WINDING UP OF BANKING COMPANIES

Authors:

Aditya Bhave, Savitribai Phule Pune University

Harshita Yadav, University of Petroleum & Energy Studies, Dehradun


Editor:

Varun Hinge, Institute of Law, Nirma University


MEANING OF WINDING UP:

“Winding up is a means by which the dissolution of a company is brought about and its assets are realised and applied in the payment of its debts. After satisfaction of the debts, the remaining balance, if any, is paid back to the members in proportion to the contribution made by them to the capital of the company.”

1. “The liquidation or winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. An Administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

2. As per Section 2(94A) of the Companies Act 2013 “winding up” means winding up under this Act.[1]

Thus, winding up ultimately leads to the dissolution of the company. In between winding up and dissolution the legal entity of the company remains and it can be sued in a Tribunal of law.[2]

WINDING UP OF BANKING COMPANIES:

Banking Companies are formed basically for purpose of providing deposit of money to people and to lend money on interest to people who are in need. But due to certain contingencies banking companies has to be closed down which is called winding up. Provisions leading to winding up of Banking companies have been enumerated under section 38 to 44 of Banking Regulation Act, 1949. Reserve Bank of India supervises the winding up procedure of Banking Companies.[3]

WINDING UP BY HIGH COURT:

(1) Notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act, 1956 (1 of 1956), but without prejudice to its powers under sub-section (1) of section 37 of this Act, the High Court shall order the winding up of a banking company-

(a) if the banking company is unable to pay its debts; or

(b) if an application for its winding up has been made by the Reserve Bank under section 37 or this section.

(2) The Reserve Bank shall make an application under this section for the winding up of a banking company it is directed so to do by an order under clause(b) of sub-section (4) of section 35.

(3) The Reserve Bank may make an application under this section for the winding up of a banking company-

(a) if the banking company-

(i) has failed to comply with the requirements specified in section 11; or

(ii) has by reason of the provisions of section 22 become disentitled to carry on banking business in India; or

(iii) 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 (2 of 1934); or

(iv) having failed to comply with any requirement of this Act other than the requirements laid down in section 11, has continued such failure, or, having contravened any provision of this Act has continued such contravention beyond such period or periods as may be specified in that behalf by the Reserve Bank from time to time, after notice in writing of such failure or contravention has been conveyed to the banking company; or

(b) if in the opinion of the Reserve Bank-

(i) a compromise or arrangement. Sanctioned by a court in respect of the banking company cannot be worked satisfactorily with or without modifications; or

(ii) the returns, statements or information furnished to it under or in pursuance of the provisions of this Act disclose that the banking company is unable to pay its debts; or

(iii) the continuance of the banking company is prejudicial to the interest of its depositors.

(4) Without prejudice to the provisions contained in section 434 of the Companies Act, 1956 (1 of 1956), a banking company shall be deemed to be unable to pay its debts if it has refused to meet any lawful demand made at any of its offices or branches within two working days, if such demand is made at a place where there is an office, branch or agency of the Reserve Bank, or within five working days, if such demand is made elsewhere, and if the Reserve Bank certifies in writing that the banking company is unable to pay its debts.

(5) A copy of every application made by the Reserve Bank under sub-section (1) shall be sent by the Reserve Bank to the Registrar.[4]

VOLUNTARY WINDING UP:

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

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

2. If Reserve Bank of India certifies in writing that the banking company is capable to pay its debts in full as and when they accrue.[5]

Section 44(2) further states that if 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 an application made to it by 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 interest of depositors.[6]

PROCEDURE OF WINDING UP

There are primarily 2 steps of winding up of a banking company:

1. Appointment of court liquidator: Section 38A of the Banking Regulation Act, states that the Central Government shall attach a court liquidator to every High Court for the purpose of conducting proceedings of winding up of a banking company and other duties which may be imposed by the High Court. However, the Central Government may not direct for appointment of a liquidator if in its opinion appointment is not necessary sue to a smaller number of cases but can appoint liquidator on case to case basis. This would also save the machinery of the court.

