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TMI Blog2014 (5) TMI 1242X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (2). The Legislature provided for a percentage of the total member of the Board of directors to consist of persons having a particular academic background and/or the requisite experience and/or possessing the requisite knowledge as stipulated in sub-clause (a) of sub-section (2) of section 10A. The Legislature was obviously of the view that such a composition of a Board of directors was necessary in the interest of banking companies and, therefore, provided for the same. The intention, therefore, was to ensure that the Board of directors comprises of a percentage of directors with the requisite qualifications and/or experience and/or knowledge. The intention was not to interfere with the machinery provided under the Companies Act regarding the appointment and removal of directors. Nor was it to denude the civil courts of their jurisdiction to decide disputes relating to the validity of the appointments of directors on the Board of a banking company. Section 10-A has, however, curtailed the jurisdiction of the civil courts, but only to a limited extent. As we mentioned earlier, we will restrict this judgment by deciding only the question that arises in this case - Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent Nos. 10 to 15 are individuals and are defendants Nos. 7 to 12. It is convenient to refer to the parties as they are arrayed in the suit. 3. Two questions arise for consideration. The first is whether the judgment of a Civil Court to consider the validity of the appointment of directors is barred in view of the provisions of the Companies Act, 1956. The second is whether in view of section 10-A of The Banking Regulation Act, 1949, which came into effect from 1st February, 1969, the question of validity of appointment of directors can only be raised before and decided by the Reserve Bank of India and not by any other Court, Tribunal or authority. We have upheld the decision of the learned Judge who answered this question in the negative. 4. For the purpose of this appeal, it is sufficient to note the facts only briefly. Plaintiff Nos. 1, 2 and 3 are the widow, daughter and son of one Ashok Kapur who passed away on 26th November, 2008. Plaintiff No. 4-Mags Finvest Private Limited, together with the other plaintiffs, formed a part of the Ashok Kapur group. The plaintiffs and the deceased Ashok Kapur formed the Ashok Kapur group. Defendant Nos. 1 to 5 formed the Rana Kapur gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ames of the remaining Independent Directors in the nominations Committee of the Company. ... 127.A a) Subject to the provisions of the said Acts and these presents, the Board shall subject to a recommendation made by the Promoters, also include such Whole time Director/s as may be appointed in terms of these Articles. b) The Board may, subject to its obtaining approval from the Reserve Bank and also subject to such approval as maybe necessary under the Act, and subject to the other provisions of these Articles, appoint and/or re-appoint from time to time one or more of its member(s) to be designated and to act as Whole time Director/s of the Company, not in any case exceeding one third of the total number of the Directors of the Company for the time being. 5. Ashok Kapur and defendant No. 1 were co-founders/co-promoters of defendant No. 6 along with Rabo Bank. Ashok Kapur was also the first Chairman of defendant No. 6. The plaintiff and defendant Nos. 1 to 5 were also the original subscribers to the Articles of Association. Defendant No. 1 was the first Chief Executive Officer and Managing Director of defendant No. 6 and continues as such. Some time after the tragic death ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 9 were appointed as directors. Thereafter, at a meeting held on 27th June, 2013, the Board of directors of defendant No. 6 appointed defendant Nos. 10 to 12 as whole-time directors. 8. In view thereof, the plaint was amended to challenge the appointments of defendant Nos. 7 to 9 at the AGM held on 8th June, 2013 and of defendant Nos. 10 to 12 at the meeting of the Board of directors held on 27th June, 2013, as being null and void and sought an injunction restraining them from acting as directors of defendant No. 6. 9. By the said notice dated 17th April, 2013, the 9th AGM of defendant No. 6 was convened on 8th June, 2013, to transact the business, inter alia, relating to the appointment of defendant Nos. 7, 8 and 9. The proposed resolutions in respect of each of them were identical. They stated that defendant No. 6 had received notices in writing along with the deposit from some members proposing them as candidates for the office of a director under the provisions of section 257 of the Companies Act, 1956, and that they are eligible for appointment to the office of director and are appointed as directors of the bank. The explanatory notes pursuant to section 173(2) of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industry, (ix) any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company: Provided that out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry; and (b) shall not- (1) have