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(1961) 31 Comp Cas 154 : 1960 SCC OnLine Ker 349 : AIR 1961
Ker 268 : 1961 KLT 54

In the High Court of Kerala

(Before Raman Nayar, J.)

Reserve Bank of India … Appellant

Versus

Palai Central Bank Ltd. … Respondent

B.C.P. No 11 of 1960.

Decided on December 5, 1960

K.V. Suryanarayana Iyer and C.M. Devan, for the petitioner.

M.S. Kurian and M.M. Adbul Kader, for the creditors supporting the
petition.

K.P. Abraham, V.K.K. Menon, K. Kuttikrishna Menon, K. Velayudhan

Nair and P.K. Krishnankutty Menon, for the creditors opposing the
petition.

Cherian Manjooran, K.S. Sabastian and M.M. Thomas for other

creditors.

K.M. Munshi, Kishore K. Koticha, P. Govinda Menon, V.O. Markose, P.

Raman Menon and P. Narendra Menon, for the company

RAMAN NAYAR, J.--By this application brought under section 38(3)(b)

(iii) of the Banking Companies Act, 1949, the Reserve Bank of India
seeks the winding up of a banking company called the Palai Central
Bank Ltd. The application is opposed by the company and by sixty-six
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creditors, some of them contributories, the debts due to whom, it is

said, amount to about Rs. 70 lakhs out of a total outside liability of
about Rs. 860 lakhs. Five creditors to whom, according to their claims
about Rs. 2 lakhs is due, have appeared to support, or seemingly to
support, the application.

The company and some of its creditors have applied under section 391
of the Companies Act, 1956, for considering schemes of reconstruction
and the company has also applied for a stay of the present
proceedings pending disposal of these applications. In view of section
44B of the Banking Companies Act, I have had the schemes examined
by the Reserve Bank (in a rather summary way it is true) and it is not
appearing from the report of the Reserve Bank that any of them is
prima facie certifiable under that section. I have not thought it
worthwhile to give further thought to the matter at this stage.

The pleadings joined issues of fact as also of law, but, all that now
remains, as a result of the clarifications and concessions made in the
course of the hearing, are the issues of law. That relieves me of any
very elaborate statement of the facts, but it might nevertheless be
necessary to state the salient facts for a proper understanding of the
case.

The Palai Central Bank Ltd. (which I shall hereafter call the company)
was incorporated in January, 1927, as a public company limited by
shares. The incorporation was under the provisions of the Travancore
Companies Act. (The company then went by the name of the Central
Bank Ltd., and it was only in May, 1936, that it assumed its present
name). The registered office of the company was at Palai. Its nominal
capital was Rs. 40 lakhs, and, of this, roughly Rs. 25 lakhs has been
paid up.

From small beginnings the company steadily grew till, it is said,

judged by the volume of the deposits it holds (which is a measure of
confidence which the public reposes in it), it has become the foremost
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banking company in this State and the 15th in the whole of India. Its
deposits which in 1928 amounted only to about Rs. 77,000 stood in
July, 1960, at over Rs. 984 lakhs. It came on the Second Schedule to
the Reserve Bank Act in March, 1937, and it has now 25 branches, six
of them outside this State in places so far afield as Mangalore, Madras
and Delhi.

But, there is another side to the picture. For, it would appear that, all
this progress notwithstanding, the business of the company was not
being conducted on sound lines. With the extension of the Reserve
Bank Act to Part B States in 1951, the Reserve Bank assumed
supervision over this company as over other banking companies in the
country. It undertook an inspection of the company some time in the
second half of 1951, in relation to its position as on June 30, 1951,
and that inspection revealed, in the words of the Reserve Bank, a very
disquieting situation. There were three more inspections as on the 31st
December, 1955, the 28th February, 1958, and the 31st December,
1959, and there were also scrutinies of the company's affairs and
meetings of the directors of the company with the officers of the
Reserve Bank. According to the Reserve Bank, the position, far from
improving, was steadily growing worse, the most unsatisfactory
features, giving rise to considerable misgiving, being:

(1) that a substantial portion of the company's advances were

unsecured and, either irrecoverable or, in banking parlance, "sticky",
which, I gather, is a short and expressive way of describing an
advance which, though perhaps not irrecoverable, has adhered
resolutely to its borrower long beyond its appointed term and
manifests no signs of disengagement;

(2) that a considerable portion of these unsatisfactory advances were

to the directors of the company or to their relatives or to concerns of
which they were in management; and

(3) that by declaring dividends where no profits really existed, the

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company was periodically presenting a false picture of its position to

the public and, in effect, paying the dividends out of its capital and
reserves. (What the company was doing was to take into account
unrealised and, in the opinion of the Reserve Bank, unrealisable
interest on the unsatisfactory advances in counting its profits, so that
dividends were largely declared on what the Reserve Bank has termed
illusory profits).

From time to time the Reserve Bank was giving advice, issuing
directions, conveying admonitions and holding out threats (such as
prohibition of fresh deposits, exclusion from the schedule and refusal
of a licence under the relevant provisions of the Reserve Bank Act and
the Banking Companies Act) with a view to reformation, but, not so
much as a result of fresh transgressions (although, it is said, that
there were some) as of the consequences of the old (mainly the
accumulation of interest on bad advances) the position was steadily
deteriorating. On the latest assessment made by the Reserve Bank as
on the 31st December, 1959, after discussing each difficult advance
with the management of the company, out of a total of about Rs. 529
lakhs advances to the extent of as much as Rs. 218.51 lakhs were
irrecoverable, to the extent of Rs. 17.71 lakhs doubtful of recovery and
to the extent of Rs. 115.57 lakhs sticky, leaving only a balance of Rs.
181.21 lakhs which could be described as good. This meant that the
realisable assets fell considerably short of what was due to the
depositors, in other words, that the company was unable to pay its
debts. And out of the bad advances of Rs. 347.79 lakhs, advances
amounting to Rs. 40 lakhs could be directly related to the directors of
the company.

The company was again and again asking for time to set its house in
order and, among the many conditions imposed by the Reserve Bank
for allowing it to continue functioning as a banking company were:

(1) that bad advances, especially to the directors, should be recovered

within certain specified periods or at least secured, something which
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the course of events showed was easier said than done;

(2) that the chief executive officer of the company should be an

outsider with sound banking experience instead of one of the
company's own men; and

(3) that the balance sheets of the company should present a true
picture of its position instead of counting illusory profits.

For reasons that have been explained in exhibit P-14, a note approved
by its Governor, but which it is unnecessary to consider (the Reserve
Bank is in the unhappy position of being blamed both for not having
taken drastic action in the first instance, and for having taken action at
all, and that by the same people) the Reserve Bank was unwilling to
take any precipitate steps. The first condition was never fulfilled. The
third was complied with only in the profit and loss account for the year
ending 31st December, 1959, when, for the first time, the company
left the "illusory profits" out of reckoning with the result that its
balance-sheet for the year showed a loss of nearly Rs. 14 lakhs. This
balance-sheet was passed by the board of directors on the 28th March,
1960, and it was published on the 23rd June, 1960. So far as the
second condition was concerned, it was only on the 1st July, 1960,
that an independent outsider with experience of sound banking, in the
shape of Mr. Sivaraman, an officer of the State Bank released by it at
the instance of the Reserve Bank, took charge as general manager.

