Bombay High Court
Yes Bank Limited vs Mrs. Madhu Ashok Kapur on 9 May, 2014
Equivalent citations: AIR 2015 (NOC) 81 (BOM.), 2014 (5) ABR 178
Author: S.J. Vazifdar
Bench: S.J. Vazifdar, B.P. Colabawalla
APPL201.14doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL (LODG) NO. 201 OF 2014
IN
SUIT NO. 462 OF 2014
YES Bank Limited, a banking company ]
incorporated under the Companies Act, ]
1956, having its registered office at Nehru ]
Centre, 9th Floor, Discovery of India, ]... Appellants
Dr. A.B. Road, Worli, Mumbai - 400018 ] (Ori.Def.No.6)
Versus
1. Mrs. Madhu Ashok Kapur, of Mumbai
inhabitant, residing at 11, Silver Arch,
]
]
Nepean Sea Road, Mumbai - 400006. ]
2. Mrs. Shagun Kapur Gogia, of Mumbai, ]
Indian inhabitant, residing at 11, Silver ]
Arch, Nepean Sea Road, Mumbai-06. ]
3. Mr. Gaurav Ashok Kapur, of Mumbai, ]
Indian inhabitant, residing at 119, ]
Samudra Mahal, Dr. A.B. Road, ]
Mumbai - 400 018. ]
4. Mags Finvest Pvt. Ltd., a company ]
incorporated under the provisions of the ]
Companies Act, 1956, and having their ]
registered address at 11, Silver Arch, ]
Nepean Sea Road, Mumbai - 400 006. ]
5. Mr. Rana Kapoor, Indian inhabitant, ]
residing at 427-428, 27th Floor, Pent ]
House, Samudra Mahal, South Wing, ]
SRP 1/36
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Dr. A.B. Road, Worli, Mumbai - 400018. ]
6. Ms. Bindu Rana Kapoor, of Mumbai ]
Inhabitant, residing at 427-428, 27th ]
Floor, Pent House, Samudra Mahal, ]
South Wing, Dr. A.B. Road, Mumbai-18. ]
7. Ms. Radha Kapoor, Indian inhabitant, ]
residing at 427-428, 27th Floor, Pent ]
House, Samudra Mahal, South Wing, ]
Dr.A.B. Road, Mumbai - 400 018. ]
8. YES Capital (India) Pvt. Ltd., ]
a company incorporated under the
]
Companies Act, 1956 having its ]
Registered office at 427-428, 27th floor, ]
Pent House, Samudra Mahal, South Wing]
Dr.A.B. Road, Mumbai - 400 018. ]
9. Morgan Credits Pvt. Ltd., a company ]
incorporated under the Companies Act, ]
1956, and having its registered office at ]
F-1/12, Hauz Khas, New Delhi - 110016 ]
10. Mr. Diwan Arun Nanda, ]
Row House No.11, Grand Paradi, 572, ]
Dady Seth Hill, August Kranti Marg, ]
Mumbai - 400 036. ]
11. Mr. Ravish Chopra, J-14, 1st Floor, ]
Saket, Delhi - 110 017. ]
12. Mr. M.R. Srinivasan, Flat No.61, ]
6th Floor, Jolly Maker Apartment - II ]
94, Cuffe Parade, Mumbai - 400 005 ]
13. Mr. Rajat Monga, Indian inhabitant, ]
having office at Nehru Centre, 9th floor ]
SRP 2/36
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Discovery of India, Dr. A.B. Road, ]
Mumbai - 400 018. ]
14. Mr. Sanjay Palve, Indian inhabitant ]
having office at Nehru Centre, 9th floor, ]
Discovery of India, Dr. A.B. Road, ]
Mumbai - 400 018. ]
15. Mr. Pralay Mondal, Indian inhabitant, ]
having office at Nehru Centre, 9th floor, ]
Discovery of India, Dr. A.B. Road, ]
Mumbai - 400 018. ] ... Respondents
Mr. Soli Cooper, senior counsel with Mr. Vijayendra P. Singh and Mr.
Ankoosh Mehta and Ms. Rachyeta Shah, Ms. G. Prakash i/b
Amarchand & Mangaldas & S.A. Shroff & Co. for the Appellants.
Mr. Aspi Chinoy, senior counsel with Mr. J.P. Sen, senior counsel, Mr.
Aditya Mehta and Ms. Nikita Mishra i/b Federal & Rashmikant for the
Respondent Nos.1 to 4.
Mr. Naval Agarwal i/b Beri & Co. for the Respondent Nos.5 to 9.
Mr. Vijayendra P. Singh and Mr. Ankoosh Mehta, Ms. Rachyeta Shah
and Ms. G. Prakash i/b Amarchand & Mangaldas & S.A. Shroff & Co.
for the respondent Nos.10 to 15.
CORAM : S.J. VAZIFDAR, &
B.P. COLABAWALLA, JJ.
