India: Whether A Scheme Of Arrangement Is A Mode Of Revival For A ‘Company Under Winding Up’ Where Winding Up Petition Is Filed By Reserve Bank Of India

PROVISIONS UNDER COMPANIES ACT , 1956

Chapter V of Part VI: Management and Administration of the Indian Companies Act, 1956 [hereinafter referred to as the 'Act'] regulates Arbitration, Compromises, Arrangements and Reconstructions as covered under Section 390-396A of the said Act. Section 390 of the Act provides interpretation of Sections 391 and 393 as under:

390. INTERPRETATION OF SECTIONS 391 AND 393

In sections 391 and 393, -

  1. the expression "company" means any company liable to be wound up under this Act ;
  2. the expression "arrangement" includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods ; and
  3. unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors.

The provisions of Section 390 (a) can be well understood referring to the landmark Judgment pronounced by Hon'ble High Court of Bombay in Khandelwal Udyog Limited Vs. Acme Manufacturing Company as:

  • Company means any company liable to be wound up under this Act
  • Any company incorporated under this Act, or, under any other previous Companies Act, 1956
  • Whether a going concern
  • Already under the course of winding up
  • Any Partnership firm having 8 or more partners- Unregistered company (Section 582)
  • Indian business of a foreign company (Section 591) Section 390 (b) of the Act provides that the term 'arrangement' includes a reorganization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or, by both those methods.

This means a scheme of arrangement under Sections 391 & 393 may be filed for internal arrangements amongst the shareholders holding equity or preference share capital of the company.

It was questioned that whether the provisions of Buy Back of shares as provided under Section 77A of the Act will qualify under arrangement being an internal from of reorganization on which the Securities Appellate Tribunal has held that the provisions contained under the Chapter V of the Companies Act, 1956 are the special provisions and hence the same over rides any other provisions of the said Act. It was also clarified that the term 'arrangement' as envisaged under Section 390 (b) of the Act includes the Buy Back of shares by a company.

The interpretation to Section 390 (c) of the Act suggests that if certain unsecured creditors of the company have obtained a decree against such company, and a scheme under Chapter V of the Act is filed before the court by certain class of unsecured creditors other than such unsecured creditors already holding the decree and obtained the approval as contained under the said chapter, the unsecured creditors holding a decree shall compulsorily switch into the scheme of arrangement and the order/decree attained by them shall have no effect by operation of law.

UNDER THE RESERVE BANK OF INDIA ACT , 1934

Chapter IIIB of the Reserve Bank of India Act, 1934 [hereinafter referred to as the 'RBI Act'] deals with the 'Provisions relating to non-banking institutions receiving deposits and financial institutions' under section 45H-45QB. Section 45 MC of the RBI Act, empowers the Reserve Bank to file a winding up petition in certain cases as follows:

45MC. Power of Bank to file winding up petition.

  1. The Bank, on being satisfied that a non-banking financial company,–

    1. is unable to pay its debt; or
    2. has by virtue of the provisions of section 45-IA become disqualified to carry on the business of a non-banking financial institution; or
    3. has been prohibited by the Bank from receiving deposit by an order and such order has been in force for a period of not less than three months; or
    4. the continuance of the non-banking financial company is detrimental to the public interest or to the interest of the depositors of the company, may file an application for winding up of such non-banking financial company under the Companies Act, 1956.

  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 offices or branches and the Bank certifies in writing that such company is unable to pay its debt.
  3. A copy of every application made by the Bank under sub-section (1) shall be sent to the Registrar of Companies.
  4. All the provisions of the Companies Act, 1956 relating to winding up of a company shall apply to a winding up proceeding initiated on the application made by the Bank under this provision.]

Also, according to the Section 45Q of the RBI Act, the provisions of Chapter IIIB of the RBI Act override the provisions inconsistent with the provisions of Chapter III B contained in any other Law. Section 45Q provides as under:

45Q. Chapter IIIB to override other laws.

The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

In the light of the above mentioned provisions of the RBI Act, the Reserve Bank is empowered to file for winding up of a non-banking institutions receiving deposits and financial institutions which are unable to pay its debts, have received prohibitory orders for receiving deposits, the running of such company is detrimental to public interest etc.

