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PETITIONER: ORIENTAL BANK OF COMMERCE LTD.

       Vs.

RESPONDENT: SHRI HARCHARAN DAS LOOMBA

DATE OF JUDGMENT: 05/03/1963

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GAJENDRAGADKAR, P.B. HIDAYATULLAH, M.

CITATION:  1963 AIR 1707            1964 SCR  (2) 231

ACT: 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).

HEADNOTE: 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  shares. 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 special leave. Held,  that  the  order directing the bank  to  convert  the shares  of the respondent into fully paid-up shares must  be

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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).

JUDGMENT: 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 its  advances. 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. 2/8- per 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,

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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  settle   ments, 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 theon. The respondent then      petitioned theTribunal 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

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(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

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             relating to the company,.               (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 sub- s.  (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  reduc- tion  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

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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. Appeal dismissed.

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