Banking Final

WINDING UP OF
BANKING COMPANY
(CRB CAPITAL MARKET A CASE STUDY)
- A PROJECT
SUBMITTED TOWARDS THE FULFILMENT OF THE

BANKING LAW COURSE TITLED -
BANKING LAW
Submitted to: Submitted by:

Prof. (Dr.) Ajay Kumar Himanshu Bhushan
Faculty, Banking Law Roll no. 30
Semester VIII
Winding up of Banking Company
TABLE OF CONTENTS
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S.NO PARTICULARS PAGE
1. ACKNOWLEDGEMENT 4
2. RESEARCH METHODOLOGY 5
3. INTRODUCTION 6
4. CHAPTERS: 9
1. Winding Up By High Court.
2. Leading cases.
3. An Overview Of The Case: The Crb Scam.
4. The Inception Of The Crb Group.
5. The Groups Strategies For Growth.
6. The scam came into limelight when...
7. The investigations revealed...
8. Where did the money go...
9. The loopholes....
10. Reserve bank of india v. Crb capital markets ltd.
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(provn. Liqn.) P.ltd.
3
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11. Trust Fund Doctrine.
12. Effects Of Winding Up.
5. CONCLUSION 41
6. BIBLIOGRAPHY 42
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ACKNOWLEDGEMENT
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I would like to take this opportunity to thank Prof. (Dr.) Ajay Kumar, for his invaluable support, guidance
and advice. I would also like to thank my parents who have always been there to support me. I would also
like to thank the library staff for working long hours to facilitate us with required material going a long
way in quenching our thirst for education.
RESEARCH METHODOLOGY
Whether Doctrinal or Non Doctrinal?
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My research is a blend of doctrinal and non-doctrinal research. Doctrinal in the sense that i
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have collected theoretical material from different sources such as text books and Internet
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resources.
Whether Primary or Secondary?
Now coming on to whether my research is primary or secondary. Our research is a totally

based on secondary material as it is totally based on Text books, articles and Internet research
(secondary source).
Analytical or Descriptive?
I have tried to be analytical in writing this project but nevertheless I have included statistics
and important quotes from different sources, as and when considered suitable.
INTRODUCTION
In several developed market economies the latter half of the 1980s was characterized by
exceptionally rapid expansion of credit and a rise in asset prices and aggregate output, followed
by equally exceptional banking problems and stagnation or a decline in credit stocks, asset
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prices, output and employment. Recovery from the recessions has also been slower than usual.
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The most prominent examples of this pattern are 1 the United States, Japan, Norway, Sweden and
Finland. Also in the United Kingdom and France similar developments have been observed,
although to a lesser degree. In terms of output and employment losses, Finland has experienced
the most severe recession in the recent history of OECD countries. Its banking problems have
also been among the most severe and possibly severest.
In public discussion, the malfunctioning of the financial system has often been made the culprit
for both the overheating and the exceptional depth and duration of the subsequent recession.
Excessive growth of credit, resulting in overindebtedness, has been claimed to have caused or
at least promoted a burst of unsustainable growth. This was followed by a period of sluggish
aggregate demand associated with a voluntary or forced consolidation of balance sheets.
Furthermore, the credit crunch that resulted from financial intermediaries shortage of capital,
excessive risk aversion by bank managers or misguided regulatory stringency has been cited as
a significant contributing factor to the recession and slow recovery that followed the boom. Thus
the financial system has been implicated, if not as a source of the observed credit cycle, at least
as a factor that has strongly contributed to the amplitude of the cycle.
This line of reasoning is by no means new or confined to public discussion. It had a prominent
role in many early academic analyses of the American Great Depression. Thus Fisher 2 argued
that in all major booms and depressions two factors have been of central importance: over
indebtedness to start with and deflation following soon after. According to Keynes3 investment
was largely determined by the state of confidence, which in turn depended on borrowers views
on the yields of investment projects and on the state of credit. He considered all these factors to
be highly volatile. Later, particularly Minsky and Kindleberger (1982) described financial cycles
and crises with the help of psychological concepts such as optimism, euphoria and
1 parts of.
2 1933.
3 1936.
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pessimism, which set in motion changes in investment, debt finance and asset prices, which
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again feed back to the confidence of economic agents. The functioning of the financial system
and the credit relationships that develop therein are central to their explanation of aggregate
economic fluctuations. Yet, these ideas contrast starkly with most of the macroeconomic theory
that has been developed since the Second World War.4 Similarily, in their influencial account of
monetary developments in the United States, Friedman and Schwarz (1963) allow no role for
credit. They claim that money supply changes have in a major way affected output and that
banking panics have resulted in significant declines in the deposit component of the money
stock. But the crucial issue is money supply. Credit extension and the subsequent debt-deflation
have no role in the explanation.
This absence of a role for credit is also characteristic of a substantial body of modern theories
that seek to explain aggregate economic fluctuations based on explicit optimizating behaviour by
individual economic agents and rational expectations (see eg Romer 1996). In particular, most of
the so-called real business cycle models either abstract from all financial market considerations,
including money, or incorporate a purely passive money, ie a quantity that responds to the
demand for transactions services.
However, in the past 10 years or so an increasing number of models aiming at explaining

