A scheme of arrangement under Companies Act cannot be approved if it violates mandatory provisions of the RBI Act, particularly when non-disclosure of regulatory violations undermines the process.

1. Leave granted.

2. I.A. filed by Mr. B. Ramanna Kumar for substitution in place of Late Mr. N. Mani is allowed.

3. These appeals, arising out of S.L.P. (Civil) Nos. 12737-12740 of 2008, are directed against the common order and judgment dated 30th April 2008 passed by the Division Bench of the High Court of Judicature at Madras. Vide the aforesaid order, the order/judgment of the learned single judge dated 19th August 2006 passed in Company Petition No. 160 of 2005 was set aside.

4. The Company Petition No. 160 of 2005 was filed by the appellant company herein under Section 391 of the Companies Act , 1956 (hereinafter referred to as “the Companies Act ”), seeking approval for the scheme of arrangement/compromise dated 10th August, 2005. The said agreement was entered into between the appellant company herein and its class of creditors, namely its deposit holders and bond holders. The learned Single Judge, vide order dated 19th August, 2006, was pleased to sanction the said scheme, albeit with some conditions. This order was challenged in the High Court by way of four original side appeals, which were allowed by the Division Bench vide the order dated 30th April, 2008 which has been challenged in this Court.

5. Summary of Facts:
The relevant facts giving rise to filing of the present appeals as narrated by the parties are as under:

6. The appellant herein was incorporated as a Non-Banking Finance Company (hereinafter referred to as a “NBFC”) under the Companies Act in 1983, and was engaged inter alia in the business of hire-purchase and leasing. Over the years the appellant company has become one of the leading financial companies. It has 32 branches with over several hundred employees. The shares of the company are listed in two stock exchanges in India. It has 20,000 shareholders. Until 1995-1996, the appellant company was a profit making company and declared dividends to its shareholders continuously.

7. That the Reserve Bank of India (hereinafter referred to “RBI” or/and the “respondent no.1”), during 1997-2003, issued a series of circulars for regulating various activities of the Non-Banking Financial Companies. The RBI also imposed certain conditions on these companies. The companies that did not comply with the aforesaid conditions were directed to stop accepting deposits from the investors and also to repay the deposits immediately.

8. In exercise of its powers under Section 45N of the Reserve Bank of India Act 1934 (hereinafter “1934 Act”), the RBI inspected the books of accounts of the appellant company in 2005. The inspection report of the RBI disclosed the following violations of the provisions of the 1934 Act:
i) On 31st March, 2004, the Net Owned Fund (NOF) of the appellant company herein stood at negative (-) Rs.10666.06 lakh, which was in excess of the reported NOF at Rs.2194.00 lakh;
ii) The credit exposure of the appellant company, as on 31st March 2004, to some of the companies was found to be in excess of 15% of its reported owned fund of Rs.2877.00 lakh as on September 30, 2003. Thus, it violated the provisions of Para 12 of the NBFC Prudential Norms (Reserve Bank) Directions, 1998 (hereinafter referred to as the Prudential Norms Directions).
iii) The appellant company did not classify its assets in accordance with the asset classification norms stipulated by RBI and thereby, violated the provisions of Paragraph 7 of the Prudential Norms directions.
iv) The Gross Non-Performing Assets of the appellant company, assessed at Rs.15603.16 lakh, stood at a very high level and constituted 69.31% of the total credit exposures of the appellant company.
v) The appellant company was found to have not made adequate provision in respect of its Non-Performing Assets. Resultantly, there was short provisioning to the extent of Rs.12575.33 lakhs. The aforesaid omission on part of the appellant violated the provisions of Paragraph 8 of the Prudential Norms Directions.
vi) The appellant company was also found to be in violatio