1. This is an appeal from an order made on June 15, 1950, by Bachawat J., refusing to sanction a scheme. The Company in question is the Bengal Bank Ltd. which was incorporated in 1926 under the Indian Companies Act. The petition under Section 153 was first presented to this Court on or about December 9, 1949, on which day preliminary directions under that section were given.
2. The Bank has twenty branches. Five of the branches are in Pakistan and the remaining fifteen are within the State of West Bengal. The authorised capital of the Company is Rs. 25,00,000/-. The paid up capital is Rs. 11,70,000/-. It carries on business as a Bank in India as well as in Pakistan. Its registered office and principal place of business is in India. The majority of the depositors are within the Union of India. Notice of the application has not been given to the creditors in Pakistan.
3. Section 153 of the Indian Companies Act deals with the right of Companies to enter into a compromise or arrangement, (a) between itself and its creditors or any class of them, or (b) between itself and its members or any class of them. The procedure is as follows. First of all an application has to be made to the Court for leave to call a meeting or meetings, (a) of the share-holders or the class of shareholders, where the arrangement is intended to be between the Company and the share-holders or a class of them; or (b) of creditors, where the compromise or arrangement is intended to be made between the Company and the creditors or any class of them. Where there are different classes, separate meeting of each class must be held. After the meeting is held, if a majority in number representing three-fourths in value of the class of creditors or members present either in person or by proxy at the meeting agree to the compromise or arrangement, the matter is brought before the Court for its sanction. The matter is then dealt with by the Court and if sanctioned, the scheme or compromise becomes binding on the shareholders or the class of share-holders, or on the creditors or the class of them, with whom such an arrangement or compromise is intended to be made.
4. The scheme of course is not effective unless it is confirmed by the Court. But before the Court makes an order sanctioning the scheme, it is necessary in the first place to have the scheme or arrangement approved and accepted by the requisite majority and if the scheme is sanctioned by the requisite majority then it is presented to the Court for confirmation. In other words, the Court cannot sanction a scheme until it has been approved by the majority in terms of Section 153 (2) of the Indian Companies Act.
5. Our Rules made under the Companies Act lay down the procedure for making applications for the sanction of the Court of schemes of compromise and/or arrangement. The rules are Rules 40 to .47, App. 7 pages 812 and 813 of the Original Side Rules. The petition for confirmation must clearly show the compromise or arrangement, recite the order for the meetings, the result of the meetings and the necessity for the compromise or arrangement. All proper materials must be placed before the Court to show that the scheme or arrangement, is one which would be accepted by an 'ordinary reasonable and prudent man of business.
6.The Court does not sanction a scheme merely because it has been approved by the requisite majority. The Court does not sit merely to see that the majority are acting bona fide and thereupon to register the decision of the meeting. But, at the same time, the Court would be slow to differ from the meeting, unless either the class has not been properly consulted, or the meeting has not considered the matter with a view to the interest of the class which it is empowered to bind, or some blot is found in the scheme. If the company is solvent, it does not follow that the creditors ought not to make concessions. If there is 20 Section in the pound for the creditors they ought to have it at the expense of the share-holders, but if they cannot get it, then a scheme for resuscitating the company with a view to paying the creditors as distinguished from a scheme to resuscitate it without paying them may be sanctioned.
7. If on the other hand, the company is insolvent, the fact that the share-holders will get nothing under the scheme does not mean that the scheme is not a fair one and a proper one for the directors to have propounded. (See Buckley on the Companies Acts, 12th Edn. page 411).
8. It must be noticed that Section 153 (2) allows the decision of the majority to bind the minority and therefore it is incumbent on the Court to see that decision does not act oppressively on the minority. The principles have been enunciated in the leading case in 'Re Alabama, New Orleans, Texas and Pacific Junction Rail Co.' (1891) 1 Ch. 213, which has been followed ever since. The net result of the cases, as I understand them, is that in sanctioning a scheme, the Court must see that it is a reasonable scheme and it is a practicable scheme.
9. It is clear that the Court cannot confirm a scheme which has not been sanctioned by the majority as required by Section 153 (2). In other words, the sanction of the majority is pre-re-quisite for confirmation of the Scheme by the| Court.
10. Before the passing of the Banking Companies Act, 1949 (subsequently amended by the Act of 1950), the law, as I have stated above, was applicable to the cases of banks as well, incorporated under the Companies Act. But the Banking Companies Act imposes a further condition in respect of schemes which relate to banks and that condition is enacted in Section 45 of the Banking Companies Act. The section is as follows:
'Restriction on amalgamation, etc. Notwithstanding anything contained in any law for the time being in force:
(a) no Court shall sanction a compromise or 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, unless the compromise or arrangement is certified by the Reserve Bank as not being detrimental to the interests of the depositors of such Company, and
(b) no banking company shall enter into any agreement or arrangement for, or be a party to, any scheme for the amalgamation of such company with any other Banking company without the previous sanction in writing of the Reserve Bank.'
