9911796707
TMI Blog2000 (10) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank) Directions, 1998 ('the Directions') to regulate acceptance of deposits by the companies carrying on the business of non-banking financial institutions. The respondent-company was, therefore, bound to follow these directions. The respondent-company was incorporated on 14-11-1972 and as NBFC was bound by the Directions of the bank as amended from time to time. It has paid-up capital of Rs. 12.14 lakhs as per the audited balance-sheet for the year ending on 31-3-1997. The main object of the respondent-company as per its memorandum of association is to mobilize funds, generate savings, to create deposits for the purpose of lending or investment and to carry on and transact by introducing mobile banking facilities in rural and urban areas. The respondent-company which has been carrying on the activities of a RNBC for over a decade never approached the bank for classification. After the Amending Act of 1997 NBFCs are prohibited by section 45-IA of the Act from commencing or carrying on the business of non-banking financial institution without obtaining a certificate of registration from the bank. The company submitted an application dated 26-6-1997 to the bank for issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in accordance with rule 21 of the Companies (Court) Rules, 1959 and as such, it deserves to be dismissed at the threshold. The conditions prescribed by section 45MC(1) are not at all satisfied and the petition is misconceived. The order dated 17-9-1998 passed by the bank under section 45-IA is appealable before the Central Government under sub-section (7). The respondent-company has filed an appeal which is pending. As such, the order passed by the bank has not become final. The Company Law Board (CLB) by order dated 27-9-1999 passed an order under section 45QA and keeping in view the interest of the respondent-company, of the depositors and also of public at large, approved a scheme of repayment of deposits which has been circulated by the respondent-company to the depositors. Despite full knowledge of such order, the bank filed the instant petition concealing the aforesaid material fact. The respondent-company has been taking steps to repay the deposits in accordance with the directions of the CLB, but the petitioner is adamant to create hurdles so that the respondent-company may not be able to comply with the directions of the CLB. No doubt, the Net Owned Funds (NOF) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt-company about non-payment of deposits on maturity or any instance which could imply inability to pay its debt. In fact, the respondent-company is capable of meeting all its obligations towards the depositors and is in a position to recover its business. 5. To be short, the respondent-company challenges the authority of Deepak Singhal to file the winding up petition and the maintainability of the petition itself as preliminary objection and then it contends that no ground exists for its winding up on testing the matter according to the relevant provisions of the Act. 6. I have heard Shri S.N. Varma, learned senior advocate on behalf of the petitioner and Shri R.P. Agarwal, the learned counsel for respondent-company, besides carefully examining the record in the light of the relevant law. Draped in brevity, the submissions from the side of the petitioner is that the petition has been filed and verified by a competent officer of the bank and the same is perfectly maintainable. The central core of the argument from the side of the petitioner is that it is clearly indicated that the respondent-company is unable to pay its debt, it is unable to carry on its business consequent upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21 aforesaid, the filing and verification of the winding up petition by him is incompetent and not maintainable. The learned counsel for the respondent has also made reference to section 2(30) of the Companies Act, 1956 which reads as under : "(30) 'officer' includes any director, managing agent, secretaries and treasurers, manager or secretary, or any person in accordance with whose directions or instructions the Board of directors or any one or more of the director is or are accustomed to act, and also includes,- (a)where the managing agent, or the secretaries and treasurers is or are a firm, any partner in the firm; (b)where the managing agent or the secretaries and treasurers is or are a body corporate, any director or manager of the body corporate; but, save in sections 477, 478, 539, 543, 545, 621, 625 and 633, does not include an auditor;" 10. It may be stated that the above definition of the term 'officer' is not exhaustive. It is only illustrative. Anyway, with the aid of this provision of the Companies Act, the argument is sought to be supported that Deepak Singhal who claims himself to be the Deputy General Manager of the Department of Non-Banking Supervision ("DNBS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken note of. Section 2(b) of the Act defines 'the Central Board' as the Central Board of Directors of the bank. Section 7 of the Act deals with the management of the bank and reads as under: "Management.