SRI KRISHNA ARTS & SCIENCE COLLEGE

[An Autonomous Institution]

LEGAL AND REGULATORY ASPECTS OF BANKING – 22CNU19

III B.COM BI
Unit: II
Lecture – 11 & 12
Topic: Winding up of Banks - Disinvestment of Shares by Government

Facilitator
Dr.S.Sangeetha
Associate Professor,
Commerce BPS & BI
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 CONTENTS

• Winding up of Banks

• Disinvestment of Shares by Government

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 DISINVESTMENT OF SHARES BY GOVERNMENT

Expert Video

References:
1. https://www.youtube.com/watch?v=WMuZFTmqW5M
- Stock Edge
Animation Video

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 SUSPENSION OF BUSINESS AND WINDING UP
✔ A banking company which is temporarily unable to meet its obligations may
apply to the High Court under Section 37 of the Banking Regulation Act for
staying the commencement or continuance of any proceedings against it.

✔ Such stay will be for a fixed period and subject to any terms and conditions
imposed by the High Court as it may think fit.

✔ The total period of such moratorium shall not exceed six months.

✔ An application for moratorium shall be supported by a report of the Reserve

Bank indicating that the banking company will be able to pay its debts if the
application is allowed.

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✔ In that case, a report will be called for and the order may be modified or rescinded
based on the report.

✔ On passing of moratorium order the court may appoint a special officer to take
custody and control of the assets, books, etc., of the banking company in the
interests of the depositors.

✔ If the Reserve Bank is satisfied that the affairs of a banking company under
moratorium as above, are being conducted in a manner detrimental 'to the interests
of the depositors, it may apply to the High Court for winding up of the company.

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 WINDING UP BY HIGH COURT

The High Court shall order the winding up of a banking company

in the circumstances mentioned in Section 38 of the Banking
Regulation Act. They are:

(i) The banking company is unable to pay its debts;

(ii) An application for winding up has been made by the Reserve

Bank under Section 37 or Section 38 of the Act.

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The Reserve Bank is bound to make an application for winding up under
Section 38, if directed by the Central Government under Section 35(4) of
the Banking Regulation Act.

✔ The Central Government may issue such direction under Section 35(4)
when, on consideration of the report of inspection or scrutiny made by
the Reserve Bank at the direction of the Central Government, it is of
opinion that the affairs of the bank are being conducted to the
detriment of the interests of the depositors.

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It is open to the Reserve Bank to apply for winding up of a banking company in
certain other cases as follows:

✔ failure to comply with the requirements of Section 11 regarding minimum paid-up

capital and reserves;

✔ bank being not entitled to carry on banking business in India under Section 22 of
the BR Act by reason of rejection or cancellation of license;

✔ prohibition to accept fresh deposits under Section 35(4) of the BR Act or Section
42 (3A)(b) of the Reserve Bank of India Act;

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In addition to the above, the Reserve Bank may apply for winding up of a banking
company if it is of the opinion that:

✔ a compromise or arrangement sanctioned for a banking company cannot be

worked satisfactorily with or without modification: or

✔ the returns, statements and information given by the bank under the Act show
that it cannot pay its debts; or

✔ the continuance of the banking company is prejudicial to the interests of the

depositors.

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✔ A banking company shall be deemed to be unable to pay its debts if it has
refused to meet any lawful demand made at any of its offices or branches
within the stipulated time and the Reserve Bank certifies in writing that the
banking company is unable to pay its debts.

✔ If the demand is made at a place where the Reserve Bank has an office,
branch or agency, the time limit is two days and in other cases five days.
When the Reserve Bank makes an application for winding up, the court is
bound to allow the application.

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 OFFICIAL LIQUIDATOR
> That is an official liquidator is appointed by the Central Government to undergo the proceedings of

winding up the provisions relating to which are discussed under section 38 A which are discussed
below.

> (1) There shall be attached to every High Court a court liquidator to be appointed by the Central

Government for the purpose of conducting all proceedings for the winding up of banking companies
and performing such other duties in reference thereto as the High Court may impose.

> (4) Where having regard to the number of banking companies wound up and other circumstances of

the case, the Central Government is of opinion that it is not necessary or expedient to attach for the
time being a court liquidator to a High Court, it may, from time to time, by notification in the Official
Gazette, direct that this section shall not have effect in relation to that High Court.]

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> So, in simple words we what we can state is, 38 A of the Act provides for an official
liquidator to be appointed by the Central Government and who shall be attached to
the High court concerned for conducting winding up by the court order i.e of High
Court.

> However, Central Government may also direct for not attaching any liquidator with
the High Court if it finds that it would not be necessary if there are not many cases
of winding up occurring within the jurisdiction of certain High Courts and therefore
may appoint liquidator by a separate order on case to case basis.

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 RESERVE BANK AS LIQUIDATOR
✔ Although there is a provision for an official liquidator as above, if the Reserve
Bank applies to the Court under Section 39 of the Act, the Reserve Bank,
State Bank or any other bank notified by the Central Government in this
behalf or any individual stated in the application may be appointed as the
official liquidator.

✔ The remuneration of the liquidator and other costs and expenditure of winding
up shall be borne by the banking company.

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✔ The liquidator has to make a preliminary report to the High Court within two
months of the winding up order on the availability of assets for making
preferential payments under Section 530 of the Companies Act and for
discharging liabilities to depositors and other creditors.

✔ Under Section 43 of the Act, the depositors need not make claims.

✔ The claim of every depositor of a banking company is deemed to have filed for
the amount as shown in the books of the banking company standing to his
credit.

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 PREFERENTIAL PAYMENT
✔ In the winding up proceedings, the liquidator of a banking company has to make certain
preferential payments under Section 43A of the Banking Regulation Act.

✔ Accordingly, the preferential payments referred to in Section 530 of the Companies Act,
in respect of which, claims have been made within one month of service of notice, get
the first preference.

✔ After that, depositors in savings bank account up to ₹250 and then other depositors up
to ₹250 get priority over all other creditors.

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 VOLUNTARY WINDING UP
✔ Apart from the provision for compulsory winding up as above, Section 44 provides for
voluntary winding up by banking companies.

✔ However, no such winding up will be permissible unless the Reserve Bank certifies
that the bank will not be able to pay in full all its debts as they accrue.

✔ It is open to the High Court to order during voluntary winding up of a banking

company that it shall continue, subject to the supervision of the Court.

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✔ The High Court may also order winding up by Court either on its own
motion or on the application by the Reserve Bank, if during voluntary
winding up it becomes clear that the company is not able to meet its
debts as they accrue or if continuing voluntary winding up or winding
up under supervision of the court may be detrimental to the interests of
depositors.

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 DISINVESTMENT OF SHARES BY GOVERNMENT
✔ In the context of the Government policy to dilute the holdings in public sector banks,
certain amendments upon the balance sheet as stipulated in Section 10 of the Act.

✔ The auditor shall send copies of the report to the bank and the Reserve Bank.

✔ The bank has to furnish copies of the balance sheet, profit and loss account and
auditor's report along with the report of the board of directors on the working and
activities of the bank to the Central Government and the Reserve Bank.

✔ The auditor's report and report of the board have to be laid before the Parliament.

✔ Without prejudice to the above, the Central Government is also empowered to appoint
auditors as it thinks fit at any time to examine and report on the accounts of a
Nationalized bank. 18
THANK YOU!!

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