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The Punjab National Bank Ltd. and ors. Vs. the Union of India and ors. - Court Judgment

LegalCrystal Citation
SubjectBanking
CourtDelhi High Court
Decided On
Case NumberLetter Patent Appeal No. 18 of 1975
Judge
Reported inAIR1984Delhi315; ILR1984Delhi1
ActsBanking Companies (Acquisition and Transfer of Undertakings) Act, 1970 - Sections 5
AppellantThe Punjab National Bank Ltd. and ors.
RespondentThe Union of India and ors.
Advocates: K.K. Jain,; P. Dayal,; B.N. Lokur,;
Cases Referred(Lucas v. Fitzgerald
Excerpt:
.....banking companies (acquisition & transfer of undertakings) act - 1970, section 5--whether the interim dividend declared by the board of directors three days before the acquisition of the company is a 'liability' and 'obligation' of the central government within the meaning of the section?; (ii) words and phrases--'liability' and 'obligation', defined 'declaring a dividend' and 'paying a dividend' explained and distinguished.; dismissing the appeal.; 1. it is firmly established that a declaration by the directors of an intended dividend to be paid at some future date may be rescinded by a resolution of the directors before that date arrives. the decisive act is that payment and not the declaration. the essential thing is payment. if the director declare but do not pay there is no.....avadh bhari rohtagi, j. (1) the short question in this appeal is whether the declaration of interim dividend by the directors of a company is a 'liability'. this question arose on a writ petition filed by the appellants, the punjab national bank ltd. (the company) and its three share-holders against the respondent the union of india, under art. 226 of the constitution. it will be recalled that by the banking companies (acquisition and transfer of undertakings) act 5 of 1970 (the act) the banking 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. 1020 lakhs.(2) what the act did was this. it took over the 'existing banks'. it created the.....
Judgment:

Avadh Bhari Rohtagi, J.

(1) The short question in this appeal is whether the declaration of interim dividend by the directors of a company is a 'liability'. This question arose on a writ petition filed by the appellants, the Punjab National Bank Ltd. (the company) and its three share-holders against the respondent the Union of India, under Art. 226 of the Constitution. It will be recalled that by the Banking Companies (Acquisition and Transfer of Undertakings) Act 5 of 1970 (the Act) the banking 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. 1020 lakhs.

(2) What the Act did was this. It took over the 'existing banks'. It created the 'corresponding new banks' of which profits 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 of July 16, 1969 declaring an interim dividend for half year 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 be justified by the profits of the company.'

(4) Founding themselves on section 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 shareholders as it was' a 'liability' and an 'obligation' of the Central Government under the said provision,

'5.General effect of vesting.- Section 5(1) of the Act reads : (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 accounts, 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 4-10-74 held that it was an 'obligation' within the meaning of section 5(1) of the Act. But he dismissed the, writ petition on the ground that the interim dividend could be paid only out of profits and the profits having gone to the Central Government under section 10(7) the Custodian, Punjab National 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. and others v. The Union of India and others, 2nd (1975) I Delhi 415.

SECTION 10(7) says :

'10.Closure of accounts and disposals of profits :-

(1)...... .........

(7),After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and all other matters 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 learned judge dismissed the writ petition. From his order the company and the shareholders' appeal to this court.

(7) The principal 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 C. Ltd. v. Schoeder & Co. Schmidt. (1901) 85 L.T. 22. This case has since been followed in England and India.

(9) In India the Supreme Court in J. Dalmia v. Commissioner of Income Tax : [1964]53ITR83(SC) , following Lagunas Nitrate held that the interim dividend is not a debt and thereforee not an enforceable obligation. Shah J. said :

'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 rescind the resolution before payment of the dividend.'

And again :

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

(10) The legal position of final dividend is entirely different. Where a dividend is declared it becomes a debt due 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' an immediate debt. (Re : Severn and Wye and Severn Bridge Ry. Co. (1896) 1 Ch. 559 .As Shah J. said :'

'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 statute of limitation immediately begins to run : In re Severn and Wye and Severn Bridge Railway Company. (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 meeting when the accounts are presented to the members. '

(11) Comparing and contrasting final dividend from interim dividend he said :

'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 rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded.'

