CHANAKYA NATIONAL LAW UNIVERSITY

PATNA

SUBJECT- BANKING LAW AND FINANCE

PROJECT WORK ON

WINDING UP OF A BANKING COMPANY

SUBMITTED TO- DR. AJAY KUMAR

SUBMITTED BY
SHUBHAM BAJAJ
ROLL NO. 1240
8TH SEMESTER

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 ACKNOWLEDGEMENT
“There are times when silence speaks much more loudly than words of praise, to only as
good as belittle a person whose words do not express, but only put a veneer over true feelings
which are of gratitude at this point of time.”
Though only my name appears on the cover of this research project, a great many people have
contributed to its production. I owe my gratitude to all those people and acknowledge their
hard work and support, who have made this exposition possible and because of whom my
experience has been one that I will cherish forever.
First of all i would like to thank god almighty, whose blessings helped me in completing the
project.
I take this opportunity to express my profound gratitude and deep regards to Dr. Ajay Kumar,
Faculty of Banking Law, Chanakya National Law University for his exemplary guidance,
monitoring and constant encouragement throughout the course of this thesis. The blessing,
help and guidance given by him time to time, carried me in the long way of the making of this
project.
I am also indebted to many friends who have helped me stay stable through this period. Their
support and care helped me overcome setbacks and stay focused on my project work. I greatly
value their friendship.
Most importantly, none of this would have been possible without the constant concern, support
and strength given by my family members during this research work. I would like to express
my heart-felt gratitude to my family.
Shubham Bajaj
8th Semester,
1240

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 TABLE OF CONTENTS

1. Aims and objectives ……………………………………………………………… 3

2. Research Methodology …………………………………………………………… 3
3. Source of Data ……………………………………………………………………. 3
4. Introduction ………………………………...…………………………………….. 4
5. Winding up by High Court ………………………..…………………………….... 6
6. Scheme of Amalgamation u/s 45 ………………………………….…………….... 9
7. Analysis of Section 45-A and 45-B ………………………………………………. 11
8. Conclusion ………………………………………………………………………... 14
9. Bibliography ………………...……………………………………………………. 15

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 AIMS AND OBJECTIVE
The aim of the researcher, in doing the research work is to analyse the provisions of winding
up of a Banking Company under the Banking Regulation Act, 1949.

RESEARCH METHODOLOGY
The researcher in his research work has adopted the doctrinal method of research.

SOURCES OF DATA
For doing the research work various sources have been used. Researcher in the research work
has relied upon the sources like books, Law Reports, Journals and online sources.

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 INTRODUCTION

Sections 38 to 44 of the Banking Regulation Act lay down the provisions for winding up of a
Banking company. Under Section 30 of the Act, the High Court has to order the winding up
for a Banking Company, if it is unable to pay its debts, or if the company is under a moratorium
and the Reserve Bank applies to the High Court for its winding up on the ground that its affairs
are being conducted in a manner detrimental to the interest of the depositors. A Banking
company is deemed to be unable to pay its debts if it has refused to meet any lawful demand
made at any of its offices within two days and the Reserve Bank certifies that company is
unable to pay its debts.

The Reserve Bank is required to apply for the winding up of the Banking Company, if the
Central Government directs it to do so after inspection under Section 35 of the Act. The Reserve
Bank may apply for winding up of a Banking Company if –

(i) it fails to comply with the requirements as to minimum paid up capital and reserves as
laid down in section 11.
(ii) is disentitled to carry on banking business for want of license under Section 22.
(iii) it has been prohibited from receiving fresh deposits by the Central Government or the
Reserve Bank.
(iv) it has failed to comply with any requirement of the act, and continues to do so even
after the Reserve Bank calls upon it to do so.
(v) the Reserve Bank thinks that a compromise or a settlement sanctioned by the court
cannot be worked satisfactorily.
(vi) the Reserve Bank thinks that according to the returns furnished by the company, it is
unable to pay its debts or its continuance is prejudicial to the interests of the depositors.

Under Section 38-A of the Act, the High Court has a court Liquidator attached to it for the
winding up of a Banking Company. In Special cases under Section 39, the Reserve Bank or the
State Bank of India or any other notified bank or any individual can be appointed as the official
liquidator on an application by the Reserve Bank.

