M/S Integrated Finance Co. Ltd. v. Reserve Bank of India (2015)

The Reserve Bank's control over banking companies comes from the Banking Regulation Act 1949. Its control over non-banking financial companies comes from Chapter III-B of its own Act, and this case is the leading illustration of what that chapter is worth when it collides with company law.

It answers a question of real practical importance. A deposit-taking finance company in difficulty proposes a scheme of arrangement with its depositors — pay less, pay later. The Companies Act allows a court to sanction such a scheme. The Reserve Bank Act obliges the company to repay deposits on maturity. Which prevails?

It is also the case to cite for the proposition that a company court approving a scheme is not a rubber stamp.

The appellant was incorporated as a non-banking financial company under the Companies Act in 1983, and was engaged among other things in the business of hire-purchase and leasing. It had grown into one of the leading financial companies, with 32 branches, several hundred employees, shares listed on two stock exchanges and 20,000 shareholders. Until 1995-1996 it was profit making and declared dividends continuously.

During 1997-2003 the Reserve Bank issued a series of circulars regulating the activities of non-banking financial companies and imposed conditions on them. Companies which did not comply were directed to stop accepting deposits from investors and to repay the deposits immediately.

On inspection of the appellant's books of account under s. 45N, numerous violations were disclosed.

On 18 January 2005 the Reserve Bank sent the company a notice under s. 45MB(1). Such a notice is sent only where a non-banking financial company violates a provision or fails to comply with a direction or order given under Chapter III-B, and under that provision the Reserve Bank has power to prohibit the company from accepting any deposit. Under s. 45MB(2), to protect the interests of depositors, the Reserve Bank may also direct the company not to sell, transfer, create a charge or mortgage over, or otherwise deal in its property and assets without the Bank's prior permission. The orders directing the company not to accept deposits were duly published in a newspaper on 20 January 2005.

On or about 19 May 2005, while the investigation into the irregularities was proceeding, the company presented a scheme of arrangement to the Company Court. Company Petition No. 160 of 2005 was filed under s. 391 of the Companies Act 1956, seeking approval of a scheme of arrangement or compromise dated 10 August 2005 between the company and a class of its creditors, namely its deposit holders and bond holders.

The notice of 18 January 2005 was not disclosed to the shareholders present at the meetings convened on the directions of the Company Court.

A single judge sanctioned the scheme, with conditions, on 19 August 2006. Four appeals were preferred, and the Division Bench of the Madras High Court set that order aside on 30 April 2008. The company appealed to the Supreme Court.

1. Can a scheme of arrangement with depositors be sanctioned notwithstanding non-compliance with Chapter III-B of the Reserve Bank of India Act, and in particular with s. 45QA(1)?
2. Is s. 45QA of the Reserve Bank of India Act to be read as pari materia with s. 58A of the Companies Act, so that what is permitted under the latter cannot be prohibited under the former?
3. Was the non-disclosure of the Reserve Bank's notice of 18 January 2005 a non-disclosure of a material fact?

The appeals were dismissed. The High Court's order setting aside the sanction was upheld.

On the conflict of statutes. The Court declined to accept that s. 45QA of the Reserve Bank of India Act is pari materia, if not identical, with s. 58A of the Companies Act. The issue of the two provisions being pari materia does not arise, because the provisions of the Reserve Bank of India Act will override the provisions of the Companies Act. That is the point of s. 45-Q, which makes Chapter III-B override other laws.

On the scheme. The submission that the scheme of arrangement could be approved even though there was non-compliance with Chapter III-B, in particular s. 45QA(1), was rejected. The appellants had had an opportunity to approach the Company Court under s. 45QA(1) to seek further time for making payment. No such application appeared to have been made, and there was therefore a complete infringement of s. 45QA(1). The inevitable conclusion was that the scheme of arrangement could not be approved.

On non-disclosure. Even if no investigation was pending under the investigation provisions of the Companies Act, it was incumbent on the company to disclose the violations pointed out by the Reserve Bank on inspection of its books, which had led to the notice of 18 January 2005. The failure clearly reflected a lack of bona fides in proposing the scheme. Non-disclosure of the action taken and initiated by the Reserve Bank amounted to non-disclosure of material facts required to be disclosed under s. 391(1) read with s. 393(1) of the Companies Act.

On the function of the company court. The Court's statement of principle is the most quotable line in the judgment: a Company Court, while examining the fairness and the bona fides of a scheme of arrangement, does not act as a rubber stamp. It cannot shut its eyes to blatant non-disclosure of material information which could have a major influence or impact on the decision whether the scheme has to be approved or not.

Chapter III-B of the Reserve Bank of India Act 1934 overrides the Companies Act, so a scheme of arrangement between a non-banking financial company and its depositors cannot be sanctioned where the company has infringed s. 45QA(1) without applying to the Company Court for further time; and failure to disclose to the members a Reserve Bank notice prohibiting acceptance of deposits is a non-disclosure of a material fact which by itself justifies refusal of sanction.

For the examiner's purposes the case is a hook on which to hang Chapter III-B. The provisions to carry with it:

| Provision | What it does | |---|---| | s. 45-IA | Registration of a non-banking financial company, and the net owned fund requirement | | s. 45K | Power to collect information from non-banking institutions as to deposits, and to give directions | | s. 45L | Power to call for information from financial institutions and to give directions | | s. 45MB | Power to prohibit acceptance of deposits and to restrain dealing with assets | | s. 45N | Inspection of a non-banking institution's books of account | | s. 45QA | Repayment of deposits, and the power of the Company Law Board or Court to extend time | | s. 45-Q | Chapter III-B to override other laws |