Oriental Bank of Commerce Ltd. v. Shri Harcharan Das Loomba

Judgment

SUPREME GOUR T REPORTS 231 ORIENTAL BANK OF COMMERCE LTD. SHRI HARCHARAN DAS LOOMBA (P. B. GAJENDRAGADKAR, M. HIDAYATULLAH and J. C. SHAH JJ.) Displaced person-Shares in bank-Statutory right given by Act to get partly paid up shares converted into fully paid-up shares-Order of Company Judge allowing reduction of capital of bank-Whether doctrine of Res judicata 'applicable-" No cause for sueh refusal", Meaning of-Displaoed Persons (Debt8 Adjustment) Act, 1951 (LXX of 1951), ss. 3, 19 (2), (4), (5). The appellant bank ~uffered losses due to the partition of India. Its scheme for reduction of capital was approved of by the Company Judge subject to the condition that the Bank should accept without any pay1nent surrender of ordinary shares on which part payment was made from any displaced person entitled to relief under s. 19 of the Displaced Persons (Debts Adjustn1ent) Art, so as to relieve such person from liability to pay the calls made and to be made.

A period of two weeks was given to displaced person!! to exercise the option. •The respondent was a share-holder of the appellant but he did not avail himself of the option given by the Company Judge. Later on, he asked the appellant bank under s. 19 (2) of the Displaced Persons (Debts Adjustment) Act to convert his 500 ordinMy shares into 250 fully paid-up shares. On the bank refusing to comply with the requisition, the respondent filed a petition under s. 19(4) of the Act for an order dire:ting the bank to convert his 500 partly paid-up shares into 250 fully paid-up shares. The Tribunal granted the relief prayed for to the respondent, It also held that losses suffered by the bank and doubtful debts had been accumulating for a long time and the bank resorted to the scheme of capital reduction only after the passing of the Act of 1951 with a view to deprive the displaced share-holders of the benefit under the provisions of s. 19 of the Act.

This view of the Tribunal was affirmed by a single judge and a Division Bench of the Punjab High Court. The bank appealed to this Court with special leave. Held, that the order directing the bank to convert the shares of the respondent into fully paid-up shares must be coi;firmed. No goo<! cause had been shown by the bank for March 5 0..'-16ok •f c ........ "L''· H-'*''" tlQ U...I• SW./. • ...... •'4 • ...__ declining to convert th~ partly paid-up shares into fully paid· up shares. The expression "no cause for such r~~f11sal" \Vithin the mca_ning of cl. ( 4) must mean "no good rause for ref usaI. ". He/4, also that the order of the companyJudg-c sanction· ing reduction of capital was not con('lu"Sive and hin<ling and could not deprive a displaced person of the right i;ranted by Act. The order of the Company )u•1ge sanctioning reduction of capital was subject lo the pr.wision of s. 19 of the Act. A displaced person was not obliged to avail himself of the option.

A displaced person not desiring to avail hi1nself of the option given under the order of the Company Judge could apply under s. 19 (4). The order of the Company Judge was valid and binding subject to any order which the Tribunal might make in respect of any individual share-holder who applied under s. 19 (1). CIVIL APPELLATE JuRTSDICTION : Civil Appeal No. 300of1961. Appeal by special leave from the judgment and order dated :"lovember 13, 1957, of the Punjab High Court at Chandigarh, in Letters Patent Appeal No. 19-D of 1955. K. L. Gosain, 0. P. Jfrilhotra and 8. X. Anand, for the appellant. Bnkshi jfehtab Singh Smvhney, ll. K. /,. Sablu1rwa.l and I. S. Sawhney, for the respondent. 1963. l\.farch 5. The Judgment of the Court was delivered by SRAll J.-Thc Oriental Bank of Commerce Ltd. was incorporated in February 1943 under the Indian Companies Act, I!Jl 3. The Bank had its registered office at Delhi and it opened branches in Lahore and in other towns which arc now in Pakistan.

