@JUDGMENTTAG-ORDER
Mohan Shantanagoudar, J.@mdashCompany Petition No. 102/2002 is filed by Reserve Bank of India (hereinafter referred to as ''the RBI'' for short) u/s 45 of the Reserve Bank of India Act, 1934 read with Section 433 of the Companies Act, 1956, praying for winding up of Tulunadu Finance & Developments Ltd., Company.
Company Petition No. 215/2003 is filed by Tulunadu Finance & Developments Ltd., (hereinafter referred to as ''the Company'' for short) under Sections 391 to 393 r/w. Section 394A of the Companies Act, 1956, praying for sanctioning of the scheme of compromise and arrangement so as to be binding on the Company, its equity shareholders, creditors viz., debenture holders and its deposit holders.
2. Tulunadu Finance & Developments Ltd., (the Company) was incorporated on 2nd February 1985 under the provisions of Companies Act, 1956. The Company filed an application u/s 45IA of the Reserve Bank of India Act, 1934 (hereinafter referred to as '' the RBI Act'' for short) dated 24.6.1987, seeking Certificate of Registration from RBI to run a non-banking financial Corporation (in short ''NBFC''). The RBI issued Certificate of Registration No. 02.00012 u/s 45IA of RBI Act on 10.2.1998. On 19.4.2000, RBI conducted scrutiny of Books of Accounts u/s 45N of RBI Act. The scrutiny revealed that the financial position of the Company was unsatisfactory and that it had defaulted in re-payment of deposits and also violated certain provisions of RBI Act and the directions issued by RBI. By its order dated 11.5.2000, the RBI prohibited the company u/s 45-K(4) read with Section 45MB(1) of RBI Act from accepting the deposits from the public until further orders and directed the company u/s 45-MB(2) of RBI Act not to sell, transfer, create charge or mortgage or deal in any manner with its properties and assets. Some of the aggrieved depositors approached the Company Law Board u/s 45QA(2) of the RBI Act for a direction of re-payment of their matured deposits. The Company Law Board directed the company to repay such depositors as per repayment schedule by its order dated 24.4.2001. The RBI conducted inspection from 8.10.2001 to 13.10.2001 u/s 45N of RBI Act with reference to the financial position as on 31.3.2001. The company vide its letter dated 14.12.2001 informed the RBI that it could not comply with the order of Company Law Board due to the problems faced by it and requested the RBI to appoint Official Liquidator to manage the affairs of the company. The RBI cancelled the Certificate of Registration issued to the company on 31.1.2002. Thereafter, the Company Petition No. 108/2002 is filed by RBI u/s 45MC of RBI Act read with Section 433 of Companies Act, 1956, for winding up of the company on 19.6.2002.
3. The company filed Company Application No. 776/2003 for reviving u/s 391 of the Companies Act, on 5.8.2003. This Court admitted the Company Application. By filing the said application, the company sought for an order from this Court to convene separate meetings of equity shareholders, secured creditors (i.e., bankers of the company), secured creditors (i.e., debenture holders), unsecured creditors (i.e., deposit holders), for the purpose of approval of scheme of arrangement and compromise in respect of repayment of the debts. On 5.9.2003, this Court ordered to convene the meetings of secured creditors, shareholders, company bankers, debenture holders, deposit holders separately. The meetings were held in the registered office of the company on 20.10.2003. The report of the meetings was furnished by the Chairman, who had chaired the meetings held on 20.10.2003 to this Court on 4.11.2003. On the very day, i.e., on 4.11.2003, Company Petition No. 215/2003 is filed by the company praying for sanctioning of the scheme of compromise and arrangement under Sections 391 - 393 read with Section 394A of the Companies Act, 1956.
4. On 3.8.2005, Company Petition No. 108/2002 filed by RBI praying for winding up is admitted and the RBI was directed to cause advertisement of the petition in the news papers i.e., ''Vijaya Times'', Mangalore Edition and in ''Udayavani'' (kannada daily news paper), on or before 24.8.2005, fixing the date of hearing as 16.9.2005. The publications were carried out in both the news papers on 19.8.2005.
5. Sri Jayaram, learned Senior Counsel appearing on behalf of the RBI and Sri Mahesh, learned Counsel appearing on behalf of the company and other learned advocates on record have taken me through the records of both the matters and submitted their arguments.
6. Learned Counsel appearing on behalf of RBI, relying upon the reply sent by the company vide Annexure-''E'' dated 14.12.2001 (filed in Company Petition No. 108/2002) submitted that the company has admitted that it would not oppose the winding up petition and that if on merits, the Hon''ble High Court considers that in the public interest the affairs of the company must be taken over by the Liquidator or Official Receiver, the company will not come in the way. In the very reply, the company expressed its helplessness. Based on these averments made in the reply filed by the company, it is argued on behalf of the RBI that the company has to be wound up. Further, the learned Counsel appearing for RBI relied upon the observations of this Court made in the order sheet dated 3.8.2005 that substantial material is laid before this Court to come to a prima facie conclusion that the company needs to be wound up. It is not in dispute that the learned Counsel representing the company at that point of time submitted that the company has no objection for it being wound up. It is argued on behalf of the RBI that the company knew very well about the cancellation of Certificate of Registration, but the said fact was suppressed by the company in the meetings of secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders; that by suppressing the factum of cancellation of Certificate of Registration, the company got approval of secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders by majority for the scheme of arrangement and compromise. According to the RBI, the secured creditors, shareholders, company''s bankers unsecured creditors (debenture holders), and deposit holders were neither informed nor notified about the cancellation of Certificate of Registration and the order of this Court restraining the company from receiving the deposits from the public; that since the order of cancellation of Registration Certificate is not challenged, the same has attained finality and that therefore, the company has no right to exist; that the liability of the company is about three times of the assets and that therefore, no useful purpose will be served in keeping the company in existence.
