Case: Yes Bank Limited Vs. Madhu Ashok Kapur &amp; Others

expressed in the recent past about the functioning of the commercial banks in the country in the context of our economic growth and planned development. The resources of the banking system need to be distributed equitably and purposefully in conformity with the developmental requirements so that priority sectors receive their due share and particular clients or groups of clients are not favoured in the matter of distribution of credit. A number of steps, both administrative and legislative are proposed to be taken to secure this objective by extending effective social control over banks. The main object of the Bill is to amend the Banking Regulation Act to incorporate certain new provisions towards achieving this purpose.2. The more important new provisions of the Bill connected with the management of the banks relate to the reconstitution of their Boards of directors and appointment of full-time chairmen. Every banking company will have to reconstitute its Board of directors so that the majority of persons on the board have special knowledge or practical experience in agriculture, rural economy, small-scale industries, co-operation, banking, finance and other matters which are useful to a banking company and should not have substantial interest or active association with large or medium-sized industrial or business undertakings. The chairman of each bank will be required to be a professional banker and a fulltime chief executive officer. It will be open to the Reserve Bank to reconstitute the Board of directors or to appoint a new chairman if it proves to be necessary. ... ... ... ... "34. The object of the Legislature was not to exclude the challenge to the appointment of directors altogether. The object of section 10A was to provide for the nature of the constitution of the Board of directors of a banking company. The object was to ensure that a requisite percentage of the Board of directors hold the qualifications prescribed in sub-section (2) and to exclude the possibility of any conflict of interest of the nature stipulated in clause (b) of sub-section (2). The Legislature provided for a percentage of the total member of the Board of directors to consist of persons having a particular academic background and/or the requisite experience and/or possessing the requisite knowledge as stipulated in sub-clause (a) of sub-section (2) of section 10A. The Legislature was obviously of the view that such a composition of a Board of directors was necessary in the interest of banking companies and, therefore, provided for the same. The intention, therefore, was to ensure that the Board of directors comprises of a percentage of directors with the requisite qualifications and/or experience and/or knowledge. The intention was not to interfere with the machinery provided under the Companies Act regarding the appointment and removal of directors. Nor was it to denude the civil courts of their jurisdiction to decide disputes relating to the validity of the appointments of directors on the Board of a banking company.35. Section 10-A has, however, curtailed the jurisdiction of the civil courts, but only to a limited extent. As we mentioned earlier, we will restrict this judgment by deciding only the question that arises in this case. We, therefore, have not dealt with the entire extent to which sub-section (6) applies. For the purpose of this case, it is necessary only to decide whether the jurisdiction of civil courts to decide a challenge to the appointment of directors made other than pursuant to or under sub-sections (3), (4) or (5) of section 10-A is ousted. The words "under this section" in sub-section (6) make it clear that the Legislature never intended to curtail the jurisdiction of civil courts at least to the extent suggested on behalf of the appellant. Had it been so, section 10A and in particular, sub-section (6) thereof would have been worded entirely differently.36. Mr. Cooper initially agreed that the appointment of a director must be not only in accordance with law, but even in accordance with the Articles of Association of the company and in accordance with all contractual terms and conditions between the shareholders or any other relevant parties. He, however, submitted that the question whether the requirements were met can only be decided by the Reserve Bank of India and not by the civil court. In the written submissions, however, it is contended that the provisions of section 10A are aimed at stopping a challenge to the appointment of directors at the threshold and that if the directors are appointed such that the constitution of the Board complies with sub-section (2), all the directors are insulated from any challenge.Mr. Cooper also submitted that the words "duly held" would only require the due procedure for the appointment of directors to have been followed and cannot mean anything beyond following the due process and procedure as laid down by the law i.e. the Companies Act. He submitted that the words "duly held" cannot mean anything falling beyond the due process and procedure as laid down by the Companies Act. Once the procedure is followed, the appointment of a director cannot be challenged on any other ground whatsoever, including that it was contrary to any provision of law or contract. So long as the appointment is legally valid, following the legal procedure mandated under the Companies Act and in compliance with section 10A of The Banking Regulation Act, a court cannot assume jurisdiction to consider the validity of such appointment / election. To do otherwise would enable a court in every case to ignore the bar of jurisdiction under section 10A since all challenges would necessarily be made on the basis of an allegation that an appointment/election has not been duly made or duly held.37. Although we are sceptical about the correctness of these submissions, we refrain from dealing with them as it is not necessary to do so having held that the bar in sub-section (6) does not operate in respect of appointments made in compliance with the requirements under sub-section (2) and not under sub-sections (3), (4) and (5).

