w w w . L a w y e r S e r v i c e s . i n



Reserve Bank of India, Represented herein by its General Manager v/s Kirloskar Investments and Finance Ltd & Others

    COMPANY PETITION NO.2 of 2000 C/W COMPANY PETITION NOS. 260 of 1999, 261 of 1999, 117 of 2005, 116 of 2005, 118 of 2005, 259 of 1999, 258 of 1999, 257 of 1999, 214 of 1999, 262 of 1999

    Decided On, 24 December 2010

    At, High Court of Karnataka

    By, THE HONOURABLE MR. JUSTICE SUBHASH B. ADI

    For the Petitioner: M/s King & Partridge, Advocates. For the Respondents: S.J. Sanghavi ACGSC, Poovaiah & Co., Advs. for Respondent Committee; Holla & Holla, Advs; M/s Tukaram S Pai, Advs. for applicants in CA 1024/2005; Aditya Sondhi, Adv. for Ex. Management; Veena Jadhav, Adv. for ROC; Sreenivasa Assts., Advor applicant in CA 665/08; Sreenivasa Rao Adv. for R-11 & R-19 in CA.665/08; Prabha Murthy, Adv. for appellant in CA.613/2008; Saji. P.John, Adv. for applicant in CA.611/09; S.Krishna Murthy, Adv. for Objector; P.B.Appaiah, Adv. for applicant in CA.937/09 & 60/10.



Judgment Text

(Prayer: Company Petition No.2/2000 is filed under Section-45MC of Reserve Bank of India Act, 1934 read with Part-VII of the companies Act for the reasons stated therein this Hon’ble Court may be pleased to wind up the respondent company viz., Kirloskar Investments & Finance Ltd., & Etc.,)

(Prayer: Company Petition No.260/1999 is filed under Section-433(e) & (f) of 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.261/1999 is filed under Section-439 read with 433(e) & (f) of 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.117/2005 is filed under Section-433(e) & (f) read with section 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.116/2005 is filed under Section-433(e) & (f) read with section 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.118/2005 is filed under Section-433(e) & (f) read with section 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.259/1999 is filed under Section-439 read with Section 433(e) & (f) and 434 read with section 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.258/1999 is filed under Section-439 read with Section 433(e) & (f) and 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.257/1999 is filed under Section-439 read with Section 433(e) & (f) and 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.214/1999 is filed under Section 433(e) & (f) and 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

(Prayer: Company Petition No.262/1999 is filed under Section 439 read with Section 433(e) & (f) and 434 of Companies Act, 1956 praying that for the reasons stated therein this Hon’ble Court may be pleased to wind up the Company Kirloskar Investments & Finance Ltd., under the provision of the Companies Act, 1956.)

1. Company Petition No.2/2000 under Section 45MC of Reserve Bank of India Act, 1934 (in short referred to as ‘the Act’) read with Part VII of the Companies Act is filed for winding up of Company and for appointment of Official Liquidator by the Reserve Bank of India.

2. Company Petition Nos.260/1999, 261/1999, 259/1999, 258/1999, 257/1999, 214/1999 and 262/1999 are all by the depositors for winding up of Company under Section 439 read with Section 433(e) & (f) further read with Section 434 of the Companies Act.

3. Company Petition Nos.118/2005, 116/2005 and 117/2005 are by the holders of Redeemable Cumulative Preference shares. These petitions are filed under Section 433(e) and (f) read with Section 434 of the Companies Act for winding up of respondent – company.

4. Depositors claim that they had deposited an amount of `1,00,000/- 10.6.1998 and the said amount is not refunded even after its maturity. Depositors had issued statutory notice on 8.7.1999, which was received by the Company on 27.7.1999, despite the receipt of notice, the Company has not made the payment, it has become incapable of paying the deposited amount whereas the holders of Redeemable Cumulative Preference shares (RCPS) claim that, they are holding 2000, 8000 and 2500 such shares respectively, neither the dividend nor the amount has been paid. Their holding up of shares is nothing but a deposit of money with the Company. Though notice was issued to the Company, however no amount has been paid, as such, the Company has become incapable of paying the amount along with dividend from 1997. The Company replied to the statutory notice stating therein that, Reserve Bank of India has filed a Company Petition for winding up and this Court has appointed a Committee consisting of Justice K.A. Swami, the then Chief Justice of Madras and Dr. K. Sreenivasan to look after the affairs of the Company, however, the Company is not aware of the terms of the appointment.

5. Since the Company did not make the payment despite the statutory notice, the petitioners claim that the Company has become incapable to repay and no purpose would be served in continuing the Company and sought for winding up of the Company.

6. Company Petition No.2/2000 is by the Reserve Bank of India (in short 'R.B.I.') seeking winding up of the Company interalia stating that, respondent – Company has become unable to pay the debt, is disqualified to carry on the business of non-banking financial institution under Section 45-IA of the Act, Company has been prohibited from receiving deposits, continuance of the non-banking financial company is detrimental to the public interest and to the interest of the depositors of the Company and accordingly, sought for winding up of the Company and for appointment of Official Liquidator.

7. In all these cases, the petitioners have sought for winding up of the respondent – Company, as such, the Company Petitions have been clubbed and heard together. For the purpose of disposal of these cases, facts as stated in Company Petition No.2/2000 are referred.