The capital of the Bank was divided into 5,97,584 ordinary shares of Rs. 10/- each, and 24,200 B class ordinary shares of Re. 1/- each. The paidup capital of the Bank as on December HJ(6 was approximately Rs. 23 lakhs: On account of disturbances which followed in the wake of the setting up of the Dominions of India and Pakistan, the Bank lost substantial part of its assets in the territory now called West Pakistan and was unable to recall its advances. By 1950 the accumulated losses ofthe Bank amounted to Rs. 10,57,850/-. In December 1950, the Directors of the Bank made a call of Rs. 2/8- per share on its ordinary shareholders. They also resolved to reduce the capital of the Bank and for that purpose an extra-ordinary General Meeting of the Bank was convened on November 29, 1951 and ,special resolutions were passed reducing the issued and subscribed capital of the Bank to Rs. 4, 56,137 ordinary shares of Rs. 5/- each and 24,200 B-class ordinary shares of annas 8 each.

This reduction was to be effected by cancelling the paid-up capital to the extent of Rs. 5/- on each ordinary share and annas 8 on each 'B' class ordinary share. Before the special resolution was passed the Parliament enacted the Displaced Persons (Debts Adjustment) Act, 70 of 1951. That Act defines 'displaced person' by s. 2 (10) as meaning "any person who on account of the setting up of the Dominions of India and Pakistan, or on account of civil disturbances or the fear of such disturbances in aIJy area now forming part of West Pakistan, has, after the first day of March, 1947, left, or been displaced from, his place of residence in such area and who has been subsequently residing in India, and includes any person who is resident in any place now forming part of India and who for that reason is unable or has been rendered unable to manage, supervise or control' any imQJ.ovable property belonging to him in West Pakistan, x x x x x."

Diverse provisions were made by the Act to ameliorate the condition of displaced persons. The Act provided for adjustment of debts, secured and unsecured, relief from Orr'111tal Bank. of Commirce Lti. Harcharan Das Loomb11 IYOJ 0 i1nl•I Bank of C"'1fmtrtt ltd. llarchatan Da.s l.oomha Sl,.Jo J, liability to pay calls on shares in companies and enacted provision for revision of decrees and settlements, apportionment of joint debts, ccssor of accrual of interest, exemption from arrest and attachment of property, scaling down of debts and extention of the period of limitation in certain classes of actions. Power to set up Tribunals having authority to exercise jurisdiction under the Act was also conferred by the State Government.

Pursuant to the resolution passed by the Bank at an extraordinary General Meeting on November 2!l, l!J51 an application was submitted before the District Judge, Delhi exercising powers of the Company .Judge for an order under ss. ;);3,fi6 and 57 of the Indian Companies Act, I!H:l for reduction of the share capital of the Bank. This application was opposed by two shareholders who contended that the Bank was merely trying to circumvent the provisions of the Displaced Persons (Debts Adjustment) Act, 70 of J 951 by resolving to reduce the capital. At the hearing of the application counsel for the Bank pro· posed that the Bank would accept, without any payment, surrender of ordinary shares· of Rs. JO/- each, on which Rs. 5/- had been paid up, by any person entitled lo relief under s. I!) of the Displacecl Persons (Dd>ts Adjustment) Act, so as to relieve him from further liability to pay the call of Rs. 2/8/- per share made by the Bank and all future calls.

This condition was accepted by the shareholders who appeared at the hearing. The Company Judge allowed the petition and confirmed the rrsolution reaucing the share capital on the terms and conditions relating to surrender accepted by the Bank and directed that notict be given under s. 61 of the Indian Companies Act, offering to all persons intending to avail themselves of the option of surrender an opportunity to apply in that behalf to the Bank within two weeks of the publication of the notice. SUPREWE COURT REPORTS The respondent Harcharan Das Loomba was a holder, since 1944, of 500 ordinary shares of the face value of Rs. 10/- each on which Rs. 5/- were paid. .The respondent was a displaced person within the meaning of Act 70 "of 1951 but he did not appear at the hearing of the petition for reduction of capital, nor did he avail himself of the option to surrender the shares given under the order of the Company Judge. On January 7, 1954 he applied to the Bank under s.

19 (2) of Act 70 of 1951 to convert his holding of !lOO ordinary shares into 250 fully paid-up shares. By its letter dated January 16, 1954 the Bank declined to carry out the requisition. The respondent then petitioned the Tribunal under s. 19 (4) of the Displaced Persons (Debts Adjustment) Act for an order directing the Bank to convert 500 partly paidup shares held by him into 250 fully paid-up shares. The petition was resisted by the Bank, inter alia, on the gr,mnds that the order of the Company Judge sanctioning reduction of capital and granting facility for surrender their holding to shareholders entitled to apply under s. 19 (2) of the Act was conclusive and binding upon all shareholder~ and the respondent having failed to avail himself of the option given by the order was not entitled to enforce his rights under s. 19 (2). The Bank also submitted that the right conferred bys.

