MONETARY BOARD OF THE CENTRAL BANKOF SRI LANKA AND ANOTHER
G. P. S. DE SILVA, C.J.
KULATUNGA, J. ANDRAMANATHAN, J.
S.C. SPL. 6/93
DECEMBER 15 AND 17,1993 ANDFEBRUARY 13, AND APRIL 6, 1995
Writ of Certiorari – Direction by Monetary Board of Central Bank of Sri Lankadirecting the Director in charge of Finance Companies to apply for winding up ofMercantile Credit Ltd., a finance company – Sections 12, 18, 20(2) and 43(2)(a)of the Finance Companies Act, No. 78 of 1988.
The Finance Companies Act, No. 78 of 1988 provides for the control andsupervision of Finance Companies by the Central Bank. The main object of theAct appears to be to safeguard the interests of depositors.
Faced with a lack of funds to carry on its current business Mr. N. U. Jayawardena,President of Mercantile Credit Ltd. ( 2nd respondent) had applied on 28.11.90 fora re-financing facility through the Central Bank. On 22.05.91 the Cabinet decideto provide financial assistance to the company subject to conditions. The Articlesof Association were amended on 5.07.91 after which six nominee directorsrepresenting the funding Banks were included in the Board of Directors. On
the new Board decided that A. N. U. Jayawardena son of N. U.Jayawardena will continue as Chairman of the Board but will cease to beManaging Director. This post was taken over by J. A. R. Felix who thus becameChairman of the Management Committee. N. U. Jayawardena was to be presenton the premises to advise Felix.
Notwithstanding the above arrangements the relationship between the shareowning Directors and the Management Committee deteriorated very early and on
all the share owning Directors resigned. Consequently on 06.02.92 theBoard took over the administration and management of the company underSection 20 of the Act. On 30.06.92 there was a change of Governors and on
the Central Bank called for competitive offers from banking and financialinstitutions to take over the company on a management contract but no offerswere forthcoming and the Bank decided to direct the Director to apply for a courtwinding-up of the company as it could not be made solvent and viable.
The petitioner does not seriously challenge the above state of affairs in thecompany but alleges that this was due to mismanagement by the 1st respondent,(monetary Board of the Central Bank in particular by its failure to invest monies. recovered on loans in new revenue generating businesses.) The petitioner seeksto quash the impugned decision to apply for a winding-up on the basis –
firstly it was male fide;
secondly it was made for a collateral purpose namely to shield the situationcreated by the 1st respondent by mismanaging the affairs of the company;
thirdly it was contrary to Section 12A of the Act which required the 1stRespondent to furnish to the company a copy of the report made underSection 18 and to give the company an opportunity to state its position andtherefore contrary to the principles of natural justice.
The question of re-organisation of the Company was discussed at lengthwith the share owning Directors before the decision to apply for winding-up wasmade. Hence the decision was intra vires and not vitiated by mala tides.
Action which may be taken by the Board is prescribed by Section (2) ofthe Act as there was no person or institution who was prepared to collaborate withthe Board in reviving the company. The decision was not unlawful.
APPLICATION for a writ of certiorari.
Case referred to:
(1) Durayappah v. Fernando 69 N.L.R. 265 (P.C.)
£ D. Wickremanayake for petitioner.
A. S. M. Perera D.S.G. for 1st respondent.
Cur. adv. vult.
This is an application in terms of Section 43(2) (a) of the FinanceCompanies Act, No. 78 of 1988 for a writ of certiorari to quash adecision of the 1st respondent (Monetary Board of the Central Bankof Sri Lanka) directing the Director in charge of Finance Companiesto apply to Court for a winding-up of the 2nd respondent (MercantileCredit Ltd.). The 2nd respondent is a public company which isregistered as a finance company under Section 2(5) of the Act. Thepetitioner is a shareholder of the said company having 463 shares.
The Act provides for the control and supervision of financecompanies. The main object of the Act appears to be to safeguardthe interests of depositors. Thus, Section 4 provides –
“A finance company shall at all times conduct its business in suchmanner so as to safeguard its deposits and shall take all suchmeasures as are reasonably necessary to ensure that depositsand interest on deposits, are payable to depositors on the duedates".
