IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH C.A. No.85 of 2011 in/and C.P. No.148 of 2008 Date of decision:10.12.2012 Reserve Bank of India ....Petitioner versus M/s Diamond Fincap Ltd. ....Respondent II. C.A. No.83 of 2011 in/and C.P. No.149 of 2008 Reserve Bank of India ....Petitioner versus M/s Moga Deposits and Advances Ltd. ....Respondent CORAM : HON'BLE MR. JUSTICE K. KANNAN ----- Present : Mr. Puneet Kansal, Advocate for the applicant. Mr. L.M. Suri, Senior Advocate with Mr. Neeraj Khanna, Advocate for the petitioner. Ms. Namrita Shergill, Advocate for Ms. Divya Sharma, Advocate for the Provisional Liquidator. ----- 1. Whether reporters of local papers may be allowed to see the judgment ?. Yes.
2. To be referred to the reporters or No.?. Yes.
3. Whether the judgment should be reported in the digest ?. Yes. ---- C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -2- K.Kannan, J.I Applications for review-the basis 1. In the above cases, applications have been filed in two company petitions i.e. C.P. Nos.148 and 149 of 2008 for recalling of orders passed by this Court on 26.02.2009 admitting the petitions filed by the Reserve Bank of India for winding up of the Companies. C.P. No.148 of 2008 was with reference to M/s Diamond Fincap Limited and C.P. No.149 of 2008 was with reference to M/s Moga Deposits and Advances Limited. Both the petitions have been admitted on the failure of the respondent to cause appearance in the company petitions and to respond to the petitions filed by the Reserve Bank of India where I had directed, by of the respective orders dated 26.02.2009, that the advertisement shall be issued and the official liquidator shall be the provisional liquidator to take possession of the assets to the companies and proceed in accordance with law. The applications have been filed by the respective two companies seeking for recall of the order contending, inter alia, that the petitions themselves were not maintainable, at the instance of the Reserve Bank of India, since by the orders of Reserve Bank of India, the Companies ceased to be non-banking financial companies (for short, 'NBFC') and, therefore, the relevant provisions of the Act empowering the Reserve Bank to apply to the Court for winding up do not apply. There were also other objections regarding the C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -3- validity of the respective two orders passed by this Court admitting the company petitions. II. Scope of adjudication 2. The case not stands for disposal for consideration of the relevant provisions of the Reserve Bank of India Act and the Companies Act relating to winding up of NBFC. The judgment will also traverse the consideration of whether a company which is previously engaged in non-banking finance and receipts of deposit from public could be permitted to carry on with other business delineated in the memorandum of association, if the certificate of registration for carrying on the business as non-banking finance company is withdrawn. This takes us to consideration whether the withdrawal of certificate of the NBFC itself will make possible for the company to carry on with other business and a petition for winding up is not a sine qua non. III. Examination of memorandum & articles of Companies 3. M/s Diamond Fincap was reported to have been engaged as a company on 23.04.1997. It was previously called Khahra Hire Purchase Pvt. Ltd. and the authorized capital was ` 1 crore divided into ` 1 lac shares @ ` 100/- each. The memorandum and articles of association provided that the company was authorized to carry a business on purchase, housing, general finance, investments; to purchase, sell or hire out or sell by installment or on hire purchase C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -4- system all kinds of motor vehicle, motor cycles, scooter, moped, cycles, sewing machines, television, machines, furniture and household equipment etc.; to invest in government promissory notes and securities, port trust debentures, corporation securities, shares and stock; to accept deposits from public as well as from members of the company as per directions of RBI besides other objects.
