TMI Blog1960 (12) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... s have applied under S. 391 of the Companies Act, 1956 for considering schemes of reconstruction and the company has also applied for a stay of the present proceedings pending disposal of these applications. In view of S. 44B of the Banking Companies Act, I have had the schemes examined by the Reserve Bank (in a rather summary way it is true) and it not appearing from the report of the Reserve Bank that any of them is prima facie certifiable under that section, I have not thought it worth while to give further thought to the matter at this stage. 3. The pleadings joined issues of fact as also of law, but, all that now remains, as a result of the clarifications and concessions made in the course of the hearing, are the issues of law. That relieves me of any very elaborate statement of the facts, but it might nevertheless be necessary to state the salient facts for a proper understanding of the case. 4. The Palai Central Bank Ltd. (which I shall hereafter call the company) was incorporated in January 1927 as a public company limited by shares. The incorporation was under the provisions of the Travancore Companies Act. (The company then went by the name of the Central Bank Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, the company was periodically presenting a false picture of its position to the public and, in effect, paying the dividends out of its capital and reserves. (What the company was doing was to take into account unrealised and, in the opinion of the Reserve Bank, unrealisable interest on the unsatisfactory advances in counting its profits, so that dividends were largely declared on what the Reserve Bank has termed illusory profits). 7. From time to time the Reserve Bank was giving advice, issuing directions, conveying admonitions and holding out threats (such as prohibition of fresh deposits, exclusion from the schedule and refusal of a licence under the relevant provisions of the Reserve Bank Act and the Banking Companies Act) with a view to reformation, but, not so much as a result of fresh transgressions (although, it is said, that there were some) as of the consequences of the old (mainly the accumulation of interest on had advances) the position was steadily deteriorating. On the latest assessment made by the Reserve Bank as on the 31st December, 1959 after discussing each difficult advance with the management of the company, out of a total of about ₹ 529 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddle of 1960, there was run on several of the branches of the company, according to the Reserve Bank owing to the publication of the true balance sheet, and according to the company owing to the appointment of Mr. Sivaraman, although it seems to me that the connection between these events and the run was temporal rather than causal and that the real reason for the run is perhaps elsewhere to seek. However that might be, the total deposits with the company fell by ₹ 123 lakhs between the 24th June and the 8th of August 1960, and, if count is taken of the ₹ 15 lakhs added as interest on the 1st July, and of borrowings (in excess of the normal) of about ₹ 20 lakhs on the security of deposits, the sum of ₹ 158 lakhs, coming very nearly to a sixth of the total deposits, would be a true measure of the run. 10. By Ext. P8 dated 21st July 1960, the latest of its periodical warnings to the company, the Reserve Bank called for the explanation of the company on its inspection report of the 4th July. It gave the company thirty days' time for the purpose and also offered it a year's time to remedy the several defects. However, on the 8th August, before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication enabling an allegedly hostile statute to steer clear of Art. 14, invests the hostility with a measure of reasonableness in the interests of the general public sufficient to attract the shelter of cls. (5) and (6) of Art. 19. 14. Counsel on both sides, Mr. Suryanarayana Iyer for the Reserve Bank, and Mr. Munshi for the company, have argued the case with admirable clarity and thoroughness. I lose count of the number, but, between them, they must have taken me to close on a hundred books, both text books and judicial decisions. Helpful as they have all been for a true understanding of the position, I shall content myself at this stage with extracting a passage each from two judgments of the Supreme Court. The first, a rather long passage from Ram Krishna Dalmia v. Justice Tendolkar, AIR 1958 SC 538 at pages 547 to 549 tells us all that we need to know of the law governing the matter. (11) The principal ground urged in support of the contention as to the invalidity of the Act and/or the notification is founded on Art. 14 of the Constitution. In Budhan Choudhry v. The State of Bihar, 1955-1 SCR 1045:((S) AIR 1955 SC 191) a Constitution Bench of seven Judges of this Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a clear transgression of the constitutional principles; (c) that it must be presumed that the legislature understands and correctly appreciates the need of its own people, that its laws are directed to problems made manifest by experience and that its discriminations are based on adequate grounds; (d) that the Legislature is free to recognise degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest; (e) that in order to sustain the presumption of constitutionality the Court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation; and (f) that while good faith and knowledge of the existing conditions on the part of a Legislature are to be presumed, if there is nothing on the face of the law or the surrounding circumstances brought to the notice of the Court on which the classification may reasonably be regarded as based, the presumption of constitutionality cannot be carried to the extent of always holding that there must be some undisclosed and unknown reasons for subjecting certain ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute may not make any classification of the persons or things for the purpose of applying its provisions but may leave it to the discretion of the Government to select and classify persons or things to whom its provisions are to apply. In determining the question of the validity or otherwise of such a statute the Court will not strike down the law out of hand only because no classification