According to the RBI, the scheme as put forth by the company is made only to escape from the prosecution and that therefore, the scheme of arrangement and compromise may not be sanctioned.
It is further argued on behalf of RBI that the primary object of the company is to do non-banking financial business; since the primary object of the company itself cannot be carried out in view of cancellation of Certificate of Registration by RBI, the ancillary objects shall not be allowed to be carried out by the company; that the company cannot approbate and reprobate, inasmuch as, the company cannot go behind its submissions made before this Court that it has no objection for winding up of the company in view of helpless situation. It is further submitted that the company shall not be allowed to contend that it should be given a chance of revival to carry on the ancillary objects of the company.
7. Sri Mahesh, learned Counsel appearing on behalf of the company submits that RBI has no focus standi to question the scheme propounded by the company, particularly when the secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders have agreed whole heartedly for the scheme; that the commercial wisdom of the shareholders and the creditors etc., should be respected; that the company has not suppressed any material before the secured creditors, shareholders, unsecured creditors (debenture holders), and deposit holders in the meetings convened pursuant to the order of this Court to discuss regarding the scheme; and that, even if the object of non-banking finance business of the company cannot be carried out by the company, the other objects of the company can be carried out by the company. He further submits that, according to the company, one of the main object of the company is to do the real estate business apart from non-banking financial business.
8. Sri R.V. Nayak, learned Counsel appearing on behalf of the applicant in C.A. No. 903/2005 filed by debenture holders opposed the winding up petition filed by RBI and submitted that, Section 45JA of RBI Act came into effect from 9.1.1997. Till 1998 no policy was declared by RBI. However, in the year 1998 and thereafter, drastic changes were made in the borrowing policies by the RBI. One such policy of the RBI made for NBFC''s is dated .1.1.2002. The copy of the same is produced at Annexure-''G'' by the company in its compilation filed along with additional statement of objections. By relying upon the said policy, it is contended that there is a provision for the company to convert itself into a non-banking non-financial company within three years from the date of cancellation of Certificate of Registration. Since the Registration Certificate was cancelled by RBI on 31.1.2002, the company had opportunity to convert itself into non-banking non-financial company on or before 31.1.2005, and that unfortunately, the company petition is filed for winding up in the year 2002 itself without giving an opportunity to the company to convert itself into non-banking non-financial company. Other applicants before the Court who are the debenture holders also argued opposing the winding up petition.
9. It is relevant to note that one of the creditor had filed Company Petition No. 115/2001 for winding up of the company and this Court had ordered for winding up of the company and appointed the Official Liquidator by the order dated 23.7.2002. The company preferred an appeal in O.S.A. No. 82/2002, which came to be rejected by the Division Bench of this Court by the order dated 13.11.2002, reserving liberty to place the subsequent events before the learned Company Judge and to seek recalling of the said order. Thereafter, the company filed an application for recalling the order dated 23.7.2002 on the ground that the company is commercially solvent. Simultaneously, the creditor-petitioner who filed the petition for winding up petition in Company Petition No. 115/2001, filed Company Application No. 271/2003 praying for withdrawal of the said Company Petition No. 115/2001. After due consideration of the matter, this Court by the order dated 11.3.2003, recalled its order of winding up dated 23.7.2002.
10. The authorised share capital of the company is Rs. 3 crores, divided into Rs. 30 lakhs equity shares of Rs. 10/- each. The share capital of the company is Rs. 1,38,60,000/-, divided into Rs. 13,86,000/equity shares of Rs. 10/- each (fully paid up). The details of the issued, subscribed and paid up share capital of the company as on 31st March 2002 are set out in Paragraphs-6 and 7 of the Company Petition No. 215/2003. The Balance Sheet and the Profit & Loss Account for the year ending 31st March 2003, with comparative figures of the previous year ending 31st March 2002 is set down in Paragraph 9 of the Company Petition No. 215/2003.
11. Before proceeding further, it is relevant to note the main objects of the company as contained in Memorandum of Association of the Company, which read thus:
(A) THE MAIN OBJECTS TO BE PERSUED BY THE COMPANY ON ITS INCORPORATION
1. To do the business of hire-purchase, finance and leasing of all durable, industrial and commercial goods and vehicles of all descriptions, motor boats, trawlers, launches, plant and machinery, equipment, tools and instruments of all descriptions, refrigerators, air-conditioners, washing machines and other equipments of personal use or otherwise or television and all types of electronic devices and equipment and all types of commercial, residential and industrial buildings and to buy, sell, pledge, pawn, mortgage or otherwise deal with them.
2. To function as a finance company by way of giving loans and advances to private industrial or commercial enterpreneurs in India.
3. To finance and/or invest in any business engaged in the distribution of goods and services including export of such goods and services and business of factoring or any other form of financing of consumer credit or by subscribing for shares or debentures or other securities issued by other companies, corporations or local or Governmental Authorities.