8. Petitioner – R.B.I. is a body corporate established under the provisions of the Act having its central office and branch office as mentioned in the cause title. R.B.I. is a regulatory authority for Non-Banking Financial Business in general and Company carrying on such business in particular. R.B.I. issues certificate of registration enabling financial companies i.e., Non-Banking Financial Companies (for short 'NBFCs') to carry on such business, prescribing prudential norms and directions prohibiting NBFCs from accepting the deposits. It has power to file a company petition for winding up under Section 45MC of the Act. Section 45-IA of the Act laid down that any company proposing to carry on the business of a non-banking financial institution as defined in Section 45-IC of the Act, can do so only after obtaining a certificate of registration under Chapter IIIB of the Act. Respondent – Company had applied for issue of certificate on 4.7.1997. Under Section 45-IA sub-section (4) of the Act, R.B.I. has power to inspect the books of accounts of an applicant before issuing registration certificate in order to satisfy itself that, the conditions specified under Section 45-IA(4) have been complied with. Between 25.5.1999 to 1.7.1999, the officials of the R.B.I. conducted the inspection. During the course of inspection, it is revealed that the financial position of the respondent – Company was very poor, it had defaulted in repayment of matured deposits and had accepted the deposits in violation of the Acceptance of Public Deposit Directions issued by the R.B.I. In view of the findings recorded during the inspection, R.B.I. issued a show cause notice dated 9.8.1999 calling upon the respondent – Company to show cause as to why its application for certificate of registration should not be rejected.

9. The R.B.I. alleged that, the Company has not maintained the liquid assets in the form of unencumbered approved securities at the specified percentage of its outstanding deposits during the period between April 1998 and March 1999 and the said act of the Company is violative of Section 45-IB sub-section (1) of the Act. By 31st March 1999, the public deposits aggregating `374.46 lakhs had matured for repayment including aggregate deposits `128.15 lakhs in 578 deposit accounts, which were claimed for repayment but had not been repaid. It increased to `972.94 lakhs as against deposit of 6529 deposit accounts by 15th June 1999. Thereafter it increased to `2,690.47 lakhs as on 30th September 1999. Company had defaulted to repayment of the deposits on the date of maturity and thereby has violated Section 45-QA sub-section(1) of the Act.

10. The public deposits aggregating `10,927.55 lakhs held by the respondent – Company as on 1st January 1998 were in excess of its eligibility to hold public deposits under the provisions of the Acceptance of Public Deposits Directions. Respondent – Company was not eligible to accept fresh deposits or renew the existing public deposits exceeding the amount of public deposits held by it as on 1st January 1998. However, the respondent – Company continued to accept fresh deposits and renew the existing deposits upto 31st March 1999, thereby violating the provisions of paragraph-4 sub-para (6) of the Acceptance of Public Deposits Directions (in short 'APDD').

11. Respondent – Company did not pay the interest on the deposits as per APDD. It had failed to repay the interest from the date of maturity till the date of repayment at the contracted rate of interest. It is in violation of paragraph-4 sub-para (10) of the APDD.

12. The form of application for acceptance of deposits used by the Company did not contain particulars relating to the credit rating assigned for its fixed deposits, address of the Branch of the Company Law Board, address of the Consumers Disputes Redressal Forum, statement regarding correctness of the financial position of the respondent – Company, role and responsibility of the Bank and verification clause to be signed by the applicant depositors. Hence, the Company had violated the provisions of paragraph-4 sub-para (12) clause (ii) of the APDD.

13. Respondent – Company had neither issued advertisement for soliciting deposits nor had submitted to the Bank a statement in lieu of advertisement after 22nd August 1997. This is violative of paragraph-4 sub-para (13) of the APDD.

14. Respondent – Company had not recorded in the register of deposits maintained by it, the dates of claim made by the depositors and the reasons for delay in repayment of deposits beyond five working days, which is violative of paragraph-4 sub-para (16) clause (i) Sub-clause (e) and (g) of the APDD.

15. Respondent – Company stopped charging the minimum statutory depreciation on the leased assets after they turned non-performing assets. The Company did not adhere to the Accounting Standards and Guidance Note issued by the Institute of Chartered Accountants of India, which is violative of paragraph-5 of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 (for short 'Prudential Norms Directions').

16. Respondent – Company has not provided for depreciation in investment to the extent of Rs.276.94 lakhs and has thereby violated the provisions of paragraph 6 sub-para (2) of the Prudential Norms Directions.

17. Respondent – Company did not classify certain leased assets in accordance with the norms stipulated for classification of Non-Performing Assets. The respondent – Company has thereby violated the provisions of paragraph-7 sub-para (1) of the Prudential Norms Directions.

18. The amount of provisions made by the respondent against Non-Performing Assets was found to be less than the provisions required to be made. The shortfall in provisioning was to the tune of Rs.3,274.11 lakhs, which is violative of paragraph-8 of the Prudential Norms Directions.

19. The realizable value of assets of the respondent – Company at Rs.11,853.12 lakhs was less than its outside liabilities at Rs.17,404.21 lakhs, as such, the respondent – Company cannot be deemed to be a solvent company. It has failed to maintain the minimum capital adequacy standards and thereby violated the provisions of paragraph-10 sub-para (1) of the Prudential Norms Directions.