From about the middle of 1960, there was run on several of the
branches of the company, according to the Reserve Bank, owing to the
publication of the true balance-sheet, and according to the company
owing to the appointment of Mr. Sivaraman, although it seems to me
that the connection between these events and the run was temporal
rather than casual and that the real reason for the run is perhaps
elsewhere to seek. However that might be, the total deposits with the
company fell by Rs. 123 lakhs between the 24th June and the 8th of
August, 1960, and, if count is taken of the Rs. 15 lakhs added as
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interest on the 1st July, and of borrowings (in excess of the normal) of
about Rs. 20 lakhs on the security of deposits, the sum of Rs. 158
lakhs, coming very nearly to a sixth of the total deposits, would be a
true measure of the run.

By exhibit P. 8 dated 21st July, 1960, the latest of its periodical

warnings to the company the Reserve Bank called for the explanation
of the company on its inspection report of the 4th July. It gave the
company thirty days' time for the purpose and also offered it a year's
time to remedy the several defects. However, on the 8th August,
before the expiry of even the thirty days allowed for the explanation, it
came forward with the present application, and the reason it gave for
this step was the run, which it apprehended would continue and
which, since the company was unable to pay its depositors in full,
would necessarily result in those depositors who were able to effect
withdrawals getting back their money leaving those less favoured with
nothing. For the same reason it applied also for the appointment of a
provisional liquidator, and an ex parte appointment was accordingly
made.

In this connection, I might mention that, although it is contended that

the run was a transient feature, that it was in fact subsiding and, but
for the harsh attitude taken by the Reserve Bank, could have been
stemmed in the normal course (statements for which the figures
furnished by the company itself in exhibit R. 11 and R. 13 furnish little
support), the directors of the company themselves thought it a matter
for alarm, for, at their meeting of the 30th July, they considered the
decrease in deposits since the 1st July and requested Mr. Sivaraman to
proceed to Bombay forthwith and acquaint the Reserve Bank of the
developments. Mr. Sivaraman, accordingly, went to Bombay on the 3rd
August and met the officers of the Reserve Bank, and paragraph 24 of
the second reply affidavit filed on behalf of the Reserve Bank shows
that it was after a full discussion of the position by the Governor, the
Deputy Governor and other officers of the Reserve Bank and in
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consultation with the authorities of the State Bank and the Reserve
Bank's Madras Board, that the Reserve Bank came to the conclusion
that the continuance of the company would be prejudicial to its
depositors and decided to make this application.

The company seeks the dismissal of this application on the following

grounds:

(1) that section 38(3)(b)(iii) of the Banking Companies Act

(hereinafter referred to as the impugned provision) is void under
article 13 of the Constitution for offending article 14 and article 19(1)
(f) and (g); and

(2) that in bringing this application the Reserve Bank has acted mala
fide. The second ground was, as we shall presently see, abandoned in
the course of the hearing.

I shall consider the attack based on article 14 and that based on article
19 together. They necessarily cover common ground, for, as often as
not, what makes for a rational classification enabling an allegedly
hostile statute to steer clear of article 14, invests the hostility with a
measure of reasonableness in the interest of the general public
sufficient to attract the shelter of clauses (5) and (6) of article 19.

Counsel on both sides, Mr. Suryanarayana Iyer for the Reserve Bank,
and Mr. Munshi for the company, have argued the case with admirable
clarity and thoroughness. I lose count of the number, but, between
them, they must have taken me to close on a hundred books, both
text books and judicial decisions. Helpful as they have all been for a
true understanding of the position, I shall content myself at this stage
with extracting a passage each from two judgments of the Supreme
Court. The first, a rather long passage from Ram Krishna Dalmia v.
Justice Tendolkar* tells us all that we need to know of the law
governing the matter:

"The principal ground urged in support of the contention as to the

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invalidity of the Act and/or the notification is founded on article 14 of

the Constitution. In Budhan Choudhry v. The State of Bihar**, a
Constitution Bench of seven judges of this court at pages 1048-49
explained the true meaning and scope of article 14 as follows:

'The provisions of article 14 of the Constitution have come up for

discussion before this court in a number of cases, namely, Chiranjit Lal
Chaudhury v. Union of India***, State of Bombay v. F.N. Balsara#,
State of West Bengal v. Anwar Ali Sarkar##, Kathi Raning Rawat v.
State of Saurashtra###, Lachmandas Kewalram Ahuja v. State of
Bombay*#, Syed Qasim Razvi v. State of Hyderabad**#, and Habeeb
Mohammad v. State of Hyderabad***#. It is, therefore, not necessary
to enter upon any lengthy discussion as to the meaning scope and
effect of the article in question. It is now well established that while
article 14 forbids class legislation, it does not forbid reasonable
classification for the purposes of legislation. In order, however, to pass
the test of permissible classification two conditions must be fulfilled,
namely, (i) that the classification must be founded on an intelligible
differentia which distinguishes persons or things that are grouped
together from others left out of the group and, (ii) that differentia
must have a rational relation to the object sought to be achieved by
the statute in question. The classification may be founded on different
bases, namely, geographical, or according to objects or occupations or
the like. What is necessary is that there must be a a nexus between
the basis of classification and the object of the Act under
consideration. It is also well established by the decisions of this court
that article 14 condemns discrimination not only by a substantive law
but also by a law of procedure'.

The principle enunciated above has been consistently adopted and

applied in subsequent cases. The decisions of this court further
establish:

(a) that a law may be constitutional even though it relates to a single

individual if, on account of some special circumstances or reasons
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* [1959] S.C.R. 279, 296. ## [1952] S.C.R. 284. ** (1955) 1 S.C.R.

1045. ### [1952] S.C.R. 435. *** (1951) 21 Comp. Cas. 33. *#
[1952] S.C.R. 710. # [1951] S.C.R. 682. **# [1953] S.C.R. 589.
***# [1953] S.C.R. 661.

applicable to him and not applicable to others, that single individual

may be treated as a class by himself;

(b) that there is always a presumption in favour of the constitutionality

of an enactment and the burden is upon him who attacks it to show
that there has been a clear transgression of the constitutional
principles;

(c) that it must be presumed that the Legislature understands and

correctly appreciates the need of its own people, that its laws are
directed to problems made manifest by experience and that its
discriminations are based on adequate grounds;

(d) that the Legislature is free to recognise degrees of harm and may
confine its restrictions to those cases where the need is deemed to be
the clearest;

(e) that in order to sustain the presumption of constitutionality the

court may take into consideration matters of common knowledge,
matters of common report, the history of the times and may assume
every state of facts which can be conceived existing at the time of
legislation; and

(f) that while good faith and knowledge of the existing conditions on
the part of a Legislature are to be presumed, if there is nothing on the
face of the law or the surrounding circumstances brought to the notice
of the court on which the classification may reasonably be regarded as
based, the presumption of constitutionality cannot be carried to the
extent of always holding that there must be some undisclosed and
unknown reasons for subjecting certain individuals or corporations to
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hostile or discriminating legislation.

The above principles will have to be constantly borne in mind by the

court when it is called upon to adjudge the constitutionality of any
particular law attacked as discriminatory and violative of the equal
protection of the laws.