19(4) of Act 70 of 1951 was not absolute and that there were good grounds for not complying with the requisition under s. 19 (2); in that at the date of the special resolution for reduction of capital th~re being practically no assets with the Bank on which a fresh credit structure could be built, funds had to be raised by making calls and by issuing fresh capital and the claim for conversion of partly paid-up shares into fully paid-up shares was neither fair nor equitable to the shareholders who had already paid the call or had subscribed to the new shares. In the view of the Tribunal losses suffered by th~ Banj( and doµbtful debts had bee!) accumulating Q,iental Bank .of Commerce Ltd. Harcharan Das Loomba Shah J. 196'! O,i111tal zJanf. of Commtrc• /,Jd. H•rcMr•n Du Loomha Shah J. for a long time, but the Bank resorted to the scheme of capital reduction after Act 70 of 1951 was enacted, only with a view to deprive the displaced shareholders of the benefit under the provisions of s.

19 of the Act. This view of the Tribunal was affirmed in appeal by Khosla J. of the Punjab High Court, and also by a Division Bench in an appeal under cl. 10 of the Letters Patent. With special leave, the Bank has appealed to this Court. The respondent'~ claim that he is a displaced person within the meaning of s. 2 (IO). of the Displaced Persons (Debts Adjustment) Act, 70of1951 is not disputed. The material clauses of s. 19 on the true effect of which the right claimed by the respondent has to be adjudicated, read as follows : "

( 1) x x x x (2) )/otwithstanding anything contained in the Companies Act, or in the memorandum or articles of association, or the Co-operative Societies Act, it shall be lawful for a displaced person or a displaced bank to apply to the company or the co-operative society, as the case may be, for the conversion of any partly paid-up shares held by him or it in the company or society into such smaller number of fully paid-up shares as the society or company may have issued and in respect of which calls have already been made. (3) x x x ( 4)

If the company or the co-operative society refuses to comply with any such request as is contained in an application under sub-section (2), the Tribunal may, on application made to it in this behalf and if satisfied that there is no cause for such refusal, issue a direction to the company or the co-operative society I 2 s.c.R.. accordingly, and the company or society shall be bound to comply therewith and every such direction shall take effect from the date thereof. ( 5) Save as otherwise provided in this section, nothing contained herein shall affect the validity of any action taken by the company or its board of directors in pursuance of the provisions of the Companies Act or of the memorandum or articles of association relating to the company. (6) x x By cl.

( 1) a displaced person is not liable to pay any interest on unpaid calls in respect of his shares nor is his holding liable to be forfeited, notwithstanding anything to the contrary contained in the Companies Act or in the memorandum or articles of association. Clause (2) grants to a shareholder of a company who is a displaced person the privilege of applying to the company for conversion of any partly paid·up shares held by him into fully paid-up shares and in respect of which a call has been made. The Tribunal ·constituted under the Act is invested by cl. (4) with power to order any company to comply with a requisition under sub-s. (2), if it is satisfied , that there_ is no cause for such refusal to comply with the requisition to convert partly paid-up shares into fully paid-up shares. The expression "no cause for such refusal" within the meaning of cl. ( 4) must mean no good cause for refusal.

Therefore when an application is filed by a shareholder for an order directing the company to grant conversion of partly paid-up shares into fully paid-up shares. and the company sets up some cause declining to carry out the conversion, the Tribunal is authorised to adjudicate whether the cause set up by the company is a cause reasonably justifying refusal to comply with the requisition. Ott1ntal Bank •f Camrn1rc1 Ltd. Harchar11.n D4J Loambo Sholl J, Orit11lal B11nJ: of C1m1mtrct' Lti /{Gl'Cht'101f lJ(I! l"u;mba . Q3g The respondent had called upon the Bank under s. l() (2) to convert his partly paid-up shares into folly paid·up shares, but the Bank declined to COlll]lly with the requisition.