(12) In the present case the learned judge took a different view. He held that Lagunas Nitrate did not apply because the resolution was never rescinded by the Board of Directors. Till it is rescinded, he said, it was a 'legal obligation' within the meaning of section 5(1) of the Act.

(13) With due deference to the learned judge his view is based on a complete misapprehension of the true legal position. In Buckley on the Companies Act (14th ed.), 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 subsequently rescinding the resolution.'

(14) In Pennington's Company Law (4th ed.) p. 367 the author says :

'AN important difference between final and interim dividends is that once a final dividend has been declared, it is a debt payable to the shareholders and cannot be revoked or reduced 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 dividend, and so can be rescinded or varied at any time before the dividend is paid.'

(15) It is not necessary to multiply the authorities. But reference can usefully be made to Gore-Browne on Companies (42nd ed.), p. 297, Palmer's Company Law (23rd ed.) Vol. I p. 979, Halspuiy's Laws of England (4th ed.) Vol. 7 p. 355 Para 608, Topham and lvamy's Company Law (16th ed.) p. 181. Lagunas Nitrate has been cited everywhere as the leading case for the proposition that a directors' declaration of interim dividend may be rescinded before payment ras been mad.

(16) Following Lagunas Nitrate Brightman J. in Potel V. Irc, (1971) 2 All E R 504 has recently held 'that an interim dividend is, as it were, subject to the will of the directors until it is actually paid'.

(17) 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 to whether the dividend is or is not expressed to be payable at a future date. The payment of 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 article in the present case did not in terms authorise the directors to declare a dividend, that is to say, to create the relationship of debtor and creditors between the company and its members. It only authorised the act of payment. This is usual in the case of an interim dividend. [Potel v. Irc (supra) at p. 513]. On payment, undoubtedly, interim dividend becomes the property of the shareholders, as Shah J. said in J. Dalmia.

(18) 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 rescinded by a resolution of the directors 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.

(19) 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 profit? available for distribution. But as Lord Alverstone Cj 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.

(20) 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. There was a pending litigation and the company was advised by their solicitors that no profits ought to be divided until the termination of the pending litigation. The directors decided 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 (1901) 85 Lt. 23.

(21) 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 ed.) part I p. 601.

(22) In the present case the directors passed the resolution declaring interim dividend on July 16, 1969. The Act came into force with effect from July 12 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 pen the draftsman took over the entire undertaking of the existing bank. This was a singular exerciser 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 kamal 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.

(23) The Act strikes at the heart of private ownership. The legislature authorised the taking of property, subject to 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 profits with the directors out of which they could pay the interim dividend which they had declared just three days before the taking 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.

(24) The take-over situation in this case itself amounted to rescission, a nullfication, of the directors' 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 director's resolution is nullified by the very act of take-over. In one word the acquisition meant the death of the resolution.

(25) A mere declaration of intention has no insignia or characteristic of a 'liability' or 'obligation' as used in section 5(1). To hold, as was held by the learned judge, 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 dividends, their decision to do so is not a declaration of dividend.' Because it can be rescinded. A thing which is subject to the will of another is not an 'obligation'. He may or may not perform the obligation.

(26) 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 section 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 did not apply. I think it is a complete answer to the case of the shareholders which the company espouses.

(27) Having held that the declaration of interim dividend is a liability of the Government, the learned judge decided against the company on another point. This other point is that dividend can be out of profits only and since the profits of the corresponding new bank under the Act are to be transferred to the Central Government under section 10, the Custodian of the new Punjab National Bank cannot be asked to pay the interim dividend. With all respect this view is equally fallacious. Section 5(1) deals with the effect of vesting. On taking 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 section 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 and taker must meet the 'liabilities and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking.'

(28) 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) 'BORROWINGS, 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 'obligations'. This is made incumbent on the taker by the statute. He who takes the benefit must take the burden. 'Liability' means an existing legal liability, actually existing in law at the relevant date. 'Obligation' means a duty or a liability aris fag in law or from contract. 'Liability' itself means subjection to a legal obligation.

(30) In truth section 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 discharged by the taker of the undertaking under section 5(1). Section 10 deals with the new dispensation. Section 5 speaks of the pre-existing 'liabilities' 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 changeth, yielding place to new, And God fulfills himself in many ways, Lest one good custom should corrupt the world.' (Tennyson-The Idylls 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 if 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 takeover. It depended on their will.

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

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


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