A close perusal of the decisions of this court in which the above

principles have been enunciated and applied by this court will also
show that a statute which may come up for consideration on a
question of its validity under article 14 of the Constitution may be
placed in one or other of the following five classes:

(i) A statute may itself indicate the persons or things to whom its
provisions are intended to apply and the basis of the classification of
such persons or things may appear on the face of the statute or may
be gathered from the surrounding circumstances known to or brought
to the notice of the court. In determining the validity or otherwise of
such a statute the court has to examine whether such classification is
or can be reasonably regarded as based upon some differentia which
distinguishes such persons or things grouped together from those left
out of the group and whether such differentia has a reasonable relation
to the object sought to be achieved by the statute no matter whether
the provisions of the statute are intended to apply only to a particular
person or thing or only to a certain class of persons or things. Where
the court finds that the classification satisfies the tests, the court will
uphold the validity of the law, as it did in Chiranjitlal v. Union of
India*, State of Bombay v. F.N. Balsara**, Kedar Nath Bajoria v. State
of West Bengal***, V.M. Syed Mohammad & Company v. State of
Andhra# and Budhan Choudhry v. State of Bihar##.

(ii) A statute may direct its provisions against one individual person or
thing or to several individual persons or things but no reasonable basis
of classification may appear on the face of it or be deducible from the
surrounding circumstances, or matters of common knowledge. In such
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a case the court will strike down the law as an instance of naked
discrimination, as it did in Ameerunnissa Begum v. Mahboob
Begum###, and Ramprasad Narain Sahi v. State of Bihar*#.

(iii) A statute may not make any classification of the persons or things
for the purpose of applying its provisions but may leave it to the
discretion of the Government to select and classify persons or things to
whom its provisions are to apply. In determining the question of the
validity or otherwise of such a statute the court will not strike down
the law out of hand only because no classification appears on its face
or because a discretion is given to the Government to make the
selection or classification but will go on to examine and ascertain if the
statute has laid down any principle or policy for the guidance of the
exercise of discretion by the Government in the matter of the selection
or classification. After such scrutiny the court will strike down the
statute if it does not lay down any principle or policy for guiding the
exercise of discretion by the Government in the matter of selection or
classification, on the ground that the statute provides for the
delegation of arbitrary and uncontrolled power to the Government so
as to enable it to discriminate between persons or things similarly
situated and that, therefore, the discrimination is inherent in the
statute itself. In such a case the court will strike down both the law as
well as the executive action taken under such law, as it did in State of
West Bengal v. Anwar Ali Sarkar**#, Dwarka Prasad v. State of Uttar
Pradesh***#, Dhirendra Kumar Mandal v. Superintendent and
Remembrancer of Legal Affairs#**.

* (1951) 21 Comp. Cas. 33.### [1953] S.C.R. 404. ** [1951] S.C.R.

682.*# [1953] S.C.R. 1129. *** [1954] S.C.R. 30.**# [1952] S.C.R.
284. # [1954] S.C.R. 1117.***# [1954] S.C.R. 803. ## (1955) 1
S.C.R. 1045.#** (1955) 1 S.C.R. 224.

(iv) A statute may not make a classification of the persons or things

for the purpose of applying its provisions and may leave it to the
discretion of the Government to select and classify the persons or
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things to whom its provisions are to apply but may at the same time
lay down a policy or principle for the guidance of the exercise of
discretion by the Government in the matter of such selection or
classification; the court will uphold the law as constitutional as it did in
Kathi Raning Rawat v. The State of Saurashtra*.

(v) A statute may not make a classification on the persons or things to

whom their provisions are intended to apply and leave it to the
discretion of the Government to select or classify the persons or things
for applying those provisions according to the policy or the principle
laid down by the statute itself for guidance of the exercise of discretion
by the Government in the matter of such selection or classification. If
the Government in making the selection or classification does not
proceed on or follow such policy or principle, it has been held by this
court, e.g., in Kathi Raning Rawat v. The State of Saurashtra*, that in
such a case executive action but not the statute should be condemned
as unconstitutional."

The second, from Kangsari Haldar v. State of West Bengal**, states

the law very briefly and warns us that here, as in other problems of
law as of life in general, the difficulty in the way of solution is not so
much to discover and enunciate the true principle to apply as to apply
them rightly to the given facts and circumstances:

"The challenge to the vires of the impugned provisions is based on the

ground that they violate the fundamental right guaranteed by article
14 of the Constitution. The scope and effect of the provisions of article
14 have been considered by this court on several occasions, and the
matter has been clarified beyond all doubt. The equality before law
which is guaranteed by article 14 no doubt prohibits class legislation
but it does not prohibit the Legislature from legislating on the basis of
a reasonable classification. If the classification is reasonable and is
founded on intelligible differentia and the said differentia have a
rational relation to the object sought to be achieved by the statute
based on such reasonable classification the validity of the statute
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cannot be successfully challenged under article 14. These propositions

have been repeated so many times during the past few years that they
now sound almost platitudinous. Thus the enunciation of the principles
which flow from the fundamental rights enshrined in

* [1952] S.C.R. 435.** (1960) 2 S.C.R. 646.

article 14 now presents no difficulty; it is, however, in the application

of the said principles that difficulties often arise. In applying the said
principles to the different sets of facts presented by different cases
emphasis may shift and the approach may not always be identical; but
it is inevitable that the final decision about the vires of any impugned
provision must depend upon the decision which the court reaches
having regard to the facts and circumstances of each case, the general
scheme of the impugned Act and the nature and effect of the
provisions, the vires of which are under examination. Let us, therefore,
first examine the relevant scheme of the Act and ascertain the effect of
the provisions under challenge."

Thus informed by the highest authority of the true principles to apply

and forewarned of the perils that attend their application, I shall
proceed to test the validity of the impugned provision, and, if I do so
with any degree of assurance, it is only because of the searching
analysis to which counsel have subjected the provision in the light of
the principles disclosed by decided cases. For, no case considering
this, or even a remotely similar, provision has been brought to my
notice; and the fact that opposing counsel have often cited the same
decision, sometimes, even the same passage, for arriving at opposite
conclusions, emphasises the futility of going to other cases for an
assessment of the circumstances of this case, or for ascertaining
whether it falls on this or on the other side of the line. A case has to be
decided on the sum-total of the several elements referred to in the
Supreme Court, decisions from which I have just quoted, and unless
the provisions are very similar in their purpose, scope and effect, it
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seems to me a profitless task to try and assimilate the facts and

circumstances of one case with those of another. There is no litmus
paper test provided by any of the decisions; common factors do not
necessarily point to the same conclusion; and I apprehend that,
excepting in the clearest of cases, whatever be the conclusion reached,
observations can be found in other cases both in support of and
against the view taken.

Section 38 of the Banking Companies Act runs thus:

"38. (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 if 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
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sub-section (3A) of 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 return, 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

interests of its depositors."

On two matters counsel on both sides are agreed. The first is that
action under the impugned provision is dictated by subjective
satisfaction of the Reserve Bank, that that satisfaction though of
course not to be capriciously entertained is not reached by the judicial
process and is not amenable to judicial review. It is well-settled that
this is what a formula like, "if in the opinion of" means, and I do not
think that after what was laid down in Liversidge v. Sir John Anderson*
the contrary has ever been urged. (There, there was the complication
introduced by the word "reasonable"; but that, it was held, made no
difference). It seems to me that no purpose is served by importing the
notion of a jurisdictional fact, for, that would not import with it

* [1942] A.C. 206.

