Mandatory winding up for insolvent banking companies upheld, and a proposed arrangement scheme refused in favour of official liquidation.

Where a banking company is unable to pay its debts, section 38(1) of the Banking Companies Act is mandatory and requires winding up, despite the general discretion preserved under the Companies Act, save for the limited saving in section 37. The construction that would leave discretion intact in such cases was rejected as making the mandatory wording ineffective. The Court also upheld refusal to send the proposed arrangement scheme to creditors and shareholders, finding it was not a fit course on the facts and that official liquidation would better protect creditors and employees.

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Issues: (i) Whether section 38(1) of the Banking Companies Act required the Court to order winding up of a banking company unable to pay its debts, notwithstanding the opening words preserving section 162 of the Indian Companies Act, 1913 and the Court's powers under section 37 of the Banking Companies Act; (ii) whether the proposed scheme of arrangement should be sent to the creditors and shareholders or whether official liquidation was the proper course.

Issue (i): Whether section 38(1) of the Banking Companies Act required the Court to order winding up of a banking company unable to pay its debts, notwithstanding the opening words preserving section 162 of the Indian Companies Act, 1913 and the Court's powers under section 37 of the Banking Companies Act.

Analysis: The opening words of section 38(1) were held to preserve the Court's discretion under section 162 only in cases falling under clauses other than inability to pay debts. Reading the provision as preserving discretion even where a banking company was unable to pay its debts would make the mandatory part of section 38(1) meaningless. The Court also rejected the narrower construction that the provision applied only to banking debts or only to the special deeming cases in section 38(3). On a proper construction, inability to pay debts under section 162(1) or section 38(3) attracted section 38(1), subject to the saving for section 37.

Conclusion: The provision was mandatory in the present case, and the learned Judge was right in holding that section 38(1) required winding up.

Issue (ii): Whether the proposed scheme of arrangement should be sent to the creditors and shareholders or whether official liquidation was the proper course.

Analysis: The scheme was found, on its merits and in the circumstances of the case, not to be a fit one for submission to the creditors and shareholders. The Court held that liquidation by an Official Liquidator would benefit the creditors and employees more substantially than the private agency proposed under the scheme, and that the learned Judge had exercised his discretion properly in preferring official liquidation.

Conclusion: The refusal to sanction or proceed with the scheme was upheld in favour of official liquidation.

Final Conclusion: The Court upheld both the rejection of the proposed scheme and the winding up order, leaving the company to be liquidated through the ordinary official process.

Ratio Decidendi: Where a banking company is unable to pay its debts, section 38(1) of the Banking Companies Act overrides the general discretion under the Companies Act and mandates winding up, while a scheme of arrangement may be refused if it is not a fit and proper mode of liquidation in the interests of creditors and employees.

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