FRIDAY, 09TH MAY, 2014 SRP 3/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc JUDGMENT .: [Per S.J. Vazifdar, J.]
1. This is an appeal against the order and judgment of the learned single Judge answering the preliminary issues raised by the appellant under section 9A of the Code of Civil Procedure, 1908, holding that the suit filed by respondent Nos.1 to 4 is maintainable and that this Court has jurisdiction to entertain and try the suit.
2. The appellant is defendant No.6. Respondent Nos.1 to 4 are the plaintiffs. Respondent No.5 - Rana Kapur is defendant No.1.
Respondent No.6 - Ms. Bindu Rana Kapur is defendant No.2.
Respondent No.7 Ms. Radha Kapur is defendant No.3. Respondent Nos.8 and 9 - Yes Capital (India) Private Limited and Morgan Credits Private Limited are defendant Nos.4 and 5. Respondent Nos.10 to 15 are individuals and are defendants Nos.7 to 12. It is convenient to refer to the parties as they are arrayed in the suit.
3. Two questions arise for consideration. The first is whether the judgment of a Civil Court to consider the validity of the appointment of directors is barred in view of the provisions of the Companies Act, SRP 4/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc 1956. The second is whether in view of section 10-A of The Banking Regulation Act, 1949, which came into effect from 1st February, 1969, the question of validity of appointment of directors can only be raised before and decided by the Reserve Bank of India and not by any other Court, Tribunal or authority. We have upheld the decision of the learned Judge who answered this question in the negative.
4. For the purpose of this appeal, it is sufficient to note the facts only briefly. Plaintiff Nos.1, 2 and 3 are the widow, daughter and son of one Ashok Kapur who passed away on 26th November, 2008.
Plaintiff No.4 - Mags Finvest Private Limited, together with the other plaintiffs, formed a part of the Ashok Kapur group.
The plaintiffs and the deceased Ashok Kapur formed the Ashok Kapur group. Defendant Nos.1 to 5 formed the Rana Kapur group.
On or about 30th April, 2003, the deceased Ashok Kapur, defendant No.1 - Rana Kapur and Rabo Bank entered into a Share Subscription Agreement wherein Ashok Kapur and defendant No.1 were collectively referred to as the "Indian partners". Rabo Bank had agreed to subscribe to 49% of the equity shares of defendant No.6. In SRP 5/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc the Share Purchase Agreement, Ashok Kapur and defendant No.1 were defined to include their successors, legal representative and permitted assignees. The relevant provisions of the Articles of Association of defendant No.6 reads as under :-
"Ashok Kapur means Mr. Ashok Kapur an Indian National and resident of 11, Silver Arch, Napean Sea Road, Mumbai - 400006 and unless it be repugnant to the context shall mean and includes his successors, legal representatives and assigns.
Indian Partners ig Ashok Kapur and Rana Kapoor, are collectively referred to as the "Indian Partners" and each of Ashok Kapur and Rana Kapoor is individually referred to as the "Indian Partner".
Rana Kapur means Mr. Rana Kapoor, an Indian National and resident of Grant Paradi Apartments, Rowhouse # 1, Mumbai-
400036 and unless it be repugnant to the context, shall mean and includes his successors, legal representatives and assigns.
... ... ... ...
DIRECTORS 110 a). Until otherwise determined by a General Meeting the number of directors shall not be less than 3 (three) and no more than 15 (fifteen).
b) So long as the Indian Partners hold along with any of their Affiliates directly or indirectly at least 10% of the paid up share capital of the company, the Indian Partner shall have the right to recommend the appointment of three directors collectively referred to as the "IP Representative Directors". So SRP 6/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc long as Rabo holds along with any of its Affiliates directly or indirectly at least 10% of the issue and paid up share capital of the company, Rabo shall have the right to recommend the appointment of one director referred to as the "Rabo Representative Director."
c) Apart from the IP Representative Directors and the Rabo Representative Director, the other director shall be independent ("Independent Directors"). The Indian Partner shall propose the name of the first three Independent Directors, who upon approval by Rabo, shall be appointed as such by the Board. Rabo and the Indian Partners may, recommend the names of the remaining Independent Directors in the nominations Committee of the Company.
... ... ... ...
127.A
a) Subject to the provisions of the said Acts and
these presents, the Board shall subject to a
recommendation made by the Promoters, also include such Whole time Director/s as may be appointed in terms of these Articles.
b) The Board may, subject to its obtaining approval from the Reserve Bank and also subject to such approval as maybe necessary under the Act, and subject to the other provisions of these Articles, appoint and/or re-
appoint from time to time one or more of its member(s) to be designated and to act as Whole time Director/s of the Company, not in any case exceeding one third of the total number of the Directors of the Company for the time being."
5. Ashok Kapur and defendant No.1 were co-founders / co-
promoters of defendant No.6 along with Rabo Bank. Ashok Kapur was also the first Chairman of defendant No.6. The plaintiff and defendant Nos.1 to 5 were also the original subscribers to the Articles SRP 7/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc of Association. Defendant No.1 was the first Chief Executive Officer and Managing Director of defendant No.6 and continues as such.
