1958 (8) TMI 55 - HC - Companies Law

Summary

Issues Involved:
1. Whether the Court should order the winding up of Chotanagpur Banking Association Ltd. or direct the consideration of a scheme of composition under Section 391 of the Companies Act, 1956.
2. Legality and maintainability of the application for winding up filed by the Depositors' Association.
3. Whether the Court is bound to order the winding up of the Bank under Section 38 of the Banking Companies Act.
4. Whether the Court can entertain the scheme proposed by the Bank and if the scheme is fit to be sent for consideration to the creditors and shareholders.
5. Whether the Court can pass a winding up order in the absence of a formal application.

Detailed Analysis:

1. Winding Up vs. Scheme of Composition:
The primary issue was whether the Court should order the winding up of Chotanagpur Banking Association Ltd. or direct that the scheme of composition proposed by the Bank under Section 391 of the Companies Act, 1956, be considered by the creditors and shareholders. The Bank had initially applied for a moratorium under Section 37 of the Banking Companies Act, 1949. However, the Reserve Bank's report indicated that the Bank would not be able to pay its debts within the six-month moratorium period. Consequently, the Court appointed a Provisional Liquidator to take charge of the Bank's assets and affairs.

2. Legality of Depositors' Association's Application:
The Court examined the application for winding up filed by the Depositors' Association and found it not legally maintainable. Section 439 of the Companies Act, 1956, lists entities that can apply for winding up, and the Depositors' Association did not qualify as a legal entity under this section.

3. Mandatory Winding Up under Section 38:
The Court analyzed Section 38(1) of the Banking Companies Act, which mandates the winding up of a banking company if it is unable to pay its debts. The Court interpreted that the language of Section 38(1) is mandatory, leaving no discretion to the Court in such circumstances. The Court also considered the financial position of the Bank, as detailed in the Reserve Bank's report, which showed that the Bank's liabilities exceeded its assets by Rs. 21,35,000. Thus, the Bank was deemed unable to pay its debts, necessitating a winding up order.

4. Entertaining the Scheme Proposed by the Bank:
The Court held that there was no legal bar to considering the scheme proposed by the Bank under Section 391 of the Companies Act. However, upon examining the merits of the proposed scheme, the Court found it to be unworkable and based on incorrect assumptions about the Bank's financial position. The scheme did not provide a feasible method for the Bank to meet its obligations to depositors and creditors. Therefore, the Court concluded that sending the scheme for consideration would be futile.

5. Winding Up Order in Absence of Formal Application:
The Court addressed the argument that a winding up order could not be passed without a formal application. It was held that while Section 439 of the Companies Act generally requires a petition for winding up, the Court's power under Section 38(1) of the Banking Companies Act is not contingent on such a petition. The Court emphasized that it has a duty to order winding up if the Bank is unable to pay its debts, based on the Reserve Bank's report and other available materials.

Conclusion:
The Court rejected the scheme proposed by the Bank and directed that the Bank be wound up. The decision was based on the mandatory provisions of Section 38(1) of the Banking Companies Act, the unworkable nature of the proposed scheme, and the Bank's inability to pay its debts. The parties were directed to bear their own costs.