K. Joseph Augusthi and Two Ors. vs M. A. Narayanan

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 254 to 256 of 1963

Decision Date: 11 March 1964

Coram: P.B. Gajendragadkar, K.N. Wanchoo, J.C. Shah, N. Rajagopala Ayyangar, S.M. Sikri

In this matter the Supreme Court of India delivered its judgment on 11 March 1964. The judgment was authored by Justice P. B. Gajendragadkar, who sat as Chief Justice, and the bench included Justices K. N. Wanchoo, J. C. Shah, N. Rajagopala Ayyangar and S. M. Sikri. The parties before the Court were K. Joseph Augusthi and two others as petitioners, and M. A. Narayanan, the Official Liquidator of Palai Central Bank Ltd., as respondent. The case is reported in the 1964 volume of the All India Reporter at page 1552 and also appears in the Supreme Court Reports (Second Series) at volume 7, page 137. The citation record notes subsequent references in 1965 at page 654 and in 1981 at page 379. The legal issue concerned the operation of Section 45G of the Banking Companies Act, 1949, in the context of a public examination of directors of a bank that had been placed under liquidation, and whether that provision infringed Article 20(3) of the Constitution of India, which protects a person from being compelled to be a witness against himself. The Court was also asked to consider the nature of the acts or omissions alleged against the directors, whether they needed to be criminal in character, and the standard that the court must apply when ordering a public examination, namely that a prima facie case must be established.

The factual background disclosed that the petitioners were directors of Palai Central Bank Ltd. Following an application made by the Reserve Bank of India, the High Court of Kerala ordered the winding up of the bank and appointed the official liquidator, who submitted several reports pursuant to Section 45G(1) of the Banking Companies Act, 1949. The directors raised objections to those reports, and after hearing the parties, the learned single judge of the High Court issued an order directing that the directors be publicly examined under Section 45G(2). The directors appealed that order to a division bench of the High Court, but their appeal was dismissed. They then obtained a certificate from the High Court and filed the present appeals before this Court. On behalf of the petitioners it was contended that Section 45G(2) was unconstitutional because it would compel a person who is ordered to be examined to become a witness against himself, thereby violating Article 20(3). The petitioners further argued that the acts or omissions described in Section 45G(1) should be limited to conduct that is prohibited or expressly enjoined by law, and that the liquidator’s reports did not establish such a basis for public examination. A third contention was that the High Court had misinterpreted the effect of Section 45G and had failed to afford the directors an opportunity to be heard. The Court held that while a public examination under Section 45G may in some circumstances compel a person to be a witness against himself, thereby satisfying one element of Article 20(3), the constitutional protection applies only when there is an accusation of an offence against the person. If a person is not yet accused of any offence, compelling him to give evidence that later leads to an accusation does not trigger the protection of Article 20(3). Consequently, the provision of Section 45G was not held to be violative of the constitutional guarantee.

The Court noted that when the examination authorized by section 45G is concluded and the documents placed before the court have been scrutinised, the court may or may not find a need to take further action. In such a situation, any result that could possibly follow cannot be said to exist before the order under section 45G is issued. An accusation might arise after the inquiry, but at the moment the public examination is ordered no accusation is yet in existence. Consequently, the appellant could not be said to have been accused. Because the essential pre‑condition for the operation of article 20(3) of the Constitution is missing in every case covered by section 45C, the Court held that section 45G does not contravene article 20(3). The Court referred to the decisions in Mallala Suryanarayana v. Vijaya Commercial Bank Ltd., decided on 26‑10‑61 (C.A. No. 286/59), and Narayaulal Bansilal v. Maneck Phiroz Mistry and Anr., A.I.R. 1961 S.C. 29.