All the provisions of the Companies Act relating to a Liquidator in so far as they are not
inconsistent with the Banking Regulation Act, apply to a Liquidator. He has to submit a
preliminary report to the High Court within two months from the date of the winding up order
on the assets and liabilities of the Banking Company. He has also to give notices to preferential

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claimants and secured and unsecured creditors within 15 days of the winding up order. Under
Section 43 of the Act every depositor of the Banking Company shall be deemed to have filed
his claim for the amount shown in its books to his credit and such claim shall be deemed to
have been proved, unless the liquidator shows that there is a reason for doubting its
correctness.1

A banking company cannot be voluntarily wound up unless the Reserve Bank certifies that it
is viable to pay its debts in full. A company formed for the purpose of carrying on banking
could not get license for banking business from the Reserve Bank. It resolved for voluntarily
winding up under Section 207 of the 1913 Companies Act (Section 488 of the 1956 Act). It
was not able to pay its debts back. The company filed a suit in the court of an Additional
Subordinate Judge against a mortgage debtor. The debtor contended that there was no
jurisdiction in this court. It was held that the Banking Companies Act was not applicable and
therefore the court had jurisdiction.2 The provisions as to exclusion of any other law in force
to the extent of its consistency has also been held to be valid.3 The provisions of the Companies
Act and those of the Banking Companies Act, 1949 are in the alternative and, therefore, a
petitioner seeking an order of winding up of a banking company may rely upon either
Companies Act or the Banking Companies Act.

The statutory requirement that a company can be wound up only with the approval of the
Reserve Bank and other supervisory powers of banking business has been held to be
constitutionally valid.

1
Tannan’s Banking Law and Practice in India, 22nd edn, 2008, pg 129
2
Raghunath Prusty v. Orrisa Bank Ltd. (1961) 31 Com Cases 617
3
Puri Bank ltd. v Kanhu Charan Das (1954) 24 Com Cases 392

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 WINDING UP BY HIGH COURT

Section 38(1) does not preclude the court from taking action suo moto if there are sufficient
materials before it for taking such action as required under the relevant provisions of
the Companies Act and Banking Regulation Act. It is, therefore, permissible to the court to
take action for winding-up on its motion without there being an application either on behalf of
some of the depositors or of the Reserve Bank. 4

Section 38 of the Banking Regulation Act is in addition to the provisions of the old Companies
Act contained in Ss. 162 and 271 of the Act and there is nothing in S. 38 of the Banking
Regulation Act or any other provision of that showing that the provisions of S. 38 of the
Banking Reguation Act or any other provision of that showing that the provisions of S. 38
(1) are in derogation of S. 153 of the old Companies Act in their application to a banking
company which is unable to pay its debts. Clearly S. 38 does not touch the powers of the Court
to sanction a scheme of arrangement between a banking company and its creditors or any class
of them or between such company and its members or any class of them, if that scheme of
arrangement or compromise is covered by the provisions of S. 153 of the old Companies Act.5
Co-operative bank could be wound-up under the provisions of Co-operative Societies
Act. Section 38 in Part III of the Banking Regulation Act, dealing with winding-up of banking
companies, could have no application, as a co-operative bank did not cease to be a society.

In view of the history of the establishment of the Reserve Bank as a Central Bank for India its
position as a Banker's Bank, its control over banking companies and banking in India, its
position as the issuing Bank, its power to license banking companies and cancel their licences
and numerous other powers, it is unanswerable that between the Courts and the Reserve Bank
the momentous decision to wind-up unsafe banking company in the interests of the depositors
may reasonably be left to the Reserve Bank. Sections 38(1) and (b)(3)(iii) of the Banking
Regulation Act are neither discriminatory nor unreasonable and cannot be declared void
under Arts. 14 and 19 of the Constitution. Since the provisions are manifestly in the public
interest they cannot be declared ultra vires under Art. 301 of the Constitution, because they are
protected by Art. 302 of the Constitution. A valid law could be made leaving to the
determination of the Reserve Bank whether a banking company should be wound-up and the

4
Prafulla Chandra Sinha v Chotanagpur Banking Association Ltd., AIR 1965 Pat 502.
5
AIR 1952 Punj 158: 1952 Co Cas 157.

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court to implement that decision. There is no inviolable rule that every determination must
always be made by the Court and by no other authority. A winding-up order means that a
company goes out of business. It also means that although it does not lose legal title to its
property the company loses all beneficial interests therein since the liquidator has to hold the
property in trust for its creditors and contributories. Therefore, such an order does affect the
fundamental rights in sub-clauses (f) and ( g) of clause (1) of Article 19 of the Constitution.
But the impugned provision, namely, S. 38(3)( b)(iii) which enable the Reserve Bank to take a
banking company to liquidation, is saved by clauses (5) and (6) of the Article. The restriction
in the impugned provision passes the test of reasonableness in the interests of the general public
imposed by those clauses.

