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Election To Board Of Directors In Banking Company A Private Affair; Writ Not Maintainable: Kerala High Court

Navya Benny
26 Oct 2022 10:00 AM GMT
Election To Board Of Directors In Banking Company A Private Affair; Writ Not Maintainable: Kerala High Court
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The Kerala High Court on Tuesday held that writ petitions cannot be instituted against the matter of rejection of nomination for election to the post of Director in the Board of a private banking company.

The Division Bench comprising Chief Justice S. Manikumar and Justice Shaji P. Chaly while in appellate jurisdiction found that the writ petitions before the Single Judge were not maintainable. it observed,

"It may be true that the Dhanalakshmi Bank, though a private Bank, may be discharging certain duties with respect to receipt of deposits and issue of loans and other financial activities. But the said duty cast upon a private Bank like the appellant, even assuming it as a public duty, has nothing to do with the election to the Director Board of the banking company, whose activity is confined to the realm and control of the shareholders of the appellant company".

The Court added that, while

"...Dhanalakshmi Bank, being a banking company, may have to discharge various public duties in the realm of its banking operations like receiving deposits, issuing loans, taking steps for recovery and so on, but the said function discharged by the appellant banking company has nothing to do with its private affair to elect the Board of Directors, if at all assuming that such transactions have any public element and public duty".

Brief Facts:

The instant writ appeals arose challenging the common interim orders passed by the Single Judge in the writ petitions W.P. (C) Nos. 19758 and 20425 of 2021 dated 09.03.2022, which had held such petitions to be maintainable.

The writ petitioners 1 and 2 (respondents 1 and 2 herein) were the shareholders of the appellant Bank, while the petitioner in W. P. (C) No. 20425/2021 was formerly a Director and a shareholder of the appellant Bank.

It is the case of the petitioners in the first writ petition that the 1st petitioner as well as 3 others had given notice in writing and placed their candidature to the post of Director of the Bank, stating that they had complied with all the statutory requirements under Section 160(1) of the Companies Act, 2013. It was contended by the said petitioners that as per Section 178 of the Companies Act, 2013, Nomination and Remuneration Committee was to be constituted and the same had to identify persons qualified to become Directors of the company, following the criteria laid down and recommend to the Board for their appointment. It was averred that neither Section 160 nor Section 178 of Act 2013 provides any right to the Board of Directors to reject or refuse the placement of the names before the General Body. It was argued before the Single Judge by these petitioners that the Bank had no other option than to place it before the General Body and to have not done so and rejecting the request of the 1st petitioner and others was a clear violation of the statutory prescriptions contained under Sections 160 and 178 of the Companies Act, 2013.

The petitioner in the second writ petition W. P. (C) No. 20425/2021 also raised similar contentions, and had further contended that the RBI and the SEBI had failed to take prompt steps against the appellant Bank as well as its Director Board for not adhering to the Corporate Governance Standards and ignoring the scheme for selection of fit and proper candidates under the 2004 notification, and the SEBI (LODR) Regulations, 2015. The petitioner herein had been aggrieved for non-inclusion of his name for reappointment although he had been declared to be fit and proper on 24.05.2021.

Single Judge's Findings:

The Single Judge, dismissing the contention raised by the Appellant bank that the writ petitions were not maintainable, found the petitions to indeed be maintainable. It was found by the Single Judge that, "a banking company, whether in the private sector or in the public sector, is handling public money, public finance and also has to necessarily comply with several statutory requirements including conducting business in accordance with certain national policies. It cannot hence be said that there is no public law element at all in the functioning of a Bank".

The Single Judge thus found the petitions to be maintainable, noting that, "where the constitution of the Board of Directors is mandated to be in a particular form by the Statutes which govern the very existence of the banking company, it cannot be said to be an affair in a private field, which is not amenable to writ jurisdiction". It is challenging this common interim order finding the petitions to be maintainable that the instant writ appeals have been preferred.

The Division Bench Ruling:

The Appellate Court found that under Sections 1(4)(a), 1(4)(c) and 160 of the Companies Act, 2013, definite parameters are prescribed concerning how an application for Directorship is to be submitted and considered. The Court also took note of Section 178 of the Act which deals with the Nomination and Remuneration Committee and Stakeholders Relationship Committee, and specifically the formulation of criteria for determining qualifications, positive attributes, and independence of a Director in Section 178(3). The court found that a conjoint reading of Sections 160 and 178 of the Companies Act, 2013 and Rule 13 of the Companies (Appointment and Qualification of Directors) Rules, 2014 would indicate that a clear cut procedure for notice of candidature has been prescribed.

As regards the complaints filed by the petitioner in the second writ petition before the RBI and SEBI, the Court found that there was no connection with the the paramount, fundamental and essential relief sought for in the writ petitions; ie, the rejection of nomination of candidates.

The Court also perused Section 10A(2) of the Banking Regulation Act, 1949 and Securities and Exchange Board of India Act, 1992, to ascertain that there was no provision in either statute to empowering either RBI or SEBI respectively in interfering with the rejection of a nomination or an election conducted to the Directorship of a banking company.

"...the sole power of SEBI is contained under Section 24 of the Companies Act to regulate the issue and transfer of securities, which has nothing to do with the nomination made for Directorship in the appellant towards the process of election in the annual general meeting", the Court noted in this light.

The Court found that none of provisions of the Banking Regulation Act or the SEBI Act dealt with election to the post of Directors of the appellant banking company.

"Even assuming that the procedures contained under Section 160 and Section 178 of the Companies Act are violated, it is a subject matter within the realm of a private dispute by and between the rival parties", it was observed.

The Court also found force in the submissions made by the counsels for the appellants, Senior Advocate Rafiq Dada, and Advocates Sunil Shanker and Vidya Gangadharan, that the present members of the Nomination and Remuneration Committee being limited to two was on account of various factors and developments that had taken place subsequent to the rejection of nomination of the petitioners and that the same would not have any bearing to the issue to be decided in the appeal.

The Court also perused a catena of Supreme Court decisions such as to ascertain that while Article 226 of the Constitution conferred power on High Courts to issue writs for enforcement of the fundamental rights as well as non-fundamental rights and Article 226 and Article 12 of the Constitution of India are not confined only to statutory authorities and instrumentalities of the State, what was relevant was the nature of the duty imposed on the body. The Court deduced from the plethora of precedents that there had to be "a public element coupled with a public duty which should be the core and paramount consideration to take into account in order to identify as to whether a writ petition can be maintained under law".

The Court thus found that the interim order passed by the Single Judge was liable to be interfered with since the issue raised in the writ petition had no public element, and the issue of rejection of nomination also had nothing to do with the public duty and public function if any discharged by the Bank with respect to the other commercial and financial banking activities of the Bank concerning the public. The Court thus allowed the appeals and set aside the interim order.

It added that the writ petitioners have the efficacious statutory remedy under the Companies Act, 2013 or before the civil courts to air their grievances if the statutory requirements were found to be violated by the appellant Bank.

The respondents in the instant case were represented by Senior Advocates Ranjith Thampan, P. Chidambaram, and Sumathi Dandapani, and Advocates Sivashankar Panicker, Millu Dandapani, Santhosh Mathew, and K.M. Jamaludheen in the two writ petitions.

Case Title: Dhanlaxmi Bank Ltd v. K.N. Madhusoodanan & Ors. and Dhanlaxmi Bank Ltd. v. P.K. Vijayakumar @ Puthalathkuttan Nair Vijayakumar & Ors

Citation: 2022 LiveLaw (Ker) 539

Click Here To Read/Download The Judgment

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