Some time after the tragic death of Ashok Kapur on 26th November, 2008, there were differences between the plaintiffs on the one hand and defendant Nos.1 to 5 on the other, which are not relevant for the purpose of this appeal. The appeal is limited to the question of maintainability of the suit insofar as it challenges the appointment of defendants Nos.7 to 12. The merits of the challenge are not, therefore, relevant. It is sufficient to note that the plaintiffs contend that even after the death of Ashok Kapur, they have the right to recommend the appointment of directors in accordance with Article 110.
6. The plaintiffs filed the above suit on 6th June, 2013, for a declaration that the resolutions proposed to be passed, as stated in a notice dated 17th April, 2013, convening an AGM of defendant No.6 on 8th June, 2013, relating to the appointment of defendant Nos.7 to 9 as directors of defendant No.6 - Yes Bank Limited are illegal and contrary to the Articles of Association and for a permanent injunction restraining the defendants from holding a meeting to consider the said SRP 8/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc resolutions. In the alternative, the plaintiffs seek an order restraining the defendants by a permanent order and injunction from passing resolutions relating to the appointment of defendant Nos.7 to 9 as directors at the Annual General Meeting which was scheduled to be held on 8th June, 2013. The plaintiffs have also sought a permanent order and injunction restraining the defendants from nominating or recommending any appointment of the directors under the Articles of Association without consulting the plaintiffs and without their consent. A decree for the payment of damages of Rs.5 crores is also sought.
By an amendment, the plaintiffs sought a declaration that rights exercisable by the Indian partners under the Articles of Association of defendant No.6 can be exercised by defendant No.1 only jointly with the plaintiffs and with their express concurrence. Consequential reliefs in this regard are also sought.
7. By an order dated 7th June, 2013, the learned vacation Judge declined the plaintiffs application for ad-interim reliefs in respect of the AGM scheduled for 8th June, 2013. The order, however, provided SRP 9/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc that the appointments made in the AGM would be subject to further directions of the Court upon the matter being taken up before the regular Court. Accordingly, the AGM was held whereat defendant Nos.7 to 9 were appointed as directors. Thereafter, at a meeting held on 27th June, 2013, the Board of directors of defendant No.6 appointed defendant Nos.10 to 12 as whole-time directors.
8. In view thereof, the plaint was amended to challenge the appointments of defendant Nos.7 to 9 at the AGM held on 8th June, 2013 and of defendant Nos.10 to 12 at the meeting of the Board of directors held on 27th June, 2013, as being null and void and sought an injunction restraining them from acting as directors of defendant No.6.
9. By the said notice dated 17th April, 2013, the 9th AGM of defendant No.6 was convened on 8th June, 2013, to transact the business, inter alia, relating to the appointment of defendant Nos.7, 8 and 9. The proposed resolutions in respect of each of them were identical. They stated that defendant No.6 had received notices in SRP 10/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc writing along with the deposit from some members proposing them as candidates for the office of a director under the provisions of section 257 of the Companies Act, 1956, and that they are eligible for appointment to the office of director and are appointed as directors of the bank. The explanatory notes pursuant to section 173(2) of the Companies Act in respect of each of the resolutions was also identical.
They stated that defendant Nos.7, 8 and 9 had been appointed as additional directors and hold office upto the next AGM, they being eligible for appointment in terms of section 257 of the Companies Act.
Defendant No.6 had received instructions in writing signifying the intentions to propose their candidature for the office of the director.
The explanatory statement stated that the directors of defendant No.6 recommended the resolution for the approval of the shareholders.
At the said meeting held on 27th June, 2013, the Board of directors of defendant No.6 elevated three of its top management executives viz. defendant Nos.10, 11 and 12, by appointing them as whole-time directors on the board of defendant No.6.
10. Mr. Cooper, the learned senior counsel appearing on behalf of SRP 11/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc the appellant submitted that the appointments of defendant Nos.7 to 12 were under section 10A of The Banking Regulation Act, 1949. He submitted that every appointment of a director to a banking company has to comply with and is deemed to be under the provisions of section 10A. He contended that this would include the appointments at any stage from the inception. Sub-section (6) of section 10A is a complete bar to the appointment of directors being challenged before any Court, Tribunal or authority.
11. Section 10-A reads as under :-
"10-A. Board of directors to include persons with professional or other experience.- (1) Notwithstanding anything contained in any other law for the time being in force, every banking company, -
(a) in existence on the commencement of section 3 of the Banking Laws (Amendment) Act, 1968 (58 of 1968), or
(b) which comes into existence thereafter, shall comply with the requirements of this section:
Provided that nothing contained in this sub-section shall apply to a banking company referred to in clause (a) for a period of three months from such commencement.