-(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest. (2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank. (3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and to all acts and things which may be exercised or done by the bank." 14. Section 8 of the Act relates to composition of the Central Board and term of offices of Directors. Section 13 contains another noteworthy provision regarding meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Act and these Regulations shall apply to meetings of the Committee of the Central Board, as if they were meetings of the Central Board." 16. Regulation 15 in Chapter IV relates to delegation to the Committee of Central Board. It says that the Committee of Central Board shall have full powers to transact all the usual business of the Bank except in such matters as are specifically reserved by the Act to the Central Government or the Central Board. The purport of the said Regulation is that barring such matters as are specifically reserved by the Reserve Bank of India Act for the Central Government or the Central Board, the Committee of Central Board has full power to transact all the usual business of the Bank and the acts of the Committee would be deemed to be those of the Central Board. Regulation 18(1) provides the manner and form in which contracts binding on the bank may be executed. The provisions contained in regulations 18(2) and 19 are important and are excerpted below for instant attention. "18. (2) Without prejudice to the generality of the powers conferred by or under Regulation 17, the Chief Manager, Additional Chief Manager, Chief Accountant, Secretary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding up petition and to verify the same. The petition filed by him is in accordance with the provisions of the Act and also meets the requirement of rule 21 of the Companies (Court) Rules. There is no delegation of powers as complained of by the learned counsel for the respondent. The act of the Committee of the Central Board is to be taken as of Central Board itself except for matters specifically reserved by the Act for Central Government or Central Board. Under valid authority, the Committee of Central Board of the Bank has issued notification dated 11-9-1998, relevant provisions whereof have been reproduced above to clear the mist. It is not ultra vires. Hyper-technical objection based on hairsplitting has been advanced by the respondent to challenge the maintainability of this winding up petition which has been filed by the bank through Deepak Singhal, Deputy General Manager, DNBS. On scrutiny, the hollowness of this objection is exposed. I, therefore, reject the preliminary objection raised by the respondent attacking the maintainability of this winding up petition. The ruling of Hukam Chand's case (supra) also has no application here. 19. Another broad argument of the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings initiated on the application made by the bank under this provision. Section 443 of the Companies Act relates to the powers of the Court hearing a winding up petition. On hearing a winding up petition, the Court may dismiss it; make any interim order that it thinks fit; or make an order for winding up of a company or any other order that it thinks fit. It is thus clear that many options are open to the Court depending upon the facts and circumstances of each case. The point that I wish to emphasize is that ultimately it is the Court hearing winding up petition, which has to come to a decision as to what order is to be passed in a particular case. The truth of the matter is that the winding up petition in question has been found to be entertainable and maintainable as discussed in the earlier part of this order. It is, however, a different question that the Court would examine in subsequent discussion the merits of the winding up petition as per the requirements of section 45MC in the light of the material placed before it. But the respondent's contention is liable to be rejected that the petition has been filed without satisfying the requirement of satisfaction of the bank w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted an application for registration to the bank under section 45-IA(2). The said application of the respondent was rejected by the bank on 17-9-1998. The contention of the learned counsel for the respondent is that the said order of rejection passed by the bank declining registration to the respondent is not final. Attention of the Court has been invited to sub-section (7) of section 45-IA which runs as under : "Requirement of registration and net owned fund.