Winding up of Banking Companies

Admin Lawnn

6 years ago

Synopsis

Introduction
Meaning
Classification
By order of High Court S. 38
Inability to pay debt
Application by RBI S.37
Voluntary winding up
Under supervision of court S. 44(2)
Procedure of winding up
Appointment of court liquidator(S. 38A)
Preliminary report and notice to preferential claimants (Ss. 41, 41A)
Powers and duties of liquidator
Preferential payment
Cases
Conclusion

1. Introduction

Banking companies are formed basically for the purpose of providing safe deposit of money to the people and to lend money on interest to people who are in need. But due to certain contingencies banking companies have to be closed down which is called winding up[i].

Winding up procedure for banking companies is almost similar to those made under Companies Act for the winding up of companies in general, but when it is done in case of banking companies, it is to be done under the supervision of Reserve Bank of India.

Provisions relating to winding up of banking companies have been enumerated under Ss. 38 to 44 of Banking Regulation Act, 1949 (hereinafter the “Act”).

2. Meaning

Winding up of a company basically means closing down of its business. After the winding up procedure, the company is dissolved. Winding up can happen because of many reasons, the most common of which is non-recovery of loans thereby increased liabilities over assets of the Company.

During the process of winding up of a banking company, all its assets are sold out so as to repay the debts of that bank.

Winding up of banking companies is generally a very long procedure but it can even be done in a short span of time under specific provisions of the Act.

Reserve Bank of India supervises the winding up procedure for banking companies.

A liquidator is appointed during the procedure so as to ensure security of interests of the customers and other creditors of the banking company.

3. Classification[ii]

The situations in which winding up of banking companies may happen have been classified under two heads:

winding up by order of High Court u/s 38 of the Act
Voluntary winding up

4. By order of High Court u/s 38

38 states that High Court can order winding up of a banking company on certain grounds stated therein and such grounds do not exclude the application of Ss. 391, 392, 433 and 533 of Companies Act, 1956. Such provisions of this section are also stated not to be prejudicial to the provisions under S. 37(1) of the act.

An official liquidator is appointed by the Central Government to undergo the proceedings of winding up the provisions relating to which have been discussed under section 38A which has been discussed later under heading appointment of liquidator of this article.

40 further states that any proceeding for winding up of banking company by order of High Court shall not be stayed by High Court unless it believes that such banking company will pay of its debts even without winding up proceedings.

Winding up of banking companies by an order of High Court can be done under two grounds stated as follows:

a) Inability to pay debt

When the banking company comes into a position when it cannot repay its debts; and

b) Application by RBI S.37[iii]

Reserve Bank of India can make an application for winding up of banking company if it is ordered to do so u/s 35(4)(b). The grounds of such application are as follows:

Non-compliance of requirements of S.11 of the Act by the banking company; or
If the banking company has become disentitled to carry on its business in India u/s 22 of the Act; or
If it has violated any of the provisions under Ss. 35(4)(a) or 42(3A)(b) of RBI Act, 1934; or
Contravenes any other provision of RBI Act, 1934; or
In the opinion of RBI the banking company is unable to pay its debts; or
If in opinion of RBI any compromise sanctioned by court cannot be complied as it is by the banking company; or
If RBI thinks had letting the banking company continue its business would be prejudicial to the interests of its depositors.

5. Voluntary winding up

Section 44(1) states that a company can be voluntarily wound up in following 2 circumstances:

If the bank and creditor themselves settle their dues without going to the court

If Reserve Bank of India certifies in writing that the banking company concerned is capable to pay its debts in full as and when they accrue.

Section 44(2) further states that if a banking company is proceeding for its voluntary winding up, it shall be done under the supervision of the High Court concerned.

The High Court can order a voluntary winding up proceeding to be conducted by an order of High court, if it believes out of its own motion or on an application made to it by the Reserve Bank of India that:

The banking company undergoing voluntary winding up proceeding is unable to pay its debts as they accrue; or

When voluntary winding up under the supervision of court is detrimental to the interests of the depositors.

7. Procedure of winding up

Winding up procedure involves two important steps:

a) Appointment of court liquidator (S. 38A)

38A of the Act provides for an official liquidator to be appointed by the Central Government and who shall be attached to the High Court concerned for conducting winding up by the order of such High Court.