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any element of the judicial process. The juridictional fact here is

whether the Reserve Bank does entertain the opinion mentioned, not
whether the situation envisaged therein actually obtain. That opinion it
is for the Reserve Bank to form on the basis of its own subjective
satisfaction, and it is again for the Reserve Bank to say whether it
entertains the opinion or not, not for the court to determine whether or
not adequate or, in fact, any, grounds exist for entertaining such an
opinion. It has been repeatedly laid down by the Court of Appeal in
England, that, in such circumstances, a refusal by the authority
concerned to place before the court the material on which it formed
the opinion would be proper and, although this seems to have been
originally done in cases where secrecy was required in the interests of
security, later decisions like Ayr Collieries Ltd. v. Lloyd George* show
that the principle is by no means confined to such cases and extends
to all cases where the Legislature has thought fit to empower an
authority to act on its subjective satisfaction. Of course, if the Reserve
Bank were to say that it entertained the necessary opinion, whereas in
truth it did not (a state of affairs which it is rather difficult to conceive
and which, even if it did exist, would be virtually impossible of proof)
that would be an entirely different matter. That would make its action
bad for mala fides, a ground which, as we have already seen, is not
pursued.

The second matter on which counsel on both sides are agreed is that,
once the Reserve Bank makes an application, sub-section (1) of
section 38 makes it obligatory on the court to order winding up. "The
High Court shall order the winding up" of this sub-section in avowedly
deliberate departure from the, "A company may be wound up by the
Court", of section 433 of the Companies Act (see the non-obstante
clause which excludes the discretion vested in the court by section 433
and other provisions of the Companies Act) puts this beyond doubt.
Indications are not wanting, if they were required--see sub-sections
(2) and (3) of section 38 and sub-section (4) of section 35, to mention
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only a few instances--that nowhere in the statute we are now

considering has the Legislature confused between "may" and "shall".
On the contrary it has throughout used the two words in conscious
contrast, and the attempt, somewhat belated, made by one of the
seeming supporters of this application, to read the "shall" of section 38
(1) as "may" was foredoomed to failure.

The position then is to all intents and purposes as if section 38 had

empowered the Reserve Bank to make a winding up order if it was of
opinion that the conditions required by the impugned provision

* (1943) 2 All E.R. 546.

obtained. And, if the provisions were valid, the court would be

powerless to interfere except on the ground of mala fides. It is on this
basis that the validity of the impugned provision has to be examined.
It seems to me that sub-section (1) of section 38 interposes an order
by the court so that the actual winding up may proceed as usual as on
such an order, although Mr. Munshi would have it that the real purpose
of what he has chosen to call the judicial rubber stamp of the sub-
section is to enable what is in truth the arbitrary fiat of a statutory
tyrant to masquerade as a judicial verdict.

That at once indicates the scope and content of Mr. Munshi's

argument. I might say at the outset that he has no quarrel with the
substantive law enunciated by the impugned provision. He does not for
a moment say that a banking company whose continuance is
prejudicial to the interests of its depositors has any right, fundamental
or otherwise, to remain in existence or that a law which provides for
the most summary winding up of such a company would be
unreasonable, restrictive, or harsh or discriminatory if its "prejudicial"
character could be objectively demonstrated and were not, as he puts
it, a matter for somebody's inscrutable satisfaction, however mighty
that somebody might be. His quarrel is with the procedural aspect of
the provision, the mode it prescribes for reaching the conclusion that
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the continuance is prejudicial. That, according to him, is bad both from

the point of view of arbitrariness under article 14 and from the point of
view of unreasonableness under article 19. For, according to him, the
impugned provision affords no guiding principle, and enables the
Reserve Bank to choose between man and man at its own sweet will
and pleasure, and accord to them differential treatment although they
may be similarly circumstanced. Discrimination is, therefore, a vice
inherent in the provision.

Apart from this contention of what I might call inherent wickedness,

Mr. Munshi has also been at pains to show that the impugned provision
suffers also from what I might characterise as comparative
wickedness. According to him there are provisions in the Reserve Bank
Act and in the Banking Companies Act, in particular section 35(4) of
the latter Act, which provide for less drastic action by more judicial
methods under circumstances identical with the circumstances
evisaged in the impugned provision. Therefore, the Reserve Bank can,
according to its own unfettered and unguided discretion, in other
words, wilfully and arbitrarily, subject one institution to the drastic
penalty of a winding up while applying to another, which might be in a
worse case, more lenient provisions like section 35(4) of the Banking
Companies Act or section 42 of the Reserve Bank Act.

Before considering these objections in detail, I might first survey the

context and setting of the statute and explore its purpose and
intendment. That a legal person like a company stands on a very
different footing from a natural person goes without saying. In a
company the affairs of many are conducted by a few, and, what is
more important from our point of view is that the device of a corporate
personality and of limited liability enables a company to go bankrupt
to the prejudice of its creditors, while the owners of the company,
namely, its members, might still be very wealthy. This aspect of the
matter is emphasised manifold in the case of a banking company
where, unlike in the case of an ordinary company, business is
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transacted mainly with the unsecured funds of its depositors, ordinarily

many times the paid up capital, in the present case nearly forty times.
Moreover, a lender normally deals with an ordinary company much in
the same manner as he does with a natural person. He takes security
whenever he thinks that prudent, and that element of trust reposed in
a banking company by its depositors does not enter into the
transaction. In fact, it is not disputed that a banking company can
justifiably be subjected to classification as against an ordinary
company, and that the most stringent of provisions to safeguard the
interests of those who have reposed trust in it cannot be assailed on
the ground of an arbitrary differentiation. Anyone who has the least
experience of how banking companies in several parts of the country,
not the least in this part of the country, were (and, I am afraid, to
some extent still are) functioning cannot fail to be impressed with the
clear necessity of subjecting the operations of such companies to
constant invigilation and strict control. It was to secure this object that
Chapter XA was added to the Indian Companies Act by Act XXII of
1936-that Chapter has now grown into the Banking Companies Act-
and it was partly to secure this object that the Reserve Bank Act was
enacted. (The report of the Indian Central Banking Enquiry Committee,
1931, gives the background). By these statutes the Legislature set up
a highly placed, independent, expert and well informed body like the
Reserve Bank, and provided it (by way of returns and inspections and
the like) with the machinery to keep close watch over the conduct of
affairs of the several banking companies in the country. Not merely
that, the statutes gave the Reserve Bank power to take action, graded
in accordance with the degree of harm, in order to safeguard the
interests of the depositors and of the general public so that it could act
not merely as their watch-dog but also as their protector. As and when
experience showed that the provisions made were not adequate for the
protection of the depositors, more and more provisions were added by
way of amendment and the provision we are now considering is one
such provision added to the Banking Companies Act by Act 33 of 1959.
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A bare perusal of the Banking Companies Actit is hardly necessary to

refer to particular sections-will show that it is throughout informed by
this purpose, namely, the protection of the interests of the depositors,
and by this Act as well as by the Reserve Bank Act, Parliament has
placed the Reserve Bank in the position of the one expert, well
informed and impartial authority charged with the duty and
responsibility of carrying out this purpose.

I shall first consider the charge of comparative wickedness. I should

think that a bare perusal of the impugned provision and of the several
provisions of the Reserve Bank Act and the Banking Companies Act
against which it is maligned, will suffice to show that, while all the
provisions are conceived in the interests of the depositors, each is
intended for a slightly different situation so that there is, as I have
said, graded action according to the degree of evil, a remedy, as it
were, to suit the disease, a punishment to fit the crime. And, in the
last resort, when things are beyond redress and danger to the
depositors imminent, liquidation.

