# K JOSEPH AUGUSTHI AND TWO ORS v. M. A. NARAYANAN, OFFICIAL LIQUIDATOR

- **Citation:** [1964] 7 S.C.R. 137
- **Court:** Supreme Court of India
- **Decided:** 1964
- **Case number:** Civil Appeals Nos. 254 to 256 of 1963
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/k-joseph-augusthi-and-two-ors-v-m-a-narayanan-official-liquidator-3076
- **Pages:** 11

## Headnote

..
7 S.C.R
SUl'HE'.\rn COURT REl'OHTS
137
K JOSEPH AUGUSTHI AND TWO ORS.
v.
M. A. NARAYANAN, OFFICIAL LIQUIDATOR.
PALA! CENTRAL BANK LTD .
IP. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO, J. c. SHAH,
N. RAJAGOPALA AYYANGAR ANDS. M. SIKRI, JJ:]
Banking Companies Act-Banking Company under liquida·
lion-Public examination of directors ordered-Section 45G oj
the Act does not violate Art. 20(3)-Elements of self incrimina·
1i.on-:4cts and oniissions of directors need not be crim1.nal-It is
suffic'ent if they are commercia!lv rmsound-Ordinarv public
e:i.:ani:nation-Covrt has to see only that a prima facie case is
est•lb!ished--Constitution oj l udia, Art. 20(3)-Ban'dng Companies Act, 1949 (X of 1949). s. 45G.
·
The appellants were directors of Palai Central Bank Ltd. On
an applicat10n made by the Reserve Bank of India the High
Court of Kerala ordered the winding up of the Bank and appointed an Official Liquidator whc filed a number of reports under
s. 45G(l) of Banking Corn;)anics Act, 19~9. The appellants filed
their objections and the learned single Judge after hearing the
parties made an order directing ihe puhlic exa1nination of the
appellants under s. ·15G(2) of the Act. After appealing without
success to a Division Bench the appellants filed the present
appeals on a certificate granted by the High Court.
It was contended on behalf of the appellants that the provision of s. 45G(2) in as ni.uch as it '.vould compel a person ordered
to be publicly examined to be a 'vitness against himself is violative of Art. 20(3) of the Constitution and therefore bad. It was
further contended that the acts or omissions alleged as contemplated by s. 45G(l) should be acts or omissions which are prohibited by law or enjoined by law and on this basis the reports of
the Liquidator have not made out a· case for public examination.
The third contention was that the High Court has misconstrued
the effect of the provisions of s. 45G and hc:.s refused to g~ve an
opportunity to the appellants.
Held: A person examined publicly under s. 45G may in
some cases be compelled to be a witness against himself and thus
one element of Art. 20(3) is satisfied. But it is only when a person
can be said to have been accused of an offence that the prohibition prescribed by Art. 20(3) comes into operation. If a person
who is not accused of any offence, is compelleci.to give evidence
and it ultimately leads to an accusation against him, that would
not be a case which would attract the provisions of Art. 20(3).
After the examination under s. 45G is over and materials adduced
before the court have been examined by the court an occasion
may or may not arise to take £•.n/ a:-tioD. In such a case, \Vhat mair
conceivably follow canaot said to be existing before the order is
passed under s. 45G; an accusation may follow the enquiry but
an accu£ation is not in existence at the time when public exarilination is ordered. Hence the appellant cannot be said to have
been accused. Since the essential condition nrecedent for the
application of Art. 20(3) is ;:bsent in all cases -covered by s. 45G
it cannot be said that s. 45G is violative of Art. 20(3) of the
:Constitution.
·
1964
ll!arch 11
138
SUPREME COURT REPORTS
[1964}
1964
K. Joseph Auguathi
and two others
Ma!la1a Suryanarayana v. Viiaya Commercial Bank Ltd.
decided on 26-10-61 (C.A. No. 286/59) and Raia Narayan!a! Bansilal v. Maneck Phiroz Mistry and Anr., A.LR. 1961 S.C. 29, referred
to.
v.
