9911796707
TMI Blog1989 (3) TMI 307X X X X Extracts X X X X X X X X Extracts X X X X ..... ined by the company on August 28, 1988 ; ( d )To pass such other orders as this Hon'ble Court may deem fit and proper in the circumstances of the case." The sum and substance of the allegations in the petition is that the chairman and the directors in using the machinery of the bank to get their candidates elected as directors (to fill the vacancies caused on the retirement of directors by rotation) has conducted the affairs of the company in a manner oppressive to the minority shareholders including the petitioners. Before I go into the merits of the case, I shall deal with the preliminary point raised by the company and the other contesting respondents, namely, whether the petition is maintainable in law. The case set up by the respondents in this regard has two aspects, (1) the company, being a banking company, any question pertaining to its management requires to be considered under the provisions contained in the Banking Regulation Act, 1949, for short, "the Act", (2) to maintain a petition under section 397 of the Companies Act, the petitioners are bound to obtain the consent in writing of those 100 members/shareholders mentioned in sub-section 1( a ) of section 399 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a banking company vis-a-vis the provisions under the Companies Act pertaining to the management and winding up of non-banking companies. A question immediately would arise as to what was the reason for the enactment of a special statute relating to banking companies. An effective answer to this question cannot be had unless one is prepared to probe into the evolution of banking laws in India. It is interesting to note in this regard that, in the past, India had no special piece of legislation governing banking companies. There was, therefore, a persistent demand for bringing out a comprehensive enactment to govern the banking companies and this resulted in the amendment of the Indian Companies Act, 1913, incorporating Part X-A therein containing provisions governing matters which are peculiar to the business of banking. However, there was no special procedure for banking companies, particularly relating to their winding up. Certain special provisions relating to banking companies were, therefore, introduced in the Companies Act by the Indian Companies (Amendment) Act of 1936. These newly introduced provisions, however, were only regulatory in nature. This amendment also did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany by a whole time chairman who has special knowledge of and practical experience in the working of a bank or financial economic or business administration (another encroachment by experts over industrialists), (section 10B of the Act). 3.Restrictions of loans and advances by a banking company to its directors or to a company or firm in which a director is substantially interested or to an individual for whom a director is a guarantor (section 20 of the Act). 4.Additional powers conferred on the Reserve Bank of India to enforce and supervise the social control (mainly sections 30, 35B, 36(1)( d ) and 47A of the Act). 5.Punishment for ( a ) obstructing any person from lawfully entering or leaving a bank, ( b ) holding demonstration within a bank, and ( c ) acting to undermine depositors' confidence in a bank (section 36AD of the Act). 6.Special powers of the Central Government to acquire under takings of banking company when it is satisfied on a report from the Reserve Bank that the banking company has committed certain defaults and that it is necessary to do so (Part IIC, sections 36AE to 36AJ of the Act) (see Tannan on Banking Law and Practice). It would thus be see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regarding the management of the company : After the imposition of "social control" by the Amending Act No. 58 of 1968, no shareholder of a banking company, unlike the shareholder of an ordinary company could complain that the affairs of a banking company are conducted in such a way that one group of shareholders is getting a benefit against the other, and, therefore, the business of the banking company is liable to be suspended. A reference in this connection to sections 10A, 10B, 20, 30, 35B, 36(1)( d ), 36AD, 36AE, 36AJ and 47A of the Act is profitable. I shall now deal with some of the salient provisions. Section 10A provides that not less than fifty-one per cent. of the total number of members of the board of directors of a banking company shall consist of persons who shall have special knowledge or practical experience in respect of one or more of the following matters, namely : ( i ) accountancy, ( ii ) agriculture and rural, economy ( iii ) banking, ( iv ) co-operation, ( v ) economics, ( vi ) finance, ( vii ) law, ( viii ) small-scale industry, ( ix ) and any other matter the special knowled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking company shall consist of persons who are having special knowledge or practical experience in any one or more of the matters stated hereinbefore, the Reserve Bank has a right, after giving to the banking company a reasonable opportunity of being heard, to direct the banking company to sq reconstitute its board of directors as to ensure that the said requirement is fulfilled ; and if, within two months from the date of receipt of such an order, the banking company does not comply with the directions, that bank can, after determining by lots drawn in such manner as may be prescribed, the person who ought to be removed from the membership of the board of directors, remove such person from the office of the director and appoint a person who has special knowledge of the matters referred to above, as a member of the board of directors in the place of the person so removed, whereupon the person so appointed shall be deemed to have been duly elected by the banking company as its director. Every appointment, removal or reconstitution duly made, and every election