Reserve Bank of India vs Al Falah Finlease Ltd.

A.K. Sikri, J.—A sum of Rs. 50 lacs has already been received and kept in the Court of Sh. Digvinay Singh, M.M. Patiala House, New Delhi.

Reserve Bank of India has filed the winding-up petition against the respondent company known as Al-Falah Finlease Ltd. (hereinafter referred to as the ''Company'') u/s 45MC of the Reserve Bank of India Act, 1934 (in short the ''RBI Act''). The company is admittedly a Non-Banking Finance Company (in short ''NBFC''). In view of amendment in the RBI Act requiring NBFCs to obtain registration from the RBI for doing such a business, the company made an application to the RBI for issue of certificate of registration u/s 45IA of the RBI Act on 2nd July, 1997. This application was rejected on 16th July, 1998. The company went in appeal before the Appellate Authority and the Appellate Authority allowed the appeal directing the RBI to re-open the application and consider the case afresh. Thereafter RBI carried out inspection of the company u/s 45N of the RBI Act to ascertain the financial position of the company as on March 31, 1999. This inspection went on from 4th October, 1999 to 9th October, 1999. According to the RBI, during the inspection large scale intermingling of assets and liabilities of the companies in the group were revealed and, Therefore, the RBI considered it necessary to inspect the books of accounts of other group companies, namely, Al-Falah Investment Ltd. Inspection of this company also revealed serious irregularities such as acceptance of deposits by Al-Falah Finlease Ltd. and peculiar methods adopted by the company for unauthorised conversion of the same into shares, bouncing of large number of cheques, diversion of funds to group concerns etc. against the interest of the depositors. After issuing show-cause notice and eliciting reply, the application for registration was again rejected on 16th February, 2000. A few days before that two Directors of the company were arrested by the Economic Offence Wing of the Crime Branch, Delhi Police. After rejection of the registration, the RBI passed prohibitory order u/s 45MB(i) of the RBI Act whereby the company was precluded from accepting deposits in any form. Another order dated 22nd February, 2000 was passed u/s 45MB(ii) of the RBI Act directing the company not to sell, transfer, created any charge or mortgage or deal with, in any manner, with properties and assets without prior written permission of the bank. Company did not challenge the order of rejection dated 16th February, 2000 by filing any appeal. Subsequently on 1 st March, 2000, the Chairman of the Company was also arrested by the Crime Branch.

Thereafter, present petition was filed in July 2000 for winding up of the company. On the very first date, i.e. on 20th July, 2000 while issuing notice to show cause in the company petition, in CA No. 1059/2000 this Court appointed Official Liquidator attached to this Court as the Provisional Liquidator to take charge of the company''s properties and assets, books of accounts, papers, vouchers and other documents in order to protect the interest of the investors. Restraint orders were also passed prohibiting the company, its servants, etc. from encumbering, transferring, alienating and disposing of any of the properties and assets of the company. During the pendency of these proceedings, while learned Counsel for the respondent prayed for passing of final winding up orders on the ground that in the absence of any license from the RBI the company, being a non-banking financial institution, cannot do any business, Counsel for the respondent submitted that the ex-directors were contemplating to file comprehensive application proposing repayment plan and, Therefore, prayed for deferring winding-up orders to enable them to file such an application. This was recorded on 13th October, 2004 and time was granted. In this sequel application has been filed in which notice was issued on 16th November 2004. The RBI and the old have filed their replies opposing this application.

It is, inter alia, stated that on the arrest of the Chairman, Managing Director and other Directors of the company in the months of January-February 2000, since they remained in jail, no effective steps could be taken in these proceedings. However, after the release of Mr. J.A. Siddiqui, Chairman and Managing Director of the company in February 2004, he had been promising and representing the investors, depositors creditors, etc. in various cases. It is also averred that he took stock of various assets, both movable and immovable, which stood illegally captured and usurped by anti-social elements while he was in jail and one such property was the housing complex located at GH-01, Alfa Sector, Greater Noida admeasuring 10,000 sq. metres allotted by Greater Noida Authority to M/s. Al-Falah Sahakari Awaas Samiti Ltd. Hundred flats were constructed over this plot of land by M/s. Al-Falah Developers Ltd. It is submitted that Mr. Sayed Manzoor Hassan Zaidi, representing as President of Al-Falah Sahakari Awaas Samiti Ltd. and Mr. S.P. Yadav representing as Secretary of M/s. Al-Falah Sahakari Awaas Samiti Ltd. have entered into an agreement dated 3rd September, 2004 with M/s. Al-Falah Developers Ltd. and M/s. Al-Falah Investment Ltd. both being represented by Mr. J.A. Siddiqui. Under the said agreement (Annexure-D), following payments are to be received:

II. A further sum of Rs. 2.26 crores would be payable on or around 30.11.2004, totalling Rs. 2.76 crores.

It is mentioned that in this manner all the claims would be settled and since applicant is intending to settle all the claims, the proposed repayment plan be accepted and order of appointment of Provisional Liquidator be recalled. The precise nature of the petition filed by the RBI and the aforesaid application filed by the ex-director giving details of the scheme of arrangement were recorded in the order dated 5th April, 2005 and it would be apposite to reproduce the said order for understanding the controversy involved and the manner in which this application was dealt with from time to time:

5.4.2005

Present: Mr. R.N. Trivedi, Sr. Advocate with Mr. Ramesh Babu, Ms. Manisha Singh, Mr. S. Banerjee, Ms. S. Pandey, Mr. Shoaib and Ms. Shweta for the R.B.I.

Mr. N.K. Kaul, Sr. Advocate with Mr. Vineet Jhanji for the respondents. Mr. S.K. Luthra with Ms. Manisha Tyagi for the OL.