4. To finance ownership or leasing or repairs to be carried out or repairs already carried out of buildings including residential houses, hotels, flats, blocks or tenements or to buy land and construct buildings of all types on own account for promoting housing projects, hotels, motels and other commercial industrial, residential and all other types of buildings.
5. To carry on the business of real estate agents for purchase, sale, lease or hire of land, buildings, structures, flats, office spaces or other buildings.
(Emphasis supplied)
From the aforementioned main objects of the company as contained in Memorandum of Association, it is clear that one of the main object of the company (fifth object) is to carry on the business of real estate for purchase, sale, lease or hire of land, buildings, structures, flats, office spaces or other buildings. The first four main objects relate to non-banking financial business of the company. Whereas, the fifth main object is to carry on the business of real estate agency for purchase, sale, lease or hire of land, building etc., Thus, it cannot be said that non-banking finance business is the only main object of the company. Apart from non-banking finance business of the company, the object of the company is to carry on the business of real estate also.
12. The Court is conscious of the fact that RBI itself has approached the Court by filing the petition for winding up of the company in exercise of its power u/s 45MC of RBI Act read with Section 433 of Companies Act. The Supreme Court of India has recognised and declared the special status statutorily assigned to Reserve Bank of India. In the case of
In the case of
13. From the enunciations of the Supreme Court, it is clear that the Reserve Bank of India is a banker''s bank and it has a large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the directions.
14. It is not in dispute that the reply was made on behalf of the company to the notice issued by RBI that it will not oppose the winding up petition, inasmuch as, the company was in helpless condition. While admitting the company petition for winding up, this Court has also observed that, substantial material is laid before this Court to come to a prima facie conclusion that the company has to be wound up.
Subsequently, a new body has taken over the management of the company''s affairs and the present body which is managing the company has prayed for revival of the company in the interest of it''s shareholders, creditors etc., for doing non-banking non-financial business in order to clear all its dues on phased manner. In this view of the matter, the scheme is framed and petition is filed by the company praying for sanctioning of the scheme for revival of the company with a view to perform non-banking non-financial business. As aforementioned, one of the main objects of the company is to do real estate business. The company has pleaded that frequent changes brought over by the RBI in conducting of non-banking finance business has seriously affected the company''s position in relation to mobilisation of reserves. Recession in the industrial sector, coupled with slow down of economy, also has adversely affected the process of recovery of amount of loan with interest.
15. According to the company, as on date, the company has valuable assets, including loaned assets, hire purchase assets etc., being more or less equal to the liabilities to be met, including the repayment of all the debts of the unsecured creditors of the company. However, due to the defaults in the repayment by certain borrowers, the company had to resort to filing suits, complaints, which obviously resulted in reduction with the inflow of funds, whereby the company may not be in a position to meet its commitments of repayment of interest and matured amounts to its creditors on Its contractual terms.
16. Earlier, the company was managed by eight Board of Directors under the Chairmanship of Mr. Kalbavi Venkat Rao. Since the creditors, deposit holders and shareholders were of the opinion that the funds of the company were being mismanaged the said Board of Directors was changed during May 2000. The new management found that the earlier management had committed lot of irregularities in the deployment of funds. Thus, criminal complaints were initiated against Ex-Managing Director and Ex-Chairman, besides initiating action against certain officials of the company for their illegitimate action during their tenure of office. The complaints are at various stages. The new management is of the firm opinion that it would do its best to proceed against the managerial personnel, as well as, its officers who had involved themselves in the mismanagement of the funds and also initiate action for recovery of the amounts for repaying the same to the creditors.
17. In order to settle the claims of all the creditors of the company, the newly formed Board of Directors of the company at a meeting held on 7th August 2003 had made a total review of the recovery possibilities in respect of the outstandings vis-a-vis the amounts that may be payable by the company to its creditors. Having felt that there is a need for re-scheduling/re-structuring the debts outstanding and after analysing various options, including the option for seeking deferment of repayment of debts, formed a bona fide opinion that the entire activity of the company was required to be re-structured, particularly with regard to repayment of debts. According to the company, the proceeds of the realisation of sale of assets, investments and recovery of financial assets could be utilised for repayment of creditor''s dues.
18. In pursuance to the directions issued by this Court in Company Petition No. 2l5/2003, the company convened separate meetings of equity shareholders, secured creditors (banker''s of the company), secured creditors (debenture holders) and unsecured creditors (deposit holders) of the company on 20th October 2003 at the registered office of the company at Udupi. Notices of such meetings were sent independently to each of the equity shareholders, secured creditors (banker''s of the company), secured creditors (debenture holders) and unsecured creditors (deposit holders) of the company, together with a copy of scheme of compromise and arrangement and the statement as required u/s 393 of the Companies Act. Notice of the meeting was also advertised in two daily news papers, viz., ''Vijaya Times'', Mangalore Edition and ''Udayavani'' on 24th and 25th September, 2003 respectively. Except the bankers of the company (secured creditors), others, such as equity shareholders, secured creditors (debenture holders) and unsecured creditors (deposit holders) of the company have approved the scheme of compromise and arrangement. The equity shareholders have approved the scheme with the majority of 99.54%. Secured creditors (debenture holders) have approved the scheme with 99.15%, whereas, unsecured creditors (deposit holders) have approved the scheme with 98.66%. However, the secured creditors (bankers) have not approved the scheme in the meeting, inasmuch as, the voting in respect of bankers "against" the scheme exceeded the voting "for" the scheme. It is relevant to note that, subsequently all the six bankers (secured creditors) were repaid fully. The said fact is not in dispute. Thus, it is clear that, equity shareholders, debenture holders and depositors have whole heartedly supported the scheme. The bankers will have no grievance any more about the scheme in question since the company has repaid the entire dues of the bankers.