The effect of the insertion of the words ‘without prejudice to its powers under S. 37' is that the
obligation laying on the court to direct a winding-up of a banking company in the
circumstanced stated in the section; would be subject to the exception that the court would be
at liberty to exercise the powers conferred by S. 37.6 Further, While passing an order for the
winding-up a banking company, the court has to take into consideration the relevant provisions
of both the Companies Act and the Banking Regulation Act and if it is satisfied that the affairs
of a banking company are such as to call for an action for winding-up, it should not hesitate to
do so. It is thus clear that as soon as the Court is satisfied that a banking company is unable to
pay its debts, it must order winding-up under S. 38 of the Banking Regulation Act.7 The
discretion given to the Court under S. 433 of the Companies Act, 1956, is taken away by S.
38(1) of the Banking Regulation act in a case where a banking company is found to be unable
to pay its debts, and in that case, it becomes obligatory for the court to order the winding-up of
that company. In a winding up petition, where the activities of the bank are found to be
prejudicial to public interest and interest of depositors and creditors and arrangements had been
made to acquire business of the bank as a going concern together with assets and liabilities,
such petition was granted by the court.8

The word ‘debts’ in S. 38 (1) does not mean banking debts. The word ‘debts’ is used in the
section simplicitor and unless there is something else in the context or other parts of the section
which suggests a limited meaning there would seem to be no reason why a word, apparently

6
Dwarkadas Agarwal v Dharam Chand Jain 58 Cal WN 517 : AIR 1954 Cal 583.
7
Supra Note 1
8
Reserve Bank of India v. Joint Provisional Liquidators Bank of Credit & Commerce International (Overseas)
Ltd., AIR 1994 Bom 177.

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used in the general sense, should be understood as limited to a particular meaning. sub-s. (3).
A reference to S. 2, Banking Regulation Act would make it clear that the circumstances
mentioned in S. 38(3) as leading to the conclusion that a banking company is unable to pay its
debts must be held to be in addition to, and not in derogation of, the circumstances given in S.
434 of the Companies Act, 1956, as leading to the same conclusion. Under S. 434(1)(c) of the
Companies Act a company must be held to be unable to pay its debts if its liabilities exceed its
assets. In such a case, the company is permanently unable to pay its debts. This circumstance
is not included in sub-s. (3) of S. 38. S. 38(1) is applicable when a banking company is unable
to pay its debts either within the meaning of S. 434 of the new Act or within the meaning of S.
38 (3) now S. 38(4) of Banking Regulation Act. This section does not say either expressly or
by necessary implication that he demand should be under the hand of the creditor. A demand
made by the Commissioner appointed by the Court to collect the debt on behalf of the parties
claiming the debt is a lawful demand within the meaning of S. 38(3) now S. 38(4) of the
Banking Regulation Act.9

9
In Re: Chotanagpur Banking, AIR 1959 Pat 288

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 SCHEME OF AMALGAMATION u/s 45

In a case of amalgamation, if some employees of the banking company are intended to be

excluded, their names have to be specifically mentioned in the scheme at draft stage. Scheme
making process is not legislative but executive, hence, principles of natural justice is
applicable, and a post-decisional hearing cannot be justified. When a scheme is framed under s.
45 for amalgamation of two bonds, it was held, that judicial review thereof was permissible
only to a very narrow extent. Particularly, when a dispute regarding equivalence of experience
had been decided by an expert body like RBI, the High Court could not sit in appeal, in its writ
jurisdiction, over the decision of RBI. In the facts, the High Court observed that it was satisfied
that the transferee bank and exercised the right of judging the equivalence of the employees of
the transferor bank with the employees of the transferee bank, hence, appeal had to be
dismissed.10

The effect of an order of moratorium under S. 45 and the winding-up of a company under
the Companies Act is almost the same, i.e., their employees automatically stand terminated
without notice. Since the employees of a company being wound-up, despite there being no
express provision in the statute, are entitled to be heard under principles of natural justice, the
same right cannot be denied to a Banking Company under a moratorium. Power has been
conferred on the RBI to apply the Central Govt. for an order of Moratorium and during the
period of moratorium to propose either reconstruction or amalgamation of the banking
company vires of a part of s. 45 need not be decided as cases could be disposed of without
reference to the question of vires.

