '""( >
c 56. In view of the aforesaid, we reject the submission of
the learned counsel for the appellant that the scheme of
arrangement could be approved even though there is a non-
compliance with the provisions of Chapter lllB of the RBI Act
in particular Section 45QA(1). We may notice here that the
D appellants had an opportunity to approach the Company Court
under Section 45QA(1) to seek further time f6r making
--r-
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
E
scheme of arrangements could not be approved.
The Effect of Non-disclosure of the Notice dated 18th
January, 2005
-~
F 57. The aforesaid notice has been sent to the Com~c;my.
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 of Chapter lllB. Under these provisions, the RBI"'
G has the power to prohibit the NBFC from accepting any )'
deposit. Under Section 45MB(2), in order to protect the
interest of the depositors, RBI is also empowered to direct
the Non-Banking Financial Company not to sell, transfer,
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 985
..,.
.
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
create charge or mortgage or deal in any manner with its A
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 been duly published in the Indian
,_. Express on 20th January, 2005. Learned counsel for the
appellant has submitted that it is an accepted fact that on B
inspection of the books of accounts of the appellant company
-. under Section 45N of the RBI Act, 1934, numerous violations
y were disclosed. The details of the violations have been
extracted in the earlier part of this judgment. Whilst the
investigation was being conducted into all the irregularities
c
that have been committed by the company, the scheme of
arrangement was presented to the Company Court on or
about 19th May, 2005. It is an accepted fact that the notice
---.,.. dated 18th January, 2005 was not disclosed to the D
shareholders, who were present in the meetings which had
b~e~ convened on the directions of the Company Court.
According to the learned counsel for the appellants, such a
non-disclosure was not required under the provisions of the
proviso lo Section 391 (2) of the Companies Act. In any event, E
according to the learned counsel, the notice dated 18th
January, 2005 had been widely advertised by the RBI in
..,. various 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. F
Furthermore, according to Mr. Datar, proviso to Section
391 (2) o_nly 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 G
393(1) and is much narrower. Learned senior counsel has
placed reliance on the judgement of this Court in Hindustan
Lever Employees' Union Vs. Hindustan Lever Ltd. & Ors.
{supra) in support.of this submission. This case is, however,
H
986 SUPREME COURT REPORTS [2013] 13 S.C.R.
A
..,..--
distinguishable from the present case and circumstances. It
was held therein that:
"In the facts of this case, considering the overwhelming
manner in which the shareholders, the creditors, the
~-
B debenture holders, the financial institutions, who had. 41 %
shares in TOMCO, have supported the Scheme and have
not complained about any lack of notice or lack of
· understanding of what the Scheme was about, we are of -(
the view, it will not be right to hold that the explanatory
c statement was not proper or was lacking in material
particulars."
The preceding excerpt makes it clear that the scheme
therein was not objected to by any of the interested persons.
D Thus, the reliance on the said case is misconceived. --r-
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
E to disclose the violations pointed out by the RBI on inspection
of its books under Section 47N, which led to the issuance of
the notice dated 18th January, 2005. This,. in our opinion,
would clearly reflect on the lack of bonafide of fhe company ~
in proposing scheme of arrangement. In our considered
'
F opinion, non-disclosure of the action taken and initiated by
the RBI as apparent from the letter dated 18th 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 ~
G 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 to be approved or not. In our
H
INTEGRATED FINANCE CO. LTD. v. RESERVE 987
BANK OF INDIA [SURINDER SINGH NIJJAR, J.)
opinion, the High Court has not committed any error of A
jurisdiction in rejecting the submission of the appellant that
the non-disclosure of the letter dated 18th January, 2005 was
not material.
,59. For the aforesaid reasons, we find no justification to B
interfere with the judgment and order passed by the High
Court. The appeals are accordingly dismissed.
Bibhuti Bhushan Bose Appeals dismissed.
<
Search Indian case law
Ask in plain English, not just keywords. 25,000 AI words free, no card.
Try "NBFC"Sign in to search