The Court explained that the acts or omissions envisaged by section 45G need not be criminal; they may also comprise conduct that is commercially unsound or unwise. The court’s task is to determine whether such acts or omissions, “as to the promotion or formation or the conduct of the business of the banking company or as to the conduct and dealings of the persons concerned in relation to the affairs of the banking company,” have caused loss to the banking company. To fulfil this task, the court must read the report submitted by the Official Liquidator, assess whether the opinion expressed in that report appears prima facie reasonable, hear the explanations of the persons concerned, and then decide prima facie whether the explanation offered is sufficient to reject the liquidator’s request for a public examination. The court must also consider whether, on the whole, holding a public examination serves the justice and the interests of the banking company.

The Court observed that the High Court had applied this approach precisely in the present matter, and therefore the appellants could not claim any grievance. It distinguished the authorities Ex parte George Stapylton Barnes (1896) A.C. 146, Sir Fazal Ibrahim Rahimtoola v. Appabhai C. Desai, A.I.R. 1949 Bom. 339, and The Ahmedabad Advance Spinning and Weaving Co. v. Lakshmishankar, I.L.R. 30 Bom. 173.

Applying the principles set out above and having examined the reports of the Official Liquidator, the Court found that the lower courts had duly considered those reports, taken into account the objections raised by the appellant, and correctly concluded that the appellants should undergo a public examination. The judgment was delivered in the civil appellate jurisdiction concerning Civil Appeals Nos. 254 to 256 of 1963. Counsel for the appellant and counsel for the respondents were listed, and the judgment was pronounced on 11 March 1964.

Chief Justice Gajendragadkar recorded that the petitioners had raised two questions of law through counsel Dr. Seyid Muhammad on behalf of K. Joseph Augusthi, who was the appellant in Civil Appeal No 254 of 1963. Both questions concerned section 45G of the Banking Companies Act, 1949, which the judgment refers to as “the Act.” The first question invited the Court to consider whether the provision was valid, while the second sought to determine the true scope and effect of the provision. Dr. Seyid Muhammad submitted that the Kerala High Court had answered both questions incorrectly. He argued that section 45G was unconstitutional because it infringed the fundamental right guaranteed by Article 20(3) of the Constitution. He also contended that, in ordering a public examination of the appellant, the High Court had misinterpreted the scope and effect of the relevant provisions of section 45G.

The factual background presented concerned the management of the Palai Central Bank Limited. The appellant, Joseph Augusthi, had served as Managing Director of the bank from 26 January 1927 until 8 August 1960. Two other respondents, K. George Thomas and George Joseph, were directors of the same bank; Thomas held his directorship from 14 January 1935 to 8 August 1960, and Joseph from 26 January 1927 to 8 August 1960. The Reserve Bank had filed an application for winding up the bank before the Kerala High Court under section 38(3)(b)(iii) of the Act, a provision that permits the Reserve Bank to seek winding up when it believes that the continued operation of the banking company would be prejudicial to the interests of depositors. On 8 August 1960 the court issued an order on that application, appointing the Official Liquidator of the High Court as the Provisional Liquidator of the bank. The winding‑up order was subsequently made on 5 December 1960, and on 8 December 1960 an Official Liquidator was appointed under section 39 of the Act.

After the Official Liquidator assumed his functions, he submitted three reports to the High Court, each made under section 45G(1). The first report, numbered 192, was filed on 17 August 1961; the second, numbered 242, on 29 September 1961; and the third, numbered 350, on 4 December 1961. The appellants lodged objections to the first two reports on 23 November 1961. The matter was then placed before a learned single judge of the Kerala High Court, who, after hearing the parties, issued an order directing the public examination of the three appellants pursuant to section 45G(2). The appellants contested that order by filing three separate appeals before a Division Bench of the High Court. The Division Bench affirmed the single judge’s decision and dismissed all three appeals. Subsequently, the appellants obtained certificates from the High Court, and it was on the basis of those certificates that they brought the present three appeals before this Court.