19. The contention of the RBI that the factum of cancellation of Certificate of Registration and the factum of restraining the company from meddling with the assets of the company in whatsoever manner is suppressed in the meetings, cannot be accepted. The scheme of arrangement/compromise and explanatory statement is served along with the notices on the secured creditors, unsecured creditors etc., The same clearly reveals that the company has not suppressed anything before equity shareholders, secured creditors (bankers of the company), secured creditors (debenture holders) and unsecured creditors (deposit holders). In Clause-22 of the Explanatory Statement u/s 393 of the Companies Act, which forms part of the scheme clearly reveals that since the company could not fulfill all the norms set by the RBI, the RBI vide its letter dated 11.5.2000 has prohibited the company from accepting of fresh public deposits, renewing existing deposits on maturity or alienating any assets of the company without the permission of RBI. Since then, the company has neither accepted the deposits nor renewed the same and has been repaying the deposits in chronological order of maturity. In Clause-26, it is mentioned that the RBI has cancelled the Certificate of Registration of non-banking financial company with effect from 31.1.2002 and In view of this, the company could not do any NBFC business and the recovery process has not proved the expected results. It is clearly stated in Clause-28 about the winding up order passed in Company Petition No. 115/2001, and subsequent withdrawal of the Company Petition No. 115/2001 and consequent recalling of the order of winding up by this Court dated 23.7.2002. It is also mentioned in Clause-30 of the Explanatory Statement that number of company petitions and complaints/recovery suits have been filed against the company by the secured creditors and the same are pending consideration before the Tribunal as well as before the Consumer Courts. From the above, it is clear that the company has not suppressed anything in the meetings convened for the purpose of approval of the scheme. In spite of all the shortcomings mentioned supra, 98% - 99% of the equity shareholders, debenture holders, and unsecured creditors (deposit holders) have given their approval for the scheme. As aforementioned, only the bankers (secured creditors) who were six in number did not approve the scheme. However, subsequently, the claims of all the bankers have been satisfied by the company. They are, Karnataka Bank Ltd., Lord Krishna Bank Ltd., Syndicate Bank, Vijaya Bank, Corporation Bank, Shamrao Vittal Cooperative Bank. It is relevant to note that these are the only six secured creditors (banks). Other secured creditors are debenture holders.
20. The Company has repaid to Karnataka Bank Ltd., Car Street, Udupi, to the tune of Rs. 40 lakhs and the Karnataka Bank Ltd., has issued No Due Certificate on 19.4.2006.
So also, the Company has repaid to Lord Krishna Bank Ltd., Car Street, Manipal, to the tune of Rs. 9.25 lakhs and the Lord Krishna Bank Ltd., has issued No Due Certificate on 11.3.2006.
The Company has repaid to Syndicate Bank, Catholic Centre Branch, Udupi, to the tune of Rs. 4.50 lakhs and the Syndicate Bank, has issued No Due Certificate on 23.2.2006.
The Company has repaid to Vijaya Bank, K.M. Marg, Udupi, to the tune of Rs. 4,50,000/- and the Vijaya Bank, has issued No Due Certificate on 13.3.2006.
The Company has repaid to Corporation Bank, Udupi, to the tune of Rs. 1.25,000/- and the Corporation Bank, has issued No Due Certificate on 18.4.2006.
The Company has repaid to Shamrao Vittal Cooperative Bank Ltd., to the tune of Rs. 3.88 lakhs towards full and final settlement of accounts.
21. Thus, after settling all the dues by the company with their respective banks, (secured creditors) No Due Certificates'' are issued by those banks in favour of the company. Copies of No Due Certificates are produced by the company in the compilation produced along with the additional statement of objections dated 15.12.2002.
22. With the introduction of new regulation in January 1998 by the RBI, the company all of a sudden had to face grave and unprecedented difficulties by virtual ban on acceptance of fresh deposits which seriously jeopardised the resource mobilisation of the company.
23. Due to the defaults committed by the borrowers, the petitioner-company initiated legal proceedings for recovery of the said amounts and their recovery was not satisfactory. Because of the mismatch of the assets recovery versus repayment commitment, difference between the projected cash in flow and the projected pay out for the commitments of the Company on the existing terms resulted in the company making certain defaults in the repayment which was the major factor for them to have considered for rescheduling/restructuring the debt outstanding by drawing up a scheme of arrangement and compromise with the creditors. Having regard to the totality of the facts and circumstances, the company analysed various options, including the option for seeking deferment for meeting the repayments of the debts of the secured and unsecured creditors and for making out a suitable programme of restructure and rearrangement of the outstanding debts.
24. As aforementioned, it is argued on behalf of the RBI that since the main object of the company being the non-banking financial business, it cannot be allowed to carry on any other business after cancelling the Registration Certificate and it has got no right to exist. In other words, the company whose substratum has disappeared, should not be allowed to exist and therefore, should be wound up. This argument seems to have been made on behalf of the RBI on the assumption that the main object of the company is non-banking financial business only. As aforementioned, one of the main object of the company is to do real estate business also.
