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1960 Supreme(Ker) 303
HIGH COURT OF KERALA
P.T.RAMAN NAYAR, J.
Reserve Bank of India
Versus
Palai Central Bank Ltd.
B.C.P. No. 11 of 1960
Decided On : 05-12-1960
K.V. Surianarayana Iyer and C.M. Devan, for Petitioners; M.S. Kurian and M.M. Abdulkader, for Creditors supporting petition; K.P. Abraham, V.K.K. Menon, K. Kuttikrishna Menon, K. Velayudhan Nair and P.K. Krishnankutty Menon, for Creditors opposing petition; Cherian Manjooran, K.S. Sebastian and M.M. Thomas, for other Creditors; K.M. Munshi, Kishore K. Koticha, Panampally Govinda Menon; V.O. Markose, P. Raman Menon and P. Narendra Menon, for the Company.
The impugned provision of Section 38(3)(b)(iii) of the Banking Companies Act, 1949, is not violative of Articles 14 and 19 of the Constitution of India as it is not arbitrary or discriminatory, provides sufficient guidance to the RBI in the exercise of its discretion, is aimed at protecting the interests of the depositors, and is saved by clauses (5) and (6) of Article 19 of the Constitution as a reasonable restriction in the interests of the general public.
Headnote:
The impugned provision of the Banking Companies Act, 1949, which empowers the Reserve Bank of India (RBI) to apply for the winding up of a banking company if it is of the opinion that the continuance of the banking company is prejudicial to the interests of its depositors, is not violative of Articles 14 and 19 of the Constitution of India. The provision is not arbitrary or discriminatory as it provides sufficient guidance to the RBI in the exercise of its discretion and is aimed at protecting the interests of the depositors. The provision is also saved by clauses (5) and (6) of Article 19 of the Constitution as it is a reasonable restriction in the interests of the general public.
Fact of the Case:
The Palai Central Bank Ltd. (the company) was incorporated in 1927 as a public company limited by shares. By 1960, it had become the foremost banking company in the state and the 15th in the whole of India. However, there were several irregularities and unsatisfactory advances in the company's operations, which were brought to the notice of the Reserve Bank of India (RBI). Despite repeated warnings and directions from the RBI, the company failed to rectify the situation. In 1960, there was a run on several of the company's branches, leading to a decline in deposits. The RBI, being of the opinion that the continuance of the company was prejudicial to the interests of its depositors, applied for its winding up under Section 38(3)(b)(iii) of the Banking Companies Act, 1949.
Finding of the Court:
The court held that the impugned provision of Section 38(3)(b)(iii) of the Banking Companies Act, 1949, is not violative of Articles 14 and 19 of the Constitution of India. The court observed that the provision is not arbitrary or discriminatory as it provides sufficient guidance to the RBI in the exercise of its discretion and is aimed at protecting the interests of the depositors. The court also held that the provision is saved by clauses (5) and (6) of Article 19 of the Constitution as it is a reasonable restriction in the interests of the general public.
Issues: 1. Whether the impugned provision of Section 38(3)(b)(iii) of the Banking Companies Act, 1949, is violative of Articles 14 and 19 of the Constitution of India? 2. Whether the provision is arbitrary or discriminatory? 3. Whether the provision is saved by clauses (5) and (6) of Article 19 of the Constitution?
Ratio Decidendi: 1. The court held that the impugned provision of Section 38(3)(b)(iii) of the Banking Companies Act, 1949, is not violative of Articles 14 and 19 of the Constitution of India. 2. The court observed that the provision is not arbitrary or discriminatory as it provides sufficient guidance to the RBI in the exercise of its discretion and is aimed at protecting the interests of the depositors. 3. The court also held that the provision is saved by clauses (5) and (6) of Article 19 of the Constitution as it is a reasonable restriction in the interests of the general public.
Final Decision: The court allowed the application for winding up of the Palai Central Bank Ltd. and ordered that the Reserve Bank of India (RBI) will get its costs from those who have appeared to oppose this application, in the last resort from the assets of the company.
2. The company and some of its creditors 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., and it was only in May 1936 that it assumed its present name). The registered office of the company was at Palai. Its nominal capital was Rs. 40 lakhs, and, of this, roughly Rs. 25 lakhs has been paid up.
5. From small beginnings the company steadily grew till, it is said, judged by the volume of the deposits it holds, (which is a measure of confidence which the public reposes in it) it has become the foremost banking company in this State and the 15th in the whole of India. Its deposits which in 1928 amounted only to about Rs. 77000/- stood in July 1960 at over Rs. 984 lakhs. It came on the second schedule to the Reserve Bank Act in March 1937, and it has now 25 branches, six of them outside this State in places so far a field as Mangalore. Madras and Delhi.
6. But, there is another side to the picture. For, it would appear that, all this progress notwithstanding, the business of the company was not being conducted on sound lines. With the extension of the Reserve Bank Act to Part B States in 1951, the Reserve Bank assumed supervision over this company as over other banking companies in the country. It undertook an inspection of the company some time in the second half of 1951 in relation to its position as on 30-6-1951 and that inspection revealed, in the words of the Reserve Bank, a very disquieting situation.
There were three more inspections as on the 31st December, 1955, the 28th February 1958, and the 31st December 1959, and there were also scrutinies of the companys affairs and meetings of the directors of the company with the officers of the Reserve Bank. According to the Reserve Bank, the position, far from improving, was steadily growing worse, the most unsatisfactory features, giving rise to considerable misgiving being
(1) that a substantial portion of the companys advances were unsecured and, either irrecoverable or, in banking parlance, "sticky" which, gather, is a short and expressive way of describing an advance which, though perhaps not irrecoverable, has adhered resolutely to its borrower long beyond its appointed term and manifests no signs of disengagement;
(2) that a considerable portion of these unsatisfactory advances were to the directors of the comp
