In Re: Bank of Commerce Ltd. v. . — 1949 DIGILAW 43 (CAL)

JUDGMENT Sinha, J. - This is an application under sec. 277N of the Indian Companies Act, 1913, for an order staying the commencement or continuance of all actions and proceedings against the company. The Company was incorporated in the year 1929 for carrying on banking business. The registered office of the company is situate at 12, Netaji Subhas Road, Calcutta. 2. The authorised capital of the company is rupees twenty lakhs, divided into one lakh 3 per cent. redeemable preference shares of Rs. 10 each and one lakh ordinary shares of rupees ten each. The subscribed capital as on December 31, 1946, is Rs. 11,78,150 and the paid up capital is Rs. 1,0,56,436. 3. The business of the company steadily improved since it commenced business in the year 1930. The company paid dividend at 6-3/4 per cent. on ordinary shares and 3 per cent. on preference shares from 1942 onwards. 4. The company has four branches in West Bengal and five in Pakistan. 5. On May 12, 1941, the company took over the assets and liabilities of K.L. Bank, Ltd., in terms of a scheme of amalgamation sanctioned by this Court. The K.L. Bank, Ltd., had its registered office at Khulna, and a substantial portion of its investments consisted of zemindary and other immovable properties in the territories now included in Eastern Pakistan. 6. From the year 1934 the company was a sub-member of the Calcutta Clearing Banks Association. In 1945 the company became its full member. On January 26, 1944, the company became a scheduled bank under the Reserve Bank Act, 1934. At that time the assets of the Bank were scrutinised by one Mr. K.P.R. Menon, an Inspecting Officer of the Reserve Bank of India. The inspection was conducted on the basis of the figures contained in the balance sheets of the company for the years 1942-43. 7. In March, 1947, the affairs of the company were investigated into by an Inspector of the Reserve Bank of India. Acting on the report submitted by the Inspector, the Central Government on April 20, 1948, issued a notification excluding the name of the company from the Second Schedule of the Reserve Bank of India Act, 1934. No notice was given to the company and no reason was assigned for such exclusion. Acting on the report submitted by the Inspector, the Central Government on April 20, 1948, issued a notification excluding the name of the company from the Second Schedule of the Reserve Bank of India Act, 1934. No notice was given to the company and no reason was assigned for such exclusion. The Central Government, however, did not stop the company from accepting fresh deposits or carrying on the normal business of the company. It is suggested that the exclusion of the company from the Second Schedule of the Reserve Bank of India Act is based on a depreciation in value of the properties included in Eastern Pakistan, resulting in a loss of capital and reserve to an extent which, according to the Central Government, would not entitle the company to continue as a scheduled bank under the said Act. There is, however, no evidence as to the reasons why the Central Government excluded the company from the Second Schedule to the Reserve Bank of India Act. It may, however, be presumed that the Central Government did not consider the continuance of the company to be prejudicial to public interest inasmuch as no order was made prohibiting the company from receiving fresh deposits and carrying on normal banking business, which they had power to do under the Banking Companies (Inspection) Ordinance, 1946. 8. The said notification of the Central Government had an adverse effect on the Clearing House, which circulated the said fact among its members. Through the members, the said fact got wide publicity amongst the members of the public. The Government Departments, including the Rationing Authorities, also refused to accept the pay orders issued by the bank, which they had been doing prior to the issue of the said notification. 9. As the result of the said notification and the circular issued by the Clearing House, there was a heavy run on the head office and the several branches in Calcutta with the result that heavy payments had to be made amounting to about 24 lakhs of rupees. 10. The company, therefore, stopped making further payments and made an application to the Registrar, Joint Stock Companies, West Bengal, for a report on the financial position of the company in order to be able to apply to Court under sec. 277N of the Indian Companies Act. 11. 10. The company, therefore, stopped making further payments and made an application to the Registrar, Joint Stock Companies, West Bengal, for a report on the financial position of the company in order to be able to apply to Court under sec. 277N of the Indian Companies Act. 11. On May 10, 1948, the present application was made and directions were given for advertisements. The Court also ordered an interim moratorium for a period of four months, subject to certain conditions, namely, upon the directors undertaking (a) not to sell or deal in any way with the shares of the said company held by them, and (b) not to withdraw any money out of the amounts, fixed or current, or to take any advance against their accounts, and upon the company's undertaking not to make any payment to any depositor during the interim period exceeding 25 per cent. of the amount lying to his credit in his account or Rs. 5,000 whichever was greater, provided that in case of depositors whose dues did not exceed Rs. 100 the amount could be paid in full. The Registrar of Joint Stock Companies was also authorised to appoint an auditor to investigate and report in terms of sec, 277N (ii') of the. Indian Companies Act, and the application was made returnable on September 13, 1948. 12. After the said order had been made by this Court, a similar application under sec. 277N was made to the Dacca High Court, and a similar order was made by that Court. 13. On May 17, 1948. the Registrar appointed Mr. S.N. Mukherjee, the seniormost Incorporated Accountant practicing in Bengal and one of the senior Registered Accountants and Auditors of this Province, to conduct an investigation into the affairs of the company and to examine its books of account and documents in respect of the head office and of the four branches situate in West Bengal. 