appears on its face or because a discretion is given to the Government to make the selection or classification but will go on to examine and ascertain if the statute has laid down any principle or policy for the guidance of the exercise of discretion by the Government in the matter of the selection or classification. After such scrutiny the Court will strike down the statute if it does not lay down any principle or policy for guiding the exercise of discretion by the Government in the matter of selection or classification, on the ground that the statute provides for the delegation of arbitrary and uncontrolled power to the Government so as to enable it to discriminate between persons or things similarly situate and that, therefore, the discrimination is inherent in the statute itself. In such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of a reasonable classification. If the classification is reasonable and is founded on intelligible differentia and the said differentia have a rational relation to the object sought to be achieved by the statute based on such reasonable classification the validity of the statute cannot be successfully challenged under Art. 14. These propositions have been repeated so many times during the past few years that they now sound almost platitudinous. Thus the enunciation of the principles which flow from the fundamental rights enshrined in Art. 14 now presents no difficulty; it is, however, in the application of the said principles that difficulties often arise. In applying the said principles to the different sets of facts presented by different cases emphasis may shift and the approach may not always be identical; but it is inevitable that the final decision about the vires of any impugned provision must depend upon the decision which the court reaches having regard to the facts and circumstances of each case, the general scheme of the impugned Act and the nature and effect of the provisions the vires of which are under examination. Let us, therefore, first examine the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 35. (3) The Reserve Bank may make an application under this section for the winding up of a banking company: (a) if the banking company-- (i) has failed to comply with the requirements specified in S. 11; or (ii) has by reason of the provisions of S. 22 become disentitled to carry on banking business in India; or (iii) has been prohibited from receiving fresh deposits by an order under clause (a) of sub-section (4) of S. 35 or under Cl. (b) of sub-section (3A) of S. 42 of the Reserve Bank of India Act, 1934; or (iv) having failed to comply with any requirement of this Act other than the requirements laid down in S. 11, has continued such failure or having contravened any provision of this Act has continued such contravention beyond such period or periods as may be specified in that behalf by the Reserve Bank from time to time, after notice in writing of such failure or contravention has been conveyed to the banking company; or (b) if in the opinion of the Reserve Bank-- (i) a compromise or arrangement sanctioned by a Court in respect of the banking company cannot be worked satisfactorily with or without modifications; or (ii) the returns, statements or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly impossible of proof) that would be an entirely different matter. That would make its action bad for mala fides, a ground which, as we have already seen, is not pursued. 18. The second matter on which counsel on both sides are agreed is that, once the Reserve Bank makes an application sub-section (1) of S. 38 makes it obligatory on the court to order winding up The High Court shall order the winding up of this sub-section in avowedly deliberate departure from the, A company may be wound up by the Court of S. 433 of the Companies Act (see the non-obstante clause which excludes the discretion vested in the court by S. 433 and other provisions of the Companies Act) puts this beyond doubt. Indications are not wanting, if they were required--see sub-sections (2) and (3) of S. 38 and sub-section (4) of S. 35, to mention only a few instances--that nowhere in the statute we are now considering has the legislature confused between may and shall . On the contrary it has throughout used the two words in conscious contrast, and the attempt, somewhat belated, made by one of the seeming supporters of this application, to read the shall of S. 38 (1) as may was foredoomed to fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions in the Reserve Bank Act and in the Banking Companies Act, in particular, Section 35(4) of the latter Act, which provide for less drastic action by more judicial methods under circumstances identical with the circumstances envisaged in the impugned provision. Therefore, the Reserve Bank can, according to its own unfettered and ungraded discretion, in other words, wilfully and arbitrarily, subject one institution to the drastic penalty of a winding up while applying to another which might be in a worse case, more lenient provisions like S. 35 (4) of the Banking Companies Act or S. 42 of the Reserve Bank Act. 22. Before considering these objections in detail, I might first survey the context and setting of the statute and explore its purpose and intendment. That a legal person like a company stands on a very different footing from a natural person goes without saying. In a company the affairs of many are conducted by a few, and, what is more important from our point of view, is that the device of a corporate personality and of limited liability enables a company to go bankrupt to the prejudice of its creditors, while the owners of the company, namely, its members, might st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Banking Companies Act by Act 33 of 1959. A bare perusal of the Banking Companies Act--it is hardly necessary to refer to particular sections--will show that it is throughout informed by this purpose, namely, the protection of the interests of the depositors, and by this Act as well as by the Reserve Bank Act, Parliament has placed the Reserve Bank in the position of the one expert, well-informed and impartial authority charged with the duty and responsibility of carrying out this purpose. 