9911796707
|
Home
Issues Involved:
1. Whether the declaration of interim dividend by the directors of a company constitutes a "liability" under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. 2. Whether the Central Government, as the taker of the undertaking, can be directed to pay the interim dividend to the shareholders. Issue-wise Detailed Analysis: 1. Whether the declaration of interim dividend by the directors of a company constitutes a "liability" under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970: The core question in this appeal was whether the declaration of interim dividend by the directors of a company is a "liability". The appellants contended that the interim dividend declared by the directors on July 16, 1969, should be considered a "liability" under Section 5(1) of the Act, which mandates that all liabilities of the existing bank at the time of acquisition should be transferred to the Central Government. The court referenced established legal principles, noting that in both England and India, an interim dividend declared by directors does not create a debt enforceable against the company. This principle was established in the case of *Lagunas Nitrate Co. Ltd. v. Henry Schroeder & Co. & Schmidt* [1901] and followed in India by the Supreme Court in *J. Dalmia v. CIT* [1964]. The court emphasized that a mere resolution to pay interim dividend does not create a debt, as it can be rescinded before payment. The court explained that a final dividend declared by a company in a general meeting creates an immediate debt, but an interim dividend declared by directors does not. The directors' resolution to pay interim dividend can be reviewed, varied, or rescinded before payment, and thus does not constitute a "liability" or "obligation" under Section 5(1) of the Act. The learned single judge had previously held that the interim dividend was an "obligation" within the meaning of Section 5(1) because the resolution was not rescinded. However, the appellate court disagreed, stating that this view was based on a misapprehension of the legal position. The court cited authoritative texts and cases to support the principle that a directors' declaration of interim dividend does not create a binding obligation or liability. 2. Whether the Central Government, as the taker of the undertaking, can be directed to pay the interim dividend to the shareholders: The court further addressed whether the Central Government, as the taker of the undertaking, could be directed to pay the interim dividend. The learned single judge had dismissed the writ petition on the ground that the interim dividend could only be paid out of profits, and since the profits had vested in the Central Government under Section 10(7) of the Act, the dividend could not be paid. The appellate court clarified that Section 5(1) deals with the effect of vesting and mandates that the taker of the undertaking must meet the liabilities and obligations of the existing bank at the time of the take-over. However, since the declaration of interim dividend did not create a "liability" or "obligation", the Central Government could not be directed to pay it. The court emphasized that the extraordinary event of the acquisition of the banking business by the Central Government nullified the directors' resolution to pay interim dividend. The acquisition disrupted the company's financial estimates, and the directors' resolution was effectively rescinded by the take-over itself. The court concluded that the resolution of July 16, 1969, was neither a "liability" nor an "obligation" under Section 5(1) of the Act. It was merely an expression of intention, not enforceable at law. The learned single judge's reasoning was flawed in equating intention with an obligation to pay. Conclusion: The appellate court held that the declaration of interim dividend by the directors did not constitute a "liability" under Section 5(1) of the Act and that the Central Government could not be directed to pay the interim dividend to the shareholders. The appeal was dismissed with costs.
|
