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