The first question falling to be determined is whether the order of the Company Judge in the petition filed by the Bank under ss. i);i, 56 and 57 of the Indian Companies Act for sanctioning reduction of capital is conclusive and binding upon the respondent so as to deprive him of his right to claim that his partly paid-up shares be converted into fully paid.up shares. The order of the Court under s. GO of the Companies Act, 1913, sanctioning reduction would normally be binding upon all shareholders. But it must be noti· ced that s. 3 of Act 70 of 1951 invests, save as expressly provided in that Act, the provisions of the Act and of the rules and orders made thereunder with over· riding effect notwithstanding anything contained in any other law for the time being in force or in any decree or order of a court, or in any contract between the parties. By s.

5ij of the Indian Companies Act, l9I:l, a company limited by shares, if so authorised by its articles, may by special resolution sanctioned by the Court reduce its share capital, and the Court is authorised to make an order confirming the reduc· tion on such terms and conditions as it thinks fit. The Company .Judge did make an order sanctioning reduction of the capital on conditions relating to conversion of the share holding of displaced persons, but the order could not deprive a displaced person of the special statutory right granted under s. 19 of the Displaced Persons (Debts Adjustment) Act 70 of 1951. The Act has conferred a special right upon displaced persons lo claim that their partly paid share holding be converted into fully paid shares: and this right may cease to be exercisable only if the Tribunal is satisfied that there is good cause for refusing conversion.

It is not the refusal by the company to comply with the requisition, but the adjudication by the Tribunal which deprives the displaced person of his right to have his shares .1953 converted. u,;,.1a1 B4"" •f Commere1 Ltd. Before the Company Judge validity of the resolution for reduction of capital was challenged on the ground that it was passed with a view to deprive the displaced persons of their right under s. HJ, and it may be assumed that the Company Judge having regard to the reasons recorded by him rejected that conte_ntion. But the order does not operate as res judicata, for the jurisdiction to decide whether there is good ground for refusing to grant the requisition for conversion by a displaced person is vested ex· elusively in the Tribunal and in no other body. It was open to any displaced person to avail himself of the option given by the order of the Company Judge : if he elected to avail himself of the option he would be bound by his election.

But a displaced person was not obliged to avail himself of the option, and if he did not, his right to call upon the Bank to grant him conversion was not affected by the order of the company Judge. The order of the Company Judge did not and could not amount to a decision binding all displaced shareholders. If a displaced person does not desire to avail himself of the option he will be entitled thereafter to apply under cl. ( 4) of s. 19. The order passed by the Company Judge remains valid and binding but subject to such orders as the Tribunal may make in respect of any individual shareholder who makes an application under sub-s. (4) of s. 19. That is clear " from the terms of cl. (5) which ensures the validity of the action taken by the Company or its board of directors in pursuance of the provisions of the Companies Act or of the memorandum or articles of association relating to the company, save as otherwise provided in s. 19.

We agi'ee therefore with the view of the Courts below that the Tribunal did not lose its jurisdiction to adjudicate upon the petition filed by the respondent, merely because the Company Hardzaran Das Laomha Shah J. . 1163 o,:,~"1 na,.k ,,r Cnrr.m,rtr Lc.i J/ar(iar an Dt:J Loomha Shalo J. Judge had given him and others similarly placed, an option which they could but were not obliged to c lee l. The second question which falls to be determined is whether the case shown by the Bank for refusing to convert the holding of the respondent into fully paid·up shares was good or sufficient. The Tribunal held that the resolution for reduction of capital was passed ma/a jide and with a view to deprive the displaced persons of their right to claim conversion oL their partly paid-up shares.

The Tribunal pointed out that even though the financial condition of the Bank was precarious for many years, the scheme of reduction of capital was only evolved after the Parliament enacted Act 70 of l!i5l as an expedient to nullify the statutory right of displaced shareholders. The High Court also held that all the assets of the Bank had not disappeared and in any event absenc~ of assets was by itself not a sufficient ground for dcprivi!1; a displaced person of his statutory right. The finding of the Tribunal which was confirmed by the High Court establishes that the cause set up by the Bank was not genuine; the resolution for reduction of capital was a device to which resort was had for nullifying the statutory protection granted to displaced persons. That con· clusion is supportc-<l by evidence, and ought according to the practice of this Court, be regarded as binding. There was no other ground set up in support of the refusal by the Bank.

The order tlirecting the Bank to convert the shares of the respondent into fully paid-up shares must therefore be confirmed, because no good cause has been shown by the Bank for declining to convert the partly paid shares. '0 This appeal must fail and is dismissed with costs. A ppcul tiismissed.