Analysis of the above mention provisions of the Indian Companies Act, 1956 and the Reserve Bank of India Act, 1934

The provisions of the Companies Act, 1956 and Reserve Bank of India Act, 1934 have been interpreted by Hon'ble Courts in India. The Hon'ble Courts on the various instances have held that the provisions of Chapter V of the companies Act, 1956 are the special provisions under such law. The validity of the scheme of arrangement depends on the merits and its effect on the general shareholders and creditors. Even if the scheme is approved by the respective creditors and shareholders of a particular company, such scheme may be improvised by the Hon'ble Authorities after due suggestions and the Hon'ble Court having the powers to incorporate such suggestions into the scheme may make order to suitable make the amendments in the scheme.

In the case of Hindustan Lever Employees' Union v. Hindustan Lever Ltd. and others 1995 Supp. (1) SCC 499 it was held that "But what was lost sight of was that the jurisdiction of the Court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test. A company court does not exercise an appellate jurisdiction ........... Section 394 casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. The basic principle of such satisfaction is none other than the broad and general principles inherent in any compromise or settlement entered between parties that it should not be unfair or contrary to public policy or unconscionable. In amalgamation of companies, the courts have evolved, the principle "prudent business management test" or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of foreign company then test is not only whether the scheme shall result in maximising profits of the shareholders or whether the interest of employees was protected but it has to ensure the merger shall not result in impeding promotion of industry or shall not result in impeding promotion of industry or shall obstruct growth of national economy. Liberalized economic policy is to achieve this goal. The merger, therefore, should not be contrary to this objective.

In Reserve bank of India vs CRB Capital Markets Limited (Date of Judgment 21st November, 2012), the Hon'ble High Court of Delhi has held that there is nothing inconsistent in the provision of Section 391 of the Companies Act with the provisions of Chapter III-B of the RBI Act and therefore it cannot be said that in a winding-up petition under Section 45MC of the RBI Act an application under Section 391 of the Companies Act, 1956 for sanctioning a scheme cannot be made to and entertained by the company court. It is another matter that while considering the scheme the company court has to ensure that no statutory provisions including the provisions of Chapter III-B of the RBI Act are contravened.

The division bench of Hon'ble High Court of Delhi observed as under in Reserve bank of India vs CRB Capital Markets Limited:

Q.1 Whether a scheme under Section 391-392 of the Companies Act is maintainable in a winding up petition filed by the Reserve Bank of India under Section 45MC(1) of the Reserve Bank of India Act, 1934?

Observation

Although an application for sanction of a scheme could be made under Section 391 of the Companies Act, 1956 even during the pendency of a winding up petition filed by the RBI under Section 45MC of the RBI Act, the terms of the scheme cannot violate or contravene any of the provisions of law including the provisions of Chapter III-B of the RBI Act, and, if the scheme contains any term or condition which is in derogation of any statutory provision, the same cannot be sanctioned. Furthermore, it is a part of public policy itself that statutory provisions are to be followed and are not to be disregarded or contravened. Therefore, a scheme which ignores or side-steps statutory provisions would clearly be opposed to public policy.

Therefore, the answer to the first question is that while a scheme under Sections 391/392 of the Companies Act could be considered by the company court even during the pendency of the winding up petition filed by RBI under Section 45MMC of the RBI Act, such a scheme cannot be sanctioned if it is in violation of any of the statutory provisions including the provisions of Chapter III-B of RBI Act.

Q.2 Whether a scheme under Sections 391-392 of the Companies Act could set aside quasi judicial orders passed by a statutory authority like SEBI constituted under the Securities and Exchange Board of India Act, 1992?

Q.3 Whether the criminal and income tax proceedings pending against the company and its directors could be stayed by the company court while sanctioning a scheme under Sections 391-392 of the Companies Act, 1956?

