1. The Oriental Bank of Commerce Ltd. was incorporated in February 1943under the Indian Companies Act, 1913. The Bank had its registered office atDelhi and it opened branches in Lahore and in other towns which are now inPakistan. The capital of the Bank was divided into 5,97,584 ordinary shares ofRs. 10/- each, and 24,200 B class ordinary shares of Re. 1/- each. The paid-upcapital of the Bank as on December 31, 1946 was approximately Rs. 23 lakhs. Onaccount of disturbances which followed in the wake of the setting up of the Dominionsof India and Pakistan, the Bank lost a substantial part of its assets in theterritory now called West Pakistan and was unable to recall its advances. By1950 the accumulated losses of the Bank amounted to Rs. 10,57,850/-.
2. In December 1950, the Directors of the Bank made a call of Rs. 2/8- pershare on its ordinary shareholders. They also resolved to reduce the capital ofthe Bank and for that purpose an extra-ordinary General Meeting of the Bank wasconvened on November 29, 1951 and special resolutions were passed reducing theissued and subscribed capital of the Bank to Rs. 4,56,137 ordinary shares ofRs. 5/- each and 24,200 B-class ordinary shares of annas 8 each. This reductionwas 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 thespecial 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 theDominions of India and Pakistan, or on account of civil disturbances or thefear of such disturbances in any area now forming part of West Pakistan, has,after the first day of March, 1947, left, or been displaced from, his place ofresidence in such area and who has been subsequently residing in India, andincludes any person who is resident in any place now forming part of India andwho for that reason is unable or has been rendered unable to manage, superviseor control any immovable property belonging to him in West Pakistan, x x x xx.' Diverse provisions were made by the Act to ameliorate the condition ofdisplaced persons. The Act provided for adjustment of debts, secured andunsecured, relief from liability to pay calls on shares in companies andenacted provision for revision of decrees and settlements, apportionment ofjoint debts, cessor of accrual of interest, exemption from arrest andattachment of property, scaling down of debts and extention of the period oflimitation in certain classes of actions. Power to set up Tribunals havingauthority to exercise jurisdiction under the Act was also conferred by theState Government.
3. Pursuant to the resolution passed by the Bank at an extraordinary GeneralMeeting on November 29, 1951 an application was submitted before the DistrictJudge, Delhi exercising powers of the Company Judge for an order under Sections 55,56 and 57 of the Indian Companies Act, 1913 for reduction of the share capitalof the Bank. This application was opposed by two shareholders who contendedthat the Bank was merely trying to circumvent the provisions of the DisplacedPersons (Debts Adjustment) Act, 70 of 1951 by resolving to reduce the capital.At the hearing of the application counsel for the Bank proposed that the Bankwould accept, without any payment, surrender of ordinary shares of Rs. 10/-each, on which Rs. 5/- had been paid up, by any person entitled to relief unders. 19 of the Displaced Persons (Debts Adjustment) Act, so as to relieve himfrom further liability to pay the call of Rs. 2/8/- per share made by the Bankand all future calls. This condition was accepted by the shareholders whoappeared at the hearing. The Company Judge allowed the petition and confirmedthe resolution reducing the share capital on the terms and conditions relatingto surrender accepted by the Bank and directed that notice be given under s. 61of the Indian Companies Act, offering to all persons intending to availthemselves of the option of surrender an opportunity to apply in that behalf tothe Bank within two weeks of the publication of the notice.
