Dr.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

Subject Banking Law

FINAL DRAFT

Winding up of Bank.

SUBMITTED BY-
Kumar Sourav
5th Semester
Roll No-72, Section-A

UNDER THE GUIDANCE OF

Mr. Abdullah Nasir

Assistant Professor (Law)

Dr. RMLNLU, LUCKNOW

 ACKNOWLEDGEMENT

This project venture has been made possible due to the generous co-operation of various persons.

I, Kumar Sourav student of B.A L.LLB (Hons.), Vth Semester would like to express my sincere

thanks and deep gratitude to Mr. Abdullah Nasir(Assistant Professor), without whose thorough

and insightful guidance this project work would not have been a success.
 TABLE OF CONTENTS PAGE NO.

Introduction....................................................................................05

Hypothesis......................................................................................06

Procedure for Winding up..............................................................06

Voluntary and speedy winding u.....................................................12

Case Law.........................................................................................14

Conclusion......................................................................................17

Bibliography...................................................................................18

TABLE OF CASES

Joseph Kuruvilla Vellukunnel v Reserve Bank of India

Baidyanath Bayar v. Berhampore bank Ltd.

Hanuman Bank Ltd v. P.T.Munia Servai

Reserve Bank of India and Others v Joint Provisional Liquidators Bank of Credit &

Commerce International (Overseas) Ltd.

Reserve Bank of India v Pattem Surya Prakash Rao and Ors.

 INTRODUCTION

Banking company is playing major role in the society for their day to day work. Now-a-days
people has are so much depended on the banking sector and most of the time they require their
help in the business or other thing. Many people keep their money in the bank for the purpose of
saving also. So their money is kept safely. But sometime it happens that some of the bank closes
down due to non-recovery of loan or such other issues. In such condition many people have to
suffer as their money are with that bank then. For this reason there is provision for winding up of
the banking company under The Banking (Regulation) Act, 1949. The provision from sec. 38 to
44 deals with the winding up procedure for banking company.

It refers to a condition, where companies or individuals are unable to pay their debts to their
creditors. In this situation, the economic value of companys assets gets much less than their
liabilities. And income long with revenues of company may be unable to fill that gap between
assets and liabilities. In starting, a company can be treated as dissolved but when the court
collects all assets of company for paying company debts or giving contribution of its members, if
necessary, then it can be called as winding up. If any surplus still exists after setting off company
debts, then it will be distributed among members according to their rights.

There are certain procedures after following that, bank can wind up, this are almost similar to the
Companies Act only. But the power of winding up of bank lies in the hand of Reserve bank of
India. At the same time RBI can also apply for the winding up of bank if thinks fit for the bank.
As it is a banking sector speedy winding up procedure can also take place under few provisions
also. As in normal procedure it takes a long time. Voluntary winding up procedure can also
started at the same time by the bank also.

The main issue in the winding up of the bank is the many people have suffered from great loss.
Sometime it also happen that some made a big fraud with the bank and due to which the bank
has to wind up and at the same time bank may be helping the accuse for this purpose also. In
such condition intervention of court and RBI seems to be good for the people at large and
interest of public is saved.
HYPOTHESIS
The researcher has made certain assumption in the beginning of the research project which are
going to be tested during the project, they are the following.
The winding up of bank cause loss to the people at large.

PROCEDURE OF WINDING UP
For the process of winding up in banking company, Companies Act is not to be followed and
power for the same is with the high court only.

Winding up by High Court

For the process of winding up S. 391, S.392, S.433 and S.583 is not applicable for banking
company of Companies Act, 1956. As per S. 37 (1) of the Banking Regulation Act the High
court can order for winding up of a banking company on basis of following conditions

1. If the banking company is unable to pay its debts; or

2. If an application for its winding up has been made by the Reserve Bank under section 37
or this section.

The Reserve Bank can also make an application under section 38 for the winding up of a banking
company if it is directed so to do by an order under clause (b) of sub-section (4) of section 35.
The Reserve Bank may make an application under this section for the winding up of a banking
company-
If the banking company has failed to comply with the requirements specified in section 11; or
has by reason of the provisions of section 22become disentitled to carry on banking business in
India; or has been prohibited from receiving fresh deposits by an order under clause (a) of sub-
section (4) of section 35 or under clause (b) of sub-section (3A) or section 42 of the Reserve
Bank of India, Act, 1934.
If the company has failed to comply with any requirement of the Act other than the requirements
laid down in section 11, has continued such failure, after notice in writing of such failure or
contravention has been conveyed to the banking company.
When high court order for winding up a liquidator is appointed by the court under S.38A which
is as follow:
1. There shall be attached to every High Court a court liquidator to be appointed by the
Central Government for the purpose of conducting all proceedings for the winding up of
banking companies and performing such other duties in reference thereto as the High
Court may impose.

