Official Liquidator, Popular Bank Ltd. vs K. Madhava Naik And Ors.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 17 August, 1964

Coram: A.K. Sarkar, Raghuvar Dayal, J.R. Mudholkar

In this matter, the Supreme Court of India recorded that the case was titled Official Liquidator, Popular Bank Ltd. versus K. Madhava Naik and Others, and that the judgment was delivered on 17 August 1964 by a bench comprising Justices A.K. Sarkar, Raghuvar Dayal and J.R. Mudholkar. The Court noted that on 19 December 1956 the High Court of Kerala issued an order directing that Popular Bank Ltd. be wound up and that a liquidator be appointed to administer the winding‑up process. During those proceedings the liquidator filed an application before a learned single judge of the High Court, seeking an order under Section 478 of the Companies Act, 1956 and Section 450 of the Banking Companies Act, 1949. The judge granted the application and ordered that nine officers of the bank be examined in public. Six of those officers challenged the order by filing appeals to an appellate bench of the High Court, and the appellate bench allowed all six appeals. The liquidator subsequently filed six separate appeals contesting the appellate bench’s orders. The Court further observed that the liquidator’s original application had also sought orders against several other individuals, but those persons were not relevant to the six appeals now before the Supreme Court.

The Court then turned to the substance of the liquidator’s original application. It recorded that the application was presented to the learned single judge on the basis of multiple statutory provisions, specifically Sections 478, 531, 538, 539 and 541 to 545 of the Companies Act, 1956 together with Sections 450, 45H and 45J of the Banking Companies Act. The liquidator alleged various instances of misfeasance and malfeasance by the nine officers and, in paragraph 19 of the application, concluded that “From the facts stated above, it appears that counter‑petitioners Nos. 1 to 8 and 12 to 16 are guilty or privy to acts of fraud, misfeasance, breach of trust and misappropriation and falsification of accounts in relation to the affairs of the company under Sections 538(1) and (j), 539(h), 542 and 543 of the Companies Act (1 of 1956).” The Court identified the counter‑petitioners numbered 1 to 8 and 12 as the nine officers against whom the impugned order of public examination had been issued. Because the arguments raised before the Court relied on specific prayers contained in the original application, the Court set out two of those prayers in full. Prayer (a) sought, “By virtue of the powers under Sections 477 and 478 of the Companies Act (1 of 1956) and Section 450 of the Banking Companies Act, to summon before it the counter‑petitioners and publicly examine them as to the conduct of the business of the company and as to their conduct and dealings as officers thereof.” Prayer (d) sought, “By virtue of the powers under Section 545 of the Companies Act to refer the matter to the Registrar of Companies for prosecuting the offenders or by virtue of the powers conferred on the High Court by Section 45J of the Banking Companies Act, 1949, as amended by Act 52 of 1953 to take cognizance of and try in a summary way the offences committed by the counter‑petitioners.”

On June 13, 1958 the single judge who had originally heard the application issued an order that the application should not be presented as a single pleading that combined a large number of provisions from both the Companies Act and the Banking Companies Act. The judge directed that the application be treated as a report under Section 455(2) of the Companies Act and Section 450 of the Banking Companies Act, and he observed that the official liquidator would be free to file separate applications for any additional relief that he might require. The record does not indicate that the liquidator subsequently filed any such separate applications. The practical result of the judge’s order was to limit the relief sought to prayer (a) alone, and the impugned order was made on that limited basis. The sole point raised before counsel was whether the order for a public examination violated Article 20(3) of the Constitution, which provides that no person accused of an offence may be compelled to give testimony against himself. The single judge held that the constitutional provision was not engaged because the persons ordered to be examined had not been formally accused of any crime. The appellate judges, however, allowed the appeals on the basis that the nine officers could be deemed to have been accused of offences under Sections 538, 539 and 541 of the Companies Act. They reasoned that, despite the June 13 order, the application still contained allegations of those offences and also included prayer (d) for their prosecution and trial, and that prayer could be pursued once the public examination concluded. Nonetheless, the appellate court expressly reserved the question of whether an order for public examination under Section 478 of the Companies Act or Section 450 of the Banking Companies Act would infringe Article 20(3) in the absence of any formal accusation.

The Court considered that the issue had already been resolved by its recent decision in K Joseph Augusthi v M A Narayanan, [1964] 34 Comp Cas 546. That judgment held that Section 450 of the Banking Companies Act does not contravene Clause (3) of Article 20 of the Constitution, and that an order for public examination issued under that section cannot violate the constitutional protection because the proceeding does not involve a prior accusation. The Court observed that this authority directly answers the question the appellate judges had left open. To understand the effect of the Augusthi decision, the Court examined the wording of the two sub‑sections of Section 450. Sub‑section (1) stipulates that when a winding‑up order is made against a banking company, 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 its promotion, formation, directorship or audit, irrespective of whether a fraud has been committed. Sub‑section (2) empowers the High Court, after considering such a report, to direct a public examination of the person concerned on matters mentioned in the report. The Court concluded that, because the provision itself does not create a formal accusation, the constitutional safeguard in Article 20(3) is not triggered by an order made under Section 450.