25. Learned Counsel appearing on behalf of the RBI relying upon the judgment of the Delhi High Court in the case of J.V.G. Leasing (Securities & Finance) Ltd. and Ors. (2006) 2 Comp.L.J. 242 (Del), argued that it would not be permissible for such company to take a detour by coming out with the plea that it is ready to do some business other than non-banking finance business and that therefore the company should not be permitted to do so and consequently under such a plea, the company shall not be permitted to file a scheme of arrangement. The said judgment may not be applicable to the facts of this case, inasmuch as, the company in the said matter was essentially a non-banking finance company, inasmuch as, the main object of the company was to do the non-banking finance business and it had to suffer winding up order because it violated the financial discipline provided under R.B.I. Act. Thus, it was concluded that it has no right to exist as NBFC and it has to be wound up. But, in the matter on hand, the company''s object is not only to do non-banking finance business, but also the real estate business. It is no doubt true that the company in question which was having registration certificate issued by RBI for doing non-banking financial business has violated financial discipline provided under RBI Act. Thus, it has no right to exist as NBFC. But, it has right to exist as non-banking non-finance company.
26. Section 45MC of RBI Act lists the circumstances under which RBI can file a petition. Apart from (a) the ground of inability to pay the debts, other grounds are peculiar to non-banking financial institution. These grounds relate to mal-functioning of NBFC viz., as (b) by virtue of provisions of Section 45IA becomes disqualified to carry on the business of a non-banking financial institution, (c) has been prohibited by the Bank from receiving deposits by an order and such order has been in force for a period of not less than three months, and (d) the continuance of the non-banking financial company is detrimental to the public interest or to the interest of depositors of the company. Sub-section (1) of Section 45MC empowers the bank to file petition on any of the grounds mentioned above, on being satisfied that one of such grounds in the case of NBFC exists. In my considered opinion, the NBFC may be wound up in case the same falls with one of the aforementioned categories. If the only object of the company was to do the business of non-banking finance, it has no right to exist. It has to be wound up under the facts and circumstances.
But, in the matter on hand, as the company is having the object of doing the real estate business also, it has right to survive even if the Certificate of Registration issued by the RBI is cancelled. Added to it, as aforementioned, the Reserve Bank of India has made certain changes in regulations on 1.1.2002 for NBFC''s, whose Certificates of Registration are cancelled, as is clear from the document Annexure-''G'' filed by the company in the compilation filed along with the additional statement of objections.
27. From the amended regulation dated 1.1.2002, it is clear that the RBI has received requests form various NBFC''s and their associations for review of some of the regulations in order to obviate the operational difficulties, without in any manner compromising the principles of protection of interests of the depositors of the NBFCs. The requests have been examined by RBI in consultation with the Informal Advisory Group on NBFCs, and thereafter, it was decided to effect certain changes in the regulations. One of the change is as under:
(1) Rejected NBFCs - Requirement of conversion to Non-financial activities and disposal of financial assets -
(i) xxxx xxx xxx
(ii) In this connection, a reference is made to paragraph 90 of the Mid Term Review of Monetary and Credit Policy for the year 2001-2002 announced by out governor on October 22, 2001 in terms of which it has been decided that companies whose application for Certificate for Registration (CoR) have been rejected or companies whose CoR have been cancelled should continue to repay their deposits on due dates and dispose of their financial assets within three years from date of rejection/cancellation or convert into nonbanking non-financial companies within the same period. The Regional Offices of the Department will advise the rejected NBFCs separately.
(Emphasis supplied)
From the above, it is clear that the RBI has decided that the companies whose Certificates of Registration have been cancelled should continue to pay the deposits on due dates and dispose of the financial assets within three years from the date of cancellation of Certificate of Registration or such company may convert itself into non-banking non-financial company within the same period of three years. The subsequent policy of the RBI as mentioned above, changes the entire scenario. The RBI itself has permitted the NBFCs, to repay the deposits on due dates and to dispose of their financial assets within three years from the date of rejection of Certificates of Registration or an option is given to such NBFCs. to convert into non-banking non-financial companies within the same period of three years. In the matter on hand, the company does not wish to continue as a non-banking financial company. Its'' Certificate of Registration issued by RBI is cancelled. The same has attained finality. Therefore, the company cannot and shall not carry on the non-banking finance business any more. It has no right to exist as a NBFC. Therefore, it cannot be called as non-banking finance company any more. However, it can convert itself into non-banking non-financial company within the period of three years from 1st January 2002. Thus, it was open for the company to convert itself into non-banking non-financial company within 1st January 2005. But, unfortunately in the meanwhile the RBI has filed company petition on 4th November 2003 i.e., within 1.1.2005 for winding up of the company contrary to and ignoring it''s own subsequent policy. The RBI could not have filed the winding up petition within 1.1.2005. By filing this petition for winding up, the RBI has violated its own amended regulations/policy as found in Annexure-''G'' to the compilation filed along with the statement of objections filed by the company. In view of pendency of the winding up petition, the company could not have converted itself into non-banking non-financial company within the prescribed period of three years.
28. At this stage, it is relevant to note the salient features of compromise/arrangement are as under:
(a) The appointed date has been fixed on 1.4.2002.
(b) The full amount of interest accrued on or after 1st April 2000 till the appointed date and all claims thereon are cancelled. No interest shall accrue or to be payable on the outstanding debts on or after the appointed date.