20. Though time was given to the respondent – Company to show cause on or before 28.8.1990 and also having made clear that, if no reply is received in time, R.B.I. would assume that the respondent – Company has no representation to make against the proposed action. In this regard, on 13.8.1999, even various press reports appeared indicating that the aggrieved depositors of the respondent – Company had been thronging offices of the respondent – Company seeking repayment of their deposits and the Police intervention became necessary to disperse the crowd. The Directors and the Chairman of the Company had also resigned, new Directors were inducted. The R.B.I. by order dated 13.8.1999 prohibited the company with immediate effect from accepting the deposits from any persons in any manner whether by way of fresh deposits or renewals or otherwise. It had also directed not to transfer, sell, create charge or mortgage or deal in any manner with the properties and assets of the Company. Respondent – company was asked to show cause on or before 30th August 1999. It was also directed to send the resolution of the Board of Directors within 15 days, further directed to produced a certificate from the auditor of the respondent – Company to the effect that, the Company had not accepted any fresh deposit or alienated the assets and was directed not to make any default in repayment of the deposits on their maturity, by issuing a show cause notice dated 13.8.1999. The Company Chairman resigned on 27.8.1999. The Chairman, Vice-Chairman, Whole Time Director, President and Company Secretary, all resigned, and new Directors were inducted. New Directors requested for one month extension of time. Time was granted up to 1.9.1999 for submission of reply to the show cause notice dated 28.8.1999. By a fax message dated 31.8.1999. Company sought time till September 1999.

21. As there was no explanation, reply and compliance with the directions and the norms, R.B.I. found that it is not possible to grant further extension, no extension was granted, however, Company by its letter dated 8.9.1999 submitted its reply to the show cause notice. Considering the reply, the R.B.I. found that, the reply is not satisfactory, as the Company did not maintain liquid assets during the period from April 1998 to March 1999, though it was directed to comply with the same. Respondent – Company holds Indira Vikas Patras (IVPs). Respondent – Company had reckoned accrued interest on IVPs towards compliance of the requirement of maintaining liquid assets, however, IVPs are not quoted securities nor they have any prefixed surrender value before maturity. Respondent – Company has defaulted in making the repayments of deposits on its maturity, the liquidity is totally mismatched. In the reply, the respondent – Company admitted, the default in repaying of deposits on the date of maturity and several depositors have also approached the Company Law Board. The resolution of the company to mobilize fresh deposits is in violation of the R.BI. directions, not paying the interest between the date of maturity and payment, etc., were all considered by the R.B.I. and found that the reply given is not satisfactory.

22. The amount of provisions made by the respondent – Company against Non Performing Assets was found to be less than the provisions required to be made. The shortfall in provisioning was `3,274.11 lakhs. Respondent – Company had understated the losses by not charging the Non Performing Assets provisions to Profit and Loss Account. The realizable value of the assets of the Company at `11,853.12 lakhs was less than its outstanding liabilities at `17,404.21 lakhs. Company has also accepted that the realizable value of its assets is less than its outside liabilities.

23. considering all these factors and in the public interest and also in the interest of the depositors, R.B.I. found that granting of certificate of registration is neither in the interest of the public nor in the interest of the depositors nor Company has satisfied the requirement for grant of certificate of registration. Accordingly, it passed an order rejecting the application for grant of certificate of registration and appointed a Special Officer for a period of one year by its order dated 1.9.1999. Pursuant to the rejection of the application for grant of certificate of registration and discussion with the representative of the respondent – Company. Company was advised to submit, the auction plan of the Company based on scrutiny being carried out by the new management prior to and after take over of the Company; details of assets and liabilities, borrower-wise and deposit-wise; changes in the constitution of the management/Board of Company including the names of Directors, their addresses, profile, etc… Respondent – Company agreed to advice its Bangalore office to fully cooperate with the Special Officer, prepare and submit action plan to protect the interest of the depositors and other institutions like banks; and evolve a policy for making repayments to small depositors and to those depositors for meeting their urgent expenses and to submit to the R.B.I. the changes in the constitution, however, in response to the discussion and proceedings of the meeting on 27.9.1999. Company did not issue any reply, as such, prohibitory orders contained in the rejection of the application continued until further orders. Even after three months after the meeting, the Company accepting the submission in the change of management, had not furnished the action taken. In these circumstances, the R.B.I. having found that the respondent – Company is unable to pay debt and had become disqualified to carry on non-banking financial business and liabilities exceeding the realizable value of the assets, non-payment of depositors’ money exceeding the deposits contrary to directions found that, the Company is required to be would up in the larger interest of the public and in particular, the interest of the depositors, bankers and creditors. Accordingly, sought for winding up of the Company.

24. Similarly, some of the depositors, shareholders have also filed company petitions, as the Company did not repay the deposit amount on its maturity and also the amount due to them.