2. Where having regard to the number of banking companies wound up and other
circumstances of the case, the Central Government is of opinion that it is not necessary
or expedient to attach for the time being a court liquidator to a High Court, it may, from
time to time, by notification in the Official Gazette, direct that this section shall not have
effect in relation to that High Court.

39. Reserve Bank to be official liquidator

(1) Notwithstanding anything contained in section 38A of this Act or in section 448 or section
449 of the Companies Act, 1956 (1 of 1956), where in any proceeding for the winding up by the
High Court of a banking company, an application is made by the Reserve Bank in this behalf, the
Reserve Bank, the State Bank of India or any other bank notified by the Central Government in
this behalf or any individual as stated in such application shall be appointed as the official
liquidator of the banking company in such proceeding and the liquidator, if any, functioning in
such proceeding shall vacate office upon such appointment.

(2) Subject to such directions as may be made by the High Court, the remuneration of the official
liquidator appointed under this section, the cost and expenses of his establishment and the cost
and expenses of the winding up shall be met out of the assets of the banking company which is
being wound up, and notwithstanding anything to the contrary contained in any other law for the
time being in force, no fees shall be payable to the Central Government, out of the assets of the
banking company.]
When high court appoints a court liquidator, the Companies Act is application to liquidators who
is appointed under Section 38A and 39. The liquidator appointed in such condition will have the
same power position that of the official liquidator for the purpose of winding up process of a
banking company.

Stay of proceedings

Notwithstanding anything to the contrary contained in 202[section 466 of the Companies Act,
1956 (1 of 1956), the 203[High Court] shall not make any order staying the proceedings in
relation to the winding up of a banking company, unless the 203[High Court] is satisfied that an
arrangement has been made whereby the company can pay its depositors in full as their claims
accrue.

In simple word if court finds that it is not beneficial to the people at large court can put a stay
then only on winding up process.

For the same purpose the liquidator have to submit the preliminary report within 2 months from
the date of winding up order by the court for the same giving the information required by that
section so far as it is available to him and also stating the amount of assets of the banking
company in cash which are in his custody or under his control on the date of the report and the
amount of its assets which are likely to be collected in cash before the expiry of that period of
two month s in order that such assets may be applied speedily towards the making of preferential
payments, under section 530 of the companies Act, 1956, and in the discharge, as far as possible,
of the liabilities and obligations of the banking company to its depositors and other creditors in
accordance with the provisions hereinafter contained; and the official liquidator shall make for
the purposes aforesaid every endeavour to collect in cash as much of the assets of the banking
company as practicable.
Then after notice to preferential claimants and secured and unsecured creditors should be served
Within fifteen days from the date of the winding up order of a banking company or where the
winding up order has been made before the commencement of the Banking Companies, within
one month from such commencement, the official liquidator shall, for the purpose of making an
estimate of the debts and liabilities of the banking company, by notice served in such manner as
the Reserve Bank may direct, call upon-

1. As entitled to preferential payment

2. Every secured and every unsecured creditor
3. If claim is not asked in a fix time limit then it will not be considered as preferential claims

Booked depositors' credits to be deemed proved

In any proceeding for the winding up of a banking company, every depositor of the banking
company shall be deemed to have filed his claim for the amount shown in the books of the
banking company as standing to his credit and, notwithstanding anything to the contrary
contained in 208[section 474 of the Companies Act, 1956 (1 of 1956)1, the High Court shall
presume such claims to have been proved, unless the official liquidator shows that there is reason
for doubting its correctness.

Preferential payments to depositors

(1) In every proceeding for the winding up of a banking company where a winding up order has
been made, whether before or after the commencement of the Banking Companies (Second
Amendment) Act, 1960 (37 of 1960), within three months from the date of the winding up order
or where the winding up order has been made before such commencement, within three months
there from, the preferential payments referred to in section 530 of the Companies Act, 1956 (1 of
1956), in respect of which statements of claims have been sent within one month from the date of
the service of the notice referred to in section 41A, shall be made by the official liquidator or
adequate provision for such payments shall be made by him.

(2) After the preferential payments as aforesaid have been made or adequate provisions has been
made in respect thereof, there shall be paid within the aforesaid period of three months;
(a) in the first place, to every depositor in the savings bank account of the banking company a
sum of two hundred and fifty rupees or the balance at his credit, whichever is less; and thereafter

(b) in the next place, to every other depositor of the banking company a sum of two hundred and
fifty rupees or the balance at his credit, whichever is less, in priority to all other debts from out of
the remaining assets of the banking company available for payment to general creditors:

PROVIDED that the sum total of the amounts paid under clause (a) and clause (b) to any one
person who in his own name (and not jointly with any other person) is a depositor in the savings
bank account of the banking company and also a depositor in any other account, shall not exceed
the sum of two hundred and fifty rupees.

(3) Where within the aforesaid period of three months full payment cannot be made of the
amounts required to be paid under clause (a) or clause (b) of sub-section (2) with the assets in
cash, the official liquidator shall pay within that period to every depositor under clause (a) or, as
the case may be, clause (b) of that sub-section on a pro rata basis so much of the amount due to
the depositor under that clause as the official liquidator is able to pay with those assets; and shall
pay the rest of that amount to every such depositor as and when sufficient assets are collected by
the official liquidator in cash.

(4) After payments have been made first to depositors in the savings bank account and then to
the other depositors in accordance with the foregoing provisions, the remaining assets of the
banking company available for payment to general creditors shall be utilized for payment on a
pro rata basis of the debts of the general creditors and of the further sums, in any, due to the
depositors; and after making adequate provision for payment on a pro rata basis as aforesaid of
the debts of the general creditors, the official liquidator shall, as and when the assets of the
company are collected in cash, make payment on a pro rata basis as aforesaid, of the further
sums, if any, which may remain due to the depositors referred to in clause (a) and clause (b) of
sub-section (2).
(5) In order to enable the official liquidator to have in his custody or under his control in cash as
much of the assets of the banking company as possible, the securities given to every secured
creditor may be redeemed by the official liquidator:
(a) Where the amount due to the creditor is more than the value of the securities as assessed by
him, or, as the case may be, as assessed by the official liquidator, on payment of such value; and

(b) where the amount due to the creditor is equal to or less than the value of the securities as so
assessed, on payment of the amount due:

PROVIDED that where the official liquidator is not satisfied with the valuation made by the
creditor, he may apply to the High Court for making a valuation.

(6) When any claimant, creditor or depositor to whom any payment is to be made in accordance
with 210[the provisions of this section], cannot be found or is not readily traceable, adequate
provision shall be made by the official liquidator for such payment.

(7) For the purposes of this section, the payments specified in each of the following clause shall
be treated as payments of a different class, namely:-
(a) payments to preferential claimants under section 530 of the Companies Act, 1956 (1 of
1956);]

(b) payments under clause (a) of sub-section (2) of the depositors in the savings bank account;

(c) payments under clause (b) of sub-section (2) to the other depositors;

(d) payment to the general creditors and payments to the depositors in addition to those specified
in clause (a) and clause (b) of sub-section (2).

(8) The payments of each different class specified in sub-section (7) shall rank equally among
themselves and be paid in full unless the assets are insufficient to meet them, in which case they
shall abate in equal proportion.]
211[(9) Nothing contained in sub-sections (2), (3), (4), (7) and (8) shall apply to a banking
company in respect of the depositors of which the Deposit Insurance Corporation is liable under
section'16 of the Deposit Insurance Corporation Act, 1961 (47 of 1961).

(10) After preferential payments referred to in sub-section (1) have been made or adequate
provision has been made in respect thereof, the remaining assets of the banking company
referred to in sub-section (9) available for payment to general creditors shall be utilized for
payment on pro rata basis of the debts of the general creditors and of the sums due to the
depositors:

PROVIDED that where any amount in respect of any deposit is to be paid by the liquidator to the
Deposit Insurance Corporation under section 21 of the Deposit Insurance Corporation Act, 1961
(47 of 1961), only the balance, if any, left after making the said payment shall be payable to the
depositor.]

VOLUNTARY AND SPEEDY WINDING UP

Power of High Court in process of voluntary winding up

For the purpose of voluntary winding up the banking company has to get a letter / certificate
from the reserve bank, that the company is able to pay all their debts to its creditors and court can
also keep supervision on such banking company if it thinks fit.

