Oriental Bank of Commerce Ltd. Vs.
Shri Harcharan Das Loomba  INSC 51 (5 March 1963)
05/03/1963 SHAH, J.C.
CITATION: 1963 AIR 1707 1964 SCR (2) 231
Displaced person-Shares in bank-Statutory right
given by Act to get partly paid up shares converted into fully paid-up
shares--Order of Company Judge allowing reduction of capital of bank-Whether
doctrine of Res judicata applicable--"No cause for such refusal",
Meaning of--Displared Persons (Debts Adjustment) Act, 1951 (LXX of 1951), ss.
3, 19 (2), (4), (5).
The appellant bank suffered losses due to the
partition of India. its scheme for reduction of capital was approved of by the
Company judge subject to the condition that the Bank should accept without any
payment surrender of ordinary shares on which part payment was made from any
displaced person entitled to relief under s. 19 of the Displaced Persons (Debts
Adjustment) Act, so as to relieve such person from liability to pay the calls
made and to be made. A period of two weeks was given to displaced persons to
exercise the option.
The respondent was a share-holder of the
appellant but he did not avail himself of the option given by the Company
judge. Later on, he asked the appellant bank under s. 19 (2) of the Displaced
Persons (Debts Adjustment) Act to convert his 500 ordinary shares into 250
fully paid-up shares. On the bank refusing to comply with the requisition, the
respondent filed a petition under s. 19(4) of the Act for an order directing
the bank to convert his 500 partly paid-up shares into 250 fully paid-up
The Tribunal granted the relief prayed for to
the respondent. It also held that losses suffered by the bank and doubtful
debts had been accumulating for a long time and the bank resorted to the scheme
of capital reduction only after the passing of the Act of 1951 with a view to
deprive the displaced share-holders of the benefit under the provisions of s.
19 of the Act. This view of the Tribunal was affirmed by a single judge and a
Division Bench of the Punjab High Court. The bank appealed to this Court with
Held, that the order directing the bank to
convert the shares of the respondent into fully paid-up shares must be
confirmed. No good cause had been shown by the ban for 232 declining to convert
the partly paid-up shares into fully paid up shares. The expression "no
cause for such refusal" within the meaning of cl. (4) must mean II no good
cause for refusal.".
Held, also that the order of the company
judge sanctioning reduction of capital was not conclusive and binding and could
not deprive a displaced person of the right granted by Act. The order of the
Company judge sanctioning reduction of capital was subject to the provision of
s. 19 of the Act.
A displaced person was not obliged to avail
himself of the option. A displaced person not desiring to avail himself of the
option given under the order of the Company Judge could apply under s. 19 (4).
The order of the Company judge was valid and binding subject to any order which
the Tribunal might make in respect of any individual share-holder who applied
under s. 19 (4).
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 300 of 1961.
Appeal by special leave from the judgment and
order dated November 13, 1957, of the Punjab High Court at Chandigarh, in
Lettes Patent Appeal No. 19-D of 1955.
K.L. Gosain, O. P. Malhotra and S. N. Anand,
for the appellant.
Bakshi Mehtah Singh Sawhney, H. K. L.
Sabharwal and I. S.
Sawhney, for the respondent.
1963. March 5. The judgment of the Court was
delivered by SHAH J.-The Oriental Bank of Commerce Ltd. was incorporated in
February 1943 under the Indian Companies Act, 1913. The Bank had its registered
office at Delhi and it opened branches in Lahore and in other towns which are
now in Pakistan. The capital of the Bank was divided into 5,97,584 ordinary
shares of Rs. 10/each, and 24,200 B class ordinary shares of Re. 1/each. The
paid., up capital of the Bank as on December 31, 1946 was approximately Rs. 23
lakhs 233 On account of disturbances which followed in the wake of the setting
up of the Dominions of India and Pakistan, the Bank lost a substantial part of
its assets in the territory now called West Pakistan and was unable to recall
By 1950 the accumulated losses of the Bank
amounted to Rs. 10,57,850/-.
In December 1950, the Directors of the Bank
made a call of Rs. 2/8per share on its ordinary shareholders. They also
resolved to reduce the capital of the Bank and for that purpose an extraordinary
General Meeting of the Bank was convened on November 29, 1951 and special
resolutions were passed reducing the issued and subscribed capital of the Bank
to Rs. 4,56,137 ordinary shares of Rs. 5/each and 24,200 B-class ordinary
shares of annas 8 each. This reduction was 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 the special 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 the Dominions of India and Pakistan,
or on account of civil disturbances or the fear 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 of residence in such area and who
has been subsequently residing in India, and includes any person who is
resident in any place now forming part of India and who for that reason is
unable or has been rendered unable to manage, supervise or control any
immovable property belonging to him in West. Pakistan, x x x x X". Diverse
provisions were made by the Act to ameliorate the condition of displaced
persons. The Act provided for adjustment of debts, secured and unsecured,
relief from 234 liability to pay calls on shares in companies and enacted
provision for revision of decrees and settlements, apportionment of joint
debts, cessor of accrual of interest, exemption from arrest and attachment of
property, 'scaling down of debts and extention of the period of limitation in
certain classes of actions. Power to set up Tribunals having authority to
exercise jurisdiction under the Act was also conferred by the State Government.
