Sec.58(9) of the Companies Act, 1956 provides that where a company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit the Company Law Board may, if it is satisfied, either on its own motion or on the application of the depositor, that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest direct, by order, the company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. Sec.58 (10) of the Companies Act, 1956 provides whoever fails to company with any order made by the Company Law Board shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of not less than rupees five hundred for every day during which such non compliance continues.
Sec.391 to 394 deals with the sanctioning of an arrangement, amalgamation or restructuring by the High Court after satisfying the conditions set out in the said sections. The question to be discussed in this article is what would be fate of a scheme of repayment of deposits as directed by Company Law Board when there is a process for amalgamation under Sections 391 to 394 for the sanctioning of the High Court. The provisions relating to merger/amalgamation requires only the satisfaction of shareholders and creditors. The intervener who is neither a shareholder nor a creditor is not having locus standi to object the scheme. From the case laws which are going to be discussed in this article it can be inferred that a scheme of repayment of deposits as directed by Company Law Board will be merged with the scheme of arrangement/restructure under Sec.391/394 of the companies Act as approved by the High Court.
The Supreme Court in 'J.K. (Bombay) (P) Ltd., V. New Kaiser-I-Hind Spinning & Weaving Co. Ltd.,' AIR 1970 SC 1041 held that once there is a scheme approved by the High Court in exercise of its power under section 394 of the Act, all earlier schemes approved by any other authority concerned, the rights and liabilities of the company or its creditors stand merged in the said scheme approved by the High Court unless a different intention appears. In other words, there could not be a separate implementation of the scheme as directed by the Company Law Board after it has merged with the scheme of arrangement approved by the High Court.
For implementing the scheme as directed by the Company Law Board the scheme of arrangement cannot be modified. In 'J.K. (Bombay) (P) Ltd., (supra) the Supreme Court held that the principle is that a scheme sanctioned by the court does not operate as a mere agreement between the parties; it becomes binding on the company, the creditors and the shareholders and has statutory force, and therefore, the joint-debtor could not invoke the principle of accord and satisfaction. By virtue of the provisions of the section 391 of the Act, a scheme is a statutorily binding even on the creditors and shareholders who dissented from or opposed to its being sanctioned. It has statutory force in that sense and, therefore, cannot be altered except with the sanction of the court even if the shareholders and the creditors acquiesce in such alteration.
In 'Smt. Premila Devi V. Peoples Bank of Northern India Ltd.,'-(1938) 4 All ER 337 the High Court held that the effect of the scheme is to supply by recourse to the procedure thereby prescribed the absence of that individual agreement of every member of the class to be bound by the scheme which would otherwise be necessary to give its validity. Sec. 391(2) of the Act allows the decision of the majority prescribed therein to bind the minority of creditors and shareholders and it is for that reason that a scheme is said to have statutory operation and cannot be varied by the shareholders or the creditors unless such variation is sanctioned by the court. The effect, therefore, of a scheme between a company and its creditors is that so long it is carried out by the company by regular payment in terms of the scheme of a creditor who is bound by it cannot maintain a winding up petition. But if the company commits a default there is a debt presently due by the company and the petition for winding up can be sustained at the instance of a creditor. The scheme, however, does not have the effect of creating a new debt; it simply makes the original debt payable in the manner and to the extent provided in the scheme. The proposition that a winding up order can only be passed after compelling the company to complete the rights which are still incomplete.
In 'Vinay Bharat Ram and others V. Registrar of Companies, NCT of Delhi' - (2009) 93 CLA 457 (Del) the company had applied to the High Court under Sec. 391/394 of the Act for confirmation of a scheme of restructuring and arrangement under which the assets and liabilities of the company were to be restructured. The Regional Director, Northern Region, Department of Company Affairs filed an affidavit in which he indicated that the CLB, Northern Region Bench, New Delhi initiated an enquiry under Sec.58A (9) of the Act, against the petitioner-transferor company, for which the petitioner-transferor company filed a detailed reschedulement plan before the Hon'ble CLB for rearranging the debts of creditors and the said scheme had been sanctioned by the Hon'ble CLB. The said sanctioned scheme has also been proposed to be implemented by the petitioner-transferor company as a part of the present scheme of restructuring and arrangement. The Court passed a detailed order approving the scheme of rearrangement under Sec. 394 of the Act. The relevant portion of that order notes as under:
* Neither the Regional Director, Department of Company Affairs nor the Official Liquidator attached to this court have indicated any objections of the scheme;
* All the classes of creditors and members were fairly represented in the meetings;
* In the above circumstances, the Court is of the view that none of the objections to the scheme now survive and accordingly the sanction under section 394 of the Act is granted to the proposed scheme of restructuring and arrangement.
The company also proceeded to repay the deposits. Compliance statements were being filed before the CLB from time to time. The position was also accepted and acted upon by the Department of Company Affairs of which the Registrar of Companies was a party.
In the meanwhile the Registrar of Companies filed a complaint under Sec. 58A (10) of the Companies Act, 1956 for the alleged contravention under Sec. 58A (9) of the Act. The complaint states that the petitioners and two others were the directors/officers of the company and were under a statutory obligation to comply with the provisions of Section 58A of the Act. It is stated that upon a technical scrutiny of the balance sheet of the company as on 31st March, 2000 it was found that the company had not complied with order passed by the Company Law Board directing the company to repay the outstanding matured fixed deposits in accordance with a scheme devised by it. It was stated that by not following the directions of the CLB for making repayment of the matured public fixed deposits, a contravention of section 58A of the Act has taken place and which was, therefore, punishable in terms of section 629A of the Act.
The contention of the petitioners before the Court is that the scheme sanctioned by the CLB was proposed to be implemented by the company as part of the scheme of restructuring and arrangement, there could not have been any occasion for the Registrar of Companies to file a complaint against the company for non compliance with that scheme. The ACM M also proceeded to issue the summoning order without being informed that a petition filed by the company under section 391/394 of the Act was pending in this court for approval of the scheme of restructuring and arrangement and in which the scheme ordered by the CLB for repayment of deposits was being accounted for. It was contended by Registrar of Companies that the mere fact that the High Court has approved the scheme of arrangement could not absolve the petitioners of their liability in terms of Section 58A(9) of the Act.
The High Court observed the following:
* The Regional Director gave sanction on 1st November, 2002for filing the complaint;
* Two years earlier, on 23rd November, 2000 the same Regional Director filed an affidavit in the pending Company petition No. 247/2000 filed by the company under section 391/394 of the Act;
* In that affidavit the Regional Director informed the Court that scheme as directed by the CLB by its order dated 10th September,1 998 was proposed to be implemented;
* Therefore, as on the date of grant of sanction, i.e., 1st November 2002, it is inconceivable that the Regional Director had informed an opinion that the company or its directors intended not to comply with the scheme as approved by the CLB in its order dated 10th September,1998. Therefore the very basis on which the complaint filed was non-existent.
* It is in fact strange that the Registrar of Companies did not mention in the complaint before the learned Metropolitan Magistrate anything about the pendency of the petition filed by the company in the court seeking approval of the scheme of arranged under Sec. 394 of the Act or of the affidavit of the Regional Director agreeing to it;
The High Court held that the scheme as directed by the CLB stood merged in the scheme of rearrangement as approved by the Court on 29th October, 2003. Thereafter it has been acted upon by the parties. Consequently, the petitioners could not be held even to have prima facie contravened section 58A (9) of the Act for not complying with the order of the CLB. The petitioners are entitled to succeed on this ground itself.
By: Mr. M. GOVINDARAJAN - January 19, 2010