substantial interest in, or be connected with, whether as employee, manager or managing agent,- (i) any company, not being a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or (ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or (2) be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern. 2A. Notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or in any other law for the time being in force,- (i) no director of a banking company, other than its chairman or whole-time director, by whatever name called, shall hold office continuously for a period exceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the case may be, appointed under this section shall hold office until the date up to which his predecessor would have held office, if the election had not been held, or, as the case may be, the appointment had not been made. (8) No act or proceeding of the Board of directors of a banking company shall be invalid by reason only of any defect in the composition thereof or on the ground that it is subsequently discovered that any of its members did not fulfill the requirements of this section. 12. There was no quarrel regarding Mr. Cooper's submission that statutory provisions must be interpreted so as to accord with the object sought to be achieved by it; that the interpretation must foster and promote the legislative intent of the statutory provision and not restrict or inhibit such intent. 13. Mr. Cooper firstly submitted that civil courts have no jurisdiction to entertain a challenge to the appointment of directors of companies incorporated under the provisions of the Companies Act, 1956. 14. The submission is not well founded. It is not necessary to deal with the submission in any detail as it is answered against the appellant by a judgment of a Division Bench of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso on other authorities like Company Law Board, the Central Government and the Registrar. Where a power is vested by the Act in a Court, that Court has to be ascertained with reference to section 10. Beyond so specifying the Court competent to deal with such a matter, section 10 cannot be construed as investing the Company Court with jurisdiction over every matter which may arise in respect of a Company or as divesting Civil Courts of their jurisdiction. 22. In the present case although the irregularities in holding meetings or the holding or cessation of the office of a Director may have to be decided with reference to the Companies Act, that Act has not prescribed a forum where such a relief can be sought. In the absence of such prescription, the ordinary Civil Courts are competent to deal with such disputes. Hence the present suits were correctly filed originally in the City Civil Court. 23. The learned Single Judge, while deciding the appeals from orders however, placed reliance on a judgment of this Court in the case of Vithalrao Narayanrao Patil v. Maharashtra State Seeds Corporation Ltd., and anr., reported in 68 Company Cases 608. In that case the learned Single Judge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction is impliedly barred and that disputes relating to the appointment and/or removal of directors are outside the jurisdiction of the Civil Courts. The learned Judge, accordingly, answered the preliminary issue in the negative holding that the company court had no jurisdiction to entertain and try the suit. The judgment is clearly contrary to the judgment of the Division Bench. It was rendered per incuriam. The judgment in Khetan's case is, therefore, over-ruled. 16. We are, in any event, in agreement with the learned single Judge that the bar of jurisdiction of civil court is not to be readily inferred and that a Court would normally lean in favour of a construction which would uphold the retention of the jurisdiction of a civil court. In this view of the matter, it is not necessary to refer to the other judgments which have been referred to by the learned single Judge. The contention that the jurisdiction of this Court to entertain a challenge to the appointment of defendant Nos. 7 to 12 as directors in view of the provisions of the Companies Act, 1956, is rejected. 17. This brings us to the main challenge. Mr. Cooper submitted that the jurisdiction of the civil courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction of civil courts to entertain a suit challenging the appointment of a director made even otherwise than under sub-sections (3), (4) and (5) of section 10A is barred in view of sub-section (6) of section 10A. 19. The appointments of defendant Nos. 7 to 12 were not under subsection (3) of section 10A. It is not the appellants case that the appointments were made on account of the requirements as laid down in sub-section (2) not having been fulfilled at any time. There was no question, therefore, of the Board of directors of the appellant reconstituting the Board so as to ensure that the requirements of subsection (2) were fulfilled. In other words, the appointments of defendant Nos. 7 to 12 were not in the course of reconstituting the Board of directors of the appellant. The appointments were made keeping in mind and in conformity with the provisions of section 10A. The appointments were not under sub-section (3) of