23. I shall first consider the charge of comparative wickedness. I should think that a bare perusal of the impugned provision and of the several provisions of the Reserve Bank Act and the Banking Companies Act against which it is maligned, will suffice to show that, while all the provisions are conceived in the interests of the depositors, each is intended for a slightly different situation so that there is, as I have said, graded action according to the degree of evil, a remedy, as it were, to suit the disease, a punishment to fit the crime. And, in the last resort, when things are beyond redress and danger to the depositors imminent, liquidation. 24. What can be done under S. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction a moment longer but is taken to liquidation. The provisions of S. 22 giving the company a locus paenitentiae as also a right of appeal to the Central Government, cannot therefore be a ground for assailing the impugned provision on the score that it affords the company no such benefits. 26. The case of S. 35 (4) is much the same. There the Central Government acts on a report made by the Reserve Bank after an inspection conducted of its own accord or on the direction of the Central Government. If, after considering the report, the Central Government is of opinion that the affairs of the banking company are being conducted to the detriment of the interests of its depositors, it may, after giving the banking company an opportunity to make representations, either prohibit the company from receiving fresh deposits or take the company to liquidation by directing the Reserve Bank to apply under S. 38 whereupon the Reserve Bank would be bound by sub-section (2) of S. 38 to make the application and the court would be bound by sub-section (1) to make a winding up order. But what is to be noticed here is that the sub-section does not contemplate a report by the Reserve Bank to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of S. 35 and the impugned provision do not provide for the same circumstances. The evil in the latter case is greater and more imminent and, naturally, the steps to counter it more drastic and summary. 27. It has been pointed out that the several provisions in S. 38 (3) itself make for differentiation. Those in clause (a) of the sub-section postulate certain objective requirements regarding which the Reserve Bank must satisfy the court before it can get a winding up order whereas those in clause (b) have no such objective requirements and compel the court to act on the subjective satisfaction of the Reserve Bank. It seems to me that both clauses contemplate a state of affairs where the continuance of the banking company cannot be permitted in the interests of its depositors. In the cases tailing under clause (a), if certain circumstances capable of ready proof, such as failure to comply with the requirements specified in S. 11, or the refusal or the cancellation of a licence under S. 22, or a prohibition from receiving fresh deposits, exist, the statute itself draws the presumption that the continuance of the banking company will imperil the interests of its depositors. Cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nging from the prime cause of unsatisfactory conduct of affairs) like a run which, if allowed to continue, would make it impossible for the company to pay all its depositors from its readily realisable assets with the result that, if its total realisable assets prove insufficient to meet its liabilities, its less favoured depositors will have to go with nothing. The complaint made against the impugned provision is that it vests in an authority like the Reserve Bank, doubtless an impartial and expert body, but, nevertheless, not infallible--the Reserve Bank, I might say, lays no claim to infallibility and probably counts this very case as one of its failures--with the power of taking a running company to liquidation in the exercise of its own discretion without any of the safeguards inherent in the judicial process. But once the position envisaged by the impugned provision has been reached, once a state of affairs has come about whereunder a company cannot be allowed to function any longer, it seems to me clear that the judicial process with its opportunity to show cause, its review by higher tribunals, its attendant stays and the loss of time that all this involves would be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery bringing of the application would be its death-knell and judicial review would then partake of the nature of a post-mortem examination. I do not suppose there would be any point in giving the company the posthumous satisfaction of knowing whether it was really necessary to destroy it to keep it out of mischief, whether its illness would, in any case, have proved fatal or could have been cured, whether, as Mr. Munshi put it, what should have been used on it was the surgeon's knife rather than the guillotine. Nor are these matters in which the mourners or the general public would be interested, and the law cannot be blamed if it does not provide for such a profitless investigation. Even if an application brought by the Reserve Bank were to be dismissed by the, court, the law enabling this, the company could live but a moment longer-- some creditor, or the company itself, would have to seek its liquidation--and in this brief moment, irreparable harm may be done. If some machinery had to be devised for ascertaining whether a banking company had reached a stage where its further continuance would be perilous and some authority empowered to take it to quick liquidation I sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not lose legal title to its property (since, unlike in the case of bankruptcy there is no vesting in a receiver) the company loses all beneficial interest therein since the liquidator has to hold the property in trust for its creditors and contributories. Therefore, it cannot be doubted that such an order does affect the fundamental rights in sub-clauses (f) and (g) of clause (1) of Article 19 of the Constitution. The enquiry then is whether the impugned provision, which enables the Reserve Bank to take a banking company to liquidation, is saved by clauses 5 and 6 of the Article. From what I have already said in discussing the charge of discrimination, it must follow that the restriction in the impugned provision passes the test of reasonableness in the interests of the general public imposed by those clauses. As I said at the beginning, it is agreed