Section 27 of the Act provides for the establishment of schemesfor insuring deposits held by finance companies and empowers theCentral Bank to require finance companies to insure deposits held bythem. Appreciation of the object of the Act as is evidenced by theseprovisions is of some relevance in resolving the dispute before usregarding which the contending parties have taken up diametricallyopposite positions. It is also appropriate at this point to refer briefly tothe provisions which contain the scheme of the Act in terms of whichthe impugned decision was made.
Sections 9 and 10 empowers the Monetary Board to givedirections to finance companies on a wide range of matters. Sections11 and 12 empowers the Director to examine books and accounts ofa finance company. Sections 13 to 16 provide for the maintenance ofaccounts and the auditing of accounts of a finance company. Section18(1) empowers the Board to take steps for the winding-up of afinance company where “it is insolvent or is likely to become unableto meet the demands of the depositors or that its continuance inbusiness is likely to involve loss to its depositors or cerditors”.
Where winding-up is contemplated, the Board may direct thefinance company to suspend its business and order the Director totake over its books, records and assets. Next, the Board is required,as soon as practicable to notify the finance company that it intends todirect the Director to apply to a competent Court for the winding-up.In the absence of an application to the Supreme Court under Section43, the Director shall apply to a competent Court for the winding-up.The Court may order the winding-up, in which event, the provisions ofthe Companies Act relating to winding-up subject to the supervision .of Court shall, mutatis mutandis, apply. The Director or any personauthorised in that behalf by the Board shall be appointed to be theliquidator (S. 18 (4)(b), S. 18(5), S. 18(7), S. and 18(9).)
If, after inquiry, the Court is of the opinion that the company is notinsolvent, it may make a declaration permitting the finance companyto resume business unconditionally or subject to such conditions asthe Court may consider necessary in the public interest or in theinterest of depositors and other creditors of the company (S. 18(11)
Every order made by a competent Court under Section 18 issubject to an appeal to the Supreme Court (S. 18(12)).
S. 20(1) empowers the Board to take over the administration andmanagement of a finance company where the Board is of the opinionthat the company may be made solvent and viable by actionprovided for therein. Some of the measures provided are –
entering into an agreement with any person or body of persons
for the management of the finance company;
amalgamation of the finance company with any other finance
re-organisation of the finance company by increasing its capital
and arranging for new shareholders.
Where the Board takes over the administration and managementof a finance company, the Board may exercise, perform anddischarge the powers, duties and functions of the Board of Directorsof such company; whereupon every Director, Manager and Secretaryof such company shall, unless expressly authorised to do so by theBoard, cease to exercise, perform and discharge any powers, dutiesand functions with respect to such company (S. 20(2) (a) andS. 20 (3)).
However, if it appears to the Board that the company cannot bemade viable and solvent within a reasonable period the Board maydirect the Director to apply to a competent Court to wind-up thecompany in which event, the provisions of Section 18 shall apply(Proviso to S. 20 (4)).
Section 21 enables the Monetary Board to arrange for temporaryfinancial accommodation to a finance company where it would be inthe interest of depositors to provide such assistance; and the Boardmay grant a loan or advance to a Commercial bank from the Fundestablished under Section 88(E) of the Monetary Law Act, for thepurpose of lending to such finance company on such terms orconditions as may be determined by the Board.
As regards the facts, the starting point is a letter dated 28.11.90addressed by N. U. Jayawardena President of the 2nd respondentcompany to the then President of the Republic (exhibit A’). The letterstates that the company has a deposit base of Rs. 1,984 million with31,700 depositors; that its business had broken down due to theinsurgency; that there were also delinquent loans amounting toRs. 1,232 million, that depositor confidence had also been affectedby the collapse of the HPT Ltd. and an “episode at Sampath Bank”(an Associated Company); that in the result, deposits beingredeemed exceeded new deposits; and hence there was a lack offunds to carry on its current business. In the circumstances N. U.Jayawardena applied for a re-financing facility through the CentralBank in a sum of Rs. 759 million “exclusively for encashment ofmaturing deposits".