section 10A. 20. There was no question in the present case of reconstituting the Board by retiring any director or directors. This is not even the appellants case. Sub-section (4) of section 10A, therefore, is not relevant to this case. 21. It is not the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king sector in term of section 10A of The Banking Regulation Act, 1949. The Committee noted that there were no relatives or entities related to the above candidates which were connected with the Bank and in which they would be deemed to be interested within the meaning of Section 299 and Section 300 of the Companies Act, 1956 or would be deemed to be substantially interested within the meaning of The Banking Regulation Act, 1949. The Committee also noted that the above candidates had not been involved with any other bank as a member of the Board or any NBPS as prescribed under the RBI Circular DBOD. No. BC.116/08.139.001/2001-02 dated June 20, 2002 on report of the Consultative Group of directors of Banks/Financial Institution (Dr. Ganguly Group)-implementation of recommendation. There were no cases involving default in respect of facilities availed by them and there were no proceedings/prosecution against the above candidates. 24. These minutes do not make the appointments at the AGM under sub-sections (3), (4) or (5) of section 10-A. The committees only acted in an advisory capacity to defendant No. 6. The views expressed in the minutes do not militate against our finding that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deemed to have been duly elected by the banking company as its director. Therefore, elections and deemed elections are contemplated under sub-section (5) itself. The view that we take, therefore, does not render the term "election" in sub-section (6) otiose. 27. Mr. Cooper then submitted that the view that we have taken would render the term "election" surplus for the election of a director would also be covered by the term "reconstitution". He submitted that where different words are used especially in the same section, different meanings ought to be ascribed to them. 28. In section 10-A, the term "election" is not rendered surplus. For instance, reconstitution can also be by virtue of a removal of a director. The contingency of a removal is, however, also provided in sub-section (6). A reconstitution of a Board, however, is not necessarily only by election of other directors. Such directors could also be nominees such as in cases where it is permitted by the Articles of Association of a company and shareholders agreements. There may also be a case where an affirmative vote is required by one group of shareholders for the appointment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieving this purpose. 2. The more important new provisions of the Bill connected with the management of the banks relate to the reconstitution of their Boards of directors and appointment of full-time chairmen. Every banking company will have to reconstitute its Board of directors so that the majority of persons on the board have special knowledge or practical experience in agriculture, rural economy, small-scale industries, co-operation, banking, finance and other matters which are useful to a banking company and should not have substantial interest or active association with large or medium-sized industrial or business undertakings. The chairman of each bank will be required to be a professional banker and a fulltime chief executive officer. It will be open to the Reserve Bank to reconstitute the Board of directors or to appoint a new chairman if it proves to be necessary. ... 32. The object of the Legislature was not to exclude the challenge to the appointment of directors altogether. The object of section 10A was to provide for the nature of the constitution of the Board of directors of a banking company. The object was to ensure that a requisite percentage of the Board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can only be decided by the Reserve Bank of India and not by the civil court. In the written submissions, however, it is contended that the provisions of section 10A are aimed at stopping a challenge to the appointment of directors at the threshold and that if the directors are appointed such that the constitution of the Board complies with sub-section (2), all the directors are insulated from any challenge. • Mr. Cooper also submitted that the words "duly held" would only require the due procedure for the appointment of directors to have been followed and cannot mean anything beyond following the due process and procedure as laid down by the law i.e. the Companies Act. He submitted that the words "duly held" cannot mean anything falling beyond the due process and procedure as laid down by the Companies Act. Once the procedure is followed, the appointment of a director cannot be challenged on any other ground whatsoever, including that it was contrary to any provision of law or contract. So long as the appointment is legally valid, following the legal procedure mandated under the Companies Act and in compliance with section 10A of The Banking Regulation A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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