What can be done under section 42 of the Reserve Bank Act is to inflict
penalties, take preventive measures or hoist the danger signal, by way
of penal interest, prohibition of fresh deposits, and removal from the
second schedule, if a banking company fails to observe certain
conditions conceived in the interests of the depositors, or conducts its
affairs to the detriment of the interests of its depositors. But the
misdemeanour, if I might call it so, contemplated by the section falls
far short of what is contemplated by the impugned provision which
postulates that the very continuance of the company is prejudicial to
the interests of its depositors. There is little point, therefore, in
comparing the procedure for, or the consequences of, action under
section 42 of the Reserve Bank Act with those of the impugned
provision. Although it might be that both are designed for the same
disease, in the case of section 42 of the Reserve Bank Act the disease
is still capable of arrest, but the impugned provision contemplates a
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position beyond cure or arrest, a situation where the company cannot

be allowed to function for a moment longer if the interests of its
depositors are to be safeguarded, and where, therefore, the liquidation
of the company is a matter of urgency. To my mind the words "the
continuance of the banking company" import this sense of urgency.

The same result is reached on a comparison of the impugned provision

with other provisions of the Banking Companies Act such as section 22
and section 35(4). Under section 22, a banking company like the
present company, functioning under the proviso to sub-section (2),
can be stopped from doing banking business by a notice in writing by
the Reserve Bank informing it that a licence cannot be granted to it.
And sub-section (4) of the section, dealing with the cancellation of a
licence already issued, read with sub-section (3), indicates that such
action is to be taken if the banking company fails to observe conditions
imposed in the interest of its depositors or if it is likely to conduct its
affairs in a manner detrimental to the interests of its present or future
depositors. Here again we notice that the stage has not been reached
where the very continuance of the company is bound to prejudice the
interests of its depositors so that it becomes incumbent on the Reserve
Bank as the guardian of the depositors to see that the banking
company does not function a moment longer but is taken to
liquidation. The provisions of section 22 giving the company a locus
poenitentiae as also a right of appeal to the Central Government,
cannot, therefore, be a ground for assailing the impugned provision on
the score that it affords the company no such benefits.

The case of section 35(4) is much the same. There the Central
Government acts on a report made by the Reserve Bank after an
inspection conducted of its own accord or on the direction of the
Central Government. If, after considering the report, the Central
Government is of opinion that the affairs of the banking company are
being conducted to the detriment of the interests of its depositors, it
may, after giving the banking company an opportunity to make
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representations, either prohibit the company from receiving fresh

deposits or take the company to liquidation by directing the Reserve
Bank to apply under section 38 whereupon the Reserve Bank would be
bound by sub- section (2) of section 38 to make the application and
the court would be bound by sub-section (1) to make a winding up
order. But what is to be noticed here is that the sub-section does not
contemplate a report by the Reserve Bank to the effect that the very
continuance of the banking company is prejudicial to the interests of
its depositors, though doubtless it contemplates a report disclosing
unsatisfactory features. That section 35(4) uses the words "to the
detriment of" while the impugned provision uses the words,
"prejudicial to" with reference to the interests of the depositors, of
course, makes no difference. Both mean the same thing, but whereas
the Reserve Bank is to act under the impugned provision if it comes to
the opinion that the very continuance of the banking company is
prejudicial to the interests of its depositors, the Central Government is
to act under sub-section (4) of section 35 if, after considering the
report by the Reserve Bank, it comes to the opinion, not as yet that
the very continuance of the company is prejudicial, but that the affairs
of the banking company are being conducted in a prejudicial manner.
As I have explained before, the two things are different, though the
difference might be one of degree rather than of kind. They are
different stages of the same misdemeanour or disease, namely,
prejudicial conduct, but the stage reached by the impugned provision
is so far advanced that nothing can be done to save the depositors
except the winding up of the company and the danger to them is so
imminent that no time is to be lost. When the Reserve Bank finds,
whether as a result of an inspection or otherwise, that this stage has
been reached, it is bound to act under the impugned provision. If it
does not, but, nevertheless, its report leads the Central Government to
think that all is not well with the company and that action is called for
to see that it conducts its affairs properly, then the Central
Government acts under sub-section (4) to section 35. The degree of
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evil not being so great, and action for safeguarding the interests of the
depositors not being a matter of such emergency, sub- section (4) of
section 35 provides for a hearing and provides also in the shape of the
proviso thereto for a locus poenitentiae. If, after this, the Central
Government is satisfied that the company should not be allowed to
continue-and that is more or less the stage contemplated by the
impugned provision-it can make a prohibition under clause (a) of sub-
section (4) of section 35 or take the company into liquidation by a
direction under clause (b). It seems to me clear that sub-section (4) of
section 35 and the impugned provision do not provide for the same
circumstance. The evil in the latter case is greater and more imminent
and, naturally, the steps to counter it more drastic and summary.

It has been pointed out that the several provisions in section 38(3)
itself make for differentiation. Those in clause (a) of the sub-section
postulate certain objective requirements regarding which the Reserve
Bank must satisfy the court before it can get a winding up order
whereas those in clause (b) have no such objective requirements and
compel the court to act on the subjective satisfaction of the Reserve
Bank. It seems to me that both clauses contemplate a state of affairs
where the continuance of the banking company cannot be permitted in
the interests of its depositors. In the cases falling under clause (a), if
certain circumstances capable of ready proof, such as failure to comply
with the requirements specified in section 11, or the refusal or the
cancellation of a licence under section 22, or a prohibition from
receiving fresh deposits, exist, the statute itself draws the
presumption that the continuance of the banking company will imperil
the interests of its depositors. Clause (b), however, provides for cases
where, for other reasons, it appears to the Reserve Bank that the
banking company should not be allowed to continue. Those reasons are
that a banking company which is already in difficulties and has,
therefore, had to work under a compromise or arrangement sanctioned
by the court, is unable to work the arrangement, or where the returns
and other information furnished by the banking company show that it
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is unable to pay its debts, or the continuance of the banking company

is prejudicial to the interests of its depositors. These are largely
matters for expert opinion after skilled investigation, not so much
matters for objective proof, and here, apart from providing guidance
by enunciating the principles on which, and the circumstances in
which, the Reserve Bank is to come to the opinion, the formation of
the opinion is left to the subjective process of the Reserve Bank's
mind.

The new provisions introduced by Act 37 of 1960 in the shape of

section 45 of the Banking Companies Act for a moratorium
accompanied by a prohibition of payments with power to enforce a
scheme of reconstruction or amalgamation have been brought to my
notice. But while it has been suggested that the Reserve Bank and the
Central Government could well act under those provisions--and it
would appear there is nothing to prevent them from doing so if they
think fit even now--it is not contended that these new provisions
provide for the same situation as the impugned provision so that there
is no need to inquire whether they are less onerous.