On 22.05.91 the Cabinet decided to provide financial assistance tothe company subject to conditions including the following:
The funding banks to be given a majority number of Directorsin the Boards of Company and its subsidiaries.
The management of the company should be irrevocably vestedin a Management Committee to be nominated by the fundingbanks.
The entire sum of Rs. 750 million will be used only to pay off thedepositors, (exhibit YB).
The Articles of Association were accordingly amended afterwhich, on 05.07.91 six nominee directors representing the fundingbanks, namely the Bank of Ceylon and the People's Bank wereincluded in the Board of Directors of the Company. On 23.07.91 thenew Board decided that A. N. U. Jayawardena (son of N. U.Jayawardena) will continue as Chairman but will cease to beManaging Director, which post will be taken over by J. A. R. Felix,Chairman of the Management Committee. It was agreed that N. U.Jayawardena will be present in the premises so that he could guideand offer his advice to Felix as Managing Director who wouldhowever have the final decision making power subject to the controlof the Board of Directors (exhibit Y17).
Notwithstanding the above arrangements, the relationshipbetween the share owning Directors and the Management Committeeappears to have deteriorated very early. Thus on 24.12.91 theDirector, Bank Supervision addressed a letter to the Chairman,Management Committee that the Management Committee will begiven instructions from time to time by the Governor of the CentralBank and the Monetary Board; hence the Committee should“completely ignore instructions of any other party, given orally or inwriting" (exhibit ‘D’). This was followed by a letter dated 27.12.91addressed to A. N. U. Jayawardena, Chairman, by the ManagingDirector requesting him to release the office area allocated to theChairman as his functions were then limited to attending Boardmeetings and associated matters (exhibit 21).
The petitioner alleges that the relationship between share-owningDirectors and the Management Committee became strained due to illwill on the part of the then Governor of the Central Bank towards
N.U. Jayawardena. Learned Counsel for the petitioner submitted thatthe Governor by a series of press statements (some of whichcontained disparaging remarks against the original Directors) causedfurther loss of depositor confidence, leading to the collapse of thecompany. The relevant newspaper reports which have beenproduced without contradiction show that there is substance in theallegation that the then Governor was motivated by ill will.
The culmination of the above situation was that on 05.02.92 all theshare owning Directors resigned. Consequently, on 06.02.92 theBoard took over the administration and management of the companyunder Section 20 of the Act (exhibit 'F). This was not challengedbefore this Court by an application under Section 43. As at that date,the deposit liability of the company was Rs. 1331.1 million. On
the former Governor ceased to hold office and the presentGovernor was appointed.
Next, we find the progressive reduction of deposit liability. By
it was reduced to Rs. 627.8 million. On 31.10.93, it wasRs. 440 million. By 06.01.94 it was further reduced to Rs. 425 million.In the process financial assistance provided to the company by thebanks up to 15.09.93 totalled Rs. 965.6 million.
Although the deposit liability was so reduced, as at 31.03.92unrecovered loans granted by the company to its subsidiaries wasRs. 348,022,153/- whilst its liability to the banking sector as at
was Rs. 1647 million.
According to a press statement by the new Governor on 25.07.92,the Central Bank intended to call for competitive offers from bankingand financial institutions to take over the company on a managementcontract, as the Central Bank does not have the expertise to managefinance companies. He explained that Bank control of companies is atemporary phase intended to make them viable so that they will beable to settle their depositors and manage on their own (exhibit ‘H’).However, there was no statutory body or institution prepared to takeover the company; and the Bank, acting on a report of the Directorwas of the opinion that the company could not be made viable andsolvent and hence decided to direct the Director to apply to acompetent Court to wind-up the company. This was communicated tothe company by letter dated 28.10.93 (exhibit ‘J’).
