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Punjab National Bank Ltd. and Others Vs. Union of India and Others - Court Judgment

LegalCrystal Citation
Subject Company
CourtDelhi High Court
Decided On
Judge
Reported in[1986]59CompCas35(Delhi)
ActsBanking Companies (Acquisition and transfer of Undertakings) Act, 1970 - Sections 5(1) and 10(7); Constitution of India - Article 226
AppellantPunjab National Bank Ltd. and Others
RespondentUnion of India and Others
Cases Referred(Lucas v. Fitzgerald
Excerpt:
.....in case, the final divided was declared by the company without any stipulation as to the date of payment, then the declaration of the dividend creates an immediate debit - section 13: [altamas kabir & cyriac joseph,jj] custody of child - welfare of child vis--vis comity of courts - the minor girl child of 3 1/2 years was brought to india by her mother. the minor girl was a citizen of u.k. being born in u.k. her parents had set up their matrimonial home in u.k. and had acquired status of permanent residents of u.k. the child with her mother was supposed to return to u.k. but the mother cancelled her tickets and remained behind in india. the husband thereupon started procededings before the high court of justice, family division. u.k. praying for an order that the minor child be made a.....rohatgi, j. 1. the short question in this appeal is whether the declaration of interim dividend by the directors of company is a 'liability'. the question arose on a writ petition filed by the appellants, the punjab national bank ltd.(the company), and its three shareholders, against the respondent the union of india, under art. 226 of the constitution. it will be recalling that by the banking companies (acquisition and transfer of undertakings) act, 5 of 1970 (the act), the banking of business of the company, known as the punjab national bank, was taken over by the central government with effect from july 19,1969. the central government paid to the company compensation of rs. 1,020 lakhs. 2. what the act did was this. it took over the 'existing banks'. it created the 'corresponding new.....
Judgment:

Rohatgi, J.

1. The short question in this appeal is whether the declaration of interim dividend by the directors of company is a 'liability'. The question arose on a writ petition filed by the appellants, the Punjab National Bank Ltd.(the company), and its three shareholders, against the respondent the Union of India, under art. 226 of the Constitution. It will be recalling that by the Banking Companies (Acquisition and transfer Of Undertakings) Act, 5 of 1970 (the Act), the banking of business of the company, known as the Punjab National Bank, was taken over by the Central Government with effect from July 19,1969. The Central Government paid to the company compensation of Rs. 1,020 lakhs.

2. What the Act Did was this. It took over the 'existing banks'. It created the 'corresponding new banks' of which profit will henceforth go to the Central Government. The banking business was nationalised with a view to serve the people better and to meet the needs of a developing economy, as the preamble said.

3. Three days before the acquisition, the board of directors of the company had passed a resolution on July 16,1969, declaring an interim dividend for the half years ending June 30,1969, at the rate of Rs. 1.20 gross per share. This resolution was passed by the board of directors pursuant to the authority conferred on them by 84th article of the articles of association of the company which provided as follows:

'The directors may from time to time pay to the members such interim dividend as appear to the directors to justified by the profit of the company.'

4. Founding themselves on s. 5(1) of the Act, the company claimed in the writ petition that the respondent Union of India, be directed to pay the amount of interim dividend to the shareholder as it was a 'liability' and an 'obligation' of the Central Government under the said provision:

Section 5(1) of the Act reads:

'General effect of vesting.-(1) The undertaking of each existing bank shall be deemed to include all assets, rights, powers, authorities and privileges and all property, movable, and immovable, cash balances, reserve funds, investments and all other rights and interests in, or arising out of such property as were immediately before the commencement of this Act in the ownership, possession, power or control of the existing bank in relation to the undertaking, whether within or without India, and all books of account, registers, records and all other documents of whatever nature relating thereto and shall also be deemed to include all borrowings, liabilities and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking.'

5. The Union of India contested the claim. The learned single judge by his judgment dated October 4, 1974, held that it was an 'obligation' within the meaning of s. 5(1) 0f the Act. But he dismissed the writ petition on the ground that the interim dividend could be paid only out of profit and the profit having gone to the Central Bank, respondent No.3, could not be directed to pay the interim dividend to the shareholders as that would be a violation of the statutory provision. His judgment is reported as Punjab National Bank Ltd. v. Union of India (1975) 45 Comp Case 408; (1975) 2nd Delhi 415.