M.A. Narayanan,
(ii) The acts or omissions contemplated under s. 45G need
O~iai Liquidalor, not necessarily be criminal, they may even include acts or
Pala• Central Bank omissions which are commercially unsound or unwise. The court
Ltd.
has only to see whether the acts or omissions "as to the promoGajendragadkar c J tion or formation or the conduct of the business of the banking
' · · company or as to his conduct and dealings in so far as they
relate to the affairs of the banking company" have led to loss to
the banking company. For this, what the c

## Text

..
7 S.C.R
SUl'HE'.\rn COURT REl'OHTS
137
K JOSEPH AUGUSTHI AND TWO ORS.
v.
M. A. NARAYANAN, OFFICIAL LIQUIDATOR.
PALA! CENTRAL BANK LTD .
IP. B. GAJENDRAGADKAR, C.J., K. N. WANCHOO, J. c. SHAH,
N. RAJAGOPALA AYYANGAR ANDS. M. SIKRI, JJ:]
Banking Companies Act-Banking Company under liquida·
lion-Public examination of directors ordered-Section 45G oj
the Act does not violate Art. 20(3)-Elements of self incrimina·
1i.on-:4cts and oniissions of directors need not be crim1.nal-It is
suffic'ent if they are commercia!lv rmsound-Ordinarv public
e:i.:ani:nation-Covrt has to see only that a prima facie case is
est•lb!ished--Constitution oj l udia, Art. 20(3)-Ban'dng Companies Act, 1949 (X of 1949). s. 45G.
·
The appellants were directors of Palai Central Bank Ltd. On
an applicat10n made by the Reserve Bank of India the High
Court of Kerala ordered the winding up of the Bank and appointed an Official Liquidator whc filed a number of reports under
s. 45G(l) of Banking Corn;)anics Act, 19~9. The appellants filed
their objections and the learned single Judge after hearing the
parties made an order directing ihe puhlic exa1nination of the
appellants under s. ·15G(2) of the Act. After appealing without
success to a Division Bench the appellants filed the present
appeals on a certificate granted by the High Court.
It was contended on behalf of the appellants that the provision of s. 45G(2) in as ni.uch as it '.vould compel a person ordered
to be publicly examined to be a 'vitness against himself is violative of Art. 20(3) of the Constitution and therefore bad. It was
further contended that the acts or omissions alleged as contemplated by s. 45G(l) should be acts or omissions which are prohibited by law or enjoined by law and on this basis the reports of
the Liquidator have not made out a· case for public examination.
The third contention was that the High Court has misconstrued
the effect of the provisions of s. 45G and hc:.s refused to g~ve an
opportunity to the appellants.
Held: A person examined publicly under s. 45G may in
some cases be compelled to be a witness against himself and thus
one element of Art. 20(3) is satisfied. But it is only when a person
can be said to have been accused of an offence that the prohibition prescribed by Art. 20(3) comes into operation. If a person
who is not accused of any offence, is compelleci.to give evidence
and it ultimately leads to an accusation against him, that would
not be a case which would attract the provisions of Art. 20(3).
After the examination under s. 45G is over and materials adduced
before the court have been examined by the court an occasion
may or may not arise to take £•.n/ a:-tioD. In such a case, \Vhat mair
conceivably follow canaot said to be existing before the order is
passed under s. 45G; an accusation may follow the enquiry but
an accu£ation is not in existence at the time when public exarilination is ordered. Hence the appellant cannot be said to have
been accused. Since the essential condition nrecedent for the
application of Art. 20(3) is ;:bsent in all cases -covered by s. 45G
it cannot be said that s. 45G is violative of Art. 20(3) of the
:Constitution.
·
1964
ll!arch 11
138
SUPREME COURT REPORTS
[1964}
1964
K. Joseph Auguathi
and two others
Ma!la1a Suryanarayana v. Viiaya Commercial Bank Ltd.
decided on 26-10-61 (C.A. No. 286/59) and Raia Narayan!a! Bansilal v. Maneck Phiroz Mistry and Anr., A.LR. 1961 S.C. 29, referred
to.
v.