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]Mr. Cooper firstly submitted that civil courts have no jurisdiction to entertain a challenge to the appointment of directors of companies incorporated under the provisions of the Companies Act, 1956.The submission is not well founded. It is not necessary to deal with the submission in any detail as it is answered against the appellant by a judgment of a Division Bench of th is Court in SantoshPoddarAnr. v. Kamalkumar Poddar (1992) 3 Bom.C.R. 310.In the present case although the irregularities in holding meetings or the holding or cessation of the office of a Director may have to be decided with reference to the Companies Act, that Act has not prescribed a forum where such a relief can be sought. In the absence of such prescription, the ordinary Civil Courts are competent to deal with such disputes. Hence the present suits were correctly filed originally in the City Civil Court.23. The learned Single Judge, while deciding the appeals from orders however, placed reliance on a judgment of this Court in the case of Vithalrao Narayanrao Patil v. Maharashtra State Seeds Corporation Ltd., and anr., reported in 68 Company Cases 608 . In that case the learned Single Judge of this Court (at Nagpur) held that in view of section 10 of the Companies Act only the High Court can entertain any dispute in respect of the affairs of the Company. We do not agree with this interpretation of the learned Single Judge for reasons set out earlier.Mr. Cooper, however, relied upon the judgment of a learned single Judge in the case of KhetanIndustries Pvt. Ltd.. v. Manju Ravindraprasad Khetan AIR 1995 Bom. 43  .We are, in any event, in agreement with the learned single Judge that the bar of jurisdiction of civil court is not to be readily inferred and that a Court would normally lean in favour of a construction which would uphold the retention of the jurisdiction of a civil court. In this view of the matter, it is not necessary to refer to the other judgments which have been referred to by the learned single Judge. The contention that the jurisdiction of this Court to entertain a challenge to the appointment of defendant Nos.7 to 12 as directors in view of the provisions of the Companies Act, 1956, is rejected.We will restrict ourselves to the point that falls for consideration. We will presume that with the appointment of defendant Nos.7 to 12 the "composition" of the Board of directors of defendant No.6 was in compliance with the provisions of(2) of section 10A.Defendant Nos.7 to 12 were, however, not appointed under(3), (4) or (5) of section 10A. We are unable to agree with Mr. Coopers submission that the jurisdiction of civil courts to entertain a suit challenging the appointment of a director made even otherwise than under(3), (4) and (5) of section 10A is barred in view of(6) of section 10A.21. The appointments of defendant Nos.7 to 12 were not under(3) of section 10A. It is not the appellants case that the appointments were made on account of the requirements as laid down in(2) not having been fulfilled at any time. There was no question, therefore, of the Board of directors of the appellant reconstituting the Board so as to ensure that the requirements of(2) were fulfilled. In other words, the appointments of defendant Nos.7 to 12 were not in the course of reconstituting the Board of directors of the appellant. The appointments were made keeping in mind and in conformity with the provisions of section 10A. The appointments were not under(3) of section 10A.22. There was no question in the present case of reconstituting the Board by retiring any director or directors. This is not even the appellants case.(4) of section 10A, therefore, is not relevant to this case.23. It is not the appellants case that defendant Nos.7 to 12 were appointed under(5) of section 10A. No action was taken by the Reserve Bank of India. The Reserve Bank has not even come into the picture. The question of the Reserve Bank forming an opinion as contemplated under(5) that the composition of the Board of directors of the appellant did not fulfill the requirements of(2) did not arise. Defendant Nos.7 to 12 were, therefore, not appointed pursuant to any opportunity being given by the Reserve Bank to the appellant to reconstitute its Board so as to ensure that the requirements of sectionare fulfilled. Nor were the appointments of defendant Nos.7 to 12 made by the Reserve Bank under(5).24. The learned Judge rightly held that the appointments of defendant Nos.7 to 12 were not under(3) or (4) of section 10A. The resolutions appointing them have been referred to earlier. None of them indicate that the appointments were made under(3) or (4). The parties led evidence even in respect of the preliminary issues. The learned Judges attention was not invited to any evidence, oral or documentary, to indicate that the appointments were under(3) or (4). Nor was our attention invited to any evidence, oral or documentary, in this regard. Even the minutes of the meeting at which the appointments were made do not suggest that the appointments were made pursuant to or in accordance withThese minutes do not make the appointments at the AGM under(3), (4) or (5) of section 10A.The committees only acted in an advisory capacity to defendant No.6. The views expressed in the minutes do not militate against our finding that the appointments were not made under(3), (4) or (5) of section 10A.They merely state that their appointment would not violate the provisions of sectionThe constitution of a Board of directors of a banking company must comply with the provisions of section 10A(2). When a Board of directors complies with the provisions of section 10A(2) the appointments of the directors are not made under section 10A but in compliance or in conformity with the provisions of(2) of Section 10A. What(6) bars is the calling into question in any court an appointment, removal