However, Central Government may also direct for not attaching any liquidator with the High Court if it finds that it would not be necessary if there are not many cases of winding up occurring within the jurisdiction of certain High Courts and therefore may appoint liquidator by a separate order on case to case basis.

According to S. 39, if the winding up is being conducted on the application made by RBI, Central Government may appoint either RBI itself, or State Bank or any other bank or individual to act as official liquidator for the purpose. However, during such appointment such functioning will have to vacate his office.

The expenses of such winding up will be borne from the assets of bank being wound up.

39A of Act specifically provides for application of all provisions of Companies Act to the official liquidator appointed in this case.

b) Preliminary report and notice to preferential claimants (Ss. 41, 41A)

Section 41 states that within two months from the order of winding up by the High court or in case liquidation of assets is taking place before such winding up order by the court and liquidator has been appointed for that purpose, within two months from commence of such liquidation, the official liquidator so appointed has to submit a report to the High Court stating following:

All the information that he may have received till then;

Amount of cash and assets that are already under his possession and in his control till date;

Amount of cash and assets that he may take in his possession and control during the process before the expiry of 2 months period;

All this information is required to make preferential payments and to discharge all the liabilities of the banking company towards its creditors and depositors.

The liquidator is supposed to make all reasonable efforts to take most of the assets and cash in his control as it is practicable.

Section 41A further provides that within 15 days from the order for winding up by the court, the official liquidator shall issue a notice in accordance with the manner prescribed by the Reserve Bank of India to the following:

All the claimants of preferential payments;

Every secured as well as unsecured creditor to submit their claims before the official liquidator within one month of receipt of such notice;

If a secured creditor does not comply by this requirement, his claim will be assessed by the liquidator himself and shall be binding upon him.

If any other claimant does not comply with this requirement, he will be treated as any ordinary debtor and his claim will not be paid as priority.

8. Powers and duties of liquidator[iv]

The liquidator can have all the powers and shall be bound by all the duties as mentioned below:

Powers:

Liquidator can exercise all the powers that have been sanctioned to him by the court.

Liquidator has the power to institute suits and defend them in court on behalf of the banking company.

He can even carry on the business of banking company concerned during the period of winding up for the benefits of creditors and depositors.

He can sell any property, movable or immovable, of the banking company either by private contract or in public auction.

He can perform any other act necessary to perform the procedure of winding up and thereby distribute the assets among the creditors and depositors.

Duties:

To make and submit preliminary report to the High Court

To take over the assets of the banking company in order to perform his duties

To send notice to and convene a meeting of all the creditors of banking company

To keep a record of all the proceedings

To submit the accounts to the High Court

To submit records of pending liquidation of the banking company.

9. Preferential payment

According to S. 43A of the act every preferential payment shall be made within three months of the order for winding up where the claimant has responded to the notice sent to him within the prescribed period of one month.

After the preferential claimants, depositors in saving bank account of the bank shall be paid in second priority a sum of Rs. 250 or their credit in account, whichever is less.

After them all other depositors shall be paid Rs. 250 or their credit in account whichever is less.

After all the above payments have been made, the remaining creditors shall be paid out of the assets of the banking company on a pro rata basis.

10. Cases

· B Suryanarayana V. K P Coop Bank Ltd[v]

It was held by the AP High Court that winding up of Co-operative bank cannot be done under Banking Regulation Act and if the High Court has ordered for winding up of co-operative bank, such order of the RBI shall bot be interfered with unless the Court believes that the order made is mala fide.

· Mann v Goldstein[vi]

This is a leading case relating to liquidation of a company where the court confirmed that when such company is unable to pay of its debts, it should be brought under liquidation proceedings by the court.

11. Conclusion

Banking companies are the companies undergoing such functions as have been authorised to them under the Act. To keep running its business the banking company needs to be able to pay of the debts of its creditors and shall be able to pay the amount to its depositors as and when it accrues.

In case the bank is unable to do so, winding up has to be done in order to realise all the debts of its creditors and depositors. An official liquidator is appointed to carry on this purpose according to the provisions of this Act and he shall pay of the debts of all the claimants accordingly. After the winding up proceedings are over, the liquidation of such company takes place.