11. By reason of this section the Court has been deprived of its jurisdiction to confirm a Scheme of arrangement or compromise even though it has been sanctioned by the requisite majority under Section 153 (2) of the Companies Act but has not been certified by the Reserve Bank. This certificate has first to be obtained before a scheme can be presented to the Court for its approval. But the Reserve Bank has a very limited power in the matter of granting the certificate. The certificate is limited to the Reserve Bank certifying that the scheme is not detrimental to the interests of the depositors of the company. No power is given to the Reserve Bank to modify a scheme which has been sanctioned under Section 153 (2) of the Companies Act. If in any particular case the Reserve Bank does modify such a scheme it is tantamount to refusal to grant a certificate. Of course, I may note that the modification by the Reserve Bank is very convenient, for it conveys to the bank concerned; an idea as to on what terms the Reserve Bank is prepared to grant a certificate, and the modifications may be regarded as suggestions made by the Reserve Bank as to the way in which the scheme should be framed. But then this scheme should be approved by the requisite majority before it can be presented to the Court for confirmation. If that is not done then I think the Court has no jurisdiction to approve a scheme.. In other words, if a scheme has been sanctioned under Section 153 (2) of the Indian Companies Act and that scheme has not been certified as it is, but has been modified by the Reserve Bank and that modified scheme is presented to the Court for confirmation, without being sanctioned as required under Section 153 (2), the Court is not entitled to confirm it, because the Court has no jurisdiction to grant sanction to such a scheme. Of course, if the changes made by the Reserve Bank are nominal only, then these observations will not apply. In other words, the changes made by the Reserve Bank which deprive the Court of its jurisdiction must be substantial changes.
12. In this case what has happened is this. There were preliminary directions given. Meetings were held and a scheme was sanctioned by the majority under Section 153 (2) of the companies Act. But that scheme was modified by the Reserve Bank. The scheme sanctioned by the majority has been set out in the judgment of Bachawat J., and it is not necessary for me to set that out in this judgment except a few clauses to show as to how the Reserve Bank has modified the scheme as sanctioned by the majority:
'10. (a) The Board of Directors will be reconstituted. There will be seven directors of whom four will be elected by the Depositors, and three by the share-holders.
(b) The Depositors' Directors will be elected by the Depositors having claims over Rs. 100/-, as on the 9th day of December 1949, at their meeting to be convened and held within three months from the date of sanction of the scheme. The qualification of such Directors shall be the holding exclusively in their own names of sums of Rs. 10,000/- or over in each case in deposit with the Company on the 9th day of December 1949. Such Directors shall not be subject to retirement by rotation until all unsecured Creditors are paid in full but they will ipso facto and immediately cease to remain in office as soon as all the creditors and depositors are paid in full in terms of the Scheme.
(c) The share-holders' Directors will be elect-ed by the share-holders at their meeting to be convened and held within three months from the date of sanction of the scheme. The qualification of such Directors shall be holding exclusively in their own names shares to the. paid up value of Rs. 10,000/- or over in each case on the 9th day of December 1949. Such Directors shall be subject to retirement by rotation according to the provisions of the Company's Articles of Association.
(d) The new Board will have power to co-opt other Directors from time to time but not exceeding three in the aggregate, provided that the number of the share-holders' Directors shall always be less than the number of Depositors' Directors. Provided further that as soon as the Depositors' Directors will cease to remain in office in terms of sub-clause (b) here in above, the Company will take necessary steps to increase the number of share-holders' Directors.
(e) Three Directors shall form a quorum in a meeting of Directors.
(f) No Debtor of any description to the Company shall be a Director.
11. The Company will take such steps to amend the Articles of Association of the Company as will be necessary to give effect to the scheme within three months from the date of sanction of the scheme.
12. The Court will have, power to modify or alter the scheme as passed by the requisite numbers of unsecured creditors and shareholders in their respective meetings and the management undertake to give effect to such modifications, if any.'
13. Clause 10 (a) has been modified by substituting the word 'five' in the second line for 'four'. The third' line has also been changed by changing the word 'three' to 'two'. Therefore there is a change in the constitution of the Board of Directors.
14. Then again the whole sub-clause (d) of Clause 10 has been deleted. Sub-clause (e) has been changed to sub-clause (d) and the words 'Of whom two should be Depositors' Directors' have been inserted after the words 'Three Directors' at the beginning.
15. The following new clause has been added to the scheme:
'12. If the Bank is at any time unable to fulfil its obligations under the scheme within the stipulated periods it shall submit a report to the Court for such action as the Court may deem fit.'