The appellant’s counsel argued that section 45G of the Companies Act is unconstitutional because it violates the protection against self‑incrimination guaranteed by Article 20(3) of the Constitution. To evaluate this claim, the Court examined the wording of subsections (1) and (2) of section 45G. Subsection (1) provides that when an order for winding up a banking company is made, the official liquidator must submit a report stating whether, in his opinion, any loss has been caused to the banking company since its formation by any act or omission of any person involved in the promotion or formation of the company, or by any director or auditor, regardless of whether a fraud was committed. Subsection (2) directs that if, after considering the report under subsection (1), the High Court is of the opinion that any person who participated in the promotion or formation of the banking company, or who has been a director or auditor, should be publicly examined, the court shall schedule a public sitting on a date it appoints. The court must then order that the identified person, director, or auditor attend that sitting and be publicly examined concerning the promotion, formation, conduct of business, or any related dealings of the banking company. A proviso in subsection (2) requires that no such person be examined unless he has first been given an opportunity to show cause why he should not be examined.

The Court noted that the remaining subsections of section 45G need not be quoted in full for the present purpose, but their substance was summarized. Subsection (3) authorises the official liquidator to take part in the examination and to engage legal assistance if the High Court specially authorises it. Subsection (4) permits a creditor or contributory to take part in the examination either personally or through any person authorised to appear before the High Court. Subsection (5) empowers the High Court to put questions to the person who is being examined. Subsection (6) authorises the administration of an oath to that person and obliges him to answer any questions put to him by the High Court or as the Court may allow. Under subsection (7), the examined person may be represented by a lawyer, and that lawyer is free to pose additional questions that the High Court deems appropriate for the purpose of enabling the examined person to explain or qualify any answer he has given. A proviso to subsection (7) gives the High Court discretion to order costs if the examined person is cleared of any charge or suggestion made against him.

The Court explained that sub‑section (8) prescribes the method by which a record of the examination must be kept. Under sub‑section (9), if after completing the examination the High Court is persuaded that a person who has previously served as a director of the banking company is unfit to act as a director, or that a person who has functioned as an auditor or as a partner performing auditor duties is unfit to continue in that capacity, the Court is empowered to issue an order prohibiting that individual, without the Court’s permission, from acting as a director or from taking part in the management of any company, whether directly or indirectly, and also from acting as an auditor or as a partner of a firm that conducts audits, for a period not exceeding five years as specified in the order. The Court then described the overall scheme of section 45G. First, the provision requires a preliminary determination, on a prima facie basis, as to whether there exists a case warranting a public examination of the individual. Second, once that preliminary question is decided, the individual must be given an opportunity to be heard. Third, if the authority decides to proceed with a public examination, the examination must be conducted. Fourth, in the event that the suggestions or allegations made against the examined person are found to be baseless, the Court may order that costs be awarded in the person’s favour. Fifth, if the examination reveals that the person is responsible for acts or omissions that have caused loss to the banking company, the Court may impose a penal order disqualifying that person from holding the position of director or auditor in accordance with sub‑section (9). Having set out this framework, the Court turned to the argument that the provisions might contravene article 20(3) of the Constitution. Article 20(3) states that no person who is accused of any offence shall be compelled to be a witness against himself. The Court acknowledged that compelling a person to undergo a public examination can, at first glance, appear to subject the individual to public ridicule or “pillorying.” It also recognised that sub‑section 6 of section 45G obliges the examined person to answer any question that the High Court puts to him, or permits to be put to him, and that the public nature of the examination may give rise to suggestions or even formal charges relating to the examined person’s conduct in establishing, managing, or operating the banking company of which he was a director or auditor. Consequently, the Court held that it is not impossible for a person subjected to a public examination under section 45G to be compelled, in some instances, to give testimony that could be self‑incriminating, thereby satisfying one of the two essential elements of article 20(3). However, the Court noted that the remaining essential element—whether the person is actually accused of an offence—must still be examined.

In this case, the Court explained that Article 20(3) of the Constitution guaranteed every citizen the fundamental right not to be compelled to be a witness against himself, but that protection applied only when the person who was being compelled was already accused of an offence. The Court clarified that the prohibition in Article 20(3) became operative solely on the condition that an accusation existed at the time the compulsion was imposed. Consequently, if a person who had not been accused was forced to give testimony, and the forced testimony later resulted in an accusation, such a situation did not fall within the scope of Article 20(3). The Court reiterated that the primary purpose of Article 20(3) was to shield an accused individual from being forced to incriminate himself, reflecting the basic principle of criminal law in the country that an accused enjoys a presumption of innocence and cannot be compelled to swear against himself. Therefore, the Court held that unless it was demonstrated that a person ordered to undergo public examination under section 45G was, before or at the moment the order was made, an accused person, Article 20(3) would not be applicable. The Court then examined the factual situation concerning the appellants against whom the High Court had issued an order for public examination. The only material before the court at that stage consisted of reports submitted by the official liquidator, who expressed the opinion that the appellants’ acts or omissions had caused loss to the banking company under liquidation. After considering those reports and the explanations offered by the appellants, the High Court concluded that, on a preliminary basis, there was a case for their public examination. The Court observed that at that relevant time the appellants could not be said to have been accused of any offence, because the purpose of the enquiry was merely to collect evidence and to determine whether any loss had resulted from the alleged acts or omissions. The Court noted that the enquiry might ultimately find that the alleged acts did not cause loss, in which event no further action would follow. Conversely, the Court recognized that the liquidator’s opinion might be confirmed, leading the court to determine that the acts or omissions did cause loss, and that additional action could then be taken against those examined, beyond the action contemplated by section 45G(9). However, the Court emphasized that such possible subsequent action could arise only after the examination was completed and the material presented before the court had been evaluated, and that an accusation, if any, would arise only after the inquiry, not before the order for public examination was issued.

In this case, the Court observed that at the moment the High Court issued the order for a public examination under section 45G, no formal accusation of any offence existed. An accusation could arise later as a result of the enquiry, but it was not present when the examination order was made. Consequently, the appellants could not argue that they were already accused of an offence at the time the order was passed. The Court explained that an accusation of an offence is a necessary condition for the protection guaranteed by Article 20(3) of the Constitution, and that condition must precede the application of the constitutional principle. Because every situation covered by section 45G lacks such a pre‑existing accusation, the Court found it difficult to sustain the contention that section 45G violates Article 20(3). Accordingly, the Court concluded that Dr. Seyid Muhammad’s claim that section 45G is unconstitutional on that ground is unpersuasive. The Court noted that a similar view had been expressed in Mallala Suryanarayana v. The Vijaya Commercial Bank Ltd., although the matter had not been extensively debated in that decision. The Court also referred to Raja Narayanlal Bansilal v. Maneck Phiroz Mistry and Another, where a provision analogous to section 45G in the former Companies Act, namely section 240, was examined and held not to be in conflict with Article 20(3). This background set the stage for a detailed analysis of the proper construction of section 45G.

Turning to the construction of section 45G, the Court addressed Dr. Seyid Muhammad’s argument that the provision requires the alleged acts or omissions to be expressly prohibited by law, or to involve failure to perform a duty that the law mandates. He suggested that, if the words “acts or omissions” were read narrowly, the liquidator’s reports in the present proceedings would not justify a public examination of the appellants. The Court rejected this narrow interpretation, emphasizing that section 45G(1) does not limit itself to fraudulent conduct. The provision specifies that an act or omission attracts section 45G(1) if it results in loss to the banking company, regardless of whether fraud was involved. The Court clarified that the inquiry must focus on whether any act or omission by a director or auditor caused loss to the company, and that such conduct need not be criminal. It may include actions that are commercially imprudent or unwise. In support of this broader view, the Court recalled section 478 of the Companies Act, which deals with a comparable issue by requiring the Official Liquidator’s report to address loss‑causing conduct without insisting on criminality.

