Oriental Bank Of Commerce Ltd vs Shri Harcharan Das Loomba

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 300 of 1961

Decision Date: 5 March 1963

Coram: J.C. Shah, P.B. Gajendragadkar, M. Hidayatullah

In the matter titled Oriental Bank of Commerce Ltd versus Shri Harcharan Das Loomba, the Supreme Court of India delivered its judgment on 5 March 1963. The opinion was written by Justice J.C. Shah, and the bench comprised Justices J.C. Shah, P.B. Gajendragadkar and M. Hidayatullah. The petitioner was Oriental Bank of Commerce Ltd and the respondent was Shri Harcharan Das Loomba in this suit. The case involved the Displaced Persons (Debts Adjustment) Act of 1951, specifically sections three, nineteen two, four and five. The bank claimed that it had suffered financial losses as a result of the 1947 Partition of India. To address those losses the bank sought a scheme for reduction of its capital, which a Company Judge approved subject to a condition concerning displaced shareholders. The condition required the bank to accept, without any payment, the surrender of ordinary shares that had been partly paid up by any displaced person entitled to relief under section nineteen of the Act. The purpose of this requirement was to relieve such persons from any further liability to pay calls that had been made or that might be made. The Company Judge gave displaced shareholders a period of two weeks to exercise the option provided by the order. Shri Harcharan Das Loomba, although a shareholder of the bank, did not make use of the option during that period. Subsequently he invoked section nineteen two of the Act and asked the bank to convert his five hundred ordinary shares into two hundred and fifty fully paid‑up shares. The bank refused to comply with that request, stating that it was not obligated to make the conversion. Consequently, the respondent filed a petition under section nineteen four of the Act seeking a writ directing the bank to effect the conversion.

The Tribunal entertained the petition and granted the relief prayed for, ordering the bank to convert the five hundred partly paid‑up shares into two hundred and fifty fully paid‑up shares. The Tribunal also noted that the bank’s losses and doubtful debts had been accumulating for a long period. It further observed that the bank had adopted the capital‑reduction scheme only after the 1951 Act was enacted, apparently to deprive displaced shareholders of the benefits provided by section nineteen. That view of the Tribunal was affirmed by a single judge and later by a Division Bench of the Punjab High Court. The bank then appealed to the Supreme Court, obtaining special leave to challenge the Tribunal’s order and the subsequent affirmations. The Supreme Court held that the order directing the bank to convert the respondent’s shares into fully paid‑up shares must be confirmed. The Court found that the bank had not shown any good cause for refusing to convert the partly paid‑up shares into fully paid‑up shares. It interpreted the phrase ‘no cause for such refusal’ in clause four as meaning that no good cause for refusal could be invoked. The Court also held that the order of the Company Judge sanctioning the reduction of capital was not conclusive and binding and could not deprive

The Court explained that a displaced person possessed a right created by the Displaced Persons (Debts Adjustment) Act, and that the order issued by the Company judge authorising the reduction of capital was conditioned by section 19 of that Act. The Court noted that a displaced person was not compelled to exercise the option offered in the order. If a displaced person chose not to take the option provided by the Company judge’s order, the individual could nevertheless make an application under clause 4 of section 19. The Court held that the Company judge’s order remained valid and enforceable, but it could be altered by any subsequent order that the Tribunal might issue concerning any particular shareholder who applied under section 19(4). In this way, the order of the Company judge was not absolute; it was subject to modification by the Tribunal in respect of any displaced shareholder who sought relief under the statutory provision.

The appeal, identified as Civil Appeal No 300 of 1961, was filed by special leave against a judgment and order dated 13 November 1957 delivered by the Punjab High Court at Chandigarh in Letter Patent Appeal No 19‑D of 1955. Counsel representing the appellant and the respondent were presented, and the matter was decided on 5 March 1963 by Justice Shah. The Oriental Bank of Commerce Ltd., which had been incorporated in February 1943 under the Indian Companies Act, 1913, maintained its registered office in Delhi and operated branches in Lahore and other towns that later became part of Pakistan. The bank’s capital comprised 597,584 ordinary shares of ten rupees each and 24,200 B‑class ordinary shares of one rupee each, with a paid‑up capital of approximately twenty‑three lakh rupees as of 31 December 1946. Following the partition of India and the creation of the Dominion of Pakistan, the bank suffered considerable loss of assets located in the area that became West Pakistan and was unable to recover its advances. By 1950, the bank’s accumulated losses totaled ten lakh fifty‑seven thousand eight hundred and fifty rupees. In December 1950, the board of directors called for a payment of two annas and eight paise per share from ordinary shareholders and resolved to reduce the bank’s capital. Consequently, an extraordinary General Meeting was convened on 29 November 1951, where special resolutions were passed to reduce the issued and subscribed capital to 456,137 ordinary shares of five rupees each and to retain the 24,200 B‑class ordinary shares at eight annas each. This reduction involved cancelling the paid‑up amount of five rupees on each ordinary share and eight annas on each B‑class share. Prior to the adoption of the special resolution, Parliament enacted the Displaced Persons (Debts Adjustment) Act, 70 of 1951, which defined a “displaced person” in section 2(10) as any individual who, because of the establishment of the Dominions of India and Pakistan or due to civil disturbances or the fear of such disturbances in any area now forming part of West Pakistan, left or was displaced from his place of residence in that area after 1 March 1947 and subsequently resided in India, including any person residing in India who, for that reason, could not manage, supervise, or control any immovable property belonging to him in West Pakistan.

In the Act, a “displaced person” was defined as any individual who, because of the establishment of the Dominions of India and Pakistan, or because of civil disturbances or the fear of such disturbances in any area now forming part of West Pakistan, left, or was displaced from, his place of residence in that area and subsequently resided in India. The definition also encompassed any person who was resident in any place now forming part of India and who, for that reason, was unable or had been rendered unable to manage, supervise or control any immovable property belonging to him in West Pakistan, x x x x X. The legislature incorporated a range of provisions in the Act to improve the situation of displaced persons. These provisions authorized the adjustment of both secured and unsecured debts, granted relief from liability to pay calls on shares in companies, permitted the revision of decrees and settlements, enabled the apportionment of joint debts, ceased the accrual of interest, exempted displaced persons from arrest and attachment of property, allowed the scaling down of debts and extended the limitation period in certain classes of actions. The State Government was also empowered to establish tribunals that could exercise jurisdiction under the Act.

Pursuant to a resolution adopted by the Bank at an extraordinary General Meeting held on 29 November 1951, an application was filed before the District Judge, Delhi, who was exercising the powers of a Company Judge, seeking an order under sections 55, 56 and 57 of the Indian Companies Act, 1913 to reduce the Bank’s share capital. Two shareholders opposed the application, arguing that the Bank’s intention was to evade the provisions of the Displaced Persons (Debts Adjustment) Act, 70 of 1951 by reducing its capital. During the hearing, counsel for the Bank suggested that the Bank would accept, without any payment, the surrender of ordinary shares of ten rupees each on which five rupees had been paid up, by any person entitled to relief under section 19 of the Displaced Persons (Debts Adjustment) Act. The surrender would relieve such a person from further liability to pay the call of two rupees eight annas per share made by the Bank and from any future calls. The shareholders present at the hearing agreed to this condition.

The Company Judge allowed the petition, confirmed the resolution reducing the share capital on the terms relating to the surrender accepted by the Bank, and directed that a notice be issued under section 61 of the Indian Companies Act. The notice was to invite all persons who intended to avail themselves of the surrender option to apply to the Bank within two weeks of the notice’s publication. The respondent, Harcharan Das Loomba, had been a holder since 1944 of five hundred ordinary shares of face value ten rupees each, on which five rupees per share were paid. Although he qualified as a displaced person under Act 70 of 1951, he neither attended the hearing on the capital reduction petition nor exercised the surrender option provided in the Company Judge’s order. On 7 January 1954, he applied to the Bank under section 19(2) of Act 70 of 1951 seeking to convert his holding of five hundred partly paid‑up shares into two hundred and fifty fully paid‑up shares.

In the present case the respondent, who held five hundred ordinary shares of ten rupees each, applied under subsection (2) of section 19 of the Displaced Persons (Debts Adjustment) Act, 70 of 1951, seeking conversion of those five hundred partly paid‑up shares into two hundred and fifty fully paid‑up shares. The Oriental Bank of Commerce Ltd responded by a letter dated sixteen January 1954, in which it refused to carry out the conversion. Consequently, the respondent filed a petition before the Tribunal invoking subsection (4) of the same section, requesting that the Tribunal issue an order directing the bank to effect the conversion of his five hundred partly paid‑up shares into two hundred and fifty fully paid‑up shares.

The bank opposed the petition on several grounds. First, it argued that the order of the company judge, which sanctioned a reduction of the bank’s share capital and provided a facility for surrender of shares to those shareholders who were entitled to apply under subsection (2), was final and binding on all shareholders. Because the respondent had not taken advantage of the option set out in that order, the bank contended that he could not later enforce the rights conferred by subsection (2). Second, the bank maintained that the right created by subsection (4) of section 19 was not an absolute one. It submitted that there were substantial reasons for refusing to comply with the conversion request, namely that at the time the special resolution for reduction of capital was passed the bank possessed virtually no assets on which a new credit structure could be built. Funds therefore had to be raised by making further calls on shareholders and by issuing fresh capital, and obliging the bank to convert partly paid‑up shares into fully paid‑up shares would be neither fair nor equitable to those shareholders who had already met the calls or had subscribed to the newly issued shares.

The Tribunal, after examining the matter, concluded that the bank had suffered losses and that doubtful debts had been accumulating for a long period. It held that the bank had resorted to the scheme of capital reduction only after the enactment of the 1951 Act, with the intention of depriving displaced shareholders of the benefit provided under section 19. This conclusion of the Tribunal was affirmed on appeal by Justice Khosla of the Punjab High Court and again by a Division Bench in a further appeal under clause 10 of the Letters Patent. With special leave, the bank subsequently appealed to the Supreme Court.

The respondent’s status as a displaced person within the meaning of subsection (2)(10) of the Displaced Persons (Debts Adjustment) Act, 70 of 1951, was not contested. The Court therefore examined the material provisions of section 19 that determine the effect of the right claimed by the respondent, which read as follows: “(1) …… (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 shares as the society or”.

The Court explained that the provision allows a company to issue shares on which calls have already been made. Clause (4) provides that if a company or a co‑operative society refuses to comply with a request made under sub‑section (2), the Tribunal may, upon receiving an application, examine the refusal. If the Tribunal is satisfied that there is no good cause for the refusal, it may issue a direction requiring the company or society to comply, and such direction becomes effective from the date it is issued. Clause (5) then states that, except as otherwise provided in the section, nothing in the provision interferes with the validity of any action taken by the company or its board of directors under the Companies Act or the company’s memorandum or articles of association. Clause (1) makes clear that a displaced person is not required to pay interest on unpaid calls on his shares, nor can his shareholding be forfeited, despite any contrary provisions in the Companies Act or in the memorandum or articles of association. Clause (2) gives a displaced‑person shareholder the right to apply to the company for conversion of any partly paid‑up shares he holds into fully paid‑up shares, provided that a call has already been made on those shares. Clause (4) empowers the Tribunal, which is constituted under the Act, to order a company to obey a requisition made under sub‑section (2) when the Tribunal is convinced that there is no good cause for refusing to convert partly paid‑up shares into fully paid‑up shares. The expression “no cause for such refusal” is interpreted to mean “no good cause for refusal.” Consequently, when a shareholder files an application seeking an order that the company convert his partly paid‑up shares into fully paid‑up shares and the company offers a reason for refusing, the Tribunal is authorised to assess whether that reason is reasonably justified. In the present case, the respondent had invoked section 19(2) and asked the Bank to convert his partly paid‑up shares into fully paid‑up shares, but the Bank declined to comply with the requisition. The first issue before the Court was whether the order of the Company judge, issued in the petition filed by the Bank under sections 55, 56 and 57 of the Indian Companies Act and sanctioning a reduction of capital, was conclusive and binding on the respondent, thereby depriving him of his statutory right to convert his partly paid‑up shares into fully paid‑up shares. The Court noted that an order under section 60 of the Companies Act, 1913, sanctioning a reduction of capital, would ordinarily be binding on all shareholders, but it observed that further analysis was required.

In this case the Court observed that section three of Act 70 of 1951 gives the provisions of that Act, together with the rules and orders made under it, an overriding effect, except where the Act itself provides otherwise. This overriding effect applies regardless of any other law that is in force, any decree or order of any court, or any contract between the parties. The Court then explained that under section fifty‑five of the Indian Companies Act, 1913 a company limited by shares, if its articles permit it, may reduce its share capital by passing a special resolution that is sanctioned by the Court. The Court is empowered to issue an order confirming the reduction and may impose any terms and conditions it considers appropriate. The Court noted that the Company judge had indeed issued an order sanctioning the reduction of capital, and that the order imposed conditions concerning the conversion of the shareholdings of displaced persons. However, the Court held that the order could not take away the special statutory right granted to displaced persons by section nineteen of the Displaced Persons (Debts Adjustment) Act, 70 of 1951. That statute confers upon displaced persons a specific right to claim that any partly paid‑up shares they hold be converted into fully paid‑up shares, and that right can cease to be exercisable only if the Tribunal is satisfied that there is good cause for refusing the conversion. Accordingly, the Court said that it is not the mere refusal of the company to comply with the requisition that defeats the right, but rather a determination by the Tribunal that deprives the displaced person of the right to have his shares converted. The Court further observed that before the Company judge, the validity of the resolution for reduction of capital had been challenged on the ground that it was passed with the intention of depriving displaced persons of their right under section nineteen. The Court inferred that the Company judge, after considering the reasons he recorded, rejected that contention. Nevertheless, the Court clarified that the order does not operate as res judicata because the exclusive jurisdiction to decide whether there is good ground for refusing a conversion request lies with the Tribunal and with no other authority. The Court explained that any displaced person was free to take up the option offered by the Company judge’s order; if a person elected to exercise that option, he would be bound by his election. Yet a displaced person was under no obligation to accept the option, and if he chose not to, his right to call upon the Bank to grant conversion remained unaffected by the Company judge’s order. The Court emphasized that the order of the Company judge could not constitute a decision binding on all displaced shareholders. Consequently, a displaced person who does not wish to use the option is entitled to make an application under clause four of section nineteen. Finally, the Court held that the order passed by the Company judge remains valid and binding, but it is subject to any further orders that the Tribunal may issue with respect to any individual shareholder who makes an application under subsection four.

In this case, the Court observed that clause (5) of section 19 made clear that any action taken by the Company or its board of directors in accordance with the Companies Act or the company's memorandum or articles of association remained valid, except where section 19 provided otherwise. Accordingly, the Court concurred with the view expressed by the lower courts that the Tribunal retained jurisdiction to decide the petition filed by the respondent, even though the Company judge had offered the respondent and similarly situated persons an optional election, which they were free to accept but not compelled to adopt. The next issue to be resolved concerned whether the Bank's justification for refusing to convert the respondent's holding into fully paid‑up shares was adequate or satisfactory. The Tribunal had found that the resolution passed for reduction of capital was entered into in bad faith and with the purpose of depriving displaced shareholders of their statutory right to convert partially paid shares. The Tribunal further noted that, although the Bank had been in a weak financial position for many years, the scheme of capital reduction had been formulated only after Parliament enacted Act 70 of 1951, and that the scheme was intended as a device to override the statutory protection afforded to displaced shareholders. The High Court agreed that the Bank's assets had not vanished and held that the mere absence of assets could not, by itself, justify the denial of a displaced person's statutory right. The Tribunal's finding, which the High Court confirmed, established that the Bank's alleged cause was not genuine; the capital‑reduction resolution was merely a stratagem employed to nullify the statutory safeguards granted to displaced persons. This conclusion was supported by the evidence and, according to the Court's practice, should be regarded as binding. No other reason was advanced by the Bank to support its refusal. Consequently, the order directing the Bank to convert the respondent's shares into fully paid‑up shares was confirmed, as the Bank had failed to demonstrate any good cause for its refusal. The appeal was therefore dismissed with costs.