4. C.P. No.149 of 2008 concerns the application in regard to company M/s Moga Deposits and Advances Ltd., which was said to have been incorporated on 16.02.1996. It was converted as the public limited and certificate of incorporation was issued on 23.07.2001. The authorized capital of the company was ` 1 crore divided into ` l lac shares @ ` 100/- each. The main objects of the Company, as per its memorandum and article of association, are to carry on India or elsewhere in all its branches the business of hire purchase, housing, general finance, investments; to purchase, sell or hire out or sell by installment or on hire purchase system all kinds of motor vehicle, motor cycles, scooter, moped, cycles, sewing machines, television, machines, furniture and household equipment etc.; to invest in government promissory notes and securities, port trust debentures, corporation securities, shares and stock; to accept deposits from public as well as from members of the company as per directions of RBI besides other objects. C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -5- IV. Facts leading up to winding up petitions 5. It is an admitted case that applications had been filed to the Reserve Bank of India for granting a certificate of Registration under Section 45IA of the Reserve Bank of India Act, 1934. The Bank had issued a certificate of registration (COR) on 14.07.1999 and 25.05.1998 respectively for M/s Diamond Fincap and Moga Deposits and Advances Ltd. The reading of the said provision would indicate that there was statutory compulsion brought through Act 23 of 1997 amending the Reserve Bank of India Act, 1934 requiring every NBFC to obtain certificate for registration under Chapter III-B. It is a matter of legislative history that Chapter III-B itself was brought through an amending Act 55 of 1963 that incorporated some sections requiring details of credit information etc. for companies dealing with banking operation. The further amendments through Act 23 of 1997 came in the wake of several instances of NBFCs accepting deposits from public and absconding without trace leaving the public in lurch. It is a matter of admission that the Managing Director of the Company had left India without fully paying back all the depositors that resulted in large scale complaints against the Company. It is a matter of record again that the Reserve Bank had deputed its officials for carrying out inspections under the relevant provisions of the Act and several irregularities were observed during the said inspection. Notices had C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -6- been issued to the companies on 14.05.2008 to show cause as to why the COR should not be cancelled in terms of Section 45IA(6) of the Act. The Reserve Bank also soon thereafter issued prohibitory orders on 04.06.2008 under Section 45MB(1) and (2) barring the respective two companies to accept deposits and from making any alienation of their assets. Soon followed the orders of cancellation of CORs on 09.06.2008 that have remained till date and they have not been challenged or modified. The Reserve Bank of India invoked the power under Section 45MC to apply to this Court for winding up to the companies principally on the ground that the Companies had defaulted in repayment of deposits and their accounts were not properly maintained, as seen from the inspection note that ultimately resulted in cancellation of registration. The Companies did not appear on notice. It, therefore, resulted in the further proceedings and admission of the petitions for winding up as already noted above. V. Cancellation of COR, whether makes RBI Act-provisions for winding up to be immediately attracted 6. The first objection that has been taken by the applicants, namely, the companies, is that after the certificate of registration was cancelled, the Companies ceased to be NBFCs and, therefore, any application under Section 45 MC itself was not maintainable. This objection will have to be considered for examining the C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -7- maintainability of the company petitions themselves and, therefore, the said Section is reproduced below :- “45MC. Power of Bank to file winding up petition - (1) The Bank, on being satisfied that a non-banking financial company,– (a) is unable to pay its debt; or (b) has by virtue of the provisions of section 45IA become disqualified to carry on the business of a non-banking financial institution; or (c) 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 (d) 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 (1 of 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. C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -8- (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.”
7. Learned counsel Shri Puneet Kansal argued that in order that Section 45 MC of Reserve Bank of India Act is satisfied, it shall be a NBFC which is unable to repay debt. Since the certificate of registration has been cancelled, it has ceased to be a NBFC and, therefore, the petition for winding up itself is not maintainable. The learned counsel would state that certificate of incorporation under the Companies Act is different from certificate of registration of the company as NBFC under Chapter III-B. The cancellation of registration of a NBFC will leave unscathed the company which is registered under the Companies Act. Consequently, when the certificate of registration is cancelled, it will not cease to be a company and it will continue as such. The winding up of a company in such a situation could arise only by resort to the contingencies contemplated under Section 433 of the Companies Act. Learned counsel argued that it was nobody's case that subsequent to the cancellation of registration under Section 45IA (6) that the company indulged in acceptance of deposits or indulged in any of the acts relating to a NBFCs. The chapter itself provides the nature of penalties that could be imposed for any of the violations under C.A. No.85 of 2011 in/and C.P. No.148 of 2008 -9- Chapter 3C in Chapter V. It is the contention that admittedly, the applicants have not been guilty of any statutory violation subsequent to the cancellation of registration and winding up cannot be merely a matter of course that the finance company had lost his certificate of registration.