4. The respondent Harcharan Das Loomba was a holder, since 1944, of 500ordinary 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 buthe did not appear at the hearing of the petition for reduction of capital, nordid he avail himself of the option to surrender the shares given under theorder 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 500 ordinary shares into 250fully paid-up shares. By its letter dated January 16, 1954 the Bank declined tocarry out the requisition. The respondent then petitioned the Tribunal under s.19(4) of the Displaced Persons (Debts Adjustment) Act for an order directingthe Bank to convert 500 partly paid-up shares held by him into 250 fullypaid-up shares. The petition was resisted by the Bank, inter alia, on thegrounds that the order of the Company Judge sanctioning reduction of capitaland granting facility for surrender their holding to shareholders entitled toapply under s. 19(2) of the Act was conclusive and binding upon allshareholders and the respondent having failed to avail himself of the optiongiven by the order was not entitled to enforce his rights under s. 19(2). TheBank also submitted that the right conferred by s. 19(4) of Act 70 of 1951 wasnot absolute and that there were good grounds for not complying with therequisition under s. 19(2), in that at the date of the special resolution forreduction of capital there being practically no assets with the Bank on which afresh credit structure could be built, funds had to be raised by making callsand by issuing fresh capital and the claim for conversion of partly paid-upshares into fully paid-up shares was neither fair nor equitable to theshareholders who had already paid the call or had subscribed to the new shares.
5. In the view of the Tribunal losses suffered by the Bank and doubtfuldebts had been accumulating for a long time, but the Bank resorted to thescheme of capital reduction after Act 70 of 1951 was enacted, only with a viewto 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. ofthe Punjab High Court, and also by a Division Bench in an appeal under clause10 of the Letters Patent. With special leave, the Bank has appealed to thisCourt.
6. The respondent's claim that he is a displaced person within the meaningof s. 2(10) of the Displaced Persons (Debts Adjustment) Act, 70 of 1951 is notdisputed. The material clauses of s. 19 on the true effect of which the rightclaimed by the respondent has to be adjudicated, read as follows :
'(1) x x x x
(2) Notwithstanding anythingcontained in the Companies Act, or in the memorandum or articles ofassociation, or the Co-operative Societies Act, it shall be lawful for adisplaced person or a displaced bank to apply to the company or theco-operative society, as the case may be, for the conversion of any partlypaid-up shares held by him or it in the company or society into such smaller numberof fully paid-up shares as the society or company may have issued and inrespect of which calls have already been made.
(3) x x
(4) If the company or theco-operative society refuses to comply with any such request as is contained inan application under sub-section (2), the Tribunal may, on application made toit 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 accordingly, andthe company or society shall be bound to comply therewith and every suchdirection shall take effect from the date thereof.
(5) Save as otherwise provided inthis section, nothing contained herein shall affect the validity of any actiontaken by the company or its board of directors in pursuance of the provisionsof the Companies Act or of the memorandum or articles of association relatingto the company.
(6) x x x'
7. By clause (1) a displaced person is not liable to pay any interest onunpaid calls in respect of his shares nor is his holding liable to beforfeited, notwithstanding anything to the contrary contained in the CompaniesAct or in the memorandum or articles of association. Clause (2) grants to ashareholder of a company who is a displaced person the privilege of applying tothe company for conversion of any partly paid-up shares held by him into fullypaid-up shares and in respect of which a call has been made. The Tribunalconstituted under the Act is invested by clause (4) with power to order anycompany to comply with a requisition under sub-s. (2), if it is satisfied thatthere is no cause for such refusal to comply with the requisition to convertpartly paid-up shares into fully paid-up shares. The expression 'no causefor such refusal' within the meaning of clause (4) must mean no good causefor refusal. Therefore when an application is filed by a shareholder for anorder directing the company to grant conversion of partly paid-up shares intofully paid-up shares and the company sets up some cause declining to carry outthe conversion, the Tribunal is authorised to adjudicate whether the cause setup by the company is a cause reasonably justifying refusal to comply with therequisition.