(c) All payments of deposits/debentures made on or from the appointed date, as well as the payments of interest made on and from 1st May 2000 to the debenture holders/deposit holders will be construed as repayment of principle and outstanding debentures/deposits value shall be arrived at accordingly after adjustment of the total payment made upto May 2003 by the Company in this regard.
(d) Full and final settlement of the outstanding debentures/deposits of Rs. 2,000 and below will be paid the entire amount on or before 90 days of the effective date.
(e) Full and final settlement of the outstanding debentures/deposits exceeding Rs. 2,000/- but not exceeding Rs. 5,000/- will be paid only up to 90% of outstanding debenture/deposit value respectively and such payments will be in six equal installments and first of the six installments will be made within six months of the approval of the scheme by the members and creditors and the subsequent five installments within 12th, 24th, 36th, 48th and 60th month of the effective date respectively.
(f) Full and final settlement of the outstanding debenture/deposit and interest thereon, exceeding outstanding value of Rs. 5,000/-as on the effective value, will be paid only up to 80% of the outstanding debenture/deposit value respectively and such payment will be paid in six equal installments and the first of the said installment will be made within six months of the approval of the Scheme by the Members and Creditors and the subsequent five installment within 12th, 24th, 36th 48th, 60th month of the effective date respectively.
(g) The amount of loan and/or advance if any, availed of or granted to any debenture holders or deposit holders, and remaining outstanding together with interest payable on such loan/advance shall be set off and adjusted and accordingly the outstanding debts payable by the company shall be reduced by the said outstanding loan/advance amount along with the interest due thereon up to the appointed date.
(h) Upon the scheme becoming effective, the Board of Directors of the Company shall, within 180 days of effective date, appoint a trustee for the deposit holders and accordingly the said appointee shall act as trustees for the unsecured creditors (deposit holders) in respect of the outstanding deposits payable to them pursuant to the scheme, and consequently, the said deposits shall become secured debts and shall be secured by the first charge on company''s financial assets (i.e., claims on customers, amounts receivable under lease/hire purchase/loan agreements and negotiable instruments), books debts and receivables. The company shall notify the said creditors of the claim amount payable to them along with each of the installments/payments made pursuant to the scheme. Upon the outstanding debts payable to the unpaid creditors becoming nil, the respective certificates of debenture/deposit shall be deemed to have been cancelled, without any further act, deed or thing.
The aforementioned features are accepted by overwhelming majority of the equity shareholders, debenture holders and deposit holders.
29. It is by now well settled that the Court may not exercise jurisdiction as an Appellate Authority to minutely scrutinise the scheme to arrive at a conclusion as to whether the scheme should be permitted or not. On this aspect, the nature of compromise or arrangement between the company and the creditors and shareholders etc., has to be kept in mind. It is the commercial wisdom of the parties to the scheme who have taken an informed decision about the usefulness and propriety of the scheme by supporting it with the requisite majority vote that has to be kept in mind by the Court. The Court certainly would not act as a Court of appeal and sit in judgment over the informed view of the parties concerned to the compromise as the same would be in the realm of corporate and commercial wisdom of the parties concerned. The Court has neither the expertise nor has the jurisdiction to dwell deep into the commercial wisdom exercised by the creditors and members of the company who have ratified the scheme by the requisite majority. Consequently, the Company Court''s jurisdiction to that extent is peripheral and supervisory and not appellate. As has been held by the Apex Court in the case of
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 been held.
2. That the scheme put up for sanction of the Court is backed up by the requisite majority vote as required by Section 391 Sub-section (2).
3. That the meetings concerned of the creditors or members or any class of them had the relevant material to enable the voters to arrive at an informed decision for approving the scheme in question. That the majority derision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind even the dissenting members of that class..
4. That all necessary material indicated by Section 393(1)(a) Is placed before the voters at the meetings concerned as contemplated by Section 391 Sub-section (1).
5. That all the requisite material contemplated by the proviso of Sub-section (2) of Section 391 of the Act is placed before the Court by the applicant concerned seeking sanction for such a scheme and the Court gets satisfied about the same.
6. That the proposed scheme of compromise and arrangement is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray the same.
7. That the Company Court has also to satisfy Itself that members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent.
8. That the scheme as a whole is also found to be just, fair and reasonable from the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant.
9. Once the aforesaid broad parameters about the requirements of a scheme for getting sanction of the Court are found to have been met, the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of 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 whom the scheme is framed. The Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
The aforesaid parameters of the scope and ambit of the jurisdiction of the Company Court which is called upon to sanction a scheme of compromise and arrangement are not exhaustive but only broadly illustrative of the contours of the Court''s jurisdiction.
In the matter on hand, 98% - 99% of the equity shareholders, secured creditors (debenture holders), unsecured creditors (depositors) have approved the scheme. Hence, this Court will not sit in appeal over the commercial wisdom of the concerned. This Court also does not find anything in the scheme proposed, which contradicts the interests of creditors and shareholders.
30. Though the Court has power u/s 391 and 394 of the Companies Act to accord sanction for a scheme, the Court has to see before granting such sanction as to whether such a scheme contravenes, any of the provisions of law. According to the RBI, since the company has contravened the provisions of RBI Act, the scheme cannot be sanctioned.