(2) Not less than fifty-one per cent of the total SRP 12/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc number of members of the Board of directors of a banking company shall consist of persons, who -
(a) shall have special knowledge of practical experience in respect of one or more of the following matters, namely:-
(i) accountancy,
(ii) agriculture and rural economy,
(iii) banking,
(iv) co-operation,
(v) economics,
(vi) finance,
(vii) law
(viii) small-scale industry,
(ix) any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company :
Provided that out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-
scale industry; and
(b) shall not -
(1) have substantial interest in, or be connected
with, whether as employee, manager or managing agent, -
(i) any company, not being a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or
(ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or (2) be proprietors of any trading, commercial SRP 13/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc or industrial concern, not being a small-scale industrial concern.
2A. Notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or in any other law for the time being in force,-
(i) no director of a banking company, other than its chairman or whole-time director, by whatever name called, shall hold office continuously for a period exceeding eight years;
(ii) a chairman or other whole-time director of a banking company who has been removed from office as such chairman, or whole-time director, as the case may be, under the provisions of this act shall also cease to be a director of the banking company and shall also not be eligible to be appointed as a director of such banking company whether by election or co-option or otherwise, for a period of four years from the date of his ceasing to be the chairman or whole-time director as the case may be.
(3) If, in respect of any banking company the requirements, as laid down in sub-section (2), are not fulfilled at any time, the Board of directors of such banking company shall re-constitute such Board so as to ensure that the said requirements are fulfilled.
(4) If, for the purpose of re-constituting the Board under sub-section (3), it is necessary to retire any director or directors, the Board may, by lots drawn in such manner as may be prescribed, decide which director or directors shall cease to hold office and such decision shall be binding on every director of the Board.
(5) Where the Reserve Bank is of opinion that the composition of the Board of directors of a banking company is such that it does not fulfil the requirements of sub-section (2), it may, after giving to such banking SRP 14/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc company a reasonable opportunity of being heard, by an order in writing, direct the banking company to so re- constitute its Board of directors so as to ensure that the said requirements are fulfilled and, if within two months from the date of receipt of that order, the banking company does not comply with the directions made by the Reserve Bank, that Bank may, after determining, by lots drawn in such manner as may be prescribed, the person who ought to be removed from the membership of the Board of directors, remove such person from the office of the director of banking company and with a view to complying with the provision of sub-section (2) appoint a suitable person as a member of the Board of directors in the place of the person so removed whereupon the person so appointed shall be deemed to have been duly elected by the banking company as its director.
(6) Every appointment, removal or reconstitution duly made, and every election duly held, under this section shall be final and shall not be called in question in any court.
(7) Every director elected, or as the case may be, appointed under this section shall hold office until the date up to which his predecessor would have held office, if the election had not been held, or, as the case may be, the appointment had not been made.
(8) No act or proceeding of the Board of directors of a banking company shall be invalid by reason only of any defect in the composition thereof or on the ground that it is subsequently discovered that any of its members did not fulfill the requirements of this section."
14. There was no quarrel regarding Mr. Cooper's submission that statutory provisions must be interpreted so as to accord with the object SRP 15/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc sought to be achieved by it; that the interpretation must foster and promote the legislative intent of the statutory provision and not restrict or inhibit such intent.
15. Mr. Cooper firstly submitted that civil courts have no jurisdiction to entertain a challenge to the appointment of directors of companies incorporated under the provisions of the Companies Act, 1956.
16. The submission is not well founded. It is not necessary to deal with the submission in any detail as it is answered against the appellant by a judgment of a Division Bench of th is Court in Santosh Poddar & Anr. v. Kamalkumar Poddar (1992) 3 Bom.C.R. 310. Two suits had been placed before the Division Bench in unusual circumstances as stated by the learned Judges themselves. It is important to note that the plaintiffs had sought a declaration that the first defendant had ceased to be a director of the third defendant company and for declarations that the meetings held subsequently as well were illegal and non-est. It is sufficient to note only briefly the circumstances in which the two suits had been placed before the SRP 16/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc Division Bench. The suits were originally filed in the Bombay City Civil Court. The plaints were, however, returned to the plaintiffs for presentation to this Court on the Original Side on the ground that the Bombay City Civil Court had no jurisdiction to entertain and try the suits in view of the provisions of section 10 of the Companies Act read with a Notification dated 29th May, 1959. The Appeals from Order against this order were dismissed. Thereupon, the plaints were lodged in this Court. The Prothonotary & Senior Master was of the view that this Court had no jurisdiction but in view of the decision of the City Civil Court, he placed the plaints before the learned Chamber Judge. The learned Chamber Judge being unable to agree with the view expressed by the learned Judge dismissing the AOs, directed the matters to be placed for the consideration of the Chief Justice. The learned Chief Justice, accordingly, placed the matter before the Division Bench.
The Division Bench, after referring to sections 2, 10 and 11 of the Companies Act held :
"21. From the provisions of the Companies Act we do not find anything by which we can infer that the jurisdiction of the Civil Court is ousted. The very fact that section 2(11) is part of the definition clause under SRP 17/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc the Companies Act which a Court is defined to mean the Court as prescribed under section 10, clearly shows that whenever the term `the Court' is used in any section of the Companies Act, the term `Court' will have to be interpreted with reference to section 10. These sections will have no application where any general civil suit is filed. The definition clause is attracted only when resort is had to a proceeding under the Companies Act under a section which prescribes resort to a Court. Under the Companies Act powers are conferred not only on Courts but also on other authorities like Company Law Board, the Central Government and the Registrar. Where a power is vested by the Act in a Court, that Court has to be ascertained with reference to section 10. Beyond so specifying the Court competent to deal with such a matter, section 10 cannot be construed as investing the Company Court with jurisdiction over every matter which may arise in respect of a Company or as divesting Civil Courts of their jurisdiction.
22. In the present case although the irregularities in holding meetings or the holding or cessation of the office of a Director may have to be decided with reference to the Companies Act, that Act has not prescribed a forum where such a relief can be sought. In the absence of such prescription, the ordinary Civil Courts are competent to deal with such disputes. Hence the present suits were correctly filed originally in the City Civil Court.
23. The learned Single Judge, while deciding the appeals from orders however, placed reliance on a judgment of this Court in the case of Vithalrao Narayanrao Patil v. Maharashtra State Seeds Corporation Ltd., and anr., reported in 68 Company Cases 608. In that case the learned Single Judge of this Court (at Nagpur) held that in view of section 10 of the Companies Act only the High Court can entertain any dispute in respect of the affairs of the Company. We do not agree with this interpretation of the learned Single Judge for reasons set out earlier.SRP 18/36 ::: Downloaded on - 04/06/2014 22:32:44 :::
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24. The learned Single Judge has also relied upon a decision of a Single Judge of the Calcutta High Court in the case of (Hitendra Bhadra v. Triton Eng. Co. (P) Ltd.) (1975 - 76) 80 CWN 242. The learned Single Judge of the Calcutta High Court had also interpreted section 10 to mean that all proceedings relating to any violation of the provisions of the Company Act must be filed before the Court prescribed under section 10 of the Companies Act.. We do not agree with these findings of the learned Single Judge of the Calcutta High Court for reasons set out earlier. The above two judgments, in our view proceed on a misunderstanding of section 10 which has to be read in conjunction with section 2(11). In our view, therefore, the claims in the two suits before us are not claims which are required to be decided in any special forum prescribed under the Companies Act.
Hence they are not governed by section 10 of the Companies Act. Therefore the jurisdiction of the Civil Court to entertain and try these two suits will be governed by the provisions of the Civil Procedure Code read with the Suit Valuation Act and the Bombay Court Fees Act."
17. Mr. Cooper, however, relied upon the judgment of a learned single Judge in the case of Khetan Industries Pvt. Ltd. & Ors. v.
Manju Ravindraprasad Khetan AIR 1995 Bom. 43. The learned Judge was incidentally also a party to the judgment of the Division Bench in Santosh Poddar's case. One of the questions which arose before the learned Judge, was whether a civil suit lies for removal of directors of a private limited company incorporated under the Companies Act, 1956. The respondent had filed a suit seeking the removal of some of SRP 19/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc the defendants from the post of directors and for a permanent injunction restraining them from acting as directors of the company.
The learned Judge held that civil courts cannot interfere with matters relating to the appointment of directors. He held that the right to appoint and/or remove directors of a company being a creature of the Companies Act which provides a machinery for the enforcement of the said right the civil court's jurisdiction is impliedly barred and that disputes relating to the appointment and/or removal of directors are outside the jurisdiction of the Civil Courts. The learned Judge, accordingly, answered the preliminary issue in the negative holding that the company court had no jurisdiction to entertain and try the suit.
The judgment is clearly contrary to the judgment of the Division Bench. It was rendered per incuriam. The judgment in Khetan's case is, therefore, over-ruled.
18. We are, in any event, in agreement with the learned single Judge that the bar of jurisdiction of civil court is not to be readily inferred and that a Court would normally lean in favour of a construction which would uphold the retention of the jurisdiction of a civil court.
SRP 20/36 ::: Downloaded on - 04/06/2014 22:32:44 :::APPL201.14doc In this view of the matter, it is not necessary to refer to the other judgments which have been referred to by the learned single Judge.
The contention that the jurisdiction of this Court to entertain a challenge to the appointment of defendant Nos.7 to 12 as directors in view of the provisions of the Companies Act, 1956, is rejected.
19. This brings us to the main challenge. Mr. Cooper submitted that the jurisdiction of the civil courts to entertain a challenge to the appointment of a director is barred in view of sub-section(6) of section 10A of The Banking Regulation Act, 1949. He submitted that every appointment of a director to a banking company has to be compliant with section 10A. Therefore, even if the Board of directors is constituted in conformity with the provisions of section 10A, the civil court cannot entertain a challenge to the appointment of a director on any ground, including on the ground of non-compliance of the provisions other than those contained in section 10A. In other words, a civil court cannot entertain a challenge to the appointment of a director even on grounds other than on account of the non-compliance with the provisions of section 10A. The question whether the SRP 21/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc requirements of section 10A are met or not can be decided only by the Reserve Bank of India and not by a civil court or by any other Court, Tribunal or authority. There is no remedy against an appointment made contrary to the provisions of any law, whether section 10A or otherwise. Nor is there any remedy against an appointment made contrary to any other provision including any contract, shareholders agreement or even the Articles of Association of the company. The only remedy, he submitted, would be by filing a writ petition under Article 226.
Mr. Cooper submitted that section 10A(6) protects appointments, reconstitutions made and elections held, not only under sub-sections (3), (4) and (5) thereof but also appointments, elections to the Board made in compliance with the provisions of section 10A(2).
The appointment of a person as a director on or his election to the Board of a banking company whether in compliance with section 10A(2) or pursuant to the reconstitution of the Board under section 10A(3) whether or not utilizing the powers under sub-section(4) or directed by the Reserve Bank under sub-section (5), is protected under sub-section (6).
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20. We will restrict ourselves to the point that falls for consideration. We will presume that with the appointment of defendant Nos.7 to 12 the "composition" of the Board of directors of defendant No.6 was in compliance with the provisions of sub-section (2) of section 10-A. Defendant Nos.7 to 12 were, however, not appointed under sub-section (3), (4) or (5) of section 10A. We are unable to agree with Mr. Cooper's submission that the jurisdiction of civil courts to entertain a suit challenging the appointment of a director made even otherwise than under sub-sections (3), (4) and (5) of section 10A is barred in view of sub-section (6) of section 10A.
21. The appointments of defendant Nos.7 to 12 were not under sub-
section (3) of section 10A. It is not the appellants case that the appointments were made on account of the requirements as laid down in sub-section (2) not having been fulfilled at any time. There was no question, therefore, of the Board of directors of the appellant reconstituting the Board so as to ensure that the requirements of sub-
section (2) were fulfilled. In other words, the appointments of SRP 23/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc defendant Nos.7 to 12 were not in the course of reconstituting the Board of directors of the appellant. The appointments were made keeping in mind and in conformity with the provisions of section 10A.
The appointments were not under sub-section (3) of section 10A.
22. There was no question in the present case of reconstituting the Board by retiring any director or directors. This is not even the appellants case. Sub-section (4) of section 10A, therefore, is not relevant to this case.
23. It is not the appellants case that defendant Nos.7 to 12 were appointed under sub-section (5) of section 10A. No action was taken by the Reserve Bank of India. The Reserve Bank has not even come into the picture. The question of the Reserve Bank forming an opinion as contemplated under sub-section (5) that the composition of the Board of directors of the appellant did not fulfill the requirements of sub-section (2) did not arise. Defendant Nos.7 to 12 were, therefore, not appointed pursuant to any opportunity being given by the Reserve Bank to the appellant to reconstitute its Board so as to ensure that the SRP 24/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc requirements of section 10-A are fulfilled. Nor were the appointments of defendant Nos.7 to 12 made by the Reserve Bank under sub-section (5).
24. The learned Judge rightly held that the appointments of defendant Nos.7 to 12 were not under sub-sections (3) or (4) of section 10A. The resolutions appointing them have been referred to earlier.
None of them indicate that the appointments were made under sub-
sections (3) or (4). The parties led evidence even in respect of the preliminary issues. The learned Judge's attention was not invited to any evidence, oral or documentary, to indicate that the appointments were under sub-sections (3) or (4). Nor was our attention invited to any evidence, oral or documentary, in this regard. Even the minutes of the meeting at which the appointments were made do not suggest that the appointments were made pursuant to or in accordance with sub-
sections (3) or (4) or (5) of section 10-A.
25. Mr. Cooper relied upon the minutes of the meeting of the Nominations and Governance Committee of defendant No.6 held on SRP 25/36 ::: Downloaded on - 04/06/2014 22:32:44 ::: APPL201.14doc 27th June, 2013, to indicate that this committee, after considering the background relating to the appointment of defendant Nos.10, 11 and 12, as well as the suitability of their appointment in view of their qualifications and experience, noted as follows :
"The Committee also reviewed the declaration and undertakings provided by the aforesaid candidates under fit and proper guidelines of RBI, as well as their detailed resumes. The Committee thereafter concluded that the above candidates meet the fit and proper criteria as per the RBI norms as well as the standard established by the Bank over the years while inducting directors on the Board from time to time. The Committee also noted that the aforesaid candidates represented the banking sector in term of section 10A of The Banking Regulation Act, 1949. The Committee noted that there were no relatives or entities related to the above candidates which were connected with the Bank and in which they would be deemed to be interested within the meaning of Section 299 and Section 300 of the Companies Act, 1956 or would be deemed to be substantially interested within the meaning of The Banking Regulation Act, 1949. The Committee also noted that the above candidates had not been involved with any other bank as a member of the Board or any NBPS as prescribed under the RBI Circular DBOD.No.BC.116/08.139.001/2001-02 dated June 20, 2002 on report of the Consultative Group of directors of Banks / Financial Institution (Dr. Ganguly Group) - implementation of recommendation. There were no cases involving default in respect of facilities availed by them and there were no proceedings / prosecution against the above candidates.