The charge of comparative wickedness must fail, and so too must, if

what I have already said is correct, the charge of inherent wickedness.
For, as I have understood it, what the impugned provision
contemplates when it says, "the continuance of the banking company
is prejudicial to the interests of its depositors", is a state of affairs,
where the company cannot be allowed to function a moment longer if
its depositors are not to suffer, where action, if it is to be effective, has
to be swift, perhaps also secret. Such a state, of affairs might come
about in the natural course of things by the continued conduct of the
company's affairs in a manner detrimental to the interests of the
depositors, or its immediate cause might be, as in the present case, a
new and unexpected mischief (though possibly springing from the
prime cause of unsatisfactory conduct of affairs) like a run which, if
allowed to continue, would make it impossible for the company to pay
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all its depositors from its readily realisable assets with the result, that
if its total realisable assets prove insufficient to meet its liabilities, its
less favoured depositors will have to go with nothing. The complaint
made against the impugned provision is that it vests in an authority
like the Reserve Bank, doubtless an impartial and expert body, but,
nevertheless, not infallible--the Reserve Bank, I might say, lays no
claim to infallibility and probably counts this very case as one of its
failures--with the power of taking a running company to liquidation in
the exercise of its own discretion without any of the safeguards
inherent in the judicial process. But once the position envisaged by the
impugned provision has been reached, once a state of affairs has come
about whereunder a company cannot be allowed to function any
longer, it seems to me clear that the judicial process with its
opportunity to show cause, its review by higher tribunals, its attendant
stays and the loss of time that all this involves would be singularly
inept if the purpose of the statute is to be served. The Reserve Bank is
the one authority which has all the information and all the expert
knowledge necessary for swift and effective action. It is a high,
independent and impartial body with no master to serve except the
public interests, no interest of its own and no competing claims to
reconcile, in fact nothing which can induce bias or cloud or sway its
judgment, and if the Legislature has thought fit to repose in such a
body the confidence that, in the light of the guidance given by the
statute, it would act rightly on its own subjective satisfaction, that is
not to invest it with the power to deal differently with different persons
similarly circumstanced or to act in an arbitrary manner. It is only in
the emergency contemplated by the section that the Reserve Bank can
act, and such an emergency cannot wait upon the unavoidable delays
of the judicial process. To use a homely phrase it would be to lock the
stable door after the steed has been stolen.

It might be pertinent to examine what would be the practical outcome

if the Reserve Bank were required to decide judicially before making an
application for winding up, and its decisions were subject to judicial
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review. The reputation of a banking company is most delicate and,

even in a case where a winding up petition is brought by a private
party maliciously and without the least foundation, the result might
well be such irreparable harm to its reputation as to induce a run
making its continuance difficult. But, if an application for winding up is
made by an authority like the Reserve Bank on the ground that the
continuance of a banking company is prejudicial to the interests of its
depositors, by an authority which as I have already said, is not merely
impartial and expert, but is by law charged with the duty of
supervision and with the means of obtaining all relevant information,
the company would have little chance of survival. (And this, I
apprehend, would be a very probable result of action under what has
been called the less drastic provisions of the Reserve Bank Act and the
Banking Companies Act against which the impugned provision is
blackened, such as the refusal of a licence, the prohibition of fresh
deposits or even the withdrawal of what was popularly, but, it would
appear mistakenly, regarded as the hall mark of scheduling). The very
bringing of the application would be its death-knell and judicial review
would then partake of the nature of a post-mortem examination. I do
not suppose there would be any point in giving the company the
posthumous satisfaction of knowing whether it was really necessary to
destroy it to keep it out of mischief, whether its illness would, in any
case, have proved fatal or could have been cured, whether, as Mr.
Munshi puts it, what should have been used on it was the surgeon's
knife rather than the guillotine. Nor are these matters in which the
mourners or the general public would be interested, and the law
cannot be blamed if it does not provide for such a profitless
investigation. Even if an application brought by the Reserve Bank were
to be dismissed by the court, the law enabling this, the company could
live but a moment longer--some creditor, or the company itself, would
have to seek its liquidation--and, in this brief moment, irreparable
harm may be done. If some machinery had to be devised for
ascertaining whether a banking company had reached a stage where
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its further continuance would be perilous and some authority

empowered to take it to quick liquidation I should think the best
authority to choose would be the Reserve Bank, and the best
machinery, its subjective satisfaction based on the intimate knowledge
with which the law provides it. And considered in the light of the
several provisions of the Banking Companies Act and the Reserve Bank
Act to which I have drawn attention, and to their general scheme, I
should think the words, "the continuance of the banking company is
prejudicial to the interests of its depositors" afford ample guidance to
the Reserve Bank in the exercise of its discretion as to whether or not
it should take the company to liquidation by making an application.
The giant's strength might be there but only to subserve the purpose
of the statute, namely, the protection of the depositors, and its use, it
seems to me, is nicely regulated to that end. I think that the charge
levelled against the impugned provision on the strength of article 14 is
groundless.

Whether considered from the point of view of inherent or of

comparative wickedness I think the impugned provision falls within
cases like Kathi Raning Rawat v. State of Saurastra* and T.K. Musaliar
v. Venkatachalam Potti**, rather than within State of West Bengal v.
Anwar Ali Sarkar***, Surajmall Mohta & Co. v. Viswanatha Sastri# or
Meenakshi Mills v. Viswanatha Sastri##. The words that passed
muster with the Supreme Court, "prejudicial to public safety or the
maintenance of public order" in N.B. Khare v. State of Delhi###, "to
provide for public

* [1952] S.C.R. 435. #(1954) 26 ITR 1 **(1956) 29 ITR 349 ##

(1954) 26 ITR 713 *** [1952] S.C.R. 284. ### [1950] S.C.R. 519.

safety, maintenance of public order and preservation of peace and

tranquillity in the State of Saurashtra" in Kathi Raning Rawat v. State
of Saurashtra*, "for maintaining or increasing supplies of essential
commodities or securing their equitable distribution" in Harishankar
Bagla v. State of Madhya Pradesh**, "to a substantial extent evaded
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payment of tax on income" in Thangal Kunju Musaliar v.

Venkntachalam Potti*** (to give but four instances) as affording
sufficient guidance to save executive action based on subjective
satisfaction from the vice of arbitrariness, do not appear to be more
definite or to give greater guidance, having regard to the scope and
purpose of the statute concerned, than the words of the impugned
provision.

A winding up order means that a company goes out of business. It

also means, as pointed out in In re Oriental Inland steam Company:
Ex parte Scinde Railway Company# that although it does not lose legal
title to its property (since, unlike in the case of bankruptcy there is no
vesting in a receiver) the company loses all beneficial interest therein
since the liquidator has to hold the property in trust for its creditors
and contributories. Therefore, it cannot be doubted that such an order
does affect the fundamental rights in sub-clauses (f) and (g) of clause
(1) of article 19 of the Constitution. The enquiry then is whether the
impugned provision, which enables the Reserve Bank to take a
banking company to liquidation, is saved by clauses (5) and (6) of the
article. From what I have already said in discussing the charge of
discrimination, it must follow that the restriction in the impugned
provision passes the test of reasonableness in the interests of the
general public imposed by those clauses. As I said at the beginning, it
is agreed on all hands that a banking company whose continuance is
prejudicial to the interests of the depositors must be stopped from
functioning. That is an end dictated by the interests of the general
public, and a law which provides for that cannot be assailed on the
ground of the fundamental rights in article 19(1)(f) and (g). The
quarrel is with the means; but, consistent with the need for speedy
and effective action, I can think of no means more fair or more
reasonable than the means adopted by the impugned provision by
which a trusted authority charged with the duty and provided with the
means of keeping itself informed of the day to day working of the
several banking companies in the country, and which has all the expert
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knowledge required for coming to a proper decision in the matter, is

asked to act on being satisfied that the continuance of a banking
company is prejudicial to the interests of its depositors and that the
banking company should therefore be wound up.

* [1952] S.C.R. 435. ***(1956) 29 ITR 349 **(1955) 1 S.C.R. 380. #

(1874) 9 Ch. App. 557.

I may in this connection observe that, unlike the human person,

respect for whose life and liberty is the very breath of our Constitu
tion, no sanctity attaches to the personality of a company. There is
nothing abhorrent in that personality being destroyed by mere
administrative action and certainly no general principle that the
winding up of a company should be by an order of court. A company
can be wound up voluntarily, and there are several special statutes
which provide for the dissolution of a company at the discretion of an
administrative authority.