Pursuant to the resolution passed by the Bank
at an extraordinary General Meeting on November 29, 1951 an application was
submitted before the District judge, Delhi exercising powers of the Company
judge for an order under ss. 55,56 and 57 of the Indian Companies Act, 1913 for
reduction of the share capital of the Bank. This application was opposed by two
shareholders who contended that the Bank was merely trying to circumvent the
provisions of the Displaced Persons (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 Bank would 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 under s 19 of the Displaced Persons (Debts Adjustment) Act,
so as to relieve him from further liability to pay the call of Rs. 2/8/per
share made by the Bank and all future calls-. This condition was accepted by
the shareholders who appeared at the hearing.
The Company judge allowed the petition an
confirmed the resolution reducing the share-capital on the terms and conditions
relating to 'surrender accepted by the Bank and directed that notice be given
under S. 61 of the Indian Companies Act, offering to all persons intending to
avail themselves of the option of surrender an opportunity to apply in that
behalf to the Bank within two weeks of the publication of the notice, 235 The
respondent Harcharan Das Loomba was a holder, since 1944, of 500 ordinary
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 but
he-did not appear at the hearing of the petition for reduction of capital, nor
did he avail himself of the option to surrender the shares given under the
order 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 250
fully aid up shares. By its letter dated January 16, 1954 the Bank declined to
carry out the on.
The respondent then petitioned the Tribunal
under s. 19 (4) of the Displaced Persons(Debts Adjustment) Act for an order
directing the Bank to convert 500 partly paid-.
up shares held by him into 250 fully paid-up
shares. The petition was resisted by the Bank, inter alia, on the grounds that
the order of the Company judge sanctioning reduction of capital and granting
facility for surrender their holding to shareholders entitled to apply under s.
19 (2) of the Act was conclusive and binding upon all shareholders and the
respondent having failed to avail himself of the option given by the order was
not entitled to enforce his rights under s. 19 (2). The Bank also submitted
that the right conferred by s. 19(4) of Act 70 of 1951 was not absolute and
that there were good grounds for not complying with the requisition under s. 19
(2), in that at the date of the special resolution for reduction of capital
there 'being practically no assets with the Bank on which a fresh credit
structure could be built, funds had to be raised by making calls and by issuing
fresh capital and the claim for conversion of partly paid-up shares into fully
paid-up shares was neither fair nor equitable to the shareholders who had
already paid the call or had subscribed to the new shares.
In the view of the Tribunal losses suffered
by the Bank and doubtful debts had been accumulating 236 for a long' time, but
the Bank resorted to the scheme of capital reduction after Act 70 of 1951 was
enacted, only with a view to 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. of the Punjab High Court, and also by a
Division Bench in an appeal under cl. 10 of the Letters Patent. With special
leave, the Bank has appealed to this Court.
The respondent's claim that he is a displaced
person within the meaning of s. 2 (10) of the Displaced Persons (Debts
Adjustment) Act, 70 of 1951 is not disputed. The material clauses of s. 19 on
the true effect of which the right claimed by the respondent has to be
adjudicated, read as follows :
"(1) x x x x (2)Notwithstanding anything
contained in the Companies Act, or in the memorandum or articles of association,
or the Co-operative Societies Act, it shall be lawful for a displaced person or
a displaced bank to apply to the company or the co-operative society, as the
case may be, for the conversion of any partly paid-up shares held by him or it
in the company or society into such smaller number of fully paid_up share$ as
the society or company may have issued and in respect of which calls have
already been made.
(3)x x x (4)If the company or the
co-operative society refuses to comply with any such request as is contained in
an application under sub-section (2), the Tribunal may, on application made to
it 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 237 accordingly, and
the company or society shall be bound to comply therewith and every such
direction shall take effect from the date thereof.
(5)Save as otherwise provided in this
section, nothing contained herein shall affect the validity of any action taken
by the company or its board of directors in pursuance of the provisions of the
Companies Act or of the -memorandum or articles of association relating to the
(6) x x x" By cl. (1) a displaced person
is not liable to pay any interest on unpaid calls in respect of his shares nor
is his holding liable to be forfeited, notwithstanding anything to the contrary
contained in the Companies Act or in the memorandum or articles of association.