macroeconomic fluctuations have incorporated a financial system much richer than one that just
produces money. Most of these models assign to private debt, balance sheet structures and
financial intermediaries an important role in magnifying the effects of various shocks so as to
lead to potentially substantial aggregate fluctuations. In some analyses, shocks to financial
intermediation can even precipitate real consequences. The so-called financial factors have
again become respectable, even if disputed, elements of macroeconomic analysis and policy
discussion5.
4 The neoclassical ISLM models that comprised the mainstream of macroeconomics until the 1970s
abstract from the financial system, except for the creation of the medium of exchange, money..
5 see eg Gertler 1988, Bernanke 1993 and Gertler and Gilchrist 1993.
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Examining the potential role of financial intermediation in the makings of the recent Finnish
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boom-bust cycle is particularly interesting. Not only is the cycle extraordinary in amplitude, but
economic activity and credit display very strong co-movements. If financial factors are at all
quantitatively important, they should be so in the Finnish case. This study focuses on the role of
the supply of bank credit in the recent Finnish credit cycle. Given banks predominant role in
financial intermediation, an understanding of their credit-supplying behaviour is crucial for
establishing why aggregate credit stocks have displayed the observed swings. The specific
hypotheses to be studied are: Did banks lending policies contribute to the rapid credit growth in
the boom period? If they did, did distorted incentives play a role? Similarly was there a credit
crunch caused by insufficient bank capital in the early 1990s?
WINDING UP BY HIGH COURT
Section 38 to 44 of the Banking Regulation Act 6 lay down the provisions for winding up of a
Banking Company.
Under Section 38 of the Act, the High Court has to order winding up for a Banking Company, if
it is unable to pay its debts, or if the company is under a moratorium and the Reserve Bank
6 1949.
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applies to the High Court for its winding up on the ground that its affairs are being conducted in
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a manner detrimental to the interests of the depositors. (A Banking company is deemed to be
unable to pay its debts if it has refused to meet any lawful demand made at any of its offices
within two days and the Reserve Bank certifies that the company is unable to pay its debtors).7
The Reserve Bank is required to apply for the winding up of the Banking Company, if the
Central Government directs it to do so after inspection under Section 35 of the Act.
Section 38. Winding up by High Court.8 (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 359.
(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
iii. on banking business in India; or
7 However in the cities where the branch of Reserve Bank of India is not present,
the time limit is 5 days from the first demand.
8 Banking Regulation Act, 1949.
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iv. has been prohibited from receiving fresh deposits by an order under clause (a) of
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sub-section (4) of section 35 or under clause (b) of subsection (3A) of section 42 of
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the Reserve Bank of India Act, 1934 (2 of 1934); or
v. having failed to comply with any requirement of this Act other than the
vi. requirements laid in section 11, has continued such failure, or, having contravened
any provision of this Act 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
iii. pursuance of the provisions of this Act disclose that the banking company is unable
to pay its debts; or
iv. the continuance of the banking company is prejudicