Section 38 of the Banking Regulation Act, 1949 - Winding Up by High Court

Section 38 of the Banking Regulation Act, 1949 deals with the winding up of a banking company by the High Court. It gives the Reserve Bank of India an important statutory role in seeking winding up where specified regulatory or financial conditions exist.

Updated with reference to the current text of the Banking Regulation Act, 1949 available through India Code.

Meaning of the provision: The section requires the High Court to order winding up when the banking company is unable to pay its debts or when the Reserve Bank applies for winding up under the circumstances authorised by the Act. It also identifies situations in which the Reserve Bank must or may make such an application.

Statutory text of Section 38

(1) Notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act, 1956 (1 of 1956), but without prejudice to its powers under sub-section (1) of section 37 of this Act, the High Court shall order the winding up of a banking company-

(a) if the banking company is unable to pay its debts; or

(b) if an application for its winding up has been made by the Reserve Bank under section 37 or this section.

(2) The Reserve Bank shall make an application under this section for the winding up of a banking company if it is directed so to do by an order under clause (b) of sub-section (4) of section 35.

(3) The Reserve Bank may make an application under this section for the winding up of a banking company-

(a) if the banking company-

(i) has failed to comply with the requirements specified in section 11; or

(ii) has by reason of the provisions of section 22 become disentitled to carry on banking business in India; or

(iii) has been prohibited from receiving fresh deposits by an order under clause (a) of sub-section (4) of section 35 or under clause (b) of sub-section (3A) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); or

(iv) having failed to comply with any requirement of this Act other than the requirements laid down in section 11, has continued such failure, or, having contravened any provision of this Act has continued such contravention beyond such period or periods as may be specified in that behalf by the Reserve Bank from time to time, after notice in writing of such failure or contravention has been conveyed to the banking company; or

(b) if in the opinion of the Reserve Bank-

(i) a compromise or arrangement sanctioned by a Court in respect of the banking company cannot be worked satisfactorily with or without modifications; or

(ii) the returns, statements or information furnished to it under or in pursuance of the provisions of this Act disclose that the banking company is unable to pay its debts; or

(iii) the continuance of the banking company is prejudicial to the interests of its depositors.

(4) Without prejudice to the provisions contained in section 434 of the Companies Act, 1956 (1 of 1956), 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 two working days, if such demand is made at a place where there is an office, branch or agency of the Reserve Bank, or within five working days, if such demand is made elsewhere, and if the Reserve Bank certifies in writing that the banking company is unable to pay its debts.

(5) A copy of every application made by the Reserve Bank under sub-section (1) shall be sent by the Reserve Bank to the registrar.

Key legal points under Section 38

Mandatory winding up: Sub-section (1) uses the expression "shall order", making the High Court's power mandatory when the statutory conditions are fulfilled.
RBI's mandatory application: Under sub-section (2), the Reserve Bank must apply for winding up when directed under section 35(4)(b).
RBI's discretionary application: Sub-section (3) permits an application where licensing, deposit-taking, statutory compliance, solvency, compromise or depositor-interest concerns arise.
Deemed inability to pay debts: Sub-section (4) creates a specific banking-law test based on failure to meet a lawful demand within the stated period and an RBI certificate.
Depositor protection: The provision expressly recognises prejudice to depositors as a ground for RBI intervention.

Related provisions

Section 38 should be read with Section 37 - Suspension of business, Section 38A - Court Liquidator, Section 39 - Reserve Bank to be official liquidator, and Section 40 - Stay of proceedings.

Legislative note: Section 38 was substituted by section 26 of the Banking Companies (Amendment) Act, 1959 with effect from 1 October 1959.