Although in the view I have taken that the impugned provision comes
within the saving in clauses (5) and (6) of article 19, this might not be
necessary, I may, out of respect for the very elaborate arguments that
have been addressed, refer briefly to the contention put forward that a
legal person like a corporation cannot claim the fundamental rights in
article 19 which are, in terms, conferred only on citizens. That, except
where the context otherwise requires, a company is a person within
the meaning of the Constitution by virtue of section 3(42) of the
General Clauses Act read with article 367 of the Constitution can
scarcely by disputed, but, what is contended is that a company though
a person and, therefore, eligible for the fundamental rights conferred
on all persons, is not a citizen and is, therefore, ineligible for the rights
like those in article 19 conferred only on citizens. I am not impressed.
Many of the rights in article 19(1) and, in particular, those in clauses
(f) and (g) thereof, are capable of enjoyment by companies. Our
Constitution makers could not have been unaware of the existence of
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legal persons. By article 19(1)(c) they gave all citizens the right to
form associations and unions, and it could not have been their
intention that the corporate bodies so formed by citizens should be
denied the rights guaranteed to the individual citizens, in particular
that the agencies through which a substantial portion of their business
is conducted by the citizens of this country and a considerable portion
of their property held should not have the protection of clauses (f) and
(g). That would mean a denial of the fundamental rights to property
and occupation not merely to companies but to all corporate bodies
even though they may be Indian in every sense of the term, their
members Indian, directors Indian and capital Indian, a denial which
virtually amounts to a denial of those fundamental rights to the
citizens who (though, of course, different persons) really constitute
those bodies. Such an intention of placing a purely Indian company
beyond the pale of protection is something with which I find it difficult
to credit our founding fathers; and the fact that American courts have
held that a corporation is not a citizen within the meaning of their
Constitution because in 1787, when that Constitution was adopted, the
word "citizen" was commonly understood as confined to human
beings, can be no reason for thinking that two centuries later, in 1949,
our Constitution makers used the word in the same limited sense and
not in its modern sense which is wide enough to include legal persons.
For, it is not contended that there is something in the very notion of
citizenship that rules out a legal person from its fold; on the contrary,
it is conceded that the law recognises that legal persons, and not
merely natural persons can be citizens.

Nor do I think that there is a casus omissus, for, I think that article 5
of the Constitution which lays down who shall be citizens at the
commencement of the Constitution, can apply both to natural and to
legal persons. So far as citizenship after the commencement was
concerned, that was a matter left to Parliament under article 11 read
with entry 17 in List I of the Seventh Schedule, and the fact, that in
making law for that purpose in the shape of the Citizenship Act, 1955,
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Parliament excluded companies and other bodies of individuals from

the operation of that law by excluding them from the definition of
"person", does not mean that a company cannot be a citizen. The Act
does not purport to terminate, or otherwise affect, the citizenship
conferred by article 5 of the Constitution, and if by reason of that
article a company was a citizen at the commencement, it continues to
be so--see article 10. The omission in the Act, deliberate though it be,
only means that we have as yet no law of citizenship so far is legal
persons who came into existence after the commencement of the
Constitution are concerned.

We need not enter into the controversy, profitless from any practical
point of view, as to whether the personality with which the law invests
a legal person is real or fictitious, for, the course of decisions in
England and in America shows that, though reluctantly to begin with,
courts have more and more found it necessary to endow legal persons
by analogy with the attributes of a natural person if the law is to be
worked. And the courts in India have walked in the footprints of the
English common law. Thus the concepts of residence and domicile in
relation to a company are now well accepted--see in this connection
rules 76 and 77 at pages 477 and 478 of Dicey's Conflict of Laws, 7th
edition--and the concept of domicile is itself founded on the fiction of
birth at the place of incorporation on the analogy of the domicle of
origin in the case of natural persons. In the Cesena case*
HUDDLESTON B., said: "taking the analogy between a natural and
artificial person, in the case of a corporation you can say that the place

* (1874) 9 Ch. App. 557.

of its registration is the place of its birth", and much the same thing
was said by LORD CAVE, L.C., and YOUNGER, L.J., in Bradbury v.
English Sewing Cotton Co. Ltd.* and by SARGANT, L.J., in Todd v.
Egyptian Delta Land and Investment Company Ltd.** And, although
the last mentioned decision was reversed by the House of Lords***,
LORD SUMNER in his speech on that occasion accepted the analogy
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when he said that the incorporation prescribed by the English

Companies (Consolidation) Act, 1908 "at the most does no more than
bring the embryo company to birth". Salmond on Jurisprudence at
page 371 of the 11th edition speaks of the birth and death of legal
persons, and I think it can be regarded as well settled that a company
is capable of having a place of birth, a residence, an ordinary residence
if you will, and a domicile, that its place of birth is the place of its
registration, that that is also its domicile, and that its residence or
ordinary residence (we need not go into the vexed question whether
plural residence is possible) is "where the central management and
control actually abides."

Article 5 of the Constitution runs thus:

"5. At the commencement of this Constitution every person who has

his domicile in the territory of India and-

(a) who was born in the territory of India; or

(b) either of whose parents was born in the territory of India; or

(c) who has been ordinarily resident in the territory of India for not
less than five years immediately preceding such commencement, shall
be a citizen of India."

This particular company we are considering was registered in the

territory of India in 1927; it has since then had its management and
has been conducting its business within the territory of India. The
basic requirement of me article, of domicile within the territory at the
commencement, is therefore satisfied, and so far as the additional
qualification demanded by the article is concerned (any one of the
three specified will suffice), I find to difficulty in holding that this
company has the qualifications in clauses (a) and (c). I see no warrant
for the assumption on which the entire argument is based, namely,
that article 5 can apply only to natural and not to legal persons. It is
true that clause (b) of the article cannot appropriately be applied to a
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company--at any rate it would appear that no court has yet found it
necessary to invest a company with parentage--but that is only one of
three alternative clauses, and I know of no principle of statutory
construction which demands that it should lend its colour to the
clauses preceding and

* [1923] A.C. 744. ** (1928) 1 K.B. 152. *** [1929] A.C. 1, 13.

following it. Nor why, because articles 6, 7, and 8 and article 39(a) can
apply only to natural persons, the application of article 5 should be
similarly circumscribed. Nor again why, because in the case of a
corporation, its domicile is in the place where it was born, or because
LORD SUMNER thought in Egyptian Delta Land and Investment Co.
Ltd. v. Todd* that the term "ordinarily resident" was an inappropriate
term to apply to an artificial person who is always and by law
immovable resident, we should in our anxiety to save the article from a
possible charge of redundancy and infelicity say that the article does
not apply to corporations when its language, adopted with an eye to
what is undoubtedly its primary object, namely, human citizens, is
capable of such application.

In Charanjit Lal v. Union India** MUKHERJEA, J. (as he then was),

observed thus at page 53 of the report:

"The fundamental rights guaranteed by the Constitution are available

not merely to individual citizens but to corporate bodies as well except
where the language of the provision or the nature of the right compels
the inference that they are applicable only to natural persons."