M.A. Narayanan,
(ii) The acts or omissions contemplated under s. 45G need
O~iai Liquidalor, not necessarily be criminal, they may even include acts or
Pala• Central Bank omissions which are commercially unsound or unwise. The court
Ltd.
has only to see whether the acts or omissions "as to the promoGajendragadkar c J tion or formation or the conduct of the business of the banking
' · · company or as to his conduct and dealings in so far as they
relate to the affairs of the banking company" have led to loss to
the banking company. For this, what the court can and should do
is to read the report submitted by the Official Liquidator,
consider whether the opinion expressed in the report appears
to be prima facie reasonable, hear the explanation of the persons concerned; and find out prima facie whether the explanation tendered by the person is sufficient to reject the liquidator's
request for such person's public examination and whether on
the whole it is just and beneficial to the interest of the banking
company that public examination should be held. The. High
Court has dealt with the matter precisely in this way in the
present case and hence the appellants cannot have any gTievance.
Ex parte George Stapylton Barnes, (1896) A.C. 146, Sir Fazal
Ibrahim Rahimtoola v. Appabhai C. Desai, A.LR. 1949 Born. 339
and The Ahmedabad Advance Spiwning and Weaving Co. v.
Lakshmishankar, I.L.R. 30 Born. 173, distinguished.
(iii) Applying the above principles and examining the
reports submitted by the Official Liquidator it is clear that the
courts below have taken into account those reports and after
considering the objections raised by the appel1ant, they havE>
come to the right conclusion that the appellants should face a
public examination.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 254
to 256 of 1963.
V. A. S. Muhammad, for the appellant (in C.A. No254/ 63)
J. B. Dadachanji, 0. C. Mathur and Ravinder Narain,
for the apJ:lellants (in C.A. Nos. 255 and 256 of 1963).
M. C. Setalvad, Atiqur Rehman, Shureshta Kumari and
K. L. Hathi, for the respondent (in all the appeals).
March II, 1964. The Judgment of the Court was delivered
by
GAJENDRAGADKAR, C. J.-Two questfons of law have
been raised' before us by Dr. Seyid Muhammad on behalf of
K. Joseph Augusthi, the appellant in Civil Appeal No. 254 /
1963. Both of them are related to section 45G of the Banking Companies Act, 1949 (No. X of 1949) (hereinafter called
the Act). The first question raised has reference to the validity
of the said section and the second to its true scope and effect.
Dr. Seyid Muhammad contends that the answers given by the
Kerala High Court to both these questions are erroneous
•
-
7 S.C.R.
SUPREME COURT REPORTS
139
According to him, s. 45G is unconstitutional inasmuch as it
1964
contravenes the fundamental right guaranteed to the citizensK /
h ,
th'
h C
.
.
H
ls
.. osep aU{JU6 •
of this country by Art. 20(3) of t e onst1tut10n.
e a o argues
and two oth"'
that in making an order for the public examination of the
T.
ll
h H. h C
1
·
t
d th
d 11/. A. Narayanan.
appe ant, t e
1g
our.t. ms m1scons. rue . e scope an
Ufficial Liquidator,
effect of the relevant prov1S1CJ111S of the said sect10n.
l'olai Central Bank
Ltd.,,
The appellant Joseph Augusth~ ~as the Managing Direc- Gujwdrag-;;dlar, C.J,
tor of the Palai Central Bank L1m1ted from 26-1-1927 to
8-8-1960; K. George Thomas and George Joseph who are the
appellants in the two other appeals Nos. 255 and 256 of 1963
respectively, were the Directors of the said Bank; the first of
them was the Directoc from 14-1-1935 to 8-8-1960 and the
latter from 26-1-1927 to 8-8-1960.
An application for the winding up of the said Bank was
made before the Kerala High Court by the Reserve Bank
under section 38(3)(b)(iii) of the Act. The said provision justifies the making of an application by the Reserve Bank in case
in the opinion of the Reserve Bank, the continuance <?f the
banking company in question is prejudicial to the interests of
the depositors. On the 8th August, 1960, an order was passed
on the said application appointing the Official Liquidator of
the High Court the Provisional Liquidator of the Bank. The
order of winding up then followed on the 5th December, 1960, '
and on the 8th December, 1960, an Official Liquidator was
appointed under s. 39 of the Act. After the Official Liquidator
came on the scene, he made three reports to the High Courtreport No. 192 on the 17th August, 1961; report No. 242 on
the 29th September, 1961 and report No. 350 on the 4th
December 1961. All these reports were made under s. 45G(l)
of the Act. The appellants filed their objections on the 23rd
November, 1961 to the first two reports. The matter was then
considered by the learned single Judge of the Kerala High
Court and after hearing the parties, he made an order directing the public examination of the three appellants under
s. 45G(2).
This order was challenged by the appellants by preferring
three appeals before a Division Bench of the High Court. The
Division Bench agreed with the view taken by the learned
single Judge and dismissed the three appeals. The appellants
then applied for and obtained certificates from the High Court
and it is with the said certificates that they have come to this
Court by the present three appeals.
The. first point whi<;h has been arg:oed before us by
Dr. Seyid Muhammad IS that s. 45G 1s unconstitutional
because it contravenes the fundamental rights guaranteed by
Art. 2013). In order to appreciate this argument, it is necessary
to read s. 45G(l) & (2).
1964
K. J.,tph Augwthi
and two others
v.
M . ..4.. Narayanan,
Official Lifvidalot',
Palai Central Bank
Lid.
140
SUPREME COURT REPORTS
[19641
"(!) Where an order has been made for the winding U!)
of a banking company, the official liquidator shall
submit a report whether in his opinion any loss has.
been caused to the banking company since its
formation by any act or omission (whether or not
a fraud has been committed by such act or omisGajendragadl:ar, O.J.
sion) of any person in the promotion or formation
of the banking company or of any director or
auditor of the banking company.
(2) H, on consideration of the report submitted under
sub-section (!), the High Court is of opinion that
any person who has taken part in the promotion or
formation Clf the banking company or has been a
director or an auditor of the banking company
should be publicly examined, it shall hold a' public
sitting on a date to be appointed for that purpose
and direct that such person, director or auditor
shall attend thereat and shall be publicly examined as to the promotion or formation or the c:onduct
of the business of the banking company. or as to
his conduct and dealings, in so far as they relate
to the affairs of the banking company:
Provided that no such person shall be publicly
examined unless he has been given an opportunity
to show cause why he should nC1t be so examined."
The other sub-sections of this section need not be' cited.
because it would be enough for our purpose to nolice, in
substance, what their effect is. Sub-section (3) allows the Official Liquidator to take part in the examination and to 'employ
such legal assistance as may be sanctioned by the High Court,
if he is specially authorised by the High Court in that behalf.
Sub-section (4) permits the creditor or contributory to take
part in the examination either personally or by any person
entitled to appear in the High Court. Sub-section (5) gives
authority to the High Court to put questions to the person
who is being examined; sub-section (6) empowers oath to be
administered to the said person and compels him to answer
questions as may be put to him by the High Court, or as the
High Court may allow to be put to him. Under sub-section (7),
such a person is entitled to appear by a lawyer and the lawyer
so appointed shall be at liberty to put to him such questions as
the High Court may deem fit just for the purpose of enabling
him to explain or qualify any answer given by him; there is a
proviso to this sub-section which authorises the High Court to
make an order of costs in its discretion in case the person
under examination is exculpated from any charges made gr
suggested against him. Sub-section (8) deals with the procedure
to be followed in keeping a record of the examination. Subsection (9) provides that where after the examination of the
•
7 S.C.R.
SUPREME COURT REPORTS
141
person, the High Court is satisfied that a person, who has been
1964
a Director of the banking company, is not fit to be a director K. Joseph Augusthi
of a company, or an auditor, or a partner who bas been acting and two othm
as such auditor. is not fit to be such an auditor or partner, the M ~ N v.
High Court may make an order that that person shall not,
off;ciat'Zl~'!d:ior,
without the leave of the High Court, be a director of, or in any PalaiCentral Bank,
way, whether directly or indirectly, be concerned or take part
Ltd:_
in the management orf, any company, or, as the case may be, Gajendragadkar,O.J.
act as an auditor of, or be a partner of a firm acting as auditors of, any company for such period not exceeding five years
as may be specified in the order.
Thus, it will be clear that the scheme of s. 45G is first to
decide whether, prima facie, there is a. case for the public
examination of a person; then in deciding this question, give
an opportunity to the person concerned; if it is decided to bold
a public examination of the said person, proceed to bold that
examination; if suggestions made against the person examined
are found to be unwarranted, make an order of costs in his
favour; and if the person concerned is found to have been responsible for acts or omissions which caused loss to the banking
company, to make a penal order disqualifying such person
from acting as a director or an auditor as indica.ted by subsection (9). It is in the light of this scheme that the argument
about the contravention of Art. 20(3) falls to be examined.
Article 20(3)
provid~s that no person accused of any
offence shall be compelled to be a witness against himself. It
may be conceded that when a person is compelled to submit to
a public examination, that itself,.prima facie, looks like pillorying him in the public gaze. It is also true that s .. 45G(6)
compels the person to answer questions which the High Court
may put to him, or which the High Court may allow to be put
to him, and it is quite likely that in cases where public examination is ordered to be held, some suggestions and even some
charges may be levelled against the person examined by
reference to his acts or omissions in relation to the promotion,
formation or conduct of the banking company of which he was
a director or an auditor. Therefore, there is no difficulty in
holding that a person examined publicly under s. 45G may, in
some cases, be compelled to be a witness against himself. Thus,
one element of Art. 20(3) is satisfied; but the question still
remains whether the other essential element is satisfied or not.
Article 20(3) guarantees to every citizen the fundamental
right not to be compelled to be a witness against himself, provided the person who is being compelled in that way, is accused of any offence. In other words, it is only when a person can
be said to have been accused of any offence that the prohibition prescribed by Art. 20(3) comes into operation. If a person
who is not accused of any offence, is compelled to give
142
SUPREME COURT REPORTS
(1964]
1964
evidence, and evidence taken from him under compulsion ult.-
mately leads to an accusation against him, that would not be
K. Jo$eph .d.Ut}wthi
an<i lwo 01,..,. a case which would attract the provisions of Art. 20(3). The
"·
main object of Art. 20(3) is to give protection to an a.ccusea
"[j/: f
1'!'.i~~'J:i";,. person not to-be compelled to incriminate himself andl that is
Palai 'O:ntr~l Bank 'in consonance with the basic principle of criminal law acceptLid.
ed in our coqntry that an accused person is entitled to rely on
Gaj .. drllfl-;;dk:,, 0 J the presumption of innocence in his favour and cannot be
' · ·compelled to swear against himself. Therefore, unless it is
shown tha.t a person ordered to be publicly examined under
s. 45G is, before, or at the time when the order for examining
him publicly is passed, an accused person, Art. 20(3) will not
apply.
·
What then is the position with regard to a person against
whom an order for public examination is made by tl1e High
Court as done against the appellants? All that has happened at the relevant time is that the official liquidator has submitted reports indicating that in his opinion, loss has been
caused to the banking company under liquidation by the acts
or omissions of the appellants, and the High Court, on considering the reports and taking into account the explanation
given by the appellant, has come to the conclusion that, prima
facie, a case has been made out for their public examination.
In such a case, how can it be said that the appellants have
been accused of any offence? The whole object of the enquiry
is to collect evidence and decide whether any acts or omissions
caused loss to the banking company. It may be that as.a result
of the enquiry, the court may reach the conclusion tllat the
alleged acts or omissions did not cause any loss; in such a case,
nothing further has to be·done. On the other hand, it is likely
that the opinion formed by the liquidator may be vindica.ted
and the court may come to the conclusion that some or all of
the acts or omissions on which the liquidator's opinion was
based did cause loss to the banking company; and in tliat case,
some action may conceivably be taken against the persons
examined in addition to the action contemplated by s. 45G(9).