Speedy disposal of winding up for banking company

From S. 44A to 44X deal with this aspect
In case of Baidyanath Bayar v. Berhampore bank Ltd.1 it was held that High court has
exclusive jurisdiction for the winding up of banking company. The main object of this
jurisdiction is speedy realization of claims of the bank
In such condition of winding up the Summary proceedings take place and not the general
proceeding. [S. 45B - The High Court shall, save as otherwise expressly provided in section 45C,
have exclusive jurisdiction to entertain and decide any claim made by or against a banking
company which is being wound up (including claims by or against any of its branches in India)
or any application made under 236[section 391 of the Companies Act, 1956 (1 of 1956)] by or in
respect of a banking company or any question of priorities or any other question whatsoever,
whether of law or fact, which may relate to or arise in the course of the winding up of a banking
company, whether such claim or question has arisen or arises or such application has been made
or is made before or after the date of the order for the winding up of the banking company or
before or after the commencement of the Banking Companies (Amendment) Act, 1953 (52 of
1953)]

In some condition court can also order for sale of debtors property, under Section 45D(7) [At
the time of settling the list of debtors or at any other time prior or subsequent thereto, the High
Court shall have power to pass any order in respect of a debtor on the application of the official
liquidator for the realization, management, protection, preservation or sale of any property given
as security to the banking company and to give such powers to the official liquidator to carry out
the aforesaid directions as the High Court thinks fit.] This was held in the case of Hanuman
Bank Ltd v. P.T.Munia Servai2. This is only done when debtor is not paying debt during the
process and this done after serving him a valid notice.

Evidence of banking transactions

(1) Entries in the books of account or other documents of a banking company which is being
wound up shall be admitted in evidence in all 239[legal proceedings] and all such entries may be
proved either by the production of the books of account or other documents of the banking
company containing such entries or by the production of a copy of the entries, certified by the
official liquidator under his signature and stating that it is a true copy of the original entries and
that such original entries are contained in the books of account or other documents of the
banking company in his possession.

1
AIR 1958 Mad 279
(2) Notwithstanding anything to the contrary contained in the Indian Evidence Act, 1872 (1 of
1872), all such entries in the books of account or other documents of a banking company shall,
as against the Directors 216[officers and other employees] of the banking company in respect of
which the winding up order has been made 240[* * *], be prima facie evidence of the truth of all
matters purporting to be therein recorded.

CASE LAWS

Joseph Kuruvilla Vellukunnel v Reserve Bank of India3

Facts: The Reserve Bank of India made an application in the High Court of Kerala under s. 38
of the Banking Companies Act, 1949 (10 of 1949) read with the Companies Act, 1956 (1 of
1956), for the winding up of the Palai Central Bank, Ltd. (having its registered office at Palai in
the State of Kerala), for the appointment of the Official Liquidator of the High Court as the
Liquidator with all the Powers under the said Acts and for the appointment of the Official
Liquidator as the Provisional Liquidator during the pendency of the application.
This application was allowed on December 5, 1960, and the present appeal with special leave,
has been filed against the order.

Issue: The vital question for decision is whether a law which requires the High Court to order
winding up because the Reserve Bank is of the opinion that a banking company should be wound
up is constitutional.

Held: The RBI is vested with wide powers to take a decision on the cancellation of licence and
winding up of a banking company and that the Court while exercising the power of judicial
review is only concerned with the decision making process and not the merits of the decision.
This Court has emphasised that the deprivation of the right to resort to court is an unreasonable
restriction. It is true that in the present case an appeal to this Court has not been taken away but
what is left is a wholly ineffective right of appeal because if the law is constitution then all that
a court can do is to act according to the opinion of the Reserve Bank and abdicate its judicial
function in favour of the opinion of an executive body.

3
AIR 1962 SC 1371
The opined that Section 384 is an unreasonable restriction on the right of the Palai Bank to carry
on its business and is therefore unconstitutional.