25. On service of summons of the Company Petition, the respondent – Company filed the statement of ob objections interalia stating that, two legal proceedings, one before the Company Law Board under Section 45-QA of the Act and another before the Appellate Authority of NBFCs are pending. Therefore, winding up petition filed now has no bonafide as it would result in the said two legal proceedings becoming infructuous. Respondent – Company has filed an appeal C.A. 128/1999 against the order of rejection of grant of certificate of registration. Therefore, the said order cannot be treated as having because final. Company has also filed an application C.A.307/2000 for staying the winding up proceedings. Apart from this, it also stated that, Company is worth of more than `100 crores. Company has a good track record of business, profits, dividends, debt servicing, however, general industrial recession and bad recoveries, the Company’s business and profits have been adversely affected in the last two years. The gross income, percentage of dividend and the dividend amount would reveal the satisfactory performance of the Company. Company has under taken property development business also right from 1990 onwards worth of several crores of rupees. The total estimated area of construction is 8,04,846 sq.ft. in Bangalore, Mysore and Goa. In other places, it is to the tune of 3,91,251 sq.ft. The legal proceedings, prohibitory orders, recession, drastic fall in demand and prices in the real estate markets, the Company could not repay the matured deposits on the due dates from February/March 1999 onwards and about 900 depositors in this background have approached the Company Law Board and the Company Law Board has registered the matter as KIF 1 to 26/45QA/SRB/99. The company Law Board is hearing the matter. The Company Law Board has been conferred with the power under Section 45-QA of the Act. Company Law Board has directed the R.B.I. to serve copies of their applications to the Company and the respondent – Company has already filed the counter to the said application. In view of the matter pending before the Company Law Board, it has fully seized of the matter and considering the matter relating to repayment of the deposits, R.B.I. being a Regulatory Authority instead of helping the Company Law Board for an early disposal of the case on merit, it has put spokes and has prayed to the orders contrary to the proceedings before the Company Board. The directions given by the R.B.I. are actuated by legal malafides, as the matter is pending before the Company Law Board. The winding up would not safeguard the interest of the depositors. The Company has already invested huge amount in joint development. It will materially affect the Company in recovery and it will cause litigation risk and on account of litigation, no one else would be able to continue and complete the property projects. The grounds alleged by the R.B.I. do not warrant for winding up of the Company. The Company has complied with the directions, despite that, the R.B.I. has sought for winding up of the Company. In fact, about `1.50 crores have been realized and the depositors have been repaid to the extent. The new Directors of the Company inducted on 27.7.1999 are striving hand to revive the Company and R.B.I. has been kept informed of the progress and R.B.I. has been informed of the difficulty faced. The Chief Executive, Chief General Manager and two General Managers are all experienced persons. In order to revive the Company, various officers were examined. Meetings of the shareholders have been conducted. If the winding up is to be ordered now, all the efforts made become close chapter and to meet the ends of justice, court should not allow the winding up petition. On these and various other contentions, the respondent – Company opposed the company petition for winding up.

26. This Court by order dated 6.1.2000 directed the petitioner to serve copy of the petition along with Annexure and also copy of the application of the respondent. by order dated 14.1.2000, this Court disposed of Company Application Nos.3/2000 and 307/2000 filed in Company Petition No.2/2000, wherein, appointment of provisional liquidator under Section 45-O of the Act was sought and also for stay of company proceedings, as an appeal is pending before the Appellate Authority for non-banking financial company registration. This Court after hearing, disposed of the application staying the company proceedings in Company Petition No./2000, however, the said interim order granted was vacated and other two applications consequently were disposed of.

27. By order dated 30.7.2001, the R.B.I. brought to the notice, the orders passed in OSA No.2/2000 on 29.6.2001 permitting the RBI to move the application for interim order preventing the company from paying the amount without the written permission of the Special Officer of the R.B.I. except payment of salaries. This Court directed the parties to move the Division Bench for necessary orders, as the matter is seized by the Division Bench. The Division Bench by its order dated 29.6.2001 disposed of MFA Nos.1530/2000 and 2030/2000 and OSA No.2/2000 interalia dismissing MFA Nos.1530/2000 and 2030/2000 and allowing OSA No.2.2000 by setting aside the order dated 14.1.2000 and directed the Company Court to proceed with the Company Petition No.2/2000 in accordance with law. Further, permitted the R.B.I. to move the Company Court for interim directions.

28. Considering the nature of dispute, interest of depositors and requirement of disbursement of the amount to the depositors and for the proper management of the Company and also on the basis of the submissions made by the Advocates representing respective parties. This Court by order dated 6.8.2001 holding that, the management of the affairs of the Company requires a committee of eminent persons and on broad agreement with the parties, constituted the committee subject to getting the consent of the members of the committee namely K.A. Swamy, Former Chief Justice, High Court of Madras and a permanent resident of Bangalore and Dr. K. Srinivasan, Former Director General of Police, Karnataka, who were appointed as committee to look after the affairs of the Company, the said committee was permitted to negotiate with the banks secured creditors for arriving at Court settlement to carry on a business of the Company and were permitted to incur all expenditure in pursuance of their task engaging of lawyers, payments, recoveries of outstanding amount owing to the Company, legal actions, appointment of Chartered Accountant to fixed the remuneration and fixed the allowance of `25,000/- to the Chairman and `20,000/- to the member per month with the staff for personal management and staff at their disposal. The Company was directed to handover the movables of the Company to the committee. The first task of the committee was to make the payment of all the depositors on pro-rata basis. Out of SLR amount, R.B.I. agreed to give such permissions, the officers of the Company also undertook to give full co-operation to the committee. Committee was requested to submit its report once in three months. In pursuance of this order, the committee took charge of the company and from time to time it has submitted its report, nearly more than 33 reports have been submitted in the matter of affairs of the company and the action taken by the committee and all are accepted by this Court. In the Company Petition, an application No.312/2002 under Rule 9 of the Company Court Rules 1959 was filed for approval of the arrangement made between the committee of the management and the landowners. The said application was filed by the committee. This Court after hearing, by its order dated 29.5.2003 has accepted the offer of the owners for return the lands to the owners with all the liabilities and responsibilities accepted by company and salvage what is possible and miximize returns with minimum loss to the Company in terms of money and time. After a prolonged negotiation between the committee and the land owners, the land owners agreed to take over the project in 'as is where is basis' on payment of Rs.2.17 Crores which is higher by 2 lakhs than the higher bid received in response to the advertisement. In addition to that, the land owners also agreed to provide at their own expense the amenities of swimming pool, club house, etc., which were committed by the Company. They also agreed to pay at market value for the unused construction materials of the value of `6 lakhs lying at the site. Thus, the Company would receive `2.83 Crores from the land owners without the company incurring any expenditure and the said Memorandum of Understanding was signed on 6.5.2002 between the committee of management and the land owners. In this regard, each of the land owner had paid `1.25 lakhs towards the agreed consideration and each one of them was to pay the balance of `9.60 lakhs and the committee was of the opinion that, the Memorandum of Understanding is in the interest of the company specially the shareholders and the depositors and sought for permission to accept the arrangement and to hand over the project to the land owners rather than to any other person.