As I have already shown there is nothing in the language of article 19

(1) read with article 5 to indicate that legal persons are excluded from
the scope of that article; on the contrary the nature of the rights
conferred by the article, by clauses (f) and (g) in particular, are such
that they should in reason be available not merely to individual
citizens but also to corporate bodies.
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A number of cases decided by the Supreme Court have proceeded on

the assumption that a company can be eligible for the rights conferred
by article 19. Bijay Cotton Mills Ltd. v. State of Ajmer***, Bhatnagars
& Co. Ltd. v. Union of India#, Bombay Dyeing & Manufacturing Co. Ltd.
v. Stale of Bombay##, and Express Newspapers Ltd. v. Union of
India###, are some of these cases, and it may well be taken that they
decided the question by implication. No doubt the question was
expressly left open in Bengal Immunity Co. v. State of Bihar*#, State
of Bombay v. R.M.D. Chamarbaugwala**#, and Shewpujanrai
Indrasanrai Ltd. v. Collector of Customs***#, but, I think with a
leaning, unmistakable in the last mentioned case, in favour of
corporate citizenship.

In this view, I think it unnecessary to consider the decisions of the

several High Courts on the point. Those brought to my notice are

* [1929] A.C. 1. ** (1951) 21 Comp. Cas. 33. *** (1955) 1 S.C.R.

752. # [1957] S.C.R. 701. ## [1958] S.C.R. 1122. ### [1959]
S.C.R. 12. *# (1955) 2 S.C.R. 603. **# [1957] S.C.R. 874. ***#
[1959] S.C.R. 821.

Narasaraopeta Electric Corporation v. State of Madras*, Jupiter General

Insurance Co. v. Rajagopalan**, and Cherry Hosiery Mills v. S.K.
Ghose***, in favour of the contention that a company is not a citizen,
and State of Bombay v. Chamarbaugwala#, and the appeal
therefrom##, and M.K. Mills v. State of Rajasthan###, to the
contrary. I shall content myself with observing that whatever might be
the position of companies "born" after the Constitution (by reason of
the omission by the Citizenship Act, 1955, to provide for their
citizenship when it provided for the citizenship of natural persons), so
far as the present case is concerned it is not necessary to muster the
courage and boldness commended by CHAGLA, C.J., in State of
Bombay v. Chamarbaugwala*#, and, following the example set by the
American Supreme Court in The Bank of United States v. Deveaux**#,
tear the corporate veil and look behind it for the purpose of
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ascertaining whether the shareholders of the company are not citizens

and whether the company should not therefore have the fundamental
rights which each of its shareholders has, a courage and boldness
which, it would appear, has been regretted in that country and by
none more than by the very Chief Justice who rendered that judgment.
But, if that is done, the present company would undoubtedly qualify.

I might perhaps add that I am not sure that Part II of the Constitution
and the Citizenship Act, 1955, exhaust between them the law of
citizenship leaving nothing of the common law behind. I am not for a
moment suggesting that article 19 uses the word "citizen" in any
sense different from its sense in Part II or entry 17 in List I, but if
there is any residue of the common law left it might be well to
remember that since 1869 when LORD WESTBURY delivered his classic
judgment in Udny v. Udny***#, the common law view has been that
citizenship is governed by domicile which as we have seen is
determined in the case of a company by the place of its registration.

It is also said that, although a legal person like a corporation can have
some other statute struck down on the score that it is violative of its
fundamental rights, it can scarcely be heard to ask that the very
statute which gave it life and made it a person should be so struck
down. A company is a person only because of the law that makes it
one, and if that law chooses to limit its personality, then the creature
of that very law cannot look to article 19 for enlarging the rights which

* (1951) 21 Comp. Cas. 297. ** (1952) 22 Comp. Cas. (Ins.) 33. ***
A.I.R. 1959 Cal. 397. # 57 Bom. L.R. 288. ## A.I.R. 1956 Bom. 1.
### A.I.R. 1953 Raj. 188. *# A.I.R. 1956 Bom. 1. **# (1809) 5
Cranch. (U.S.) 61; 3 L. ed. 38. ***# [1869] L.R. 1 Sc. & Div. 441.

the law that brought it into existence thought fit to restrict. This
argument presupposes that it is to the Banking Companies Act that
banking companies owe their existence, but, assuming that the
Banking Companies Act is, as it at one time was, only a special chapter
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of the Companies Act, I do not think it can be said that it was these
Act s that made a person of the present company. It was the old
Travancore Companies Act that invested this company with personality
and that Act had no provision similar to the impugned provision. When
the Constitution came into force this company was already a person,
and, as I have shown, also a citizen in whom vested the fundamental
rights in article 19. Any restrictive law thereafter made, whether by a
separate statute, or by way of amendment to the very statute under
which the company is incorporated, would, I think, have to satisfy the
test of reasonableness laid down in clauses (5) and (6) of article 19 if
it is to survive.

In my view, the impugned provision need not suffer immolation at the

altar of the fundamental rights.

There remains only the question of mala fides. Although the counter-
affidavits filed on behalf of the company implied, if they did not
expressly aver, fraud and dishonesty, Mr. Munshi made it quite clear at
the very commencement of his argument that he was making no such
imputation against the Reserve Bank or suggesting that it acted
through some improper or ulterior motive. He was, however, for some
time at pains to make out a special kind of mala fides, not real fraud or
dishonesty but a sort of constructive fraud arising out of an entire lack
of materials on which the Reserve Bank could found its opinion or a
complete misapprehension on its part of the true position. As if mala
fides were the converse of "good faith", as defined in section 52 of the
Indian Penal Code,

"Nothing is said to be done or believed in 'good faith' which is done or

believed without due care and attention."

But, as pointed out in Watrap S. Subramania Iyer v. The United India

Life Insurance Co. Ltd.*, the proposition of constructive corruption or
constructive dishonesty was so ruthlessly repelled by LORDS WATSON
and BRAMWELL in Adams v. Great North of Scotland Railway
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Company** that I do not think a doctrine of constructive mala fides

can be put forward. And, if "mala fides" embraces all that is left out by
"good faith" I think the definition of "good faith" in section 3(22) of
the General Clauses Act, "a thing shall be deemed to be done in 'good
faith' where it is in fact done honestly, whether it is done negligently
or not", would be the proper definition to adopt. In fact,

* (1928) 55 M.L.J. 385, 407, 408. ** [1891] A.C. 31.

before the close of his argument. Mr. Munshi conceded that, in view of
the decisions in Puranlal Lakhanapal v. Union of India* and State of
Bombay v. Krishnan and Others**, he was not in a position to press
his case of mala fides.

In view of the wording of the impugned provision it was, as I have

already said, open to the Reserve Bank not to disclose the materials on
which it arrived at the opinion that the continuance of the company
was prejudicial to the interests of its depositors. It has, however,
chosen to place all the materials before the court, and, in view of the
charge of mala fides at one stage levelled against it, I think it only
proper to say that it is clear from the several documents filed in the
case and the several particulars furnished by the company itself, that
ever since 1952, the Reserve Bank was taking grave defects in its
working to the notice of the company and was giving it repeated
opportunities either to explain away the defects if it could, or remedy
them. Neither was done by the company, and it seems to me that the
Reserve Bank far from having acted without adequate material or in a
hasty and ill-considered manner was doubtless alive to the grave
responsibility placed upon it to preserve the banking structure of
country, acted with a degree of care and circumspection which has
drawn to it adverse criticism from those who do not share its
responsibility. Faced with the run it would have failed in its duty to the
depositors, had it not acted as it did.

In the result I allow the application and order that the Palai Central
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Bank Ltd. be wound up.

The Reserve Bank will get its costs from those who have appeared to
oppose this application, in the last resort from the assets of the
company.

Petition allowed.

* [1958] S.C.R. 460. ** (1960) 2 L.L.J. 592.

———

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