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TMI Blog1958 (8) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... ying for an order of moratorium under Section 37 of the Banking Companies Act (X of 1949), It was not accompanied with a report from the Reserve Bank as required by Sub-section (2) of the section. Acting under the proviso to that sub-section, however, I granted moratorium and called for a report from the Reserve Bank on the affairs of this Bank. By my order dated 14-1-1958, I appointed a Special Officer to take over charge of the assets of the Bank. In accordance with my order, the Reserve "Bank submitted a report dated the 14th March, stating that there was no reasonable chance of the Bank paying its debts within the period of six months beyond which the order of moratorium could not last. On the 17th March, the Bank filed an application proposing a scheme under Section 391 of the Companies Act, 1956, and praying for an order that the scheme be considered by the creditors and shareholders at meetings to be held in accordance with the directions of this Court. The Chotanagpur Banking Depositors' Association (hereinafter called the Depositors' Association) filed an application on the 17th April, praying that an order for the winding up of the Bank be passed. The orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n apply for the winding up of a company. No attempt has been made on behalf of the Depositors' Association to show that it is a legal entity or that it is one of the parties in the list given in that section. It must, therefore, be held that its application is not maintainable. 7. Mr. Das has next argued that this is a fit case in which this Court should exercise its power under Section 391 of the new Act and order a meeting of depositors and shareholders to be held For consideration of the scheme of composition proposed by the Bank. He has submitted that the procedure has been laid down in Section 391 of the new Act, which is equivalent to Section 153 of the Indian Companies Act, 1913 (hereinafter referred to as the old Act), and Section 45 of the Banking Companies Act, 1949. The provisions of those sections, when read together, show that the procedure in such cases is as follows: 1. Firstly, the Court has to consider whether the scheme is fit to go to creditors or share-holders or both for consideration and then, in exercise of its discretion, to order meetings of those persons to be called, held and conducted in accordance with its directions. 2. If the requisite majori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as argued a different point. His contention is that the Court cannot order the winding up of the Bank in the absence of a legally entertainable application for the purpose. Neither of them has advanced any argument on the interpretation and scope of sub-ss. (1) and (3) of Section 38 of the Banking Companies Act. 10. It is necessary first to consider the true scope of Sub-section 0) of Section 38 of the Banking Companies Act. That sub-section reads: "Without prejudice to the provisions contained in Section 162 or Section 271 of the Indian Companies Act, 1913 (VII of 1913), and without prejudice to its powers under Section 37, the High Court shall order the winding up of a banking company if it is un-able to pay its debts and the High Court shall also order the winding up of a banking company if the Reserve Bank applies in this behalf to the High Court." Section 162 of the old Act is equivalent to Section 433 of the new Act. I am not concerned in this case with Section 583 of the new Act which is equivalent to Section 271 of the old Act. Section 37 of the Banking Companies Act gives power to the High Court to grant moratorium for a fixed period of time which cannot exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il in the case of a banking company, where there is an inconsistency between a provision made in it and a provision made in the Companies Act. In my judgment, therefore, the discretion given to the Court under Section 433 of the new Act is taken away by Section 38(11 of the Banking Companies Act where a banking company is found to be unable to pay its debts, and, in that case, it becomes obligatory for the Court to order the winding up of that company. 14. Section 38(1) came up for consideration before a Bench of the Calcutta High Court in Dwarkadas v. Dharam Chand AIR 1954 Cal 583. Chakarvartti, C.J. with whom Sarkar, T. concurred, has, while referring to Section 38(1), observed: "There can be no doubt that the section is most clumsily drafted and does no credit to the draftsman. The only reasonable and sensible meaning that can be spelt out of it is that the opening words preserve the discretion of the Court only in cases specified in Clauses (i) to (iv) and Clause (vi) of Section 162, but so far as Clause (v) is concerned, namely, a case where a company is unable to pay its debts, the provisions of Section 38(1), Banking Companies Act must prevail in the case of a banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances referred to in Section 434, and that, for the purposes of Sub-section (1) of Section 38, a banking company would be deemed to be unable to pay its debts in the circumstances mentioned in subsection (3) of that section. On fuller consideration, however, I have come to the conclusion that my impression was wrong. There are several reasons which support this conclusion. Firstly, there is nothing in Sub-section (1) of Section 88 to suggest that the expression ''unable to pay its debts" as used in this sub-section limited to the circumstances covered by Sub-section (3), nor is there anything in Sub-section (3) to suggest that it is only in the circumstances given in that section that a banking company can be held to be unable to pay its debts. 