29. Though the said application was opposed by the company and others also. This Court found that the offer made by the land owners is just and proper and the committee of management was justified in accepting the said proposal and it requires to be approved by the Company Court. Accordingly, by the said order, the memorandum of Understanding by the Committee was approved subject to granting 90 days to the land owners to deposit the balance of amount. Further ordered that, the landowners shall provide at their own expense amenities of swimming pool, club house, as per agreed terms. They shall deposit a sum of `6 lakhs being the cost of the construction material lying on the site. The sale in favour of the landowners shall be confirmed only after they complied with Memorandum of Understanding (MOU). This Court also permitted the objectors or the applicants or any other person to putforth and better offer than one made by the landowners within 90 days from the date of order and accordingly, it disposed of the Company Application No.312/2002.

30. By virtue of the Memorandum of Understanding entered into between the Committee of Management and land owners, the joint development agreement entered into by the Company and the Developers stood cancelled. The Company Petitions were heard from time to time and during the pendency of the Company Petition committee of management also filed its report as directed and several company applications were filed and were disposed of. This Court also granted an opportunity to the respondent Company to explore the possibility of reviving the Company and in this regard the Company also had filed revival scheme. Another Company Application No.1024/2005 by the landowners was filed for approval interalia seeking approval of the MOU dated 6.5.2002 as ordered in Company Application No.312/2002. The said application was allowed by this Court by order dated 31.3.2008. Thus Court after considering the earlier applications and orders passed thereon and OSA No.13/2003 against the order on Company Application No.312/2002 recorded the submission of the counsel for the Company that, it has no objection to accept the MOU subject to enhance the consideration of `4 Crores. This Court found that, there are 20 landowners on Sy. Nos.66/1, 66/2, 66/3 and 66/4 of Adugodi village. They have jointly entered into an agreement for joint development of the said land, whereunder 4 residential/commercial complexes known as Madhuban, Brindavan, Gopika and Radhika. KIFL having engaged contractors, completed the construction of Madhuban and Brindavan complexes, while Gopika Complex was completed to the extent of 64.20%. Radhika Complex was at the stage of excavation. In 1999, M/S. KIFL became unable to complete the works, in terms of the joint development agreements. Secured a quotation specifically from M/s. Land Marks Builders and Developers who proposed to pay `3.84 Crores in 30 months’ time, to take over the right and interest, flowing from the joint development on 'As is where is basis', while the land owners submitted their proposal to pay `1.8 Crores. The Committee of Management having taken over the management of KIFL, floated an invitation to tender in relation to taking over the rights and obligations flowing from the joint development agreement, on 'As is where is basis' which was responded to by the land owners by making an offer of `2.17 Crores including providing amenities such as Swimming pool. Club house, etc. and purchase the building materials lying at the site, by giving up the claim for damagers of `3 Crores for breach, due to non-performance of the terms of joint development agreement by KIFL found to be reasonable and accordingly held that, Company Application No.312/2002 is allowed and Company Application No.1024/2005 is rejected as unnecessary, wherein the management company wanted to re-tender. The landowners were directed to deposit Rs.3.70 Crores within 30 days before the Company and accordingly, the application was disposed of.

31. Heard Sri Vijayshankar, learned Senior Counsel for RBI. Sri Poovayya, ;earned counsel for Committee of Management and Sri Aditya Soundhi, for the respondent Company.