Section 10(7) says:

'10. Closure of account and disposal of profits....(7) After making provision for bad and doubtful debts, depreciation in assets, contributions to stuff and superannuation funds and all other matter for which provision is necessary under any law, or which are usually provided for by banking companies, a corresponding new bank shall transfer the balance of profits to the Central Government.'

6. So the large judge dismissed the writ petition. From his order, the company and the shareholders have appealed to this court.

7. The principle question for decision is whether the interim dividend declared by the directors on JUly 16, 1969, is a ' liability' of the taker of the undertaking. The Central Government was the taker of the existing bank of the company. In other words, can the Central Government be directed to pay interim dividend to the shareholders of the company, it being a 'liability'?

8. The answer to this question admits of no difficulty. It is settled law in England and India that in case of an interim dividend which the directors have resolved to pay, it is open to them at any time before payment to review their decision and resolve not to pay. This was established in England as early as 1901 by the decision of Joyce J. in Lagunas Nitrate Co. Ltd. v. Henry Schreder & Co. & Schimidt (1901) 85 LT 22; (1901) 17 TLR 625. This case has since been followed in England and India.

9. In India, the Supreme Court in J. Dalmia v. CIT : [1964]53ITR83(SC) , following Langunas Nitrate's case (1901) 85 LT 22; (1901) 17 TLR 625, held that the interim dividend is not a debt and , thereforee, not an enforceable obligation. Shah J. said (at p.87 of 53 ITR and at p. 672 of 34 Comp Cas):

' But a mere resolution of the directors resolving to pay a certain amount as interim dividend does not create a debt enforceable against the company, for it is always open to the directors to reached the resolution before payment of the dividend.'

10. And again (at p.88 of 53 ITR and at p.673 of 34 Comp Case):

'Even if the directors have resolved to pay interim dividend, they may before payment rescind the resolution.'

11. The legal position of final dividend is entirely different. Where a dividend is declared , it becomes a debt due to from the company to the shareholders. if final dividend is declared by the company without any stipulation as to the date of payment , the declaration of the dividend creates and immediate debt: In re Severn and Wye and Severn Bridge Ry. Co, (1896) 1 Ch 559. As Shah J. Said (at p. 87 of 53 ITR and at pp. 671 and 672 of 34 Comp Cas):

'There is no doubt that a declaration of dividend by a company in general meeting gives rise to a debt. when a company declares a dividend on its shares, a debt immediately becomes payable to each shareholder in respect of his dividend for which he can sue at law, and the stated of limitation immediately being to run: In re Severn and Wye and Severn Bridge Rly. Co. (1896) 1 Ch 559. But this rule applies only in case of dividend declared by the company in general meeting. A final dividend in general may be sanctioned at an annual meting when the accounts are presented to the members.'

12. Comparing and contrasting final dividend from interim dividend, he said (at P.88 of 53 ITR and at p. 672 of 34 Comp Cas):

'Therefore, a declaration by a company in general meeting gives rise to an enforceable obligation,but a resolution of the board of directors resolving to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the articles of association gives to no enforceable obligation against the company, because the resolution is always capable of being rescinded.'

13. In the present case, the learned judge took a different view. He held that Langunas Nitrate's case (1901) 85 LT 22; (1901) 17 TLR 625, did not apply because the resolution was never rescinded by the board of directors. Till is rescinded, he said , it was a 'legal obligation' within the meaning of s. 5(1) of the Act.

14. With due deference to the learned judge, his view is based on a complete misapprehension of the true legal position . In Buckey on the Companies Acts (14th edition), vol. I. at P. 1030, the author says:

'Where the directors are authorised to pay interim dividends, a mere resolution to pay does not create a debt as between the company and the members so as to prevent the directors from subsequent rescinding the resolution. '

15. In Pennington's Company Law (4th edition), p. 367, the author says :

'An important difference between final and interim dividends is that once a final dividends has been declared, it is a debt payable to the shareholders and cannot be revoked by any subsequent action of the company ; but where directors have power to pay interim dividends, their decision to do so is not a declaration of dividends, and so can be rescinded or varied at any time before the dividend is paid. '

16. It is not necessary to multiply the authorities. But references can usefully be made to Gore-Browne on Companies, 42 nd edition, P. 297 ; palmer's Company Law, 23rd edition, vol. 1, p. 979 ; Halsbury's Laws of England, 4th edition, vol 7, p. 355, para. 608 ; Tophan and Ivany's Company Law, 16th edition p. 181. Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625, has been cited everywhere as the leading case for the proposition that a directors' declaration of interim dividend may be rescinded before payment has been made.