That. however, only means that after the examination is over
and the material adduced before the court has been e:rnmined
by the court, an occasion may or may not arise to take any
action. In such a case, what may conceivably follow cannot be
said to be existing before the order is passed under s. 45G; an
a.ccusation may follow the enquiry, but an accusation was not
in existence at the time when the public examination was
ordered; and so, the appellants cannot contend that they were
accused of any offence at the time when the order for their
public examination was passed by the High Court. The accu-
. sation of any offence which is an essential condition for the
application of Art. 20(3) is a condition precedent for the application of the principle prescribed by the said Article, and since
this essential condition is lacking in all cases covered by sec-
7 S.C.R.
SUPREME COURT REPORTS
143
tion 45G, it is difficult to sustain the argument that the said
1964
section contravenes Art. 20(3). Therefore, we do not think K. Joseph Aug,.,tM
Dr. Seyid Muhammad is right in contending that. s. 45G is
and two othera
invalid on the ground that it contravenes Art. 20(3) of the .M. A. ;~rayanan
Constitution. It appears that m the case of Malla/a Suryan~a- Official LiquidatM,
yana v. The Vijaya Commercial Bank Ltd.('), the same view Palai Central Bank
has been expressed by this Court, though it may be added that
Ltd.
this question does not appear to have been then elaborately Gajendragadkar, O.J.
argued.
In this connection, we may refer to a decision of this
Court in Raja Narayanlal Bansilal v. Maneck Phiroz Mistry
and Anr.('), where a somewhat similar provision contained in
s. 240 of the old Companies Act fell to be considered and it
was held that it did not contravene Art. 20(3) of the Constitution.
That takes us to the question of the construciion of s. 45G.
Dr. Seyid Muhammad contends that s. 45G requires that the
acts or omissions alleged against a person should be acts which
are prohibited by law, or omissions in relation to acts the performa-nce of which is enjoined by law, and he suggested that
if this interpretation is put on the words "acts or omissions",
it would appear that the reports made by the liquidator in the
present case have not made out any case for the public examination of tbe appellants. We are not impressed by this argument. It is significant that the acts or omissions to which
s. 45G(l) refers need not be fraudulent acts or omissions.
because, in terms, the section provides that the act or omission
would attract s. 45G(l) if it has led to any loss to the banking
company even though fraud may not have been committed b}
such act or omission. The context also shows that what the
Court has to consider, is whether any act or omission on the
part of the director or the aud_itor of the banking company
~as caused any loss to the company. Now, such an act or omiss10n need not necessarily be criminal; it may even include acts
or omissions which are commercially unsound or unwise. In
this con_nection, it may be r~c~lled tliat s. 478 of the Companies
Act which deals with a similar problem, requires that the
repo~t of the Official Liquidator should disclose his opinion
that .a. fraud has be_en committed. To the· same effect is the
provis10n contamed m s. 268 of the English Companies Act (11
& 12 Geo. 6, c 38). Therefore, it would, we think, be unreasonable to put a narrow and restricted construction on the
words "acts or omissions" used by s. 45G(l).
. Dr. Seyid Muhanimad ha~ then contended that in dealing
w~th the reports made .by the hquidator in the present case. the
High Court has not given effect to the provision contained in
(') Civil Appeal No. 286 of 1959 decided on 26:-10-1961.
(') A.I.R. 1961 S.C. 29.