The Committee having considered the aforesaid merits in the proposal and long term benefit decided unanimously to recommend the appointment of the proposed candidates to the Board of directors."
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26. These minutes do not make the appointments at the AGM under sub-sections (3), (4) or (5) of section 10-A. The committees only acted in an advisory capacity to defendant No.6. The views expressed in the minutes do not militate against our finding that the appointments were not made under sub-sections (3), (4) or (5) of section 10-A. They merely state that their appointment would not violate the provisions of section 10-A. The Committee confirmed that defendant Nos.7, 8 and 9 had the qualifications prescribed in section 10-A.
27. The constitution of a Board of directors of a banking company must comply with the provisions of section 10A(2). When a Board of directors complies with the provisions of section 10A(2) the appointments of the directors are not made under section 10A but in compliance or in conformity with the provisions of sub-section (2) of Section 10A. What sub-section (6) bars is the calling into question in any court an appointment, removal or reconstitution duly made and every election duly held "under this section" and not appointments, SRP 27/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc removal or reconstitution or election in accordance or in conformity with the section.
28. The contention that this view would render the term "election"
in sub-section (6) otiose is incorrect. It is based on the erroneous presumption that a director cannot be elected where the provisions of sub-sections (3), (4) and (5) apply. In a case under sub-section (5), there can be an election. Under sub-section (5), where the Reserve Bank of India is of the opinion that the composition of the Board of directors of a banking company does not fulfill the requirements of sub-section (2), it may direct the banking company to so reconstitute its Board of directors as to ensure that the requirements of sub-section (2) are fulfilled. The direction, therefore to reconstitute the Board to make it compliant with the provisions of sub-section (2) is to the banking company and not to the Board of directors. The banking company, like any other company, can make appointments at a general meeting. At the general meeting, a director would be elected.
Furthermore, under sub-section (5), if the banking company does not comply with the direction of the Reserve Bank, then, in that event, the SRP 28/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc Reserve Bank may, after determining, by lots drawn in such manner as may be prescribed, remove such person from the office of the director of the banking company and with a view to comply with the provisions of section 10A(2), appoint a suitable person as a member of the Board of Directors in the place of the person so removed. In such an event, the person so appointed shall be deemed to have been duly elected by the banking company as its director. Therefore, elections and deemed elections are contemplated under sub-section (5) itself.
The view that we take, therefore, does not render the term "election"
in sub-section (6) otiose.
29. Mr. Cooper then submitted that the view that we have taken would render the term "election" surplus for the election of a director would also be covered by the term "reconstitution". He submitted that where different words are used especially in the same section, different meanings ought to be ascribed to them.
30. In section 10-A, the term "election" is not rendered surplus. For instance, reconstitution can also be by virtue of a removal of a SRP 29/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc director. The contingency of a removal is, however, also provided in sub-section (6). A reconstitution of a Board, however, is not necessarily only by election of other directors. Such directors could also be nominees such as in cases where it is permitted by the Articles of Association of a company and shareholders agreements. There may also be a case where an affirmative vote is required by one group of shareholders for the appointment of directors.
31.Mr. Cooper furnished the same illustration as he did before the learned single Judge in support of his contention that a view, contrary to the one submitted by him would lead to an anomalous situation.
For example, he said, assuming a bank is required to appoint only one director under sub-section (3), but appoints five directors who meet the qualifications in the same meeting, it would be difficult to say which of these directors comes within the "protected appointment"
under sub-section (3)."
32. The illustration does not substantiate his submission regarding the interpretation of section 10A. There is no anomaly. The company SRP 30/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc can always pass separate resolutions thereby indicating which of the directors is appointed to ensure compliance with sub-section (3).
Assuming that a director is entitled to protection, it would be that director then who would be entitled to the same. As the learned Judge rightly held, when a banking company elects its Board as a whole in compliance with section 10A (2), the appointments are not under section 10A and there is no question of any of the directors having a protected status under sub-section (6) thereof. As and when the provisions of sub-sections (3), (4) and/or (5) come into play, the appointments can always be identified.