8. The respondent had called upon the Bank under s. 19(2) to convert hispartly paid-up shares into fully paid-up shares, but the Bank declined tocomply with the requisition. The first question falling to be determined iswhether the order of the Company Judge in the petition filed by the Bank underSections 55, 56 and 57 of the Indian Companies Act for sanctioning reduction ofcapital is conclusive and binding upon the respondent so as to deprive him ofhis right to claim that his partly paid-up shares be converted into fullypaid-up shares. The order of the Court under s. 60 of the Companies Act, 1913,sanctioning reduction would normally be binding upon all shareholders. But itmust be noticed that s. 3 of Act 70 of 1951 invests, save as expressly providedin that Act, the provisions of the Act and of the rules and orders madethereunder with overriding effect notwithstanding anything contained in anyother law for the time being in force or in any decree or order of a court, orin any contract between the parties. By s. 55 of the Indian Companies Act,1913, a company limited by shares, if so authorised by its articles, may bespecial resolution sanctioned by the Court reduce its share capital, and theCourt is authorised to make an order confirming the reduction on such terms andconditions as it thinks fit. The Company Judge did make an order sanctioningreduction of the capital on conditions relating to conversion of the shareholding of displaced persons, but the order could not deprive a displacedperson of the special statutory right granted under s. 19 of the DisplacedPersons (Debts Adjustment) Act 70 of 1951. The Act has conferred a specialright upon displaced persons to claim that their partly paid share holding beconverted into fully paid shares : and this right may cease to be exercisableonly if the Tribunal is satisfied that there is good cause for refusingconversion. It is not the refusal by the company to comply with therequisition, but the adjudication by the Tribunal which deprives the displacedperson of his right to have his shares converted.
9. Before the Company Judge validity of the resolution for reduction ofcapital was challenged on the ground that it was passed with a view to deprivethe displaced persons of their right under s. 19, and it may be assumed thatthe Company Judge having regard to the reasons recorded by him rejected thatcontention. But the order does not operate as res judicata, for thejurisdiction to decide whether there is good ground for refusing to grant therequisition for conversion by a displaced person is vested exclusively in theTribunal and in no other body. It was open to any displaced person to availhimself of the option given by the order of the Company Judge : if he electedto avail himself of the option he would be bound by his election. But adisplaced person was not obliged to avail himself of the option, and if he didnot, his right to call upon the Bank to grant him conversion was not affectedby the order of the company Judge. The order of the Company Judge did not andcould not amount to a decision binding all displaced shareholders. If adisplaced person does not desire to avail himself of the option he will beentitled thereafter to apply under clause (4) of s. 19. The order passed by theCompany Judge remains valid and binding but subject to such orders as theTribunal may make in respect of any individual shareholder who makes anapplication under sub-s. (4) of s. 19. That is clear from the terms of clause(5) which ensures the validity of the action taken by the Company or its boardof directors in pursuance of the provisions of the Companies Act or of thememorandum or articles of association relating to the company, save asotherwise provided in s. 19. We agree therefore with the view of the Courtsbelow that the Tribunal did not lose its jurisdiction to adjudicate upon thepetition filed by the respondent, merely because the Company Judge had givenhim and others similarly placed, an option which they could but were notobliged to elect.
10. The second question which falls to be determined is whether the caseshown by the Bank for refusing to convert the holding of the respondent intofully paid-up shares was good or sufficient. The Tribunal held that theresolution for reduction of capital was passed mala fide and with a view todeprive the displaced persons of their right to claim conversion of theirpartly paid-up shares. The Tribunal pointed out that even though the financialcondition of the Bank was precarious for many years, the scheme of reduction ofcapital was only evolved after the Parliament enacted Act 70 of 1951 as anexpedient to nullify the statutory right of displaced shareholders. The HighCourt also held that all the assets of the Bank had not disappeared and in anyevent absence of assets was by itself not a sufficient ground for depriving adisplaced person of his statutory right. The finding of the Tribunal which wasconfirmed by the High Court establishes that the cause set up by the Bank wasnot genuine; the resolution for reduction of capital was a device to whichresort was had for nullifying the statutory protection granted to displacedpersons. That conclusion is supported by evidence, and ought according to thepractice of this Court, be regarded as binding. There was no other ground setup in support of the refusal by the Bank.
11. The order directing the Bank to convert the shares of the respondentinto fully paid-up shares must therefore be confirmed, because no good causehas been shown by the Bank for declining to convert the partly paid shares.This appeal must fail and is dismissed with costs.
12. Appeal dismissed.