duly held under section 10A shall be final and shall not be called in question in any court. Similarly, every director el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may, by order, remove the first-mentioned person from the office of the chairman and appoint a suitable person in his place where-upon, the person so appointed shall be deemed to have been duly elected or appointed, as the case may be, as the chairman of the board of directors. The chairman, thus appointed, shall hold office for the residue of the period of office of the person in whose place he has been so elected or appointed. This right of the Reserve Bank is without prejudice to the provisions of section 36AA. The banking company and the chairman against whom an order of removal is made may, if so advised, within thirty days from the date of communication to it or to him of the order, prefer an appeal to the Central Government and the decision of the Central Government thereon, and subject thereto, the order made by the Reserve Bank, shall be final and shall not be called in question in any court. Section 10-BB provides that where the office of the chairman of a banking company is vacant, the Reserve Bank may, if it is of opinion that the continuation of such vacancy is likely to adversely affect the interests of the banking company, appoint a person, who possesses the qualif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank by section 36 of the Act deserve special mention. It has the power to direct the company to call a meeting of its directors, etc., if it is found that the affairs of the banking company are being conducted in a manner detrimental to the interests of the banking company or its depositors. It can depute one or more of its officers to watch the proceedings at any meeting of the board or of any committee or of any other body constituted by it; require the company to give an opportunity to the officers so deputed, to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank. I do not wish to burden this judgment by referring to more such provisions of the Act pertaining to the management of a banking company. It can thus be seen from these provisions that "the Act, at every turn, makes the Reserve Bank the authority to sanction, permit, certify, accept, report, advise, control, direct, license and prohibit. There is hardly any provision where the Reserve Bank's judgment is not made final vis-a-vis a banking company except rarely where an appeal to the Central Government would lie". (See Vellukunnel's case [1962] 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business and winding up of banking companies. The High Court, on an application from the Reserve Bank, can suspend the business of a banking company provided the conditions stipulated under section 37 are satisfied. The winding up of a banking company, after the introduction of Part III, can be ordered only on the ground that the banking company is unable to pay its debts or if an application for its winding up has been made by the Reserve Bank under section 37 or under subsection (2) of section 38. The non-obstante clause in section 38, namely, "notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act, 1956" indicates that the provisions of the Companies Act pertaining to the winding up of a company should, as they are derogatory to or inconsistent with these provisions, give way to the provisions of the Act in that regard. A reference to Part IIIA, particularly to section 45A, irrelevant in this context. The section says that the special provisions for speedy disposal of winding up proceedings contained in Part IIIA shall override all other laws including the Companies Act. That means, that after the introduction of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who control the company abuse their powers to such an extent as to seriously prejudice their interest is, no more, a moot question. (See Anglo-Continental Produce Co. Ltd., In re [1939] 1 All ER 99 (Ch D). Briefly stated, the object in enacting section 397 is to salvage a company which otherwise is liable to be wound up under, the "just and equitable" ground (Section 433( f )). At this juncture, it is profitable to keep in view the opinion of Lord Clyde, Lord President in Baird v. Lees [1924] SC 83 quoted with approval by the Privy council in Loch v. John Blackwood Ltd. [1924] AC 783 (PC). The opinion reads (at page 103 of [1939] 1 All ER) : "I have no intention of attempting a definition of the circumstances which amount to a 'just and equitable' cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act by Amending Act 58 of 1968, pertaining to the management of a banking company and its winding up, in my judgment, will come under the qualifying .clause in section 2 of the Act, namely, "save as hereinafter expressly provided". It should, in this connection, be remembered that the Act is one to consolidate and amend the law relating to banking in the country and that a consolidating Act is a code by itself in regard to the matters dealt with therein. See Ravulu Subba-Rao v. CIT [1956] 27 ITR 164 (Mad). In short, any proceeding concerning the management of a banking company and the one for the winding up of the same could be maintained only on establishing the requirements prescribed under the respective provisions of the Act. To the said extent, the provisions of the Act, in my view, are not in addition to, but in derogation of, the Companies Act. Section 45A of the Act also can profitably be referred to in this connection. The above argument of learned counsel for the petitioners is, accordingly, rejected. The petition under section 397, therefore, is not maintainable. The second aspect of the preliminary point : To maintain a petition under section 397, the petitioner s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 399. Here, there is no such evidence ; for that matter, there is no proper pleadings even in this regard. For this reason also, I am of the view that the petition is not maintainable. Now, I shall