33. Mr. Cooper submitted that the intention of the Legislature was to protect banking companies from any litigation in civil courts in respect of appointment of directors. He relied upon the following extract from the statement of objects and reasons to the Banking Laws (Amendment) Bill 1967, by which section 10A was sought to be introduced :
" A good deal of concern has been expressed in the recent past about the functioning of the commercial banks in the country in the context of our economic growth and planned development. The resources of the SRP 31/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc banking system need to be distributed equitably and purposefully in conformity with the developmental requirements so that priority sectors receive their due share and particular clients or groups of clients are not favoured in the matter of distribution of credit. A number of steps, both administrative and legislative are proposed to be taken to secure this objective by extending effective social control over banks. The main object of the Bill is to amend the Banking Regulation Act to incorporate certain new provisions towards achieving this purpose.
2. The more important new provisions of the Bill connected with the management of the banks relate to the reconstitution of their Boards of directors and appointment of full-time chairmen. Every banking company will have to reconstitute its Board of directors so that the majority of persons on the board have special knowledge or practical experience in agriculture, rural economy, small-scale industries, co-operation, banking, finance and other matters which are useful to a banking company and should not have substantial interest or active association with large or medium-sized industrial or business undertakings. The chairman of each bank will be required to be a professional banker and a full- time chief executive officer. It will be open to the Reserve Bank to reconstitute the Board of directors or to appoint a new chairman if it proves to be necessary. ... ... ... ... "
34. The object of the Legislature was not to exclude the challenge to the appointment of directors altogether. The object of section 10A was to provide for the nature of the constitution of the Board of directors of a banking company. The object was to ensure that a requisite percentage of the Board of directors hold the qualifications SRP 32/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc prescribed in sub-section (2) and to exclude the possibility of any conflict of interest of the nature stipulated in clause (b) of sub-section (2). The Legislature provided for a percentage of the total member of the Board of directors to consist of persons having a particular academic background and/or the requisite experience and/or possessing the requisite knowledge as stipulated in sub-clause (a) of sub-section (2) of section 10A. The Legislature was obviously of the view that such a composition of a Board of directors was necessary in the interest of banking companies and, therefore, provided for the same. The intention, therefore, was to ensure that the Board of directors comprises of a percentage of directors with the requisite qualifications and/or experience and/or knowledge. The intention was not to interfere with the machinery provided under the Companies Act regarding the appointment and removal of directors. Nor was it to denude the civil courts of their jurisdiction to decide disputes relating to the validity of the appointments of directors on the Board of a banking company.
35. Section 10-A has, however, curtailed the jurisdiction of the civil SRP 33/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc courts, but only to a limited extent. As we mentioned earlier, we will restrict this judgment by deciding only the question that arises in this case. We, therefore, have not dealt with the entire extent to which sub-section (6) applies. For the purpose of this case, it is necessary only to decide whether the jurisdiction of civil courts to decide a challenge to the appointment of directors made other than pursuant to or under sub-sections (3), (4) or (5) of section 10-A is ousted. The words "under this section" in sub-section (6) make it clear that the Legislature never intended to curtail the jurisdiction of civil courts at least to the extent suggested on behalf of the appellant. Had it been so, section 10A and in particular, sub-section (6) thereof would have been worded entirely differently.
36. Mr. Cooper initially agreed that the appointment of a director must be not only in accordance with law, but even in accordance with the Articles of Association of the company and in accordance with all contractual terms and conditions between the shareholders or any other relevant parties. He, however, submitted that the question whether the requirements were met can only be decided by the SRP 34/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc Reserve Bank of India and not by the civil court. In the written submissions, however, it is contended that the provisions of section 10A are aimed at stopping a challenge to the appointment of directors at the threshold and that if the directors are appointed such that the constitution of the Board complies with sub-section (2), all the directors are insulated from any challenge.
. Mr. Cooper also submitted that the words "duly held" would only require the due procedure for the appointment of directors to have been followed and cannot mean anything beyond following the due process and procedure as laid down by the law i.e. the Companies Act. He submitted that the words "duly held" cannot mean anything falling beyond the due process and procedure as laid down by the Companies Act. Once the procedure is followed, the appointment of a director cannot be challenged on any other ground whatsoever, including that it was contrary to any provision of law or contract. So long as the appointment is legally valid, following the legal procedure mandated under the Companies Act and in compliance with section 10A of The Banking Regulation Act, a court cannot assume jurisdiction to consider the validity of such appointment / election. To SRP 35/36 ::: Downloaded on - 04/06/2014 22:32:45 ::: APPL201.14doc do otherwise would enable a court in every case to ignore the bar of jurisdiction under section 10A since all challenges would necessarily be made on the basis of an allegation that an appointment/election has not been duly made or duly held.
37. Although we are sceptical about the correctness of these submissions, we refrain from dealing with them as it is not necessary to do so having held that the bar in sub-section (6) does not operate in respect of appointments made in compliance with the requirements under sub-section (2) and not under sub-sections (3), (4) and (5).
38. In the circumstances, the appeal is dismissed. There shall, however, be no order as to costs.
B.P. COLABAWALLA, J. S.J. VAZIFDAR, J. SRP 36/36 ::: Downloaded on - 04/06/2014 22:32:45 :::