or reconstitution duly made and every election duly held "under this section" and not appointments, removal or reconstitution or election in accordance or in conformity with the section.28. The contention that this view would render the term "election" in(6) otiose is incorrect. It is based on the erroneous presumption that a director cannot be elected where the provisions of(3), (4) and (5) apply. In a case under(5), there can be an election. Under(5), where the Reserve Bank of India is of the opinion that the composition of the Board of directors of a banking company does not fulfill the requirements of(2), it may direct the banking company to so reconstitute its Board of directors as to ensure that the requirements of(2) are fulfilled. The direction, therefore to reconstitute the Board to make it compliant with the provisions of(2) is to the banking company and not to the Board of directors. The banking company, like any other company, can make appointments at a general meeting. At the general meeting, a director would be elected. Furthermore, under(5), if the banking company does not comply with the direction of the Reserve Bank, then, in that event, the Reserve Bank may, after determining, by lots drawn in such manner as may be prescribed, remove such person from the office of the director of the banking company and with a view to comply with the provisions of section 10A(2), appoint a suitable person as a member of the Board of Directors in the place of the person so removed. In such an event, the person so appointed shall be deemed to have been duly elected by the banking company as its director. Therefore, elections and deemed elections are contemplated under(5) itself. The view that we take, therefore, does not render the term "election" inMr. Cooper furnished the same illustration as he did before the learned single Judge in support of his contention that a view, contrary to the one submitted by him would lead to an anomalous situation. For example, he said, assuming a bank is required to appoint only one director under, but appoints five directors who meet the qualifications in the same meeting, it would be difficult to say which of these directors comes within the "protected appointment" under(3)."32. The illustration does not substantiate his submission regarding the interpretation of section 10A. There is no anomaly. The company can always pass separate resolutions thereby indicating which of the directors is appointed to ensure compliance with(3). Assuming that a director is entitled to protection, it would be that director then who would be entitled to the same. As the learned Judge rightly held, when a banking company elects its Board as a whole in compliance with section 10A (2), the appointments are not under section 10A and there is no question of any of the directors having a protected status under(6) thereof. As and when the provisions of(3), (4) and/or (5) come into play, the appointments can always be identified.as, however, curtailed the jurisdiction of the civil courts, but only to a limited extent. As we mentioned earlier, we will restrict this judgment by deciding only the question that arises in this case. We, therefore, have not dealt with the entire extent to which(6) applies. For the purpose of this case, it is necessary only to decide whether the jurisdiction of civil courts to decide a challenge to the appointment of directors made other than pursuant to or under(3), (4) or (5) of section 10Ais ousted. The words "under this section" in(6) make it clear that the Legislature never intended to curtail the jurisdiction of civil courts at least to the extent suggested on behalf of the appellant. Had it been so, section 10A and in particular,(6) thereof would have been worded entirely differently.Mr. Cooper initially agreed that the appointment of a director must be not only in accordance with law, but even in accordance with the Articles of Association of the company and in accordance with all contractual terms and conditions between the shareholders or any other relevant parties. He, however, submitted that the question whether the requirements were met can only be decided by the Reserve Bank of India and not by the civil court. In the written submissions, however, it is contended that the provisions of section 10A are aimed at stopping a challenge to the appointment of directors at the threshold and that if the directors are appointed such that the constitution of the Board complies with(2), all the directors are insulated from any challenge.Mr.Cooper also submitted that the words "duly held" would only require the due procedure for the appointment of directors to have been followed and cannot mean anything beyond following the due process and procedure as laid down by the law i.e. the Companies Act. He submitted that the words "duly held" cannot mean anything falling beyond the due process and procedure as laid down by the CompaniesOnce the procedure is followed, the appointment of a director cannot be challenged on any other ground whatsoever, including that it was contrary to any provision of law or contract. So long as the appointment is legally valid, following the legal procedure mandated under the Companies Act and in compliance with section10A of The Banking Regulation Act,a court cannot assume jurisdiction to consider the validity of such appointment / election. To do otherwise would enable a court in every case to ignore the bar of jurisdiction under section 10A since all challenges would necessarily be made on the basis of an allegation that an appointment/election has not been duly made or duly held.37. Although we are sceptical about the correctness of these submissions, we refrain from dealing with them as it is not necessary to do so having held that the bar in(6) does not operate in respect of appointments made in compliance with the requirements under(2) and not under(3), (4) and (5).