The Court observed that the provision requiring the Official Liquidator to disclose his opinion that a fraud has been committed is analogous to the provision contained in section 268 of the English Companies Act (11 & 12 Geo. 6, c 38). Consequently, the Court held that it would be unreasonable to adopt a narrow or restricted construction of the words “acts or omissions” employed in section 45G(1). Dr Seyid Muhammad argued that, in considering the reports made by the liquidator in the present matter, the High Court failed to give effect to the provision set out in Civil Appeal No. 286 of 1959 decided on 26‑10‑1961 and reported in A.I.R. 1961 S.C. 29, namely the proviso to section 45G(2). That proviso stipulates that no person shall be publicly examined unless he has been given an opportunity to show cause why he should not be so examined. Dr Seyid Muhammad contended that, because the appellants were not afforded a full examination of the facts alleged in the liquidator’s reports nor an opportunity to demonstrate that those facts were untrue, the requirements of the proviso had not been satisfied, and his grievance was that such an opportunity was denied to the appellants. The Court found this argument without substance.

The Court explained that, in exercising its power under section 45G(2), the proper course is to review the liquidator’s report and decide whether it is reasonable to entertain the opinion that any person who participated in the promotion, formation, or conduct of the banking company should be publicly examined. This assessment represents a preliminary stage of inquiry, where the Court must determine, on a prima facie basis, whether a case exists for a public examination of the person concerned. The Court emphasized that section 45G(2) read with its proviso does not require the Court to permit the appellants to adduce evidence to rebut the liquidator’s allegations, because such a step would transform the limited preliminary inquiry into a full‑blown enquiry, thereby defeating the purpose of a restricted initial investigation. Accordingly, the Court may read the Official Liquidator’s report, evaluate whether the opinion expressed therein appears prima facie reasonable, hear the explanation offered by the person in question, and then decide whether that explanation is sufficient to reject the liquidator’s request for public examination. The Court must also consider whether, on the whole, it is just and beneficial to the banking company’s interests to hold a public examination. This preliminary investigation concerns only whether the director or auditor should be publicly examined, not the merits of the entire case. On that basis, the Court concluded that Dr Seyid Muhammad was not justified in asserting that the High Court had ignored the safeguard provided by the proviso to section 45G(2).

By reference to the proviso to section 45G(2) the Court observed that the issue of interpreting sections 45G(1) and 45G(2) was not a difficult one. The report of the Official Liquidator must disclose any act or omission by the identified person that has caused loss to the banking company since its incorporation. The acts or omissions mentioned in section 45G(1), when read together with section 45G(2), are to be understood as relating to the promotion, formation, or conduct of the business of the banking company, or to that person’s conduct and dealings insofar as they affect the affairs of the banking company. After the liquidator’s report is filed, the court is required to take a broad overall view of the facts presented and to determine, on a preliminary basis, whether there is sufficient ground to order a public examination of the director or the auditor. The Court was satisfied that the High Court had applied this approach correctly and therefore no complaint could be sustained against the High Court’s decision on the ground that it ignored the provisions of the proviso to section 45G(2). In support of his contention that the High Court had mis‑interpreted section 45G(1), Dr Seyid Muhammad cited two authorities. The first authority was the House of Lords decision in Ex parte George Stapylton Barnes (1). In that case the issue was the scope of section 8(3) of the Companies (Winding‑up) Act, 1890. Lord Halsbury stated that he had no doubt that the legislative intent was that the Court could only order a public examination when fraud had been found against an individual, and that the individual summoned would be compelled to answer even if the answer might incriminate him, though he would be exculpated and awarded costs. He further remarked that, having examined the whole legislative scheme, he could not imagine any doubt that the legislature required a finding of fraud. The present Court found this passage to be largely irrelevant because section 45G(1) expressly provides that the act or omission complained of need not be fraudulent, and consequently a finding of fraud is not a prerequisite for directing a public examination under that section. The second authority relied upon by Dr Seyid Muhammad was the Bombay High Court judgement in Sir Fazal Ibrahim Rahimtoola v. Appabhai C. Desai (2), which concerned the provisions contained in section …

