2014 (5) TMI 1242 - HC - Companies Law

Banking companies' director appointments can be challenged in civil courts despite section 10-A restrictions on jurisdiction

YES Bank Limited Versus Madhu Ashok Kapur and Ors.

The Bombay HC held that section 10-A of The Banking Regulation Act, 1949 does not completely exclude civil courts' jurisdiction to decide disputes ... Maintainability of suit filed by respondent Nos. 1 to 4 - jurisdiction to entertain and try the suit - bar on judgment of a Civil Court to consider the validity of the appointment of directors - hether in view of section 10-A of The Banking Regulation Act, 1949, which came into effect from 1st February, 1969, the question of validity of appointment of directors can only be raised before and decided by the Reserve Bank of India and not by any other Court, Tribunal or authority? - HELD THAT:- 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. 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 - 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. Conclusion - 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. The appeal is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe judgment primarily addresses two core legal questions:Whether the jurisdiction of a Civil Court to consider the validity of the appointment of directors is barred by the provisions of the Companies Act, 1956.Whether the validity of the appointment of directors can only be raised before and decided by the Reserve Bank of India under section 10-A of The Banking Regulation Act, 1949, and not by any other Court, Tribunal, or authority.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Jurisdiction of Civil Courts under the Companies Act, 1956Relevant legal framework and precedents: The Companies Act, 1956, and the judgment in Santosh Poddar & Anr. v. Kamalkumar Poddar were considered. The Act does not explicitly oust the jurisdiction of Civil Courts regarding the appointment of directors.Court's interpretation and reasoning: The Court held that the jurisdiction of Civil Courts is not ousted by the Companies Act, 1956. The Act does not prescribe a specific forum for disputes regarding the appointment of directors, thus allowing ordinary Civil Courts to entertain such disputes.Key evidence and findings: The Court referred to the judgment of the Division Bench in Santosh Poddar's case, which established that the jurisdiction of Civil Courts is not ousted by the Companies Act.Application of law to facts: The Court applied the principles from Santosh Poddar's case, affirming that Civil Courts have jurisdiction to entertain challenges to the appointment of directors.Treatment of competing arguments: The Court rejected the appellant's reliance on Khetan Industries Pvt. Ltd. & Ors. v. Manju Ravindraprasad Khetan, ruling it was contrary to the Division Bench's judgment and rendered per incuriam.Conclusions: The Court concluded that Civil Courts retain jurisdiction to entertain challenges to the appointment of directors under the Companies Act, 1956.Issue 2: Jurisdiction under Section 10-A of The Banking Regulation Act, 1949Relevant legal framework and precedents: Section 10-A of The Banking Regulation Act, 1949, was analyzed, particularly sub-sections (2), (3), (4), (5), and (6).Court's interpretation and reasoning: The Court interpreted that sub-section (6) bars challenges only to appointments made under sub-sections (3), (4), and (5), not those made in compliance with sub-section (2).Key evidence and findings: The Court found no evidence that the appointments of defendant Nos. 7 to 12 were made under sub-sections (3), (4), or (5). The appointments were made in compliance with sub-section (2).Application of law to facts: The appointments were not under the purview of sub-sections (3), (4), or (5), and thus, the jurisdiction of Civil Courts was not barred by sub-section (6).Treatment of competing arguments: The Court rejected the appellant's argument that sub-section (6) bars all challenges, emphasizing that it applies only to appointments made under specific sub-sections.Conclusions: The Court concluded that the jurisdiction of Civil Courts is not barred for appointments made in compliance with sub-section (2) of section 10-A.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The jurisdiction of Civil Courts is not ousted by the Companies Act, 1956, as it does not prescribe a specific forum for disputes regarding the appointment of directors.'Core principles established: Civil Courts retain jurisdiction over disputes regarding the appointment of directors unless explicitly barred by specific statutory provisions.Final determinations on each issue: The Court affirmed the maintainability of the suit challenging the appointment of directors, rejecting the appellant's contention that such jurisdiction was barred by the Companies Act and The Banking Regulation Act.