144
SUPREME COURT REPORTS
(1964]
1964
the proviso to s. 450(2). The said proviso requites that no
K. Joatph Augu•lhi person shall be publicly examined unless he has been given an
and two Dlh<ra
opportunity to show cause why he should not be so examined,
JI A ;~•ayanan and Dr. Seyid Muhammad argues that unle.ss the matter is
offi,;,;;[L;quidator; fully examined and an opportunity is given to him to show
Palai Oen;;;:/ B•nk tha.t the facts alleged in the reports are untrue, the require-
-
·
ments of the proviso will not have been satisfied and his grieGajendrugadkar, o.J. vance is that no such opportunity was given to the appellants
in the present case. There is no substance even in this argument. What the Court has to do in exercising its power under
s. 450(2) is to consider the report made by the liquidator and
decide whether it can reasonably entertain the opinion that
any person who has taken part in the promotion or formation
or conduct of the banking company should be publicly examined. In other words. it is a preliminary stage of the enquiry and
the point which the Court has to consider is whether, prima
facie, a case has been made out to hold a public examination
of the person concerned. It cannot be the object of s. 450(2)
read with the proviso that the Court should allow the appellants to lead evidence rebutting the allegations made by the
liquidator in 11is reports, for if such a course was adopted, it
would itself develop into a full-fledged enquiry a.nd the very
object cf a limited enquiry at the initial stage would be defeated. What the Court can and should do in such cases is Ito read
the report submitted by the Official Liquidator, consider
whether the opinion expressed in the report appears to be,
prima facie, reasonable; hear the explanation of the person
concerned; and find out prima fade whether the explanation ·
tendered by the person is sufficient to reject the liquidator's
request for such person's public examination and whether, on
the whole, it is just and beneficial to the interest of the banking
company that public examina.tion should be held. The subjectmatter of this preliminary investigation is not the whole of the
enquiry on the merits; it is an enquiry as to whether the director or the auditor should be publicly examined. Therefore. we
do not think Dr. Seyid' Muhammad is justified in contending
that the High Court has ignored the safeguard afforded to the
appellants by the proviso s. 450(2).
The question about the construction of s. 450(1) & 12)
does not present any serious difficulty. What must be disclosed
by the report of the Official Liquidator is the act or omission
of the person there specified which has led to loss to the banking company since its formation. The acts or omissions to
which s. 450(1) refers, when considered in the light of s. 450
(2), are acts or omissions "as to the promotion, or formation,
or the conduct of the business of the banking company, or ~s
to his conduct and dealings in so far as they relate to the
affairs of the banking company", so that after the report is
made, the. court takes a broad and overall view of the state of
7 S.O.R.
SUPREME COURT REPORTS
145
affairs disclosed by the report and considers prima facie
1964
whether a case has been made out for the public examination K. Jo" ;;hA.,<!l,.,tM
of the director or the auditor. We are satisfied that the High
ana '"~ othe"
Court has dealt with the matter precisely in this way, and no ftf 1 ;·,
grievance can be made against its decision on the ground that off;,~~' J~q~1/;~":.~:
the provisions of the proviso to s. 45G(2) have been ignored. Fa:ai Central Bank
.Lf{l,
In support of his argument that the High Court has mis-uajendr09adknr,C.J.
construed the effect of the provisions of s. 45G(l), Dr. Seyid
Muhammad referred to two decisions which may be mentioned at this stage. The first of these is the decision of the House
of Lords in Ex parte George Stapylton Barnes('). In that case,
the question which fell to be considered was the scope and
effect of s. 8(3) of the Companies (Winding-up) Act, 1890; Lord
Halsbury observed that he entertained not the smallest doubt
that the me~ming of this legisbtion is that. in order to give
the Court jurisdiction to make an order for public examination, there must be a finding of fraud, and a finding of fraud
against an individual who is thereby made subject to being
summoned before the Court, and is compelled to answer,
whether the answer incriminates him or not, but, being exculpated, receives his costs. He further observed: "I confess I am
unable, looking at the whole of the legislation qn the subject,
to entertain the least doubt that that was what the Legislature
intended, and I am a little surprised, I confess, that there
should have been any doubt that fraud must be found." In our
opinion, this passage
i~ hardly relevant for our purpose,
because as we have already indicated, s. 45G(I) expressly
provides that the act or omission complained of need not
necessarily be fraudulent, and so, there can be no question,
under s. 45G(]). of corning to a conclusion that fraud has been
committed before directing public examination of a person.