16. These changes are substantial changes and we think that the scheme that was presented to the Court was not the scheme that was sanctioned by the requisite majority under Section 153 (2). On this ground alone this Court would be justified in refusing the scheme, and Bachawat J.'s order can be sustained.
17. But we have gone into the merits of the case and we are of opinion that on the merits the scheme should not be sanctioned. As I have said the scheme must be a reasonable one and a practicable one. The position of the Bank as set out in the affidavit of its Secretary used in these proceedings is for the sake of convenience, reproduces below:
The position as on 31st December 1949 :
Share Capital...Rs. 11,70,000Cash and Bank Balance...Rs. 60,000Reserve...Rs. 2,15,000Investment in G. P. Notes, Shares, Land etc....Rs. 6,15,000Deposits...Rs. 35,81,000Loans & Advances...Rs. 44,95,000Other borrowings and liabilities...Rs. 8,58,000Paper assets & Loss (for 1948 & 1949)...Rs. 3,96,000
Other tangible assets...Rs. 2,68,000
Rs. 58,34,000 Rs. 58,34,000
The position if the scheme is given effect to :
Share Capital...Rs. 9,44,000Cash & Bank balance...Rs. 60,000Reserve...Rs. 11,26,000Investment in G. P. Notes, Shares Land etc....Rs. 6,15,000Deposits...Rs. 26,04,000Loans & Advances...Rs. 44,95,000Other liabilities and borrowings...Rs. 7,64,000
Other tangible assets...Rs. 2,68,000
Rs. 54,38,000 Rs. 54,38,000
It will be observed that the success of the scheme depends upon the building of the reserve of Rs. 11,26,000 and that depends again on the loans and advances Rs. 44,95,000/- being realised. That is clear from the figures set out above. Haw, this Rs. 44,95,000/- consists, inter alia, of a sum of Rs. 18,08,776-3-11, which is referred to in the balance sheet for the year ended 31st December 1949, which has been handed over to us by learned counsel for the appellant, as 'Debts considered doubtful or bad not provided for.' The Secretary of the Bank in his affidavit Has said that one-third of this debt might be realised. Taking the statement in the affidavit at its face value it is clear that two-thirds of it are not realisable. In other words, Rs. 12,00,000 cannot be realised. If that be the position then the reserve cannot be built, and if the reserve cannot be built, the scheme cannot succeed, because the whole scheme has been made on the basis of this reserve of Rupees eleven lacs and odd. The matter does not rest here. We find several other interesting sums which make up the said figure of Rs. 44,95,000/-. For example,
'(i) Debts considered good in respect of which the bank is fully secured Rs. 13,13,613- 2-3
(ii) Debts considered good in respect of which the bank holds no security Other than the debtors' personal security Rs. 13,29,500-13-8.'
18. The Bank it seems advanced on personal security more money than it advanced on security of property.
19. It appears from the balance sheet that there are :
'(a) 'Debts owing by Directors or officers of the bank or any of them either severally or jointly with other person', (b) 'Debts due by Companies or firms in which the Directors of the bank are interested as directors, partners etc.', (c) 'Loans including temporary advances made to directors or managers or officers, of the Company.'
On these heads, the sums amount to about rupees three lacs. In the course of the hearing, we asked if the directors or officers of the bank who owe money to the bank were prepared to bring the money into Court forthwith. There was no answer. No director or officer came forward to repay his debt. From our experience, we know what happens to the debts due by directors or officers of a Company where the time for repayment comes.
20. It is clear in this case that this bank has not been managed in the way in which a bank' should be managed. The bad and doubtful debts will, as our experience shows, not be realised and therefore the scheme is not reasonable or practicable.
21. Bachawat J., taking the figures from the affidavit of the Secretary of the Bank at their face value has come to the conclusion that taking the most favourable view of the bank's case there will still be a deficit of Rs. 2,00,000/-and the scheme is not workable. This figure has not been challenged by the appellants' counsel before us. That is also a matter which we have taken into consideration for deciding as to whether on the merits we should sanction the scheme.
22. Further the scheme contemplates reduction of the share capital. It has been held that a scheme which involves reduction of capital must be carried out in accordance with the statutory provisions relating to reduction. See 'Re Cooper, Cooper v. Johnson, Ltd.', (1902) W N 199. In this case no provisions of the Act relating to reduction have been complied with. That is admitted by counsel for the appellant.
23. There are several technical difficulties in the way of sanctioning the scheme. But if we were convinced that the scheme was a reasonable one or would be a successful scheme, we would have allowed time to the appellant to cure the defects. But in our view the scheme is not a practicable scheme at all. On these considerations we are unable to sanction the scheme. We think that the order made by Bachawat J. was right and this appeal fails and is dismissed with costs.
24. Certified for two counsel.
25. I agree.