If the winding is being conducted on the application made by the RBI, then the Central Government may appoint either the RBI or State Bank or any other bank or an individual as official liquidator. After such appointment the such individual have to vacate his office. The expenses of the winding up will be taken out of the assets of the banking company that is being wound up.[7]

2. Preliminary report and notice to preferential claimants: Section 41 says that the official liquidator shall submit a preliminary report to the High Court within two months from the date of winding up order. The appointed liquidator has to submit the report to the high court stating following:

· Information that is so far available to him, till date.

· Amount of assets of banking company in cash which are in his custody, till date.

· Amount of assets which are likely to be collected in cash before the expiry of the period of two months in order to apply the assets towards making preferential payments.

This information is required to make preferential payments and to discharge all the liabilities of the banking company towards the creditors and depositors.[8]

Section 41 A that the official liquidator shall issue a notice in accordance with the manner prescribed by RBI within 15 days from the order of winding up by the court to the following:

· To all the claimants entitled to preferential payment.

· To every secured and unsecured creditor to submit a statement of amount claimed to the official liquidator within one month from the date of service of notice.

If a secured creditor does not comply with the requirement, then his claim will be assessed by the liquidator himself and it will a binding upon him. This applies to the claimant as well and he will be treated as a normal debtor and the claim will not be paid as a priority.[9]

POWERS AND DUTIES OF LIQUIDATOR

1. Powers:

· All the powers sanctioned to the official liquidator by the court.

· Can institute suits and defend them in the court on behalf of the banking company.

· Can carry on the business of the banking company during the period of winding up for the benefits of the creditors and depositors.

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

· Can perform any other act necessary for the performance of procedure of winding up and to distribute the assets among the creditors and depositors.

2. Duties:

· To prepare and submit a preliminary report to the High Court.

· To take over the assets of the banking company to perform his duties.

· To send notice in order to convene a meeting of all creditors of the banking company.

· To keep record of the proceedings.

· To submit the accounts to the High Court.

· To submit records of pending liquidation of the banking company.[10]

PREFERENTIAL PAYMENTS

As per section 43 A the preferential payments shall be made within three months of the order of winding up where the claimant has responded to the to the notice sent to him within the period of one month.

The second propriety after the claimants shall be the depositors with Rs. 250 or their credit in account, whichever is less. After all the payments, the remaining creditors shall be paid out of the assets of the banking company on pro rata basis.[11]

CONCLUSION

By the above given procedure, it can be inferred that winding up of a banking company is different than that of other company. The procedure is prescribed in the Banking Regulation Act, 1949, where as the procedure of winding up of companies is given under Companies Act, 2013. This is a speedy process which in turn saves the time and money of the creditors and debtors and machinery of the court as well.

[1] Section 2(94A) of Companies Act, 2013 Winding up. [2] Winding Up of a Company, Taxmann (Oct. 25, 2020, 16:38 PM), https://www.taxmann.com/blogpost/2000000260/winding-up-of-a-company.aspx [3] Winding up of Banking Companies, Lawnn (Oct. 25, 2020, 17:04 PM), https://www.lawnn.com/winding-up-of-banking-companies. [4] Section 38 of the Banking Regulation Act, 1949 Winding up by High Court. [5] Section 44 of the Banking Regulation Act, 1949 Powers of High Court in voluntary winding. [6] Id. at 5. [7] Section 38A of the Banking Regulation Act, 1949 Court liquidator. [8] Section 41 of the Banking Regulation Act, 1949 Preliminary report by official liquidator. [9] Section 41A of the Banking Regulation Act, 1949 Notice to preferential claimants and secured and unsecured creditors. [10] Id. at 5. [11] Section 43A of the Banking Regulation Act, 1949 Preferential payments to depositors.

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