TMI Blog2010 (4) TMI 608X X X X Extracts X X X X X X X X Extracts X X X X ..... 20(4) of Schedule I to the Karnataka Stamp Act, 1957. (g)All pending company applications are disposed of by separate orders. - C.P. NOS. 108 OF 2002 AND 215 OF 2003 - - - Dated:- 16-4-2010 - MOHAN SHANTANAGOUDAR, J. N. Mahesh, Kishore Shetty, Sundaraswamy, Ramdas Anand, N. Mahalinga Bhat, N.S. Rajendra and D.B. Rajanna for the Parties JUDGMENT Mohan Shantanagoudar, J. Company Petition No. 102 of 2002 is filed by the Reserve Bank of India (hereinafter referred to as "the RBI" for short) under section 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 and Developments Ltd., ("the company"). 2. Company Petition No. 215 of 2003 is filed by Tulunadu Finance and Developments Ltd. (hereinafter referred to as "the company" for short) under sections 391 to 393 read with 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. 3. Tulunadu Finance and Developments Ltd., ("the company") was incorp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the scheme of arrangement and compromise in respect of repayment of the debts: On September 5, 2003, this court ordered to convene the meetings of the secured creditors, shareholders, company bankers, debenture holders and deposit holders separately. The meetings were held in the registered office of the company on October 20, 2003. The report of the meetings was furnished by the chairman, who had chaired the meetings held on October 20, 2003, to this court on November 4, 2003. On the very day, i.e. , on November 4, 2003, Company Petition No. 215 of 2003 is filed by the company praying for sanctioning of the scheme of compromise and arrangement under sections 391 to 393 read with section 394A of the Companies Act, 1956. 5. On August 3, 2005, Company Petition No. 108 of 2002 filed by the 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, Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany from receiving the deposits from the public ; that since the order of cancellation of registration of 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. 8. 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. 9. It is further argued on behalf of the 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 the 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 allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the court who are the debenture holders also argued opposing the winding up petition. 12. It is relevant to note that one of the creditors had filed Company Petition No. 115 of 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 July 23, 2002. The company preferred an appeal in O.S.A. No. 82 of 2002, which came to be rejected by the Division Bench of this court by the order dated November 13, 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 July 23, 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 of 2001, filed Company Application No. 271 of 2003 praying for withdrawal of the said Company Petition No. 115 of 2001. After due consideration of the matter, this court by the order dated March 11, 2003, recalled its order of winding up dated July 23, 2002. 13. The authorised share capital of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buildings." (emphasis1 supplied) 15. 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 the non-banking finance business is the only main object of the company. Apart from the non-banking finance business of the company, the object of the company is to carry on the business of real estate also. 16. The court is conscious of the fact that the RBI itself has approached the court by filing the petition for winding up of the company in exercise of its power under section 45MC of the RBI Act read with section 433 of the Companies Act. The Supreme Court of India has recognised and declared the special status statutorily assigned to the Reserve Bank of India. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the amount of loan with interest. 21. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anker'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 under section 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 September 24 and 25, 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 per cent., secured creditors (debenture holders) have approved the scheme with 99.15 per cent., whereas, unsecured creditors (deposit holders) have approved the scheme with 98.66 per cent. 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 creditor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the meetings convened for the purpose of approval of the scheme. In spite of all the shortcomings mentioned supra, 98 per cent. - 99 per cent, 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 Co-operative Bank. It is relevant to note that these are the only six secured creditors (banks). Other secured creditors are debenture holders. 26. The company has repaid to Karnataka Bank Ltd., Car Street, Udupi, to the tune of Rs. 40 lakhs and the Kamataka Bank Ltd., has issued no due certificate on April 19, 2006. 27. 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 March 11, 2006. 28. The company has repaid to Syndicate Bank, Catholic Centre Branch, Udupi, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 objects of the company is to do real estate business also. 36. Learned counsel appearing on behalf of the RBI relying upon the judgment of the Delhi High Court in the case of JVG Leasing Ltd., In re [2006] 2 Comp. LJ 242 ; [2008] 144 Comp Cas 780 , 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 suff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that the RBI has received requests from various NBFCs 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 the 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. ( ii ) In this connection, a reference is made to paragraph 90 of the Mid Term Review of Monetary and Credit Policy for the year 2001-02 announced by out Governor on October 22, 2001 in terms of which it has been decided that companies whose application for certificate of 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 non-banking non-financial companies within the same period. The reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued on or after April 1, 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 May 1, 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 up to 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 per cent, of outstanding debenture/deposit value respectively and such payments will be in six equal instalments and first of the six instalments will be made within six months of the approval of the scheme by the members and creditors and the subsequent five instalments within 12th, 24th, 36t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp Cas 792; [1997] 1 SCC 579, the court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 could 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 jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 47. According to the RBI, the company has violated the provisions of the 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied the orders of the 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 instalments. 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. 51. 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, throughout 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose 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 Comp Cas 637 . In the said matter also, the certificate of registration issued in favour of NBFC was cancelled by the RBI. The company had prayed for sanctioning of the scheme before this court.. After considering various aspects of the matter, this court accorded sanction 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e depositors under the terms of the scheme. (6)The 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. 57. In view of the same, the following order is made : ( a )Company Petition No. 108 of 2002 filed by the Reserve Bank of India is dismissed. ( b )Company Petition No. 215 of 2003 filed by Tulunadu Finance and 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 Company Petition No. 215 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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