CP No. 236/2000

This petition is filed by the Reserve Bank of India (RBI) seeking winding up of the respondent company, namely, AL-FALAH FINLEASE LTD. The petition is filed primarily on two grounds:

B. The company had accepted deposits from hundreds of depositors and substantial amount is to be paid to those depositors which the respondent company is unable to pay and prayer for winding up of the respondent company is made on this ground as well.

List for further arguments on 10th May, 2005.

There applicant thereafter filed the affidavit and on the next hearing held on 10th May, 2005, following order was passed:

10.5.2005

Present: Mr. R.N. Trivedi, Sr. Adv with Ms. Manisha Singh and Mr. Ramesh Babu, Counsel for the R.B.I.

Mr. N.K. Kaul, Sr. Adv with Mr. Vineet Jhanji for the respondent.

Mr. S.K. Luthra with Ms. Manisha Singh for OL.

CP No. 236/2000

List for further arguments on 22nd July, 2005."

Subsequent to the aforesaid order another affidavit is filed stating that all the claims have been settled.

A. The respondent company being a non-banking financial company was required to comply with provisions of the RBI Act and in particular Section 45, Section 45N and Section 45 of the RBI Act, 1934. After the inquiries made into the functioning of the respondent company, it was found that respondent company was indulging in various irregularities and, Therefore, prohibitory orders were issued u/s 45MB(1) of the Act directing the respondent company not to sell, transfer, create any charge or mortgage or deal in any manner with its property and assets without prior written permission of the RBI and also restrained the respondent company from accepting deposits in any form. The case of the petitioner is that in view of these irregularities and rejection of grant of certificate of registration it is not open to the respondent company to undertake the business of accepting deposits from the company, which is the primary business as per the Memorandum of Association of the respondent company and, Therefore, respondent company is liable to be wound up.

Vide order dated 20.7.2000, the Official Liquidator was appointed as the Provisional Liquidator. The company has filed reply thereafter and contested this petition. During the pendency of these proceedings, ex-Director of the respondent company filed application proposing Scheme of Arrangements/Revival. The application with which we are concerned today is CA 1365/2004. In this application the applicant has given two lists as Annexures A and B. Annexure A contains names of 647 persons whose claims were settled in full and final uptil 28.1.2000, the date when Directors of the respondent company were arrested by the Economic Offence Wing of the Crime Branch, Delhi. Annexure-B is the list of 158 investors/shareholders whose claims have been settled after 17.2.2004 i.e. after the release of the applicant Jawed Ahmed Siddiqui, Chairman of the respondent company. As per these Annexures a sum of Rs. 1,22,26,191.50 p and Rs. 1,56,15,500/- respectively have been paid to two sets of investors. The applicant has also filed Annexure D which is Agreement dated 3.9.2004 entered into between M/s. Al-Falah Developers Ltd. and M/s. Al-Falah Investment Ltd. on the one hand and M/s. Al-Falah Sahakari Awaas Samiti Ltd. (A Cooperative Group Housing Society) on the other hand. Without going into detail of this agreement, what is to be noticed at this stage that in terms of this Agreement, first party has to receive a sum of Rs. 2,76,50,000/- from the second party.

Mr. N.K. Kaul, learned Senior Counsel appearing for the respondents states that this amount, as per the Agreement was to be received on quashing of FIR No. 262/ 2004 filed with Police Station, New Friends Colony, New Delhi which FIR was lodged by the first party. He further informs that various depositors/shareholders of the respondent company have filed criminal complaints against the company which are pending in the Court of Shri Digvinay Singh, M.M., Patiala House Court, New Delhi. He submits that a sum of Rs. 50 lacs was deposited earlier in that Court and thereafter further sum of Rs. 2.26 crores was also deposited. He has produced copy of the order dated 24.2.2005 passed by Shri Digvinay Singh, M.M., Patiala House Court, New Delhi and submits that out of these deposits, substantial number of shareholders/investors have already been paid in full and final settlement of their claims through the Court of the said M.M. He also informs that learned M.M. has issued notices to other depositors/investors and complainants for making payment to them as well out of these funds. His submission is that sufficient amount is lying with the said M.M. to discharge the liability of all the remaining depositors/investors/shareholders/creditors.

It cannot be doubted that if this is accomplished the second ground on which the winding up of the respondent company is prayed for would cease to exist. Otherwise also, it is the first concern of this Court to ensure that all these depositors/shareholders/creditors are paid up by the applicant. It would, Therefore, be necessary to have complete picture in this behalf. The applicant is accordingly directed to file a detailed affidavit indicating therein the list of all the shareholders; depositors/investors whose claims have been settled in the Court of Shri Digvinay Singh, M.M., Patiala House Court, New Delhi; list of all those shareholders, investors/creditors whose claims have yet to be settled; steps taken by the learned M.M. in this behalf and the present status of proceedings before the learned M.M. The applicant in the affidavit shall also explain the circumstances under which payment was so deposited is made to the shareholders/depositors of respondent company, namely, Al-Falah Finlease Ltd. as under the Agreement the second party had to make this payment to Al-Falah Developers Ltd. and Al-Falah Investment Ltd. The applicant shall without prejudice to its rights and contentions give the details of creditors/shareholders of Al-Falah Developers Ltd. and Al-Falah Investment Ltd. The affidavit shall be filed within three weeks, as prayed.

It may be noted at this stage itself that though various persons who had lodged their claims were treated as depositors by the RBI, company has been maintaining that they were the shareholders. Without touching this aspect, however, as per the claims settled before the Metropolitan Magistrate, money is paid to all such persons and their purported shareholding purchased by the applicant. The position which emerges today is that there are no claims and no "depositors" remain unpaid.

CP No. 236/2000

List the matter for final arguments on 14th December, 2005 before the Regular Bench.