Where in a scheme for amalgamation, certain employees were thrown out of employment who
raised a plea that hearing opportunity was not given to them, amalgamation as such was not
challenged, it was held, that sub-section (7A) of s. 45, one for the purpose of evidence was not
applicable.11

By virtue of S. 45(14) of the Banking Companies Act the provisions of the Scheme of
Amalgamation prevail over even the express provision in S. 45(5)(e). The words ‘Subject to
the provisions of the Scheme’ cannot be limited to the provisions relating to the manner of
continuance only of pending actions. There is nothing in the Companies Act or the Banking

10
Davis Kuriape v. Union of India, (2002) 2 LLJ 879 (Ker—DB)
11
K.I. Shephard v. Union of India, AIR 1988 SC 686.

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Companies Act which on the amalgamation of a bank with another bank, automatically puts an
end to a pending suit on misfeasance, and requires the transferee bank to report to S. 45-L of
the Banking Companies Act, and apply under S. 453 of the Companies Act. A fiction or
deeming provision cannot be extended beyond the purposes for which it was made. It cannot
be said that by reason of the provisions contained in S. 45-L(4) all the provisions of
the Companies Act relating to winding-up would be attracted to a scheme of amalgamation

Before the Reserve Bank frames schemes for restricting or amalgamating a banking company,
it has to satisfy itself that the condition mentioned in sub-section (4) exist. Sub-section (5)
contains guidelines as well for framing the schemes. The Reserve Bank is merely to provide
the details which are bound to be so varied that they cannot be set down in the Act itself. The
power conferred on the Reserve Bank is within defined limits and not indefinite. The Reserve
Bank is a very high powered body. There is, there-fore, no excessive delegation.

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 ANALYSIS OF SECTION 45-A and 45-B

The object of the Legislature in incorporating Ss. 45A and 45-B as Chapter IIIA of the Act of
1949 and S. 11 of the Act of 1950 clearly was to facilitate disposal of all claims by or against
the banking companies in liquidation in the self-same forum where winding-up proceedings
would be going on at the time, and by incorporating S. 45-C by further amendment all doubts
in regard to the construction to be put upon these sections have been set at rest. Sections
45A and 45-B were inserted with the main object of conferring even extra-territorial
jurisdiction on a High Court so that all claims by a banking company against its debtors may
be realised as soon as possible. For that purpose exclusive jurisdiction was conferred on the
High Court and on no other Court in respect of any matter relating to the realisation of the
assets of the banking company.

S. 45-B has no application to a banking company which is under a voluntary liquidation.

Section 45-B applies when any question of law or fact, which may relate to or arise in the
course of the winding-up of a banking company has to be decided. If, therefore, such a question
arises in any legal proceedings then it is to be determined by the High Court under S. 45-B.
Section 45-B of the Act provides that the High Court shall have exclusive jurisdiction to
entertain and decide any claim made by or against a banking company which is being wound-
up. A claim petition under Order XXI, Rule 58, Civil Procedure Code, (in respect of property
attached by the bank in execution of a decree) which is merely incidental to the main execution
proceedings could be entertained by the Court which entertained execution petition and S. 45-
B could not apply to such cases. But where a claim petition is disposed of and a suit has been
filed under Order XXI, Rule 63 of the Code it will be an independent proceeding and S. 45-
B of the Banking Regulation Act will apply to such proceedings.

In view of the provisions of Ss. 45-A and 45-B of the Banking Regulation Act it is the High
Court alone, to the exclusion of other Courts, that possesses the power to decide all claims by
or against a banking company in liquidation. Therefore, when a decree in favour of a banking
company in liquidation, is transferred by the high Court for execution, the transfer does not
imply a permission to all proceedings in execution so that an investigation of a claim preferred
under O. XXI, R. 58, C.P Code, by the wife of the judgment-debtor cannot be undertaken by
the executing Court. Nor can such jurisdiction be assumed by the executing Court under S.
171 of the Companies Act, in view of the fact that the provisions of the Banking Regulation

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Act being in addition to, and not in derogation of the Companies Act must prevail. The claim
must in terms of Ss. 45-A and 45-B, Banking Regulation Act.12

Section 45-B is not confined to claims for recovery of money or recovery of property movable
or immovable, but comprehends – 13

(i) any claim made by a banking company which is being wound-up

(ii) any claim made against a banking company which is being wound-up
(iii)any question of priorities arising in the course of the winding-up of a banking company
(iv) any other question whatsoever of law or fact which may relate to or arise in the course
of the winding-up of a banking company

Section 45-B confers a special jurisdiction upon the High Court. Wherever the party may be
resident, wherever the cause of action may have arisen if the matter relates to or arises out of
the winding-up of a banking company, then the High Court is invested with the jurisdiction to
decide the matter. Sections 45-A and 45-B cover cases which relate to the winding-up of a
banking company. Instituting of a suit or carrying on a suit already instituted are matters which
relate to the winding-up of the company. Under S. 45-A of the Act only the High Court in
which the winding-up is ending has jurisdiction to try such suits and it applies to suits pending
before or instituted after the winding-up.14 Under S. 45-B, the High Court has exclusive
jurisdiction to decide any claim made by a banking company in liquidation or any other
question whatsoever whether of law or fact which may relate to or arise in the course of
winding-up of a banking company, whether such claim has arisen or arises before or after the
date of winding-up of the banking company. The powers conferred upon the High Court
under S. 45-B are plenary in nature and embrace all claims made by a banking company in
liquidation and all other questions of law or fact which may arise in the course of the winding-
up of a banking company and the powers exercised by that Court under S. 45-B are exclusive
in nature and no other Court has jurisdiction to deal with such questions.