17. Following Lagunas Nitrate's case [1901] 85 LT 22 [1901] 17 TLR 625, Brightman J. in Potel v. IRC [1971] 2 All ER 504, 513, has recently held 'that an interim dividend is, as it were, subject to the will of the directors until it is actually paid.'

18. There is a difference between declaring a dividend and paying a dividend. The declaration of a dividend by a company in general meeting creates a debt enforceable immediately or in the future, according as to whether the dividend is a different operation. It is an actual distribution of profits of the company. The two processes - declaration and payment - are quite separate. The articles in the present case did not in terms authorise the directors to declare a dividend, that is to say, to create a relationship of debtor and creditor between the company and its members. It only authorised the act of payment. This is usual in the case of an interim dividend. (Patel v. IRC [1971] 2 All ER 504 at p. 513). On payment, undoubtedly, interim dividend becomes the property of the shareholders, as Shah J. said in J. Dalmia v. CIT : [1964]53ITR83(SC) .

19. From the cases and the standard text book writers, it appears that the proposition that a declaration by the directors of an intended dividend to be paid at some future date may be rescind by a resolution of the of the director before that date arrives is now firmly established. The decisive act is the payment and not the declaration. A mere declaration without payment has no value. The essential thing is payment. If the directors declare but do not pay, there is no liability. A declaration is a mere intention. The declaration can be reviewed. It can be varied. It can be rescinded.

20. Before declaring an interim dividend, the directors must satisfy themselves that the financial position of the company warrants the payment of such dividend out of profits available for distribution. But, as Lord Alverstone C. J. observed :

'The declaration of interim dividend depends much more upon estimates and opinions than the declaration of a final dividend, which is made upon the information contained in a formal balance-sheet.' (Lucas v. Fitzgerald [1903] 20 TLR 16, 18).

21. Between declaration and payment of interim dividend there are many a slip between the cup and the lip. It may turn out that the position of the company does not justify the payment of dividend, as happened in Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625. There was a pending litigation and the company was advised by their solicitors that no profits ought to be dividend till the termination of the pending litigation. The directors decide not to pay even though they had set apart the money for payment in a separate 'Interim dividend account '. In a reserved judgment, Joyce J. said :

'As at present advised I do not see why the board of directors might not before an interim dividend is actually paid, acting bona fide, reconsider the question as to whether it ought to be paid at all. ' (Lagunas Nitrate's case, [1901] 85 LT 23).

22. He held that this is so even if the cash to cover the proposed dividend has been placed into a separate account. The directors' paramount duty is not to pay dividends out of capital, and accordingly, after declaring an interim dividend and before payment, the directors can reconsider the matter and properly refuse to pay it for they may discover that it will, if paid, have to be paid out of capital. (Palmer's Company Precedents 17th edition, Part I, p. 601).

23. In the present case, the directors passed the resolution declaring interim dividend on July 16, 1969. The Act came into force with effect rom July 19, 1969. This extraordinary happening of acquisition of the most profitable banking business of the company by the Central Government would upset all estimates of profit and no directors in that situation will ever dream of paying interim dividend even if they have, as in this case, already declared it. The company was faced with an unprecedented situation. By one stroke of the pen, the draftsman took over the entire undertaking of the existing bank. This was a singular exercise of power of eminent domain. The cold and paralysing hand of the draftsman brought the banking business of the company to a dead end. The Government took over the going concern, the kernal of the thing, leaving behind the husk of the company. When its very existence was at stake, there was no question of paying interim dividend by the company.

24. The Act strikes at the heart of private ownership. The Legislature authorised the taking of property, subject of paying compensation. This was appropriation of private property for public use by virtue of the power of eminent domain. The corporate wealth was taken in the public domain, leaving no part of the profit with the directors out of which they could pay the interim dividend which they had declared just of three days before taking over of the existing bank. In these circumstances, the directors had incurred no liability. If it was no longer the directors liability, it could not be the liability of the taker.

