Judgment

HIDAYATULLAH, J. : (Majority view: B. P. Sinha C. J., Hidayatullah and Mudholkar JJ.) On August 8, 1960, the Reserve Bank of India made an application in the High Court of Kerala under S. 38 of the Banking Companies Act, 1949 (10 of 1949) read with the Indian Companies Act, 1956 (1 of 1956), for the winding up of the Palai Central Bank, Ltd. (having its registered office at Palai in the State of Kerla), for the appointment of the Official Liquidator of the High Court as the Liquidator with all the powers under the said Acts and for appointment of the Official Liquidator as the Provisional Liquidator during the pendency of the application. This application was allowed on December 5, 1960, and the present appeal with special leave, has been filed against that order.

2. The Palai Central Bank, Ltd. (herein referred to as the Palai Bank or the Bank) was incorporated in January, 1927 under the Travancore Companies Regulations. Till 1936, it was known as The Central Bank, Ltd.", when the name was changed. In March 1937, the Palai Bank was included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1984). According to the balance sheet of the Palai Bank for the year ending December 31, 1959, the paid-up capital was Rs. 24,89,639.53. The nominal capital of the Palai Bank was Rs. 40 lakhs divided into 1,60,000 equity shares of Rs. 25/. each. The Palai Bank seems to have greatly extended its business as time passed. In 1928, the deposits were a mere Rs. 77,000 but by 1960, they had become almost Rs. 10 crores. It had, during the years become the foremost Bank in Kerala State, and its place was l5th in the whole of India. It had 25 branches in and outside the State of Kerala.

3. When Kerala became a Part B State, the Reserve Bank of India Act was extended to that area; and the Palai Bank came under the supervision of the Reserve Bank, which, in exercise of the powers vested in it by the Banking Companies Act as well as the Reserve Bank of India Act, periodically inspected the Palai Bank. These inspections were made in 1951, July 1953, February-March 1956, March 1958 and January-February, 1960. Every time, the Reserve Bank found irregularities which were pointed out to the Bank, and special directions were issued. The main defects were that the advances made by the Palai Bank were not sound, that the bulk of the advances were either irrecoverable or "sticky" (which means, not easily recoverable), that the income taken into account represented to a great extent unrealised interest on these advances, that large advances were made to the Directors, their relations and Companies, in which they were interested, on no security or inadequate security, and that the Bank was declaring dividends on the basis of profits which were computed without making provision for bad and doubtful debts and by using up the reserves at an alarming rate,. while the deposits were going down. In the beginning, the Reserve Bank contented itself by prohibiting further advances to Directors, their relations and individuals, firms or companies, in which the Directors were interested, advising the Palai Bank to reduce clean advances and to regularise others, warning the Bank. that the Reserve Bank considered that the business of the Bank was being conducted in a manner detrimental to the interests of its depositors, and that if the directions were not carried out, action under the first proviso to sub-s. (2) of S. 22 of the Banking Companies Act would be taken by issuing a notice that a licence could not be granted to the Bank.

4. From the correspondence which, has been filed in this case, it does appear that the Reserve Bank was not satisfied at each following inspection that the position had improved; rather it apprehended that it had worsened, and that the directions had not been carried out. This was denied on behalf of the Bank, but nothing depends upon who is right and who is wrong, because no charge of mala fide conduct is now made again