The petitioner does not seriously challenge the above state ofaffairs in the compSny but alleges that this was due tomismanagement on the part of the 1st respondent, in particular by itsfailure to invest monies recovered on loans in new revenuegenerating businesses. The petitioner seeks to quash the impugneddecision on the basis that firstly, it was mala fide; secondly it wasmade for a collateral purpose, namely, to shield the situation createdby the 1st respondent by mismanaging the affairs of the company;thirdly it was contrary to Section 12A of the Act which required the 1strespondent to furnish to the company a copy of the report madeunder Section 18 and to give the company an opportunity to state itsposition; hence it was also contrary to the principles of NaturalJustice.
Learned Counsel for the petitioner argued that if the 1strespondent has settled deposit liabilities winding-up is not justified. Inany event, the 1st respondent’s decision should be quashed as it wasmala fide. Counsel added that on the other hand, if winding-up isabsolutely necessary, it is open to the Central Bank, the Bank ofCeylon or the People’s Bank to apply for a winding-up by Court, intheir capacity as creditors of the company.
Learned Deputy Solicitor General for the 1st respondent submittedthat even assuming that the former Governor of the Central Bank wasactuated by mala fides it has no relevance to the decision to apply fora winding-up; that in making the said decision the 1st respondentacted within its statutory power; and that there is no nexus betweenthe conduct of the former Governor and the impugned decisionwhich was made long after he had ceased to hold office. He alsosubmitted that as the evidence shows, the said decision was takenafter long and protracted discussions with the share owning Directorsled by N. U. Jayawardena regarding the affairs of the company.Hence, there is no breach of the principles of Natural Justice. Hesubmitted that in all the circumstances, it should be left to thecompetent Court to make the decision on the winding-up of thecompany.
The D.S.G. also made the point that the company which is theparty most affected by the impugned decision has not challengedthe proposed winding-up. Hence, this Court should not entertain theapplication of the petitioner who is only a minority share holder. Thisraises the question of the Status of the petitioner as in the case ofDurayappah v. Fernandom. However, I do not propose to considerthis question particularly in view of the fact that by reason of the takeover of the administration and management of the company by theBoard, every Director, Manager and Secretary of the companyceased to exercise, perform and discharge any powers, duties andfunctions in respect of the company.
As regards the failure of the 1st respondent to furnish to thecompany a copy of the Director’s report and to allow it to state itsposition, it is to be noted that in terms of Section 12A relied upon bythe petitioner, the Board is permitted to act without allowing suchopportunity where it is necessary to take immediate action, in theinterest of the depositors and the finance company. In any event, asthe D.S.G. submitted, the evidence shows that the question of re-organisation of the company was discussed at length with the shareowning Directors, before the decision to apply for winding-up wasmade. I, therefore, hold that the said decision was intra vires. It isalso not vitiated by mala fides.
As regards the complaint that the 1 st respondent mismanaged theaffairs of the company by failing to invest monies recovered on loansin new businesses, I am of the view that action which may be takenby the Board is prescribed by Section 20(2), which is what the newGovernor explained in his press statement (exhibit ‘H’). That sectiondoes not appear to contemplate the kind of action contemplated bythe petitioner. What is relevant here is the fact that there was noperson or institution who was prepared to collaborate with the Boardin reviving the company. This is understandably due to the fact thatthe company which had a deposit base of Rs. 1,984 million haddeveloped serious liquidity problems. Nobody in the business worldwould possibly agree to take over the management of such acompany which had lost depositor confidence and was without fundsto carry on its current business, as early as 28.11.90, as evidencedby N. U. Jayawardena’s letter ‘A’.
I am of the view that in the circumstances it is not a matter for thisCourt to consider whether the company may be wound up becausethat is essentially a decision for the competent Court, subject to anappeal to this Court. Suffice it to hold that the impugned decision wasnot unlawful. The petitioner has failed to establish sufficient cause forquashing that decision. I accordingly, dismiss the application. In allthe circumstances, I make no order as to costs.
G. P. S. DE SILVA, C.J. -1 agreeRAMANATHAN, J. -1 agreeApplication dismissed.
DAWSON SILVA v. MONETARY BOARD OF CENTRAL BANK OF SRI LANKA AND ANOTH