25. The take-over situation in this case amounted to rescission, a nullification, of the director's resolution without anything more. Interim dividend was to be paid out of profits. That is a cardinal principle of company law. Now, if under the Act the profits of the existing undertaking vest in the Central Government on acquisition, the directors resolution is nullified by the very act of take-over . In the word, the acquisition meant the death of the resolution.

26. A mere declaration of intention has no insignia or characteristic of a 'liability' or 'obligation' as used in s. 5(1). To hold, as was held by the learned judges that till it is rescinded, the declaration of interim dividend is a 'liability' is to miss the real point. As Pennington tersely puts it : 'Where directors have power to pay interim dividend, their decision to do so is not a declaration of dividend', because it can be rescinded. A thing which is subject to the will another is not an 'obligation '. He may or may not perform the obligation.

27. The resolution of July 16, 1969, was neither a 'liability' nor an 'obligation'. It was an expression of a desire. It was not a debt. It was at best a pious wish but not enforceable at law . It was an intention. But intention is one thing and payment another. In my opinion, the learned judge was wrong in holding that it was an 'obligation' within the meaning of s. 5(1). The fundamental fallacy in his reasoning is that he equates intention with an obligation to pay. The learned judge thought that Lagunas Nitrate's case [1901] 85 LT 22 ; [1901] 17 TLR 625 did not apply. I think is is a complete answer to the case of the shareholders which the company espouses.

28. Having held that the declaration of interim dividend is a liability of the Government, the learned judge decide against the company on another point. This other point is that dividend can be paid only out of profits and since the profits of the corresponding the new bank under the Act are to be transferred to the Central Government under s. 10(7), the Custodian of the new Punjab National Bank cannot be asked to pay interim dividend. With all respect , this view is equally fallacicous. Section 5(1) deals with the effect of vesting. On a take-over, the assets and liabilities vest in the Central Government, the taker of the undertaking. That all profits in future of the corresponding new bank will belong to the Central Government under s. 10(7) has nothing to do with the liabilities that are imposed on the taker of the undertaking by the Act. Whether the Central Government makes profits or incurs losses, the taker must meet the 'liabilities and obligation of whatever kind then subsisting of the existing bank in relation to the undertaking.' The taker has to discharge the liabilities of the undertaking subsisting at the time of the take-over of the 'existing bank'. Whether the 'corresponding new bank' makes profits or not is not the concern of the expropriated owner. Section 10(7) deals with the future set-up of the 'corresponding new bank' and not with the past liabilities of the 'existing bank'.

29. 'Borrowing, liabilities and obligations' have nothing to do with profits under section 10(7). The taker of the undertaking must pay the 'borrowings', discharge the 'liabilities', perform the 'obligation'. This is made incumbent on the taker by the statute. He who takes the benefit must take the burden also. 'Liability' means an existing legal liability, actually existing in law at the relevant date. 'obligation' means a duty or a liability arising in law or from contract. 'Liability' itself means subjection to a legal obligation.

30. In truth s. 10(7) has nothing to do with the question at issue. Section 10 deals with the future framework of the nationalised banks in which profits will go to the Central Government. In the old order, the banks had incurred liabilities, obligations and debts. They were now to be discharge by the taker of the undertaking under s. 5(1). Section 10 deals with the new dispensation. Section 5 speaks of the pre-existing 'liability' of the old order. In the new order, the profits will go not to private pockets but to the coffers of the State. The Act made a profound change. The old order was abolished. Out of the ashes of the old, a new order was born.

'The old order change the, yielding place to new. And God fulfillls himself in may ways, Lest one good custom should corrupt the world.'

(Tennyson - The Idyll of the king. The Passing of Arthur).

31. The essence and innate character of a 'liability' is that it is fixed by law or agreement or judgment of a court of justice and it cannot be got rid of at will. The primary meaning (in law) of the word 'liable' is 'that can be bound'. Directors were not bound to pay interim dividend on July 19, 1969, the day of take-over. It depended on their will.

32. In my respectful opinion, the learned judges was wrong on both points. The resolution of July 16, 1969, created no ' liability' within the meaning of s. 5(1) and that s the end of the matter.

33. For these reason which are entirely different from those of the learned judge, I would, dismiss the appeal with costs.

G.C. Jain, J.

34. I agree.

35. Appeal dismissed.


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