on all hands that a banking company whose continuance is prejudicial to the interests of the depositors must be stopped from functioning. That is an end dictated by the interests of the general public, and a law which provides for that cannot be assailed on the ground of the fundamental rights in Article 19 (1) (f) and (g). The q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to form associations and unions, and it could not have been their intention that the corporate bodies so formed by citizens, should be denied the rights guaranteed to the individual citizens, in particular that the agencies through which a substantial portion of their business is conducted by the citizens of this country and a considerable portion of their property held, should not have the protection of clauses (f) and (g). That would mean a denial of the fundamental rights to property and occupation not merely to companies but to all corporate bodies even though they may be Indian in every sense of the term, their members Indian, directors Indian, and capital Indian, a denial which virtually amounts to a denial of those fundamental rights to the citizens who (though, of course, different persons) really constitute those bodies. Such an intention of placing a purely Indian company beyond the pale of protection, is something with which I find it difficult to credit our founding fathers; and the fact that American courts have held that a corporation is not a citizen within the meaning of their Constitution because in 1787, when that Constitution was adopted, the word c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the fiction of birth at the place of incorporation on the analogy of the domicile of origin in the case of natural persons. In the Cesena case Huddleston, B. said, taking the analogy between a natural and artificial person, in the case of corporation you can say that the place of its registration is the place of its birth and much the same thing was said by Lord Cave, L.C. and Younger, L.J., in Bradbury v. English Sewing Cotton Co., Ltd., (1923) AC 744 and by Sargant, L.J., in Todd v. Egyptian Delta Land and Investment Co. Ltd., (1928) 1 K.B. 152. And, although the last mentioned decision was reversed by the House of Lords in (1929) Appeal Cases 1, Lord Sumner in his speech on that occasion accepted the analogy when he said that the incorporation prescribed by the English Companies (Consolidation) Act, 1908 at the most does no more than bring the embryo company to birth . Salmond on Jurisprudence at page 371 of the 11th Edition speaks of the birth and death of legal persons, and I think it can be regarded as well settled that a company is capable of having a place of birth, a residence, an ordinary residence if you will, and a domicile, that its place of birth is the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what is undoubtedly its primary object, namely, human citizens, is capable of such application. 38. In AIR 1951 SC 41 Mukherjea, J., (as he then was) observed thus at page 52 of the report: The fundamental rights guaranteed by the Constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons. As I have already shown there is nothing in the language of Art. 19(1) read with Art. 5 to indicate that legal persons are excluded from the scope of that article; on the contrary the nature of the rights conferred by the Article, by clauses (f) and (g) in particular, are such that they should in reason be available not merely to individual citizens but also to corporate bodies. 39. A number of cases decided by the Supreme Court have proceeded on the assumption that a company can be eligible for the rights conferred by Art. 19. Bijay Cotton Mills Ltd. v. State of Ajmer, 1955-1 SCR 752: ((S) AIR 1955 SC 33) Bhatnagars and Co. Ltd. v. Union of India, (S): AIR 1957 SC 478, Bombay Dyeing and Manufacturing Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for a moment suggesting that Art. 19 uses the word, citizen in any sense different from its sense in Part II or entry 17 in list I but if there is any residue of the common law left it might be well to remember that since 1860 when Lord Westbury delivered his classic judgment in Udny v. Udny, (1869) 1 SC and Div 441 the common law view has been that citizenship is governed by domicile which as we have seen is determined in the case of a company by the place of its registration. 42. It is also said that, although a legal person like a corporation can have some other statute struck down on the score that it is violative of its fundamental rights, it can scarcely be heard to ask that the very statute which gave it life and made it a person should be so struck down. A company is a person only because of the law that makes it one, and if that law chooses to limit its personality, then the creature of that very law cannot look to Art. 19 for enlarging the rights which the law that brought it into existence thought fit to restrict. This argument presupposes that it is to the Banking Companies Act that banking companies owe their existence, but, assuming that the Banking Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in fact done honestly, whether it is done negligently or not would be the proper definition to adopt. In fact, before the close of his argument, Mr. Munshi conceded that, in view of the decisions in Puranlal Lakhanpal v. Union of India, AIR 1958 SC 163 and State of Bombay v. K.P. Krishnan, (1960) 2 Lab LJ 592: (AIR 1960 SC 1223) he was not in a position to press his case of mala fides. 45. In view of the wording of the impugned provision it was, as I have already said, open to the Reserve Bank not to disclose the materials on which it arrived at the opinion that the continuance of the company was prejudicial to the interests of its depositors. It has however chosen to place all the materials before the court, and, in view of the charge of mala fides at one stage levelled against it, I think it only proper to say that it is clear from the several documents filed in the case and the several particulars furnished by the company itself that, ever since 1952, the Reserve Bank was taking grave defects in its working to the notice of the company and was giving it repeated opportunities either to explain away the defects if it could, or remedy them. Neither was done by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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