14. Similarly, the Registrar of Joint Stock Companies, East Bengal, appointed Mr. S.K. Mukherjee, R.A., and a Registered Accountant of the Commercial Academy. Dacca, to conduct an investigation into the affairs of the branches of the company situate in Eastern Pakistan up to May 8, 1948. 15. [His Lordship then proceeded to consider the intermediate proceedings before the matter came up for final disposal and proceeded.] 16. S.K. Mukherjee, R.A., and a Registered Accountant of the Commercial Academy. Dacca, to conduct an investigation into the affairs of the branches of the company situate in Eastern Pakistan up to May 8, 1948. 15. [His Lordship then proceeded to consider the intermediate proceedings before the matter came up for final disposal and proceeded.] 16. The report of the Registrar, West Bengal, on the over-all position of the company has now been placed before me. His report is that setting off the excess in the West Bengal branches against the deficit in the East Bengal branches there was an overall deficit of Rs. 3.17,842-5-6. He also said that if the valuation made by Messrs. William Temple and Bartholomew, was accepted the deficit in East Bengal branches would be reduced to Rs. 96,723 in respect of the East Bengal branches only and there would be a net over-all excess of Rs. 24,459-10-6, without an actual valuation of the West Bengal properties by an expert assessor. According to the Registrar, it the immovable properties of the company in West Bengal were valued by an expert assessor the valuation of those properties would have gone up to a great extent resulting in a much greater excess over the figures given in his report. 17. On December 9, 1948, the Registrar, East Bengal, submitted a report on the over-all position of the company to the Dacca High Court, a copy whereof has been placed before me. In the said report the Registrar stated that if the immovable properties of the Bank can be sold at the valuation made by the expert valuer Messrs. Williams Temple and Bartholomew, there would be a net over-all excess over liabilities of Rs. 2,09,975. He recommended a moratorium for two years from the date of the order. 18. The advertisements directed have been duly published and the directions of, Court have been duly complied with. The application has now come on for final hearing before me. 19. The opposition to the application has come from certain creditors, who allege that between themselves they are creditors to the extent of Rs. 28,850 in current account in the Kidderpore Branch of the company. A joint affidavit affirmed by two creditors on November 25, 1948, has been placed before me. 19. The opposition to the application has come from certain creditors, who allege that between themselves they are creditors to the extent of Rs. 28,850 in current account in the Kidderpore Branch of the company. A joint affidavit affirmed by two creditors on November 25, 1948, has been placed before me. They submit that the difficulties of the Bank are not temporary and that serious charges against the management have to be investigated and it would not be in the interest of public policy and commercial morality to allow the company to function any longer. 20. [His Lordship then considered the grounds of the opposition and the answers thereto given by the company and concluded as follows:] 21. With regard to the affidavits filed on behalf of the opposing creditors, it is objected that they have not been properly verified. Even so, I think it necessary to investigate into the matters referred to by (hem in their affidavits. Under sec. 277 N of the Indian Companies Act the Court has to call for a report from the Registrar, Joint Stock Companies, who in his turn appoints an auditor to investigate into the affairs of the company. The auditor has investigated and has come to certain conclusions. In the absence of definite evidence that the conclusion of the auditor is wrong, I think I ought to accept it as correct. The report of the auditor was submitted to the Registrar, who himself has considered the report and has found it to be satisfactory. In those circumstances mere allegations against particular directors that certain loans and over-drafts are not realisable do not carry much weight. The auditor has Himself mentioned that out of a total amount of 34 lakhs lent out on loans and 17 lakhs paid out in overdrafts, a sum of 25 lakhs has been lent to companies, of which a director of the bank is a director. There is no prohibition against a banking company lending money to concerns, of which a director of the bank is also a director. There are certain prohibitions under sec. 86 (D) of the Indian Companies Act, 1913, but these prohibitions do not apply to banking companies. 22. The real point to consider, is whether these loans and overdrafts are amply secured, and whether, if the bank is given sufficient time, it will be able to realise its investments and meet its creditors. There are certain prohibitions under sec. 86 (D) of the Indian Companies Act, 1913, but these prohibitions do not apply to banking companies. 22. The real point to consider, is whether these loans and overdrafts are amply secured, and whether, if the bank is given sufficient time, it will be able to realise its investments and meet its creditors. The auditor has made a reserve of over two lakhs of rupees for the contingency that some loans and overdrafts may not be realised and for other losses which may possibly be incurred. It is complained that he has made no reserve in respect of loans and overdrafts from the Central office of the bank, while he has done so in respect of the Head Office loans and overdrafts. I have to assume that the auditors considered that a deduction ought to be made in respect of the Head Office loans and overdrafts and not in respect or the Central office loans and overdrafts. It is true that the auditor has made some observations in relation to the loans and overdrafts of the Central Office, but he has treated those loans to be fully secured. In the absence of definite materials to show that the auditor was wrong in not making the deductions from the Central office loans and overdrafts, I must accept the estimate made by the auditor and accepted by the Registrar. 