The other decision on which Dr. Seyid Muhammad has
relied is the judgment of the Bombay High Court in Sir Fazal
Ibrahim Rahimtoola v. Appabhai C. Desai('). fn that case,
dealing with the provisions contained ins. 196 of the old Companies Act. Chag]a C.J. disapproved of the practice of ordering ex parte public examination of persons. In that connection,
he quoted with approval the warning sounded by Sir Lawrence
Jenkins in the Ahmedabad Advance Spinning and Weaving
Company v. Lf!kshm!shanker('), that the practice of passing
~x parte orders mvolvmg the person affected in serious liability
1s much to be deprecated. In tht case, the Bombay High Court
was. called u~on to consider whether the allegations made
agamst the d1rector were vague and indefinite. As we will
(') [1896] A.C. 146 at p. 152.
(') I.L.R. 30 Born. 173.
(')A.LR. 1949 Born. 339.
146
SUPRE~1E COURT REPORTS
[1964 J
1964
presently point out, that difficulty does not arise in the present
K. J0>ephAugu,thi appeals. The allegations ma.de by the liquidator in his reports
and two others
against the appellants are clear, precise and definite.
v.
M. A. lfora~anan,
Let us now refer to the reports submitted by the liquidator
Official L•quidator. •
h' fi
h 1·
'd
h
d
Palai Central Bank m the present case. In ts rst report, t e 1qm ator as state
Ltd.
that in carrying out the affairs (}f the bank, the Directors, with
0 . d -:u; . u J the help of officers appointed by them out of their own rela-
"J'n "'II"· "" · · tives, have not properly conducted the affairs of the bank. He
has also stated that in his opinion, loss had been caused to the
bank since its formation by the acts and omissions of the
Directors and of the auditor of the bank. The report then
proceeds to specify the extent of the loss and the causes for the
said loss. It appears from the report that loans were advanced
by the bank without regard to the question of any adequate
security. In many cases, loans were advanced without any
security at all and the inevitable consequence has been that a
large number of debts have become barred by time long before
the winding up proceedings were started. The bank appears to
have paid dividends without earning profits. Similarly, though
it did not earn any profits between 1936 to 1958, it submitted
reports showing substantial amO'Unts as net income and so, it
has paid income-tax on the said amounts. A large amount of
advances appears to be irrecoverable. At the end of his report,
the liquidator has mentioned IO persons, including the three
appellants before us, whose acts and omissions, in his opinion,
contributed to loss to the banking company. Two further
reports were made by the liquidator and they support ·the
opinion expressed by him in his first report. The third of these
reports was filed after this matter was heard by the learned
Single Judge but the first twCI reports themselves fully justify
the order made by him, and so, the third report can well be
left out of consideration.
When we turn to the objections filed by the appellants, it
is clear that some of the facts are not seriously disputed. Take,
for instance, the allegation that dividends were declared without earning profits. The appellant Joseph Augusthi contended
before the High Court that the bank used to treat interests
accrued on advances, though not received, as income, and so,
income-tax and super-tax were paid on such income and dividends were also paid on the same basis. He suggested that the
Reserve Bank had noticed these facts and had waived its objection. In other words, he relied on a practice which is obviously
unsound in a commercial sense and pleaded that at this stage
the Reserve Bank cannot challenge the correctness or propriety
of the said practice. This practice has been described by the
appellant as mercantile system of accounting. It would thus be
seen that some of the facts alleged by the liquidator in his
report are not disputed; the effect of those facts was a matter
of argument between the parties before the High Court. In such
7 S.C.R.
SUPREME COURT REPORTS
147
a. case, we do not see how the appellants can successfully
1964
challenge the correctness of the view taken by the High Court K. Jo"ph Augusll•i
that a case had been made out for the public examination of
and tu·o other•
the ap~ellants. That is why we do not think there !8 any sub- M. A. ;~rayanan,
stance m the argument urged before us by Dr. Seyid Muham- <Nfic.;a/ Mqa,-dator,
mad that on the facts, an opportunity had not been given to Pa'a; C'"'"" Bank
the appellants to show that their public examination should
L1'.::._
not be ordered. We are satisfied that in dealing with the factscajendragadkar,C.J.
of this case, the Courts below have taken into account the
reports made by the liquidator and after considering the objections raised by the appellants, they have come to the right
conclusion that the appellants should face a public examination.
The r~sult is ihe appeals fail and are dismissed with costs.
One set of hearing fees.
Appeals dismissed.