Jurisdiction conferred on High Court by Banking Regulation Act is original jurisdiction. Where
the liquidator has to approach the Court under S. 45-B for relief in respect of matters
legitimately falling within the scope thereof, elaborate proceedings by way of a suit involving
time and expense, to the detriment of the ultimate interest of the company under liquidation,

12
AIR 1962 Cal 86.
13
Thangia v Hanuman Bank Ltd. AIR 1958 Mad 403
14
AIR 1953 Punj 145

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were not contemplated. In the absence of any specific provision in this behalf in the Act itself
and in the absence of any rules framed by the High Court concerned under S. 45-G, the
procedure must be taken to be one left to the judgment and discretion of the Court having regard
to the nature of the claim and of the questions therein involved. S. 45-B is not confined to
claims for recovery of money or recovery of property, movable or immovable but comprehends
all sorts of claims which relate to or arise in the course of winding-up. Obviously the normal
proceeding that the section contemplated must be taken to be a summary proceeding by way
of application. 15

Section 45-B of the Banking Companies Act, 1949 makes a distinction between winding-up
proceedings simpliciter and an application made under S. 391 of the Companies Act, 1956. It
is only in respect of the former that all claims questions, etc., are brought under the exclusive
jurisdiction of the High Court. But such is not the case where an application under S. 391 of
the Companies Act is concerned. All that S. 45-M of the said Act contemplates is that in the
case of a company working under a scheme the list of debtors can be summarily settled and
when it is so settled the certificate of the Court would operate as a decree, which could be
executed in the normal way. There is no provision in it that the execution of such a decree will
also be made by the High Court or come within the exclusive jurisdiction of the High Court.
Thus certification of debt, while settling the list of debtors of the banking company under S.
45-D alone is exclusively vested in the High Court. The certificate granted under the section is
denied to be a decree for purposes of execution, but the subsequent execution proceedings are
not brought within the exclusive jurisdiction of the High Court.

15
AIR 1955 SC 213

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 CONCLUSION

Sections 38 to 44 of the Banking Regulation Act lay down the provisions for winding up of a
Banking company. Under Section 30 of the Act, the High Court has to order the winding up
for a Banking Company, if it is unable to pay its debts, or if the company is under a moratorium
and the Reserve Bank applies to the High Court for its winding up on the ground that its affairs
are being conducted in a manner detrimental to the interest of the depositors. A Banking
company is deemed to be unable to pay its debts if it has refused to meet any lawful demand
made at any of its offices within two days and the Reserve Bank certifies that company is
unable to pay its debts.

A banking company cannot be voluntarily wound up unless the Reserve Bank certifies that it
is viable to pay its debts in full. Under Section 38-A of the Act, the High Court has a court
Liquidator attached to it for the winding up of a Banking Company.

To conclude it can be said that the winding up procedure of the Banking Company is not the
same as of the other company, but many provisions image is found in the Banking Regulation
Act for then winding up process. Most of the times, the company applies for speedy winding
up procedure. By this process, time and money both are saved of the banking company and its
creditors and debtors. In such winding up procedure, due care is taken by the High Court.
Therefore, it can be said that no mistakes can take place and in case, a person is found guilty
then he is penalized for the same.

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 BIBLIOGRAPHY

BOOKS

 Tannan’s Banking Law and Practice in India, 22nd Edition, 2008

WEBSITES

 http://www.legalservicesindia.com/article/1346/Winding-Up-of-Banking-
Company.html
 http://www.advocatekhoj.com/library/bareacts/bankingregulation/38.php?Title=Banki
ng%20Regulation%20Act,%201949&STitle=Winding%20up%20by%20High%20Co
urt
 http://shodhganga.inflibnet.ac.in/bitstream/10603/7272/8/08_chapter%203.pdf
 https://www.lawnotes.in/Section_37_of_Banking_Regulation_Act,_1949
 http://www.preservearticles.com/2012033129475/what-are-the-main-provisions-of-
banking-regulation-act-1949.html

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