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2004 Supreme(Kar) 583
Karnataka High Court
Maharashtra Apex - Appellant
Versus
Nil - Respondent
Decided On : 10-08-04
COMPANY PETITION : 37 of 2003
D.O.KOTRESH, K.Parameswaran
Headnote:
The Karnataka High Court, in this case, considered the sanction of a scheme of compromise and arrangement proposed by a non-banking financial company (NBFC) under Section 391-393 read with Section 394a of the Companies Act, 1956. The scheme aimed to address the company's financial difficulties and inability to repay deposits on maturity due to various factors, including regulatory changes, economic slowdown, and defaults by borrowers.
Fact of the Case:
The NBFC, Maha Rashtra Apex Corporation Limited, filed a petition seeking sanction of the scheme, which involved waiver of interest after a certain date, payment of debts in five installments, and sale of assets to raise funds. Objections were raised by various parties, including depositors, creditors, and the Reserve Bank of India (RBI), which had prohibited the company from accepting deposits and alienating assets. The court examined the scheme's compliance with statutory requirements, the representation of creditors and shareholders, and the fairness and reasonableness of the proposal.
Finding of the Court:
The court held that the scheme met the statutory requirements and was approved by the requisite majority of shareholders and creditors. It found that the terms of the scheme, including the waiver of interest and deferred payments, were not contrary to the law and were in the interest of the company, its members, and creditors. The court also considered the objections raised by the RBI and other parties and found them to be without merit.
Issues: 1. Whether the scheme complied with the statutory requirements under Sections 391-393 read with Section 394a of the Companies Act, 1956. 2. Whether the scheme was approved by the requisite majority of shareholders and creditors. 3. Whether the terms of the scheme, including the waiver of interest and deferred payments, were contrary to the law or against the interest of the company, its members, and creditors. 4. Whether the objections raised by the RBI and other parties had merit.
Ratio Decidendi: The court's decision was based on the following legal principles: 1. The power of the court under Section 391 to 394 of the Companies Act is unhindered by any of those provisions. The only two circumstances under which the company court is prevented from according sanction is contained in proviso to Section 391 and 394 where the official liquidator or the Registrar of Companies files a report stating that the affairs of the company is conducted in a manner prejudicial to the members of the company and the company. 2. Merely because the statutory requirements are fulfilled, the court cannot grant sanction automatically. At the time of according sanction the Registrar of Companies is heard and even the objectors are heard. 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, it does not contravene any of the provisions of the statute, court can accord sanction. 3. In exercising the power of sanction, the Courts have to see whether provisions of the statute have been complied with. Secondly, that the class was fairly represented by those who attended the meeting and the statutory majority are acting bonafide and are not coercing the minority in order to promote interest adverse to those of the class whom they purport to represent and thirdly, that the arrangement is such as an intelligent and honest man, a member of the class concerned and acting in respect of this interest, might reasonably approve.
Final Decision: The court sanctioned the scheme of compromise and arrangement proposed by the NBFC, subject to certain modifications and conditions. It directed the company to file a certified copy of the order with the Registrar of Companies and to comply with the terms of the scheme, including the repayment of debts in installments and the sale of assets under the supervision of the court. The court also directed the company to file a statement of accounts showing recoveries and amounts realized once a year.
( 2 ) THE case of the petitioner is as hereunder; the petitioner company was incorporated on the 26th day of April 1943 under the Indian Companies Act 1913 as a public limited company under the name and style of Maharashtra Apex Bank Limited. They obtained a certificate of commencement of business on 5th May 1943. Subsequently the name of the petitioner was changed to Maharashtra Apex Corporation Limited on 2nd September 1955. Thereafter the name of the company was changed as Maha Rashtra Apex Corporation Limited on 22 March 1996. The registered office of the petitioner-company is situated at Syndicate House, Upendra Nagar, Manipal, in the State of Karnataka. The authorized capital of the petitioner-company is Rs. 40 crores divided into 1 crores equity shares of Rs. 10-00 each and Rs. 2 crores redeemable cumulative preference shares of Rs. 10/-each. The details of the issued, subscribed and paid up share capital of the petitioner-company as on 31st March 2002 is set out in paragraphs-5 and 6 of the petition. As is clear from the said paragraphs the petitioner-company has issued 1,41,50,100 equity shares of Rs. 10-00 each; 17,63,500, 17. 5% redeemable cumulative preference shares of Rs. 10-00 each. It is stated that subsequent to 31st March 2002 no material change or alteration has been made to the share capital of the petitioner-company. However, they have not paid redemption amount on preference shares on the due dates in respect of repayment falling due from September 2002 onwards. The petitioners equity shares are listed at National Stock Exchange, Mangalore, Pune, Bangalore and Mumbai Stock Exchanges and comprises of around 12000 public equity share holders besides equity shares held by the promoters and their associates. In para-8 of the petition they have set out the share holding as on 31. 3. 2002. The main object of the petitioner-company is set out in the memorandum of association. It discloses that the petitioner-company is mainly engaged in deposit mobilization, hire purchase, leasing, bill discounting, demand loans and money changing business etc. The petitioner-company is a non-banking financial company classified as hire purchase and equipment leasing company by the Reserve Bank of India, The audited accounts of the company for the year ending 31st March 2002 is produced along with the petition. It discloses that the accumulated loss as on 31st March 2002 stood at around Rs. 105. 85 crores. The petitioner-company submits that the fiscal reforms and the rapid changes in the monetary system necessitated structural adjustments and further even economy in the country had moved from regulated interest regime to deregulated interest rate mechanisms subject however to the directions and instructions and to the over-all policy frame-work issued by the Reserve Bank of India, ft is contended that the petitioner-company is managing its business affairs without any major difficulty or constraints right from the inception in the year 1943 and have paid uninterrupted dividend since its inception till 1999. The petitioner had set up over 100 branches and supported by over 350 sub-offices, over the length and breadth of the country wide network of agents. Due to adverse financial situations they have closed down many of its breaches and is presently functioning through 36 branches across the country. The petitioner-company could mobilize over Rs. l00 crores deposits during the period April-December 1997 and deployed them in financial assets with utmost commercial prudence and probity. However, with the introduction of the new regulation in January, 1998 by t