18. Secondly, reference may be made to Section 2 of the Banking Companies Act which reads:- "2. The provisions of this Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of, the Indian Companies Act, 1913 (VII of 1913), and any other law for the time being in force". Hence, the circumstances mentioned in section 38(3) as Heading to the conclusion that a banking company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions of Section 37 are complied with. Such an order of moratorium can only continue up to the maximum period of six months. If the High Court is of opinion that the Bank's inability is not temporary, or if the Reserve Bank's report shows that moratorium will not serve any useful purpose, it has no option but to carry out the mandate given •in Section 38(1) and to pass an order for winding up. 22. I have already analysed the financial position of the Bank as it is apparent from the Reserve Bank's report. I had granted moratorium under section 37 to the Bank; but, finding from the Reserve Bank's report that it would be unable to pay its debts within the period of six months, I had to cancel it. As I am fully satisfied that the liabilities of the Bank substantially exceed its asserts, I am bound to order its winding up. 23. I may also mention that there will be definite advantages if a winding up order is passed. As I have shown, more than half of the realisable assets of the Bank consist of secured and unsecured advances made to other persons. In the ordinary course, the Bank will have to undertake costly litigations in order to secure decrees against its d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the present case which satisfies me that the Bank is unable to pay its debts. 26. There is clear indication in Section 37 of the Banking Company's Act itself that the Court's power is not confined to merely passing an order for continuation of moratorium or for rescinding it. With reference to the order of moratorium, the proviso to Sub-section (2) of Section 37 lays down that on receipt of a report from the Reserve Bank the Court "may either rescind any order already passed or pass such further orders thereon as may be just and proper in the circumstances". This has to be read along with Sub-section (1) of Section 38 which makes it imperative for the court to pass an order for winding up of a Bank if it is unable to pay its debts. The two sections leave no room for doubt as to the action which the High Court has to take if the Reserve Bank's report satisfies it about the Bank's inability to pay its debts. 27. Section 433 of the new Act gives a discretionary power to the Court to order the winding up of a Company, and, as I have already held, Sub-section (1) of Section 38 of the Banking Companies Act imposes a duty upon the Court to order the windi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... safeguarding the interests of the depositors. 29. In my judgment, the legal position can be summarised thus. A winding up order cannot ordinarily be passed without a petition under Section 439 of the new Act. Such a petition is not necessary, however, in two cases (1) when the affairs of a Bank come to the notice of the court by reason of an application for moratorium under Section 37 and the court is satisfied on materials before it that the Bank is unable to pay its debts and that moratorium cannot be granted or should not be continued : and (2) when a scheme has been sanctioned by the court and it feels satisfied that the scheme is not capable of being worked satisfactorily. In the former case, the court has no option but to order winding up, irrespective! of whether a petition under Section 439 is or is not filed. In the latter case, it may, in its discretion, take action only after a petition is filed. 30. In the present case, a practical consideration makes the necessity for passing a winding up order greater. As I will presently show, the proposed scheme is worthless. In the absence of a satisfactory scheme, there are only two alternatives which I can follow : (1) to order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In any case, it has been said in paragraph 14 itself that the Bank will keep a separate account of its existing assets from the account of its new assets and that the two kinds of assets will not be mixed up. In paragraph 25, it has been stated that new deposits made subsequently to the date of sanction of the scheme shall not come under the scheme. Thus, no part of the new assets can go to the liquidation of the Bank's liabilities as they exist at present. 33. Although, it has been stated in paragraph 17 that certain percentage of the claims will be paid by the Bank to its depositors in each year so that they will be paid in full in seven years, neither Mr. Das nor Mr. Ghose was able to point out to me how the Bank would be able to add to its existing assets or the method in which it will derive sufficient income to enable it to pay the depositors and its other creditors in full or even substantially. The modifications suggested by Mr. Ghose's clients in their application dated the 22nd April, relate only to the constitution of the Board of Directors and management. Though they have supported the scheme, they have indicated their apprehension by suggesting that a Special ..... X X X X Extracts X X X X X X X X Extracts X X X X
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