23. It does not seem to me that, apart from vague allegations and indefinite suggestions, there is any material before me on which I can act and overrule the estimate made by the auditor and accepted by the Registrar. I think the allegations made have been sufficiently answered. Certain additional allegations were made in an affidavit affirmed on December 8, 1948. I could not take notice of those allegations, nor could I verify the truth of those allegations. Many allegations made have been proved to be reckless and untrue. 24. The debt due to the appearing creditors is of the total value of Rs. 28,000 and odd. The vast majority of the creditors apparently do not oppose the moratorium. These appearing creditors are said to have withdrawn their 25 per cent. payable under the order of May 19, 1948. 24. The debt due to the appearing creditors is of the total value of Rs. 28,000 and odd. The vast majority of the creditors apparently do not oppose the moratorium. These appearing creditors are said to have withdrawn their 25 per cent. payable under the order of May 19, 1948. New accounts have been opened with the bank since the date of the moratorium which shows that the credit and reputation of the Bank, though damaged, have not been destroyed. 25. The reports of the Registrars of the two Dominions proceed on the basis of the book valuation of the immovable properties. As the Registrar, West Bengal, has said, the immovable properties have greatly appreciated in value, and if the present market value of the properties is taken into consideration there will be a larger surplus than the surplus mentioned in the Registrar's report. The company produced before me original documents in order to prove the truth of the statements made in their affidavits. I could not go through all the documents, but I have checked some of them, and the truth of the statements made in the affidavits is borne out by those documents. 26. On the affidavits I am unable to say that the auditors' reports, or the Registrars' reports are incorrect, or that they should not be acted upon. It has also not been proved to my satisfaction that it is necessary to investigate into the management of the company in the interest of public-policy or commercial morality. There may be one or two or more bad investments but they seem to be due more to error of judgment than to any moral turpitude on the part of the directors and the management. 27. Further, even assuming that some of the loans would not be realised and there may be a small deficit, the situation can be met by reducing the capital of the company, which would affect the share-holders and not the creditors. There is no risk of creditors remaining unpaid if the Bank is allowed to go on. 28. The other alternative is the framing of a scheme or a winding-up. I am convinced that neither a scheme under sec. 153 nor a winding-up order would be in the interest of the creditors and share-holders. There is no risk of creditors remaining unpaid if the Bank is allowed to go on. 28. The other alternative is the framing of a scheme or a winding-up. I am convinced that neither a scheme under sec. 153 nor a winding-up order would be in the interest of the creditors and share-holders. The company has still a reputation and if it is allowed reasonable protection it may be hoped that the Bank will be able to carry on banking business in the normal way. 29. Under sec. 277N of the Indian Companies Act I can give relief only if the bank is in a temporary difficulty. If the bank is not solvent or if the bank is in chronic difficulty in meeting its creditors, I cannot help the bank on an application under sec. 277N of the Indian Companies Act. The section provides for a report from the Registrar, apparently on the ground that the Court will make up its mind as to whether an order under sec. 277N should be made or not, on the materials contained in the report, coupled with other materials which may be placed before it by supporting or opposing creditors. The Registrars of West Bengal and East Bengal consider that it would be in the interest of the creditors and share-holders if protection is granted to the bank under sec. 277N of the Indian Companies Act. They think that the difficulty is temporary and if time is granted to the bank it would be able to meet its creditors and go on doing banking business in the normal way. The davits filed by the appearing creditors do not furnish sufficient materials on which I can overrule the conclusions arrived at by the Registrars and Auditors, who are experts in the line. 30. The Registrars of West and East Bengal are at variance as to the period for which moratorium should be granted. The Registrar, West Bengal, considers that three years' time should be granted to the bank. The Registrar, East Bengal, considers that a period of two years should be granted. I do not think it would be right to grant a very long period of moratorium to a banking company. If the position of the bank is sound, it ought to be able to collect its assets locked up in investments and loans in a short time. I do not think it would be right to grant a very long period of moratorium to a banking company. If the position of the bank is sound, it ought to be able to collect its assets locked up in investments and loans in a short time. It should also be remembered that the bank has been enjoying interim protection from May 10, 1948. Considering all the facts, I think one year's moratorium ought to be enough for the bank. 31. I, therefore, make an order for stay of the commencement and or continuation of all actions and proceedings against the bank for a period of one year from the date of the order. 32. The company will submit a quarterly report to the Court relating to the affairs of the company and supply a copy thereof to the Attorney for the opposing creditors. 33. The company shall retain and pay its own costs of and incidental to these proceedings as between attorney and client, if necessary, to be taxed by the Taxing Officer of this Court. The company shall pay to the opposing creditors one set of costs to be taxed by the said Taxing Officer as between party and party.