Section 450 of the Banking Companies Act required that, when an order for winding up a banking company was made, the official liquidator had to submit a report stating whether, in his opinion, any loss had been caused to the banking company by any act or omission of any person involved in the promotion or formation of the company, or of any director or auditor of the company, regardless of whether a fraud had been committed by such act or omission. Sub‑section 2 of the same provision authorised the High Court, after considering the report filed under Sub‑section 1, to order a public examination of the person concerned on any matters mentioned in the report. The wording of Sub‑section 1 therefore permitted the liquidator to include an allegation of fraud in the report if he believed that fraud had occurred. The Court observed that the earlier decision in K. Joseph Augusthi v. M. A. Narayanan held that Section 450 did not offend Clause 3 of Article 20 of the Constitution, and that this holding applied to all proceedings under Section 450, even where the report contained an allegation of fraud. Consequently, the Court concluded that no accusation within the meaning of Article 20(3) arose against the person whose public examination was sought, even when allegations of fraud were present. The Court emphasized that the purpose of the enquiry under Section 450 was to gather evidence and determine whether any act or omission caused loss to the banking company, not to consider any criminal accusation. Accordingly, any allegation of an offence that was irrelevant to the purpose of the order was deemed idle and could not be treated as an accusation. The Court further noted that even if the present application had contained allegations of offences under Sections 538, 539 and 541 of the Companies Act, such allegations would not constitute an accusation under Article 20(3). Therefore, the Court held that the appellate bench had erred in its view, a view that could not be sustained, and observed that the judges of that bench had not had the decision in K. Joseph Augusthi before them when they decided the case.

The counsel for the respondents attempted to distinguish the present case from K. Joseph Augusthi on two grounds. The first ground was that the earlier case concerned only Section 450 of the Banking Companies Act, whereas the present order had also been made under Section 478 of the Companies Act. While acknowledging that difference, the Court found that it did not affect the determination of whether an accusation had been made, because for the purpose of deciding the existence of an accusation, the two sections were indistinguishable. Section 478, like Section 450, allowed the court to direct a public examination of a person alleged to have committed fraud when the liquidator’s report—prepared under Section 455—stated that fraud had been committed in relation to the affairs of the company. The Court therefore applied the same reasoning articulated in K. Joseph Augusthi, holding that an application under Section 478 that led to a public examination could never amount to an accusation within the meaning of Article 20(3). The second ground raised by the counsel will be considered subsequently.

In the case presently before the Court, the order that was under consideration had been issued pursuant to Section 478 of the Companies Act. The Court accepted without dispute that the order in the present proceedings was indeed made under the authority granted by Section 478 of the Companies Act. However, the Court held that this fact did not, in its opinion, create any material distinction for the issue of whether an accusation had been made. The Court explained that, for the purpose of determining whether an accusation existed, the two statutory provisions – Section 450 of the Banking Companies Act and Section 478 of the Companies Act – are indistinguishable. Section 478 provides that a liquidator may file a report under Section 455 alleging fraud by a person in relation to the company’s affairs. When such an allegation is made, the court has the power to direct that the person alleged to have committed the fraud be examined publicly. In K. Joseph Augusthi’s case, the Court reasoned that an application under Section 450 of the Banking Companies Act which leads to a public examination cannot be regarded as an accusation under Article 20(3). The Court held that the same reasoning applies equally to a proceeding that is instituted under Section 478 of the Companies Act. The second ground on which counsel for the respondent attempted to distinguish K. Joseph Augusthi’s case concerned prayer (d) in the application, which had been set out earlier. The argument advanced was that prayer (d) in the application constituted an accusation because it asked the court to refer the matter to Section 545 of the Companies Act for the prosecution of nine officers. It also sought the court’s cognizance to try those officers summarily under Section 45J of the Banking Companies Act for certain offences. The Court found itself unable to accept the contention presented by the respondent’s counsel. First, the Court expressed great doubt that the appellate bench was correct in holding that prayer (d) remained part of the application despite the order issued by the learned single judge on June 13, 1958. The order had, in the Court’s view, removed the possibility of seeking relief on the terms contained in prayer (d) within the same application. Consequently, the Court concluded that, because of the single judge’s order, the relief sought in prayer (d) could not be pursued within the present application. The liquidator, therefore, would need to file an independent application to obtain that specific relief. If prayer (d) was indeed absent, the Court noted that K. Joseph Augusthi’s case, [1964] 34 Comp. Cas. 546, could not be distinguished on that basis. Second, the Court observed that, in any event, prayer (d) was not made under either Section 450 of the Banking Companies Act or Section 478 of the Companies Act. Accordingly, for proceedings under either of those statutes, the prayer had no legal effect and could be treated as if it had never been made. The Court further held that, for the purpose of initiating an action under Section 545 of the Companies Act and Section 45J of the Banking Companies Act, it is not essential that a public examination first be conducted under Section 478 of the Companies Act. Similarly, a preceding public examination under Section 450 of the Banking Companies Act is also unnecessary. Therefore, public examination under Section 478 of the Companies Act and Section 450 of the Banking Companies Act have no concern with the matters raised in prayer (d).

In the matter before it, the Court considered the effect of a prayer for relief that sought to invoke the provisions of Section 545 of the Companies Act and Section 45J of the Banking Companies Act. The Court held that such a prayer could not be treated as an accusation within the meaning of Article 20(3) of the Constitution for the purpose of directing a public examination under either Section 478 of the Companies Act or Section 450 of the Banking Companies Act. The Court further expressed doubt as to whether an application for orders under Section 545 of the Companies Act or Section 450 of the Banking Companies Act could ever be characterised as an accusation. The Court observed that it was at least arguable that any accusation, if it were to arise, would only materialise after the relevant orders under those sections had been granted, and not at the stage of filing the application. On the basis of the foregoing reasoning, the Court concluded that the appeals filed by the petitioners were maintainable and therefore should be allowed. Accordingly, the Court ordered that the appeals be allowed and that costs be awarded to the successful parties. The Court further directed that only a single set of hearing fees should be payable. Finally, the Court set aside the earlier order of the appellate bench and restored the order originally made by the single judge.