deal with the merits of the case : Facts essential and requisite for the purpose of this lie in a narrow compass. The 5.7th annual general meeting of the company, to elect the directors to fill the vacancies caused by retirement by rotation, was scheduled to take place on August 30, 1988. Exhibit A-2 is the statutory notice issued in this regard. Note (1) appended to exhibit A-2 provides that a member entitled to attend and vote at the meeting is entitled to appoint a proxy to attend and vote instead of himself. The note further says that the instrument appointing a proxy shall be deposited at the registered office of the bank not later than 48 hours before the time for holding the meeting which as per exhibit A-2, is fixed at 10 a.m. on August 30, 1988. A proxy need not be member. As per this notice, proxies, therefore, should be deposited before or at 10 a.m. on August 28, 1988. This time happens to fall on a Sunday and, therefore, the first petitioner handed over exhibit A-6 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the act of oppression pleaded is the undue interest taken by the chairman and some of the directors to see that their nominees are elected as directors. These statements may perhaps constitute an isolated act of oppression, assuming they constitute an act of oppression, but not in any way an act of oppression continuing down to the date of the petition. Is this isolated act of oppression sufficient to maintain a petition under section 397, assuming the petitioners can press that section into service in this case? An incidental question arising for consideration in this connection is this: Without a revocation in writing, could it be said that a vote given in accordance with the terms of an instrument of proxy is invalid? Regarding the first question, the law is well-settled. In order to grant the relief under section 397, a petitioner must show three things : (1) the facts pleaded justify the making up of a winding-up order on the "just and equitable" ground, but the winding up would unfairly prejudice the shareholders including the petitioners who support the petition but an order passed under section 402 of the Companies Act would grant them appropriate relief. (2) the affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to be referred to in this connection. This section provides that the articles of association of a company, limited by shares, may adopt one or any of the regulations contained in Table A of Schedule 1. It, therefore, follows that the rights of the shareholders, mentioned under section 176 of the Companies Act in regard to the appointment of another person (whether a member or not) as his proxy to attend and vote instead of himself, are governed by article 88. This article is nothing but a replica of regulation 63 of Table A of the Companies Act, as we have already seen. The shareholders are bound by this article because "the articles constitute a contract between the company and a member in respect of his rights and liabilities as a share-holder " (See Halsbury's Laws of England, Hailsham edition, para 118, at p. 71, Volume 7). If that be so, a vote given by a shareholder, in accordance with the terms of an instrument of proxy, shall be valid notwithstanding the revocation of the proxy, provided no intimation in writing of the revocation has been received at the office or by the chairman of the meeting before the vote is given. I am fortified in this view by a ruling of Russell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is not the position if the articles of association provide for such a contingency is clear from the following principle, stated again in Halsbury : " The articles of a company usually provide, however, that a proxy is valid notwithstanding its revocation unless notice of the revocation is received before the meeting at which it is used". This passage, as is seen from the footnote, is a replica of article 73, Schedule 1, Table A, Part I of the English Companies Act 1948, corresponding to regulation 63, Table A, Schedule I to the Companies Act, 1956. We have already seen that the rights of a shareholder to vote by proxy recognised under section 176 of the Companies Act is guided by article 88, of the articles of association (corresponding to regulation 63 of Table A of Schedule I to the Companies Act, 1956). The above argument of learned counsel in this regard, therefore, is rejected. There is yet another aspect that should be borne in mind in this context and it is this : There is nothing in law to exclude Sunday in the computation of the 48 hours and, therefore, a proxy delivered on Sunday for a meeting to be held on Tuesday that is 48 hours later would be valid provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily, it would have been enough to direct the chairman to announce the results. But, in view of the various allegations regarding the collection of proxies by the contesting parties and particularly the complaint of the plaintiff (the arguments were heard along with the arguments in this petition) and in the larger interests of the banking company, I am of the view that the following directions require to be issued : 1.The retiring directors who are allowed to continue in office as per directions of this court shall cease to be directors from today. 2.The chairman, with the approval of the board, can, if so advised, co-opt two directors and they can function as directors until election is conducted at the next annual general meeting. 3.The election aforesaid shall be conducted before September 30, 1989. 4.Subject to the above directions, all interim orders issued during the pendency of the company petition stand vacated. Taking note of the following observations of the Supreme Court in the order in S.L.P. Nos. 14060-64 of 1988 dated December 1, 1988, this judgment is kept in abeyance till April 8, 1989. "It is, however, desirable that the order passed by the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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