31. The scheme does not contravene any of the provisions of the Companies Act. In a case of scheme of compromise or arrangement between the company and its members and creditors, it is the proviso to Section 391(2) which has to be complied with. Before the Court can accord sanction to such a compromise or arrangement following conditions have to be fulfilled as is clear from the proviso to Section 391(2) of the Companies Act viz.,
(a) The company should disclose to the Court by an affidavit or otherwise all material facts relating to the company.
(b) The company should produce the latest financial condition of the company showing its financial position.
(c) The latest auditors report on the accounts of the company.
(d) It should disclose the pendency or otherwise of any investigation proceedings in relation to the company under Sections 235 and 251 and the likewise.
32. It is by now well settled that where the company is unable to perform its part of its contract, discharge its statutory obligation, in a case of default, because of the circumstances which are beyond its control, it proposes a scheme with its members and creditors, whereunder it is seeking concession, seeks enlargement of time for repayment of deposits, seeks waiver of interest of a portion to see that in the circumstances to what extent the interest of the members and creditors could be salvaged. Ultimately, it is for the members and the creditors of the company to compromise with the company in these matters. Once a statutory majority of the members and the creditors of the company approve the scheme, then before it is implemented, sanction by the Court is necessary. If after considering all the objections and the law which govern the parties, only if the Court is satisfied that the scheme is in the interest of members and creditors and the public at large, and if it does not contravene any of the provisions of the statute, the Court can accord sanction.
According to RBI, the Company has violated the provisions of Reserve Bank of India Act while acting as NBFC. It is no doubt true that the company working as NBFC has contravened certain provisions of the RBI Act and it has not fulfilled its obligations as NBFC. In view of the same, the RBI has rightly cancelled the Certificate of Registration issued to the company for doing non-banking finance business. In view of the same, the company cannot any more perform as non-banking finance company. Consequently, the provisions of RBI Act may not be applicable to the company any more. In fact, the Circular dated 1.1.2002 vide Annexure-''G'' produced along with the compilation filed along with additional statement of objections filed by the company shows that non-banking finance institution is directed to close down its business of which Certificate of Registration is cancelled. As a consequence thereof, such non-banking finance institutions are directed to continue to repay the deposits on due dates and dispose of their financial assets within three years from date of rejection/cancellation or convert into non-banking non-financial companies within the same period.
33. I am satisfied that the terms of the scheme which provide for waiver of interest and deferred payment do not have the effect of contravening the aforesaid provisions of law which compels the company to repay the entire amount received, essentially when the members and the creditors of the company have approved such a scheme by a statutory majority.
34. The 23rd Annual Report and Accounts for the year 2007-08 and 2008-09 are filed before the Court during the course of arguments by the company. Certain other material is also placed before the Court by filing the memos from time to time by the company. From the records, it is clear that the company has as aforementioned repaid all its six secured creditors (bankers) after submission of the scheme and all the six secured creditors have acknowledged the receipt of amount towards full and final settlement. Thus, it is clear that the company is not due to any of its secured creditors (Bankers).
35. I have gone through the terms of the scheme which is approved by statutory majority in the meeting held pursuant to the order of the Court. The same reveals that the dues payable by the company as per the scheme as on that date, to the depositors (totally numbering 3614) was Rs. 423.93 lakhs, and whereas, the dues payable to debenture holders (totally numbering 3714) was Rs. 589.43 lakhs. Thus, in all the company was due to pay a sum of Rs. 1013.36 lakhs in all. Whereas, the assets of the company as is clear from the memo filed by the company on 4.3.2010 is Rs. 628.11 lakhs. As aforementioned, subsequently, the company has repaid all the dues of the Bankers. It has also repaid certain of the dues of some of the bond holders and has satisfied the orders of Company Law Board. According to the company, as per the memo filed, the total dues of the company as on the year 2009 is about Rs. 760 lakhs. Assets are worth about Rs. 628 lakhs. The balance of dues is agreed to be paid in 60 months in installments. The company has initiated legal action to recover the loans from its debtors. The total recoveries to be made by the company are worth about Rs. 1,548 lakhs.
36. When the company was performing smoothly in the year 1998, the RBI introduced regulatory measures regulating the business of non-banking finance companies. During that period, through out the country, there were various scandals and the investors in the non-banking finance companies started taking back the amounts deposited by them. There was recession in the industrial sector. The real estate business also was affected . There was delay In recovering the amounts due to the company. Because of panic situation, the depositors started withdrawing the money and fresh depositors were not coming forward to invest the amount in the company. It is on those circumstances when there was a mismatch with regard to the actual amount to be recovered and the actual payments to be made on the due dates, the company found it difficult to repay the deposits and has come forward with the scheme in question, wherein they pleaded their inability to pay the deposits which they have received In one installment and sought for some more instalments and also they have pleaded their inability to pay the interest. Under the terms of the scheme, what has been agreed is that all the deposit holders and creditors would get back the entire principle amount paid to the company, but in certain installments.