Reserve Bank of India and Others v Joint Provisional Liquidators Bank of Credit &
Commerce International (Overseas) Ltd.5

Facts: The Reserve Bank of India, which is a Central Bank in this country (i.e. India) and which
controls the banking companies and banking in this country is the petitioner in this petition. The
petition has been filed under S. 38(3) of the Banking Regulation Act, 1949 (Act X of 1949) (in
short Banking Act) read with Ss. 582, 583 and 584 of the Companies Act, 1956 (1 of 1956)
(hereinafter for brevity sake referred to as 'the Companies Act) for winding up of the Bank of
Credit and Commerce International (Overseas) Limited, an unregistered company having its
branch at Bombay.

Held: Petition granted and following order was passed:

That the Bank of Credit & Commerce International (Overseas) Limited, Bombay, be
wound up by and under the direction of this Hon'ble Court under the provisions of the
Banking Regulation Act, 1949 read with Companies Act I of 1956;
That the State Bank of India, Central Office, Bombay be appointed as Liquidator of the
Bank of Credit & Commerce International (Overseas) Limited, Bombay with all
necessary powers under the provisions of the Banking Regulation Act, 1949 read with
Companies. Act, 1956."

State Bank of India-Official Liquidator is ordered and directed to take all further
necessary steps required pursuant to the order passed herein as provided under the
Rule 114 of the Companies (Court) Rules), 1956.

Reserve Bank of India v Pattem Surya Prakash Rao and Ors.6

4
Banking Regulation Act, 1949.
5
AIR 1994 Bom 177
Facts: The Bank was registered as a Cooperative Society and later on it was converted into a
Mutually Aided Cooperative Society under the provisions of Andhra Pradesh Mutually Aided
Co-operative Societies Act 1995. On 23.9.1998 it was granted license to carry on banking
business under Section 22 of the Banking regulation Act, 1949. As a part of its annual
inspection, the RBI conducted its statutory inspection of the books of accounts of the Bank.
The inspection report revealed deteriorating financial position of the Bank and its violation of
the various provisions of the , Banking Regulation Act1949 and directions issued there under.
The report also revealed the Banks failure to repay the matured deposits. After supplying the
inspection report to the Bank and noticing the further deterioration of financial position of the
Bank, the RBI classified the Bank as "sick Bank". After taking certain measures such as
advising the Bank to draw up an action plan etc., the RBI superseded the Board of Directors
on and appointed an administrator.

After conducting statutory inspection RBI was satisfied that the Banks financial position was
precarious and its non-performing assets (NPAs) were at alarming levels. The Bank submitted
its explanation and the RBI having not found the explanation satisfactory passed its order
dated whereby it cancelled the Banks' license. The RBI also vide its order dated 3.12.2003
requested the Commissioner and Registrar of Co-operative Societies to make an order for
winding up of the Bank and appointed a Liquidator. Accordingly, the Registrar vide his
proceedings dated 7.12.2004 issued directions for winding up of the Bank and appointed Joint
Register/Managing Director of A.P. State Co-operative Union Limited, Hyderabad as
Liquidator.

Issue: Whether appointment of a Liquidator to the Bank by the RBI to wind up the Bank is
not valid?

Held: The learned Judge held that the RBI should not have passed an order for winding up of
a Co-operative Bank simultaneously or along with an order cancelling license. He also held
that if at all the RBI desires that the Bank shall be wound up after cancellation of its license, it
has to issue a show cause notice to the cooperative bank concerned to enable its members to

6
1989 (2) KLJ 597
discuss among themselves on the course of action and that since no such notice was given, the
order of RBI directing winding up of the bank without issuing a notice to the Bank and the
consequential order passed by the Registrar without following the procedure prescribed either
in the Andhra Pradesh Mutually Aided Co-operative Societies Act 1995 and Banking
Regulation Act are liable to be set aside and accordingly they were set aside.

CONCLUSION
From this all procedure now we can say that the winding up procedure of Banking Company is
not the same as of the other company, but many provisions image is found in the Banking
Regulation Act for the winding up process.
Most of the time company applies for speedy winding up procedure. By this process time and
money both are saved of banking company and its creditors or debtors. In such winding up
procedure due care is taken by the High court so no mistake can be made and if any person found
guilty then penalized for the same.

By the end of this project I didnt find my hypothesis to be true as people do not make any loss
due to winding up of banking company as there are special rights to creditors and if delay is
made in payment then they also get the interest.
BIBLIOGRAPHY
M.L Tannan, Tannans Banking Law and Practice in India, Wadhwa Nagpur,2007
R.N Chaudhary Banking Law, Central Law Publications, 2014
J.M Holden, The Law and Practice of Banking, Universal Law Publishing