Clause (2) grants to a shareholder of a company who is a displaced person the
privilege of applying to the company for conversion of any partly paid-up
shares held by him into fully paid-up shares and in respect of which a call has
been made. The Tribunal constituted under the Act is invested by cl. (4) with
power to order any company to comply with a requisition under subs. (2), if it
is satisfied that there is no cause for such refusal to comply with the
requisition to convert partly paid-up shares into fully paid-up shares. The
expression "no cause for such refusal" within the meaning of cl. (4)
must mean no good cause for refusal. Therefore when an application is filed by
a shareholder for an order directing the company to grant conversion of partly
paid-up shares into fully paid-up shares and the company sets up some cause declining
to carry out the conversion, the Tribunal is authorised to adjudicate whether
the cause set up by the company is a cause reasonably justifying refusal to
comply with the requisition.
238 The respondent had called upon the Bank
under s. 19 (2) to convert his partly paid-up shares into fully paid-up
shares., but the Bank declined. to comply with the requisition. The first
question falling to be determined is whether the order of the Company judge in
the petition filed by the Bank under ss. 55, 56 and 57 of the Indian Companies
Act for sanctioning reduction of capital is conclusive and binding upon the
respondent so as to deprive him of his right to claim that his partly paid-up
shares be converted into fully paid-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 it must be
noticed that s. 3 of Act 70 of 1951 invests, save as expressly provided in that
Act, the provisions of the Act and of the rules and orders made thereunder with
overriding effect notwithstanding anything contained in any other law for the
time being in force or in any decree or order of a court, or in 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 by special resolution
sanctioned by the Court reduce its share capital, and the Court is authorised
to make an order confirming the reduction on such terms and conditions as it
thinks fit. The Company judge did make an order sanctioning reduction of the
capital on conditions relating to conversion of the share holding of displaced
persons, but the order could not deprive a displaced person of the special
statutory right granted under s. 19 of the Displaced Persons (Debts Adjustment)
Act 70 of 1951. The Act has conferred a special right upon displaced persons to
claim that their partly paid share holding be converted into fully paid shares
: and this right may cease to be exercisable only if the Tribunal is satisfied
that there is good cause for refusing conversion.
It is not the refusal by the company to
comply with the requisition, but the ad. judication by the' Tribunal -which
deprives the 239 displaced person of his right to have his shares converted.
Before the Company judge validity of the
resolution for reduction of capital was challenged on the ground that it was
passed-with a view to deprive the displaced persons of their right under s. 19,
and it may be assumed that the Company judge having regard to the reasons
recorded by him rejected that contention. But the order does not operate as res
judicata, for the jurisdiction to decide whether there is good ground for
refusing to grant the requisition for conversion by a displaced person is vested
exclusively in the Tribunal and in no other body. It was open to any 'displaced
person to avail himself of the option given by the order of the Company judge :
if he elected to avail himself of the option he would be bound by his election.
But a displaced person was not obliged to
avail himself of the option, and if he did not, his right to call upon the Bank
to grant him conversion was not affected by the order of the company judge. The
order of the Company judge did not and could not amount to a decision binding
all displaced shareholders. If a displaced person does not desire to avail
himself of the option he will be entitled thereafter to apply under cl. (4) of
s. 19. The order passed by the Company judge remains valid and binding but
subject to such orders as the Tribunal may make in respect of any individual
shareholder who makes an application under sub-s. (4) of s. 19. That is clear
from the terms of cl. (5) which ensures the validity of the action taken by the
Company or its board of directors in pursuance of the provisions of the
Companies Act or of the memorandum or articles of association relating to the
company, save as otherwise provided in s. 19. We agree therefore with the view
of the Courts below that the Tribunal did not lose its jurisdiction to
adjudicate upon the petition filed by the respondent, merely because the
Company 240 judge had given him and others similarly placed, an option which
they could but were no obliged to elect.
The second question which falls to be
determined is whether the case shown by the Bank for refusing to convert the
holding of the respondent into fully paid-up shares was good or sufficient. The
Tribunal held that the resolution for reduction of capital was passed mala fide
and with a view to deprive the displaced persons of their right to claim
conversion of their partly paid-up shares. The Tribunal pointed out that even
though the financial condition of the Bank was precarious for many years, the
scheme of reduction of -capital was only evolved after the Parliament enacted
Act 70 of 1951 as an expedient to nullify the statutory right of displaced
shareholders. The High Court also held that all the assets of the Bank had not
disappeared and in any event absence of assets was by its-elf not a sufficient
ground for depriving a displaced person of his statutory right. The finding of
the Tribunal which was confirmed by the High Court establishes that the cause
set up by the Bank was not genuine; the resolution for reduction of capital was
a device to which resort was had for nullifying the statutory protection
granted to displaced persons. That conclusion is supported by evidence, and
ought according to the practice of this Court, be regarded as binding. There
was no other ground set up in support of the refusal by the Bank.
The order directing the Bank to convert the
shares of the respondent into fully paid-up shares must therefore be confirmed,
because no good cause has been shown by the Bank for declining to convert the
partly paid shares. This appeal must fail and is dismissed with costs.