-(1) to (6) ** **** (7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final : Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard." 24. It is not disputed by the petitioner that the respondent has preferred an appeal against the order of the bank dated 17-9-1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddle strata of the society started falling prey in the hope of multiplying their deposits. Proliferation of such companies outside the banking system wholly depending upon public deposits started causing concern to the authorities. It was thought that such institutions/companies should not be allowed unlimited and unrestricted access to the public money. To remedy the situation and to prevent unwarranted growth of deposits outside the banking system, it was felt necessary for healthy credit system of the country to empower the RBI with necessary statutory provisions so as to enable it to control, regulate and supervise the deposits accepted by such companies and institutions. To achieve the goal, the Act was amended in 1963 and a new Chapter III-B was introduced in the Act by Banking Laws (Miscellaneous Provisions) Act, 1963 whereunder powers were conferred on the bank to issue suitable directions for regulating and monitoring the deposit acceptance by such companies and institutions. Chapter III-B of the Act contains deposits and financial institutions. In pursuance of powers conferred by Chapter III-B aforesaid, the Reserve Bank has been issuing directions to non-banking financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutions and unincorporated bodies receiving deposits are regulated in terms of the provisions of Chapters III-B and III-C of the Act, respectively. Until recently, the emphasis was on regulating the receipt of deposits by NBFCs as an adjunct to credit and monetary policies and to provide indirect protection to depositors. However, experience has shown that the provisions were neither sufficient to regulate the business activities of these companies nor do they provide adequate protection to depositors. 28. The Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulating NBFCs is sufficiently wide. The Working Group on Financial Companies appointed by RBI under the Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies. 29. Despite the provisions before the promulgation of the Reserve Bank of India (Amendment) Ordinance, 1997 contained in Chapter III-C of the Act, the unincorporated bodies circumvented the statutory restrictions by floating different par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passing of this Amending Act, Reserve Bank of India (Amendment) Ordinance, 1997 was promulgated by the President on 9-1-1997 and the Amending Act of 1997 replaced the same. 34. With the above backdrop, the facts of the present case as to the alleged inability of the respondent to pay its debt (which is the point under consideration presently) should be taken note of. It was in 1972 that the respondent-company was incorporated under the Companies Act and commenced its business of accepting deposits from the members of the public. Being classified as Residuary Non-banking Company, it is governed by the provisions of Chapter III-B of the Act. On its application dated 26-6-1997 to the RBI for registration under section 45-IA(2), the bank carried out an inspection under section 45N with reference to its financial position as on 31-3-1997. A show-cause notice dated 27-5-1998 (Annexure 15 to the counter-affidavit A-6) was issued to it by the bank to explain certain deficiencies/irregularities observed during inspection. The same related to net owned funds, solvency, management and violation of the RBI directions. The respondent-company submitted its reply dated 12-6-1998 to the show-cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repayment of the deposits of the depositors as per the scheme sanctioned by the CLP. It has been urged that the bank has unnecessarily hastened to present the winding up petition under section 45MC. Suffice it to say in this regard that the power of this Court to entertain and adjudge a winding up petition presented by RBI under section 45MC is not controlled by section 45QA. To state it another way, section 45MC is not overridden by section 45QA. Untrammelled by the order of the CLB under section 45QA, this Court is empowered to entertain and decide in an adjudicatory manner a winding up petition presented under section 45MC having regard to the provisions contained in the said section and guided by the material on record. 37. Another argument of the learned counsel for the respondent company is that as per the averments made in the winding up petition the bank has not succeeded in establishing that the respondent is unable to pay its debt. On the other hand, the submission of the learned counsel for the petitioner is that it is amply proved by the own case of the respondent before the CLB that it was unable to pay its debt. It has been stressed by the learned counsel for the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, it could not make any payment to the depositors since September 1998. Even its working came to standstill and all the offices had to be shut down. However, it contended that aggregate amount of its asset as on 30-9-1998 was around Rs. 54.60 crores. According to the company, its liabilities towards deposits and interest were to the tune of Rs. 54 crores. It appears that such assertion of the respondent-company swayed the CLB to approve a scheme for repayment. The discussion that I intend to make a shortwhile later would show that actually the liability of the respondent-company was far in excess of its assets which has to be taken to mean that it is unable to pay its debts. 