37. It is relevant to note that the company has made recoveries of Rs. 119.94 lakhs from October 2003 to April 2006. Apart from the same, certain of the borrowers have deposited in Udupi Court to the tune of Rs. 10.50 lakhs to be disbursed in favour of the company. So also an amount of Rs. 8.31 lakhs is deposited in Bangalore Courts. The Annual Reports and Accounts for the year 2008-09 reveal that the loss carried to schedule was Rs. 12,44,64,601, whereas, the loans carried to schedule for the year ending on 31st March 2009 is Rs. 11,97,81,377/-. Basic earning per share as it stood on 31st March 2008 was Rs. 0.15, whereas, the basic earning per share as on 31st March 2009 was Rs. 3.34. The total collection of dues under hire purchase, lease, loans and advances and other receivables was Rs. 12.46 lakhs in the year 2008, whereas, it is Rs. 13.80 lakhs in the year 2009. The company is also receiving rent from the tenants to the tune of Rs. 1,17,000/- every month, out of which, the outgoing expenses would be Rs. 0.40 lakhs towards the salary of staff, electricity, maintenance etc., Thus, the company is saving the rental Income also every month and the same has to be used for repaying the debts of unsecured creditors.
It is relevant to note that the company has satisfied the orders of the Consumer Forum and other statutory bodies during the pendency of the matter.
38. From the above discussions, it is clear that the company is recovering slowly every year financially and consequently, the confidence of equity shareholders and the depositors and debenture holders appears to be in favour of the company. May be because of the aforementioned facts, the equity shareholders, depositors and debenture holders must have approved the scheme by requisite majority. In view of the above, this Court is of the opinion that no useful purpose will be served in ordering for winding up of such company, particularly when the company is improving in financial aspect every year and as the assets of the company are almost equal to the dues. So also, the company is recovering the debts through legal action. Consequently, the proposed scheme needs to be sanctioned with certain conditions and modifications. In this case, a reference may be made to the judgment of this Court in the case of Maharashtra Apex Corporation Ltd. In Re 2005 (124) Com. Cases 637 (Kar). In the said matter also, the Certificate of Registration issued in favour of NBFC was cancelled by RBI. The company had prayed for sanctioning of the scheme before this Court. After considering various aspects of the matter, this Court accorded sanction to the scheme. The facts in that matter are almost akin to the facts of this case, except the fact that in the matter on hand, the RBI has filed an application for winding up. As aforementioned, since the Certificate of Registration is already cancelled, the company cannot conduct the non-banking finance business. It has no right to exist as NBFC. However, in view of the aforementioned facts and circumstances, the company has got right to exist to do other primary object of the company viz., real estate business.
39. Section 392 of Companies Act comes into play after the scheme is sanctioned by the Court u/s 391 of the Companies Act. After sanction of the scheme, the Court has the power to supervise and carry out the compromise or arrangement. In the course of such supervision or at the time of making the order sanctioning the scheme or at any time later, the Court can give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for proper working of the compromise or arrangement. In fact, Sub-section (2) of Section 392 of the Companies Act confers wide powers on the Court. After the scheme is sanctioned if the Court is of the opinion that the scheme cannot work satisfactorily with or without modifications, it may either on its own motion or on the application of any person interested in the affairs of the company, make an order of winding up of the company and such order shall be deemed to be an order made u/s 433 of the Act.
40. In view of the same, I accord sanction of the scheme subject to conditions and amendments mentioned hereunder:
(1) The company shall not carry on business of non-banking finance since Certificate of Registration is cancelled by RBI.
(2) The time stipulated for repayment of the loans as contained in the scheme shall be adhered strictly.
(3) All the depositors and bond holders of the company whose deposits exceed Rs. 2,000/-, but do not exceed Rs. 5,000/- to be paid within two years from this day in two equal installments. On such payment, statement shall be filed before this Court showing the payments.
(4) The company shall file a statement showing the payments made as per the scheme within one month from the date prescribed for making such payments.
(5) The company is at liberty to negotiate for sale of its immovable properties with any persons. The notice shall be Issued to the debenture holders and depositors to enable them to bring better offer. After receiving the offer, it shall be placed before this Court for sanction. It is only after the said offer is accepted by this Court and permission is accorded, the company shall sell the assets. The sale proceeds shall be utilised for the purpose of discharging the amounts due to the depositors under the terms of the scheme.
(6) This Court finds that the supervision of this Court to carry out the terms of the scheme is very much necessary. If the parties find any necessity for modification of the scheme in the proper working of the scheme, they are at liberty to approach this Court in accordance with law for obtaining necessary directions and orders.
(7) The company is directed to file a statement of accounts showing the recoveries of amounts realised once in a year before this Court.
In view of the same, the following order is made:
(a) The Company Petition No. 108/2002 filed by the Reserve Bank of India is dismissed.
(b) The Company Petition No. 215/2003 filed by Tulunadu Finance & Developments Ltd., is allowed, subject to the terms and conditions mentioned above.
(c) The scheme of compromise and arrangement (revised) as per Annexure-''B'' of the Company Petition No. 215/2003 is hereby sanctioned, subject to modifications/orders mentioned above, so as to be binding on the company, its members and creditors.
(d) In view of the scheme being sanctioned, all criminal cases filed against the company as well as the suits, execution petitions and complaints/appeals before various forums shall stand abated and payments made in these proceeds shall be adjusted against the outstanding debts payable to the claimants..
(e) The company shall file a certified copy of this order with the Registrar of Companies, Karnataka, within thirty days from the date of receipt of the certified copy of this order.
(f) Office is directed to draw the order in the prescribed form by incorporating the amendments as per this order without insisting for stamp duty since the scheme of compromise and arrangement is being sanctioned u/s 391 of the Act, which is not covered by Article 20(4) of Schedule I to the Karnataka Stamp Act, 1957.
(g) All pending company applications are disposed of by separate orders.