32. Sri Vijayashankar, learned Senior Counsel submitted that, Section 45-IA of the RBI Act prohibits carrying on non-banking financial business without certificate of registration. RBI is conferred with a power to seek winding up of the Company in case the purpose of the company is not satisfactory. The Company has not fulfilled the requirement of Chapter 3(b) of the Act. Without their being Certificate of Registration in favour of the Company, the Company has accepted the deposits. In this regard, show cause notice was issued to the Company as to why its application for registration should not be rejected. In the show cause notice, R.B.I. has stated the ground of the failure of the Company in its purpose and acting in contravention of the provisions of the Act. The R.B.I. after considering the reply by the Company, has rejected the application for grant of Certificate of Registration to carry on business. The Company has admitted that, it has not repaid the amount to the depositors on the maturity. It is also admitted that, no interest is paid for depositors for delayed payment. It is also not in dispute that, the net worth of the assets of the company is less than the outside liability. Further, the joint development agreement to develop the properties between the Company and the developers has been cancelled. Landowners have taken over the lands for the development and the same has been accepted by this Court. Without there being Certificate of Registration, the company has accepted the deposits. The assets of the Company is worth of `37 Crores and `7 Crores, whereas, `60 Crores is the outstanding liability. These facts which cannot be disputed and they clearly demonstrate that, the company is not in a position to re-pay the debt, has become disqualified to carry on business of non-banking financial institution and has acted in contravention of the provisions of the Act and has acted in contravention of APDD. The R.B.I. has been conferred with the power to seek winding up of Company, for violation of the provisions of the Act. Section 45-IA of the Act prohibits the non-banking business without the Certificate of Registration and deviating from main business to another business and Section 45-Q of the Act has got over-riding effect. The revised scheme now proposed also lacks bona-fide, as the Company has not shown the source of finance and liquid assets, capacity to re-pay, in turn, it is deviating from the main business. As such, the material available on record does establish beyond reasonable doubt that the company has suffered all disqualification and has become incapable of performing and the interest of the public and the depositors and the creditors would be protected if the company is wound up.

33. To support his contention he relied on the decision reported in AIR 1961 Calcutta 144 in the matter of LAWANG TAHANG Vs. GOENKA COMMERCIAL BANK LTD., and submitted that, in case of non-banking financial institutions, majority of the substratum of the Company has gone, the Company is liable to be wound up. If the shareholders do not derive any benefit there from, it would be concluded that, the Company should be would up. In this case, on the facts and figures, it clearly show that, the Company substratum has disappeared.

34. He also relied on another decision reported to AIR 1962 PANJAB 151 and submitted that, in case of disappearance of substratum, it is equitable ground to wound up the company particularly when the subject matter of the company is gone, or the object for which it was incorporated has substantially failed, or it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or the existing and probable assets are insufficient to meet the existing liabilities. Failure of any one of these tests would be a good ground to wind up the Company.

35. Referring to the above decision, he submitted that, even from showing of the Company, it is clear that, it is not in a position to revive, even the proposed scheme would not ensure profit, but it may result in loss and the main object with which the Company was incorporated is no more in existence. Therefore, when the main object of the Company cannot be fulfilled, the question of Company continuing also does not arise.

36. He further relied on the judgment reported in 1983 Vol. 53, Company Cases and submitted that, it is not permissible to change the business of the Company for which it is incorporated when substratum of the Company has lost. If the Company has failed on various grounds of contravention of the provisions of the Act, failure by the Company to maintain the requisite liquid assets, its negative net owned fund, its high percentage of non-performing assets, short provisioning and failure to observe credit exposure norms. The continuance of Company as a non-banking financial institution would be detrimental to the public interest and to the interest of the depositors. In such circumstances, petition under Section 45MC of the Reserve Bank of India Act, 1934 for winding up of Company by Reserve Bank of India is not only maintainable but is justified in seeking winding up of the Company.

37. To support this, he relied on the judgment reported in 2002 Vol. III Company Cases page 820 and the judgment of the Himachal Pradesh High Court reported in 2004 Vol.122 Company Cases page 762 and submitted that, in identical case, Himachal Pradesh High Court invoking the provisions of Section 45MC of the Act, has ordered for winding up of the Company.

38. The Apex Court in the judgment report in AIR 1962 SC 1371 has held that, winding up of application of the Reserve Bank is not in violation of Article 14, 19(1)(f) and (g) and 301 of the Constitution of India and it is in the public interest.

39. He further relied on the decision reported in AIR 2007 SC 3079, 2009 Vol.45 Company Cases page 87, 1980 Vol.50 Company Cases 202 to submit that, there is no possibility of reviving the Company. Company cannot indulge in non-doing banking business and when the substratum of the Company is lost. It cannot be continued and would be oppose to the public policy and to the interest of the public and the depositors.

40. On the other hand Sri Aditya Soundhi, learned counsel submitted that, Section 391 of the Companies Act provides for revival of the Company and the revival scheme is effectively to the benefits of the depositors and is in the interest of the public, it should be accepted. Carrying on real estate business is not akin to the object of the Company. It is also one of the business of the non-banking company. If the company is exclusively doing non-banking business without any other objects, in such case, it cannot divert its business. But in this case, Memorandum of Article of the Company shows that the company apart from doing non-banking financial business, it also carry on real estate, because of non recovery of the amount due to the company, the substratum of the company has reduced. Further, the business of the Company is not in violation of the provisions of the Act, as the application for registration is still pending. Section 45IA sub-section(2) is inserted by Act 23 of 1997. The company has filed an appeal questioning the order of rejection of the application for registration.

41. Non-banking company can continued to act while its application is pending and till it is rejected there is no bar, the transactions of the company are bonafide transaction.