In discussing section 196 of the old Companies Act, the Court noted that Chief Justice Chagla had expressed disapproval of the practice of ordering ex parte public examinations of individuals. He highlighted, with approval, a warning made by Sir Lawrence Jenkins in the case of Ahmedabad Advance Spinning and Weaving Company v. Lakshmishanker (3), where it was observed that issuing ex parte orders that placed the affected person in serious liability was highly undesirable. The Bombay High Court in that matter was asked to determine whether the accusations made against a director were vague and indefinite. The citations referenced in that discussion are (1) [1896] A.C. 146 at p. 152, (2) A.I.R. 1949 Bom. 339 and (3) I.L.R. 30 Bom. 173. The Court now points out that the difficulty identified in the earlier case does not arise in the present appeals, because the allegations set out by the liquidator in his reports against the appellants are clear, precise and definite. The Court then turned to the liquidator’s reports in the present matter. In the first report, the liquidator stated that, in managing the affairs of the bank, the Directors—together with officers they appointed from among their own relatives—had failed to conduct the bank’s business properly. He further expressed the opinion that the bank had suffered loss since its formation as a result of the acts and omissions of the Directors and of the bank’s auditor. The report subsequently detailed the magnitude of the loss and identified the causes. According to the report, the bank had advanced loans without adequate security; in many instances loans were granted without any security at all, leading to a large number of debts becoming time‑barred long before winding‑up proceedings began. The report also indicated that the bank had paid dividends despite not earning profits. Moreover, although the bank did not earn any profit during the period 1936 to 1958, it filed statements showing substantial net income and consequently paid income tax on those amounts. A considerable portion of the advances was found to be irrecoverable. At the conclusion of the first report, the liquidator identified ten individuals, including the three appellants, whose conduct he believed contributed to the loss suffered by the banking company. Two additional reports were later filed by the liquidator, and both supported the conclusions reached in the first report. Although a third report was filed after the matter had been heard by the learned Single Judge, the first two reports alone fully justified the order made by that judge, and therefore the Court considered the third report unnecessary for examination. When the Court examined the objections raised by the appellants, it observed that several factual points were not seriously contested. For example, the claim that dividends were declared without any profit was not denied. The appellant Joseph Augusthi, before the High Court, had argued that the bank treated interest accrued on advances—although not actually received—as income, and consequently paid income‑tax, super‑tax and dividends on that purported income.

In this case, the appellant argued that interest accrued on advances, although not actually received, was treated as income, and consequently both income‑tax and super‑tax had been paid on that presumed income, with dividends also distributed on the same basis. The appellant further suggested that the Reserve Bank of India had observed these circumstances and had subsequently waived any objection to the practice. In effect, the appellant relied on a method of accounting that he described as a “mercantile system of accounting,” acknowledging that such a method was commercially unsound, and contended that, at the present stage, the Reserve Bank could not question the correctness or propriety of that method. The Court observed that several of the factual assertions made by the liquidator in his report were not contested by the appellants; however, the impact and significance of those facts formed the core of the dispute before the High Court. Given this context, the Court found no basis on which the appellants could successfully overturn the High Court’s conclusion that sufficient grounds existed to order a public examination of the appellants. Accordingly, the Court rejected the submission made on behalf of Dr. Seyid Muhammad, which claimed that the appellants had not been afforded an opportunity to demonstrate why a public examination should not be ordered. The Court was satisfied that the lower courts had duly considered the liquidator’s reports, had taken into account the objections raised by the appellants, and had correctly concluded that a public examination of the appellants was warranted. Consequently, the Court affirmed the decision of the lower courts, dismissed the appeals, ordered the appellants to bear costs, and directed the payment of one set of hearing fees. The appeals were thereby dismissed in their entirety.