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

- **Citation:** [2013] 13 S.C.R. 938
- **Court:** Supreme Court of India
- **Decided:** 2013-07-16
- **Bench:** Surinder Singh Nijjar, Pinaki Chandra Ghose
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-integrated-finance-co-ltd-v-reserve-bank-of-india-etc-etc-28993
- **Pages:** 50

## Headnote

,,,,,,,
'
c
Companies Act, 1956 -
s.391 -
Appellant, a NonBanking 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
disclosed u/s. 391(1) rlw s. 393(1) of the 1956 Act -
The
y
.
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
y
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
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 -
Nonobstante clause in s.45Q - Applicability of -
Scope ~
Discussed.
Interpretation of Statutes -
Two enactments -
Overriding 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
G
India Act, 1934.
H
940
SUPREME COURT REPORTS
[2013] 13 S.C.R.
A
The appellant-company was incorporated as a NonBa 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,
0
transfer, create charge or mortgage, or deal in any
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

## Text

_Characters 0–39,906 of 88,214. This is a partial read: ask again with offset=39906 for what follows._

[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.]
,,,,,,,
'
c
Companies Act, 1956 -
s.391 -
Appellant, a NonBanking 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
disclosed u/s. 391(1) rlw s. 393(1) of the 1956 Act -
The
y
.
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
y
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
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 -
Nonobstante clause in s.45Q - Applicability of -
Scope ~
Discussed.
Interpretation of Statutes -
Two enactments -
Overriding 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
G
India Act, 1934.
H
940
SUPREME COURT REPORTS
[2013] 13 S.C.R.
A
The appellant-company was incorporated as a NonBa 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,
0
transfer, create charge or mortgage, or deal in any
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
~
A
:r
391-393 of the Companies Act; that the scheme of
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 nonB
disclosure of the letter dated 18th January, 2005 was
not material, and declined to approve the compromise
scheme holding that not only was the scheme contrary
Y
to the specific provisions contained in Chapter lllB of
the RBI Act; but also it was against pub1ic policy, and
"
c
accordingly set aside the judgment of the Single Judge.
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
D
provisions contained in Chapter lllB of the RBI Act; and
'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
c
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
the point of view ,of a prudent man of business taking
commercial decisions, which are beneficial to the class
D
represented by them. 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
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
r
G requirements appear to be found wanting in the
•
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
y
given to Section 45QA, the provisions contained in
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 nonobstante 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.
E
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.
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
y
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
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.
.
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
E
F
of ~he· RBI Act in particular Section 45QA(1), is rejected.
The appellants ha~. an opportunity to approach the
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 235251 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 nondisclosure 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
:-r·
y
~
INTEGRATED FINANCE CO. LTD. v. RESERVE
949
BANK OF INDIA
19_71 (3) SCR 9
referred to
Para 22, 49
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
1998 (2) SCR 390
referred· to
Paras 25, 49
111(2004) DLT 554
referred to
Para 29
1994. (4) Suppl.
distinguished Paras 30, 57
SCR 723
·{2004) 121Comp Cas
referred to
Para 30
861(Delhi).
2008 (9) SCR 267
referred to
Paras 33, 47
· 1996 (6) Suppl. SCR 1
relied on
Paras 36, 43
. ·CIVIL APPELLATE JURISDICTION : Civil Appeal No.
5505-5508 of 2013.
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,
Shyam Divan, lmran Sharma, Nakul Mohta, Mahesh Agarwal,
Rishi Agrawala, E.C. Agrawala, Abhinav Agrawala, Manju
Jaria,.S.R..Setia1 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
appearing parties.
The Judgment of the Court was delivered by
SURINDER SINGH NIJJAR, J. 1. Leave granted.
A
B
c
D
E
F
G
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
c
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.
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:
r
G
6. The appellant herein was incorporated as a Nonr · ·
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,
1
issued a series of circulars for regulating various activities of
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
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A
B
c
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[2013] 13 s.c.R:
. in accordance with the asset classification norms'
stipulated by RBI and the·reby, violated· fhe
provisions of Paragraph 7 of the Prudential Norms
directions.
(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.,
(v)
The appellant company was found to have not
made adequate provision in respect of its NonPerforming Assets. Resultantly, there .. was short·
provisioning to the extent of Rs.12575.33 lakhs.
The aforesaid omission on part of the appellant
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
r
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.
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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
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[2013] 13 S.C.R.
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
c
D
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
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.
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
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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
F
G
x
H
capitalization being available for the liquidation of
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
as financial BPO and is in the ·process of
expanding the same."
x
x
x
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,
B
this.scheme is not being offered to them and it is
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 c
prejudiced or affected.
5.
Since this scheme does not envisage cash outflow
at the first instance and does seek to convert the
depositors and bond over a period of time into
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'--r
shareholders there is no requirement of fresh
infusion of cash.
6.
IMPLEMENTATION OF SCHEME
6.1
The Scheme if approved by the deposit holders
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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
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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 ·
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
(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.
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
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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
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
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[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
note here that the appellant company, during the pendency of
·1
'
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
Iany 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.
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INTEGRATED FINANCE CO. LTD. v. RESERVE
959
BANK OF INDIA [SURINDER SINGH NIJJAR, J.]
Submissions:
16. We have heard the learned counsel on behalf of the
parties.
A
B
17. Mr. Arvind P. Datar, learned senior counsel,
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;
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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
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[2013) 13 S,C.R.
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: none 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.
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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
even solemn contractual obligations to be varied by a particular
class of similarly placed members/creditors, provided there
B
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,
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
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
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-f .different fields, altogether. Mr.