8. The argument may seem attractive, but I am of the view that the submission is fallacious and it fails to take into account the entire body of language of Section 45MC. Section 45MC(b) contemplates the situation of a company being disqualified to carry on the business of a NBFC. Sub-section (c) provides prohibition from receiving the deposits. It is an admitted fact that the disqualification has been rendered by cancellation of COR. It is also an admitted fact that prohibition against acceptance of deposits has also been issued by resorting to Section 45MB that provides for certain contingencies namely a disqualification by virtue of Section 45IA or a prohibition issued under Section 45MB as applying to a NBFC which suffered from certain disqualification and which had ceased to be such NBFC. To this extent, the opening words in Section 45MC requires to be understood as NBFC, which has ceased to NBFC as well. It will be wrong to assume that the moment a Company incurs a disqualification under Section 45IA, it will go out of the ambit of Section 45 MC itself. The interpretation suggested by the learned counsel appearing for the applicants would allow for C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 10 - bringing a contradiction in Section itself. There is no challenge to the vires of the Act or any of its provisions before me. The provision of Section has to be taken as it is and has to be read harmoniously from one sub clause to another seamlessly. I, therefore, reject the argument that by virtue of the cancellation of certificate of registration, the power to apply to a Company Court under Section 45MC itself is lost. Such an argument is illogical and untenable, for all the reasons referred above. VI. Feasibility of allowing Companies to be permitted to carry on other business permitted under memorandum 9. The argument made by learned counsel appearing on behalf of the applicants is that the object of the Company, as brought in the memorandum and articles of association, admitted of activities other than banking and, therefore, the cessation of banking activity ought not to result in cessation of any other activity of the Company by a winding up process. I have already extracted the relevant clauses in the memorandum and articles of association that spell out the permissible acts outside the arena of banking or financing activities. The satisfaction that Section 45MC requires is one of 4 situations, clause (a) contemplates inability of a Company to pay its debts. In this case, subsequent to this application being filed, I had allowed for inspection of the documents by the company on certain conditions of deposit of some moneys and also allowed for C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 11 - advertisements to be issued calling for applications or representations from any member of the public, who had claims against the Companies. I had also allowed for production of documents by the Companies that purport to discharge certain claims of the members of public who had made deposits with the respective Companies. There have been no outstanding claims from the members of public by any response to the advertisement given. The event that has taken place, subsequent to the order when the applications are pending before the Court bear testimony to the fact that there are no pending claims. The situation of a non-payment of debt would arise only on proof of acceptance of deposits and inability to repay the amount. The order cancelling the registration was on the basis of complaints from the members of public and for certain irregularities noticed at the time of statutory inspection by authorizing RBI Act. It is just as well likely that after the COR was cancelled, there were no violations through acceptance of deposits. It is most probable that there are no pending claims. Clauses (b) and (c) are self-evident that the Reserve Bank of India has power to apply for winding up, the moment a NBFC becomes disqualified or when it is prohibited under the relevant clauses imposing prohibition as contained under Section 45J.The section requires no further breach or violations to justify invoking the provisions of Chapter V relating to penalties. The resort to an action under Section 45MC(b) C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 12 - shall exist, without reference to invoking the penal provisions. Clause (d) arises in a situation to provide for a more comprehensive situation that would prohibit the financial company which is detrimental to the public interest or to the interest of the depositors of the companies. VII. Fulfillment of anyone conditions under Section 45MC is enough for winding up (a) Continuance under same name will mislead public and harm public interest.
10. In this case, when the Reserve Bank applied to this Court, all that it was required to be done was to satisfy anyone of the clauses (a) to (d). One may overlap on another but it may also remain mutually exclusive. In this case, the Bank has applied pointing out to the instances (b) and (c). The fulfillment of conditions in (b) and (c) is also admitted. The argument of the learned counsel appearing for the applicants is that the Companies have other objects for which they are incorporated and, therefore, the Companies must be allowed to continue the business. The argument would merit acceptance only if there was proof, that apart from the finance business, the Company was actually in any other business. The learned counsel has not filed any document to show that the Company had any other business other than accepting deposits and providing credit assistance. The Company at the time of incorporation may set out several independent or allied activities C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 13 - acts, being objects of Companies. It is essentially a question of fact whether the Company was engaged in several other activities authorized through its MOA. There is also no balance sheet or statement of accounts filed by the petitioners subsequent to the years following the cancellation of COR to point out to any other acitivity. The Company that loses COR for carrying on financial business or banking business does not surely cease to exist. A question of fact of whether the Company not merely exists on paper with a certificate of incorporation under the Companies Act, but it is also doing other activities which were permissible under the memorandum and articles has to be brought on record. In this case, as already observed there is no proof that the Companies are involved in some other business, during or subsequent to the cancellation of COR and the prohibition orders issued under the RBI Act. The names of respective two Companies themselves may suggest to the public an association of thought as Companies engaged in activities requiring registration under the RBI Act.
11. For instance, the reference to “Fincap”. or “Moga Deposits and Advances”. may suggest that they are associated with acceptance of deposit or providing finances. It shall be wholly inappropriate for it to continue as such, as it can definitely harm public interest. That is where Section 45 MC(b) & (d) extracted in para 6 above assume significance. The continuance of NBFC which C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 14 - has ceased to be operative as finance company could result in detriment to the public by dealing of the company under wrong assumptions.