42. He relied on the order passed in OSA 13/2007 and submitted that, the direction by the Division Bench was to accept the better offer. The management had proposed to protect the interest of the depositors by increasing the bid amount to `4 Crores. However, it is not taken into consideration in right spirit from the beginning of the constitution of the committee for management. Company has been supporting the interest of the depositors, it had never failed in its act. He relied on the revised revival scheme and submitted that, the management is ready to deposit `10 Crores subject to acceptance of the revised revival scheme. Now the market has improved and the Company is in position to revive its scheme and sought for acceptance of the revised revival scheme. He also submitted that, as against the claim of 26 Crores as Income Tax, the appeal is pending before the Appellate Tribunal. It is the committee of management has not taken effective steps in getting the appeal expedited. The disposal of the said appeal would have reduced the liability. On these submission he sought for dismissal of the company petitions.

43. In the light of the submissions made by the parties, the points for consideration are;

(i) As to whether the substratum of the company is lost?

(ii) Whether the outside liability of the company is more than the realizable value of the assets of the company?

(iii) Whether the conduct of the company affairs warrants for winding up?

44. Facts, which are not in dispute are; the respondent company is constituted as a non-banking financial company. It is also not in dispute that, it had issued an advertisement calling upon the intending depositors for deposit of the amounts, offering to re-pay the said amount on its maturity with certain incentives. It is also not in dispute to carry on the business of non-banking financial business. Company is required to obtain certificate of registration under Section 45-IA of the Reserve Bank of India Act. It is in this context it is better to refer to the relevant provision which reads as under:

Section 45-IA: Requirement of registration and net owned fund:- (1) Notwithstanding anything contained in the Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a non-banking financial institution without:

(a) obtaining a certificate of registration issued under this Chapter; and

(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may by notification in the Official Gazette, specify….

45. It is also not in dispute that, registration certificate has not been granted. Reading of Section 45-IA of the Act prohibits from carrying on business of non-banking financial institution without obtaining certificate of registration under the Act.

46. It is not in dispute that, without even securing certificate, deposits have been collected and according to the averments in the company petition, the public deposits aggregated to the tune of Rs.10,927.53 lakhs as on 1.1.1998. It also disclosed that, as on 30.9.1999, the amount of Rs.2,690.47 lakhs had become due towards re-payment of deposits on their maturity. In the objection statement filed by the company it is admitted that, on account of rescission of lack of recovery, the re-payment has not been made. In the connected petitions filed by the depositors and the redeemable cumulative preference shareholders it is stated that, the Company has not made the payment, it has not paid the dividend from 1997. The properties of the Company were also auctioned by the committee and the owners of the lands have purchased the same which is also accepted by this Court. The committee constituted by this court has submitted several reports and ultimately the members of the committee have requested the Court to relieve them from the management. Even the Special Officer of the Reserve Bank of India has also made a request to relieve him from the management. The committee has opined that, there is no possibility of revival of the Company. All attempts made by them have failed and it is also not possible to re-pay the amount to the depositors, as the outstanding liability is more than the assets. As far as possible, the committee of management has disbursed the amount to the depositors. The revival scheme proposed by the company also do not ensure its source of income, does not show as to how the liability outstanding will be discharged. No definite source of generation of income. The scheme is very vogue, does not ensure the possibility of the repayment towards the depositors. In turn, the company wants to do the business other than the business of non-banking financial institution.

47. This matter has been pending from 2000 and from 2001 onwards after the committee of management is functioning, the committee has submitted its reports. The reports themselves disclosed that, functioning of this company is not in the interest of the public nor in the interest of the depositors and the opinion of the committee management show that, there is no possibility of revival of the company.

48. Taking into consideration the outstanding liability and the assets of the company and the reports of the committee of management and also the financial position of the company as on the date of filing of the petition itself, the authorised capital of the respondent company was `56 Crores, paid-up share capital was `16 Crores 69 lakhs, whereas, the outstanding liability is much more than the realizable value of the assets. Nearly `174 Crores is the outstanding liability as against `118 Crores the realizable assets. Thus, there is no match between the value of the assets as against the outstanding liability.

49. Considering all circumstances and the contentions, when there is hardly any disputes as regards to the erosion of the substratum, on broader ground it would be just and equitable and proper to wound up the company. The shareholders have not derived any benefit. In case of disappearance of the substratum of the company, it is permissible to the Company Court to order for winding up of the company.

50. It is clear from the records that, the subject matter of the company has gone and the object with which the company was incorporated has substantially failed, the revised scheme also shows that, the company is intending to do real estate business i.e. the business difference from non-banking business. Even the proposed revisable scheme is considered, it does not ensure any profit and it is likely to cause more loss. These circumstances do establish that, the company is not in a position to revive and it is also not in the interest of the public. As the company is not permitted to carry on the business for which it is not incorporated, mainly because there is a reference to real estate business, it is not substantial business for which company is incorporated.

51. There is no prohibition for the Company Court to consider the Company Petition under Section 45MC of the RBI Act even on the ground that, the application is pending before the Company Law Board. If the continuation of the respondent company as a non-banking financial institution would be detrimental to the public interest and to the interest of the depositors, a petition under Section 45MC of the RBI Act is certainly maintainable.

52. From the material on record it cannot be disputed that,

(i) Company carried on non-banking financial business without having certification of registration under Section 45-IA of the RBI Act.

(ii) Its attempt to revive is not substantially the same business, but it is some other business, which is not the main business of the company.

(iii) The realizable assets of the Company is much much less than the outstanding debt. It is totally disappropriate to the assets.

(iv) The depositors’ amounts have not been paid on maturity and in case whether they are paid, they are not paid with interest for the delayed payment.