39. In any view of the matter, the admissions of the respondent-company before the CLB referred to above leaves not the slightest doubt that its office had shut down, it had stopped making payments since September 1998 and the primary reason was that fresh deposits were not coming to it after September 1998. It gives a clear inkling that the trick or hidden secret of its operation over the years was that out of the fresh deposits, it was making the payments of earlier deposits but there was a sizeable gap be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is an indicator that the profits were siphoned off or dealt with in a manner otherwise than reasonably protecting the interest of the depositors. Investments were made in subsidiary companies or in fields favoured or patronized by Directors to advance their own ulterior interests with scant regard to the security of the money of the depositors, liquidity and refund/repayment prospects. 42. The point is crystal clear that the respondent-company is unable to pay its debts. 43. The learned counsel for the respondent has argued that unability to pay debt is required to be proved as nor the requirement of sub-section (2) of section 45MC, which is to the following effect : "(2) A non-banking financial company shall be deemed to be unable to pay its debt if it has refused or has failed to meet within five working days any lawful demand made at any of its office or branches and the Bank certifies in writing that such company is unable to pay its debt." 44. So far as the first requirement of this sub-section is concerned, it should be pointed out that it is clear from the own case of the respondent-company before the CLB that all its offices had to shut down and it was not making any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 8 of the petition, the bank has averred that the company has failed to repay the deposit amounts but in subsequent sentences, the ground advanced is that it is unable to pay its debts. According to the learned counsel for the respondent, the RBI is in a confused state and is uncertain about the grounds on which the petition is founded. I do not attach any importance to this argument. 'Failed to pay' and 'unable to pay' are synonymous without any meaningful difference. As per the Oxford Dictionary, 'unable' means 'not able', 'lacking ability'. The meaning of 'fail' is 'be unabled'. Therefore, it is difficult to see any difference between the two words. 48. In the conspectus of the above discussion, at the admission stage this Court is of the opinion that the petitioner has been able to show that the respondent-company is unable to pay its debts with the result that the petition deserves to be admitted and advertised on this ground. 49. I would now address myself to another ground taken in the winding up petition, viz., the continuance of non-banking financial business by the respondent-company is detrimental to the public interest or to the interest of the depositors of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten per cent of (a) above. (II) 'subsidiaries' and 'companies in the same group' shall have the same meanings assigned to them in the Companies Act, 1956 (1 of 1956)." 51. In the case at hand, in the balance-sheet for the year ending 31-3-1997 the share capital is shown a little over Rs. 12 lakhs. In according with the definition of net owned funds contained in the Act as reproduced above, net owned funds of the respondent-company were found to be negative to the extent of Rs. 1106.98 lakhs as on 31-3-1997 in the show-cause notice dated 27-5-1998 issued by the Bank to the respondent-company. In its reply dated 12-6-1998 to the show-cause notice the respondent-company could not refute that net owned funds were negative to the above extent as on 31-3-1997. Instead, it contended that net owned funds have been arrived at by applying the definition as contained in Explanation to section 45-IA and that the said artificial definition was to be ignored. It cannot be appreciated as to how could the net owned fund be calculated otherwise than in accordance with the statutory provision contained in Explanation to sub-section (7) of section 45-IA. Having regard to the negative state of net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI in exercise of powers conferred by sections 45J and 45K proved to be un-edifying and the respondent-company defined the same with impunity, seemingly to advance and feed fat the personal interests of the directors of the company who largely made investments in their subsidiaries or in the field favoured or patronized by them for their own ulterior motive. 54. The reply dated 12-5-1998 submitted by the respondent to the show-cause notice of the bank says that without going into the details of calculation arrived at by the RBI, they could only say that if they had repaid their liabilities in past 26 years, why they would not be able to repay the same in future. The fact is that the only secret of the operation of the respondent-company over the years has been to repay the previous depositors out of fresh deposits, at the same time squandering and eroding part of the deposits and making investments in contravention of the statutory directions issued by the bank. But it stands exposed that at a given time, viz., on 31-3-1997 its liabilities far exceeded its assets. It would be recalled that there has been simultaneous stoppage of inflow of fresh deposits and repayment of the earli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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