Observation

It is clear that quasi-judicial orders passed by a statutory authority like SEBI or orders passed by RBI and the Income Tax Authorities under special enactments cannot be set aside while sanctioning a scheme under Section 391 of the Companies Act. It is also clear that no stay of any criminal or income tax proceedings can be ordered by the company court while considering an application under Sections 391 / 392 of the Companies Act, 1956. Therefore, the scheme which entails a direction to SEBI to revoke the orders passed under Section 11B of the SEBI Act could not have been sanctioned in law. Similarly, directions regarding "vacation or stay sine die" of all criminal cases could not have been given by the company court. Furthermore, we feel, that directions could not be given to the CBI to release the passport of the propounders of the scheme as also of the Ex-Directors of CRB Capital nor a direction could be given to CBI to hand over all records and documents of CRB Capital including records of fixed deposits, particularly, in view of the fact that the criminal cases were pending against the said Directors/ Ex-Directors of CRB Capital. ..................... It was held by the Supreme Court that SICA was a specially constituted Act and that it was a self contained code and therefore the jurisdiction of the company Judge in a case where a reference has been made to BIFR would be subject to the provisions of SICA. Similarly, the provisions of SEBI Act and RBI Act being special and complete codes in themselves with regard to their respective subject matters would over-ride the provisions of Companies Act in case there is any inconsistency between the said provisions.

A reference to Section 20A of the SEBI Act would also be appropriate. The said Section reads as under:-

"20-A. Bar of jurisdiction.--No order passed by the Board or the Adjudicating Officer under this Act shall be appealable except as provided in Section 15-T or Section 20 and no civil court shall have jurisdiction in respect of any matter which the Board or the adjudicating officer is empowered by, or under, this Act to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by the Board or the adjudicating officer by, or under, this Act."

The above provision, inter alia, entails that no injunction shall be granted by any court in respect of any action taken or to be taken in pursuance of any order passed by SEBI or its adjudicating officer. This provision also stipulates that no order passed by the SEBI or the Adjudicating Officer under the SEBI Act shall be appealable except as provided under Section 15 or 20. The latter provisions have already been set out above. Therefore, there cannot be any interference with the provisions of SEBI Act while a scheme is sanctioned under Section 391 of the Companies Act.

The two questions have, therefore, to be answered in the negative.

Q.4 Depending on to the answer to the questions above, whether the scheme formulated in the instant case is bonafide, feasible and fair?

Observation

It is apparent that the reliefs and concessions as sought under the scheme form an integral part of the scheme. If a majority of reliefs and concessions sought in law cannot be granted, the scheme itself would be unworkable. The learned counsel for CRB Capital, in the course of arguments, submitted that he was willing to give up various parts of the reliefs and concessions but, we fail to understand as to how that would improve the position inasmuch as without the reliefs and concessions, the scheme in itself would become unworkable. For example, one of the reliefs sought is that a direction be given to SEBI to revoke its order passed under Section 11B of the SEBI Act which includes the revocation of a suspension order for trading in shares of CRB Capital as well as its further group of companies in all stock exchanges. It also includes revocation of the suspension of the order passed by SEBI suspending the membership rights of the Ex-Directors of CRB Capital and to allow them to resume security trading business at stock exchanges. A direction has also been sought that SEBI be directed to give its approval for issuing fresh shares to the unsecured creditors (including deposit holders) by way of preferential allotments as envisaged in the scheme. It is obvious that the payment to depositors having deposited in excess of Rs. 5000/- is to be made partly (50%) by issuance of fresh shares of CRB Capital. That cannot happen unless and until this concession and relief is given in the shape of a direction to the SEBI to grant approval for issuance of fresh shares to unsecured creditors. We have already seen that such a direction cannot be given. There are several other such directions which cannot be given including the direction in respect of criminal cases and stay of demands and vacation of ex-parte orders insofar as income tax authorities are concerned. We also find that the release of the passport of the propounders of the scheme would probably be contrary to the direction given by the criminal court inasmuch as that may have been a condition for grant of bail. Such a direction, once again, may be contrary to law. We are, therefore, of the view that once the reliefs and concessions are not there, the scheme itself becomes unworkable. This is apart from the fact that there are other serious concerns with regard to the paltry amount of funds proposed to be brought in by the propounders of the scheme in the context of the overall fund requirement. This is also apart from the fact that the scheme as propounded and as sanctioned by the company court, in fact, contravenes the provisions of the RBI Act particularly those of Section 45QA. We have already held that though a scheme can be envisaged in the course of a winding up petition under Section 45MC of the RBI Act it has to be in conformity with the provisions of Chapter III-B of the RBI Act and not in contravention thereof. For all these reasons we feel that the scheme as formulated in the present case is not bonafide, feasible or fair.

CONCLUSION

In the light of the above, it can be concluded that the scheme of arrangement of the company already under winding up under the provisions may be called valid and approved if it is shown that such scheme is not contrary to Law.

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