(v) Some of the assets have been already sold and appropriated towards payment of depositors by the committee of management.

(vi) There is a due of `26,94,83,144/- towards Income Tax itself.

(vii) Even taking into consideration the entire assets of the Company, it does not even substantially meet the liability.

(viii) The revival of the Company would cause more loss than any profit.

(ix) Company has failed from all counts.

(x) Considering these circumstances and considering the interest of depositors, creditors and others, it is reasonable to windup the company. The possibility of non-revival of the company is also evident from the long pendency of the company petitions. For last 10 years wit the able assistance of committee of management headed by Justice K.A. Swamy, the then Chief Justice of Madras High Court, nothing has improved, in turn, the committee itself has opined that, the revival of company is not possible. These circumstances do show that, keeping these matters pending would cause more harm than solving the problem of the depositors and others.

53. In the decision of 2004 Vol.122 page 762 of the Himachal Pradesh High Court which reads as under:

'Held, allowing the petition, that there was no scope for dispute that the company failed to repay the depositors their deposits on maturity and, therefore, the company would be deemed to be unable to pay its debts within the meaning of the sub-clause(a) of sub-sec

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tion(1) of Section 45MC of the Act. The realizable assets of the company were less than its total assets as per the inspections conducted by the bank and, therefore, the satisfaction of the Reserve Bank that the company was unable to pay its debts could not be said to be irrational or against the provisions of section 45MC of the Act. The company did not deny the allegations of the Reserve Bank. There was no denial that the capital to risk weighted assets ratio of the company was nil and outside liabilities of the company amounted to several lakhs of rupees against the nil worth of the company. There was no answer about the high level of non-performing assets. Thus, the company failed to satisfy the statutory conditions for the grant of registration as stipulated under Section 45-IA of the Act. In view of the rejection of the application of the company for the grant of certificate by the Reserve Bank under Section 45-IA, the company became disqualified to carry on the business of a non-banking financial institution and, therefore, the Reserve Bank was justified in praying for the winding up of the company under clause (b) of Section 45MC of the Act. The company had not challenged the dental of grant of registration certificate. Admittedly, show cause notice was issued to the company and the company was given an opportunity to explain the position which the company failed to do. Therefore, winding up of the company was to be ordered and advertised in four daily newspapers two of which would be in vernacular in the State.' 54. Similarly as held in a decision reported in AIR 1962 page 151 in the matter of O.P. BASRA S/O GAURI SHANKAR AND OTHERS Vs. KAITHAL COTTON AND GENERAL MILLS CO. LTD. at para 6, which reads as under: 'The usual tests for determining whether the substratum of the company has disappeared are when (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or (d) the existing and probable assets are insufficient in meet the existing liabilities, vide In re Cine Industries and Recording Co. Ltd., AIR 1942 Bom, 231. Failure of any one of these tests is deemed a good ground for winding up of the company. There seems to be no reasonable hope that this company will be able to carrying on its business, for which it was formed profitably. Looking it from any angle, I do not find there is any justification in continuing functioning of the company. 55. In the decision of the Calcutta High Court reported in 1980 Vol.50 in the matter of BOMBAY GAS COMPANY LTD Vs. HIDUSTAN MERCANTILE BANK LTD., it is held that: 'Banking business was the paramount and main object and business of the company and all other clauses were merely incidental or ancillary to the said banking business or, in some way or other, connected with the same. These could not be said to be an independent business as that was not permissible under section 5 of the Act. Further, it was clear from the provisions of section 6(1)(o) of the Act that the Central Government, by notification, specified a form of business which would be lawful for a banking company to engage investigation Section 6(2) makes it clear that a banking company could not engage itself in any form of business other than what was referred to in section 6(1). It appeared from section 7 that no company or firm could carry on the business of banking in India unless the word 'bank', 'banker', or 'banking' is used.' 56. Taking into consideration the above circumstances and the developments taken place during the pendency of these Company Petitions and revival scheme filed by the company, I do not find there is any justification to revive the company. It will not be either in the interest of the public or in the interest of the depositors or the creditors or the shareholders or anybody to continue the functioning of the company. Petitions for winding up is pending for lost more than 9 years, nothing has improved and it has caused more damage than serving interest of the depositors. 57. In these circumstances, I have no option except to allow the Company Petitions for winding up. Accordingly, I pass the following: ORDER (i) Company Petition No.2/2000 is allowed. (ii) The respondent – Company is directed to be would up. (iii) The Official Liquidator is appointed to discharge the statutory duties under the Companies Act. (iv) Petitioner is directed to serve the copy of this order on the Registrar of Companies within 30 days. (v) Petitioner is directed to take out advertisement in English daily newspaper 'The Hindu' and also in a Kannada daily newspaper within 14 days from the date of receipt of copy of this order. (vi) Registry is directed to serve two certified copies of this order on the Official Liquidator. (vii) The Committee of Management appointed by this Court by order dated 8.8.2001 stands dissolved subject to the transfer of assets and liabilities and books of accounts to the Official Liquidator. (viii) The connected Company Petitions viz., Co.P. Nos. 260/1999, 261/1999, 117/2005, 116/2005, 118/2005, 259/1999, 258/1999, 257/1999, 214/1999, and 262/1999, stand disposed of in view of the order passed in Company petition No.2/2000. (ix) Memo dated 5.3.2010 stands disposed of.
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