12. I have also thought about the prospect of the Company to resort to provisions for alteration of the memorandum or articles or change in the name of the Company that could be less deceptive, under the relevant provisions of the Companies Act. Even such directions are inappropriate and would literally travel beyond the area of an inquiry in an application for winding up. I have therefore desisted from making any such attempts to have either the memorandum or articles altered or the name of the respective company changed. (b) Precedents through the decisions 13. The subject which I am dealing with is not wholly an unchartered territory. Learned counsel appearing for the applicants Shri Puneet refers to a judgment of the Karnatka High Court in Reserve Bank of India Versus Tulunadu Finance and Developments Ltd.-(2010) 157, Company Cases 240. In that case a cancellation of registration of a Company being finance company had taken place and winding up petition have been filed upon the company expressing inability to repay the debts. A new management had assumed control and it proposed a sanction of a scheme, after due approval of the majority of shareholders. Although, individually C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 15 - the debts of the companies were more or less equal to its assets, the Company had improved its financial conditions steadily. The Company had one of its objects to do real estate business and therefore, scheme which suggested the change of main operation to real estate was seen to be appropriate and fit for due consideration for approval. When the Court was passing an order in a petition moved under Sections 391 to 393 of the Companies Act, it was considering a contest of a petition for winding up, moved at the instance of Reserve Bank of India, simultaneously with petitions moved by the Company under Sections 391 and 393 read with Section 394-A of the Companies Act applying for sanction of the scheme of compromise and arrangement. I have before me no other petition than the petition for recalling the orders. The situation that arose before the Karnataka High Court is not before me.
14. Issue involved in this case of whether the Company could be permitted to continue its business and stave off the prospect of winding up if the memorandum of association contained other objects that did not include banking or finance came before the Calcutta High Court in Prudential Capital Markets Limited Versus Reserve Bank of India-(2005) 123 Comp Cas 764. The point raised before the Court was the very same issue of what was raised before this Court as well, namely, of the tenability of maintaining a petition under Section 45MC of the Reserve Bank of India. In that case also C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 16 - the Company's certificate of registration had been cancelled by initiating action under Section 45IA. There was a statutory appeal provided which was also exhausted by the Company. As on the date when the petition was moved by the Reserve Bank of India, the Company was disqualified to carry on business as NBFC. The Bench of the Calcutta High Court held that when the business activity of carrying on non-banking finance had stopped and the Company had been prohibited from accepting public deposits, the activity came squarely within the mischief of Section 45IA and once the Company becomes disqualified to carry on such business, there could be no other activity left open to the Company to carry on. As on the date when the petition was moved by the Reserve Bank of India, the Companies had been disqualified to carry on the business. No purpose would be, therefore, served by allowing some other business to be carried on by the Companies. (c) RBI circulars, irrelevant for this case 15. Learned counsel appearing Shri Puneet Kansal also refers me to certain circulars issued by the Reserve Bank of India to all NBFCs in 1st January 2002 and on 19.10.2006. The circular dated 1st January 2002 enjoins that when a Company issued with COR is cancelled, it should continue to repay the deposits on the due dates and should dispose of the financial assets within three years from the date of rejecting/cancellation or converted into not C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 17 - Banking not Financial Companies within the same period. I cannot understand how this circular in any way assists the companies, since as pointed out by Shri Suri, the learned senior counsel for the Reserve Bank, it is not the case of the applicants that within a period of three years the company was applying for permission to carry on or converted into not Banking not Financial Company. On 19.10.2006, the circular has undergone by one more amendment to NBFC Rules. This has been issued to allow a situation of NBFC which has obtained a certificate of commencement but has not actually commenced the business. The circular requires that there shall be an auditor's certificate in support of commencement/ continuance of business as a non-banking financial institution if it had not immediately commenced business on obtaining COR. This circular also has no bearing to the facts involved in the case. VIII. Disposition 16. At the initial time when permission to inspect the records was given to the applicants, I had directed certain deposits to be made as condition precedent to exercise such right. Any amount that may have been deposited is ordered to be refunded to the persons who caused the deposits to be made, when such an application is moved before the Official Liquidator. The further process in liquidation pursuant to the order passed already by this Court shall be taken forthwith by the Official Liquidator in C.A. No.85 of 2011 in/and C.P. No.148 of 2008 - 18 - accordance with law.
17. The applications for recalling the orders are, therefore, required to be dismissed and accordingly dismissed. C.P. Nos. 148 and 149 of 2008 List on 11.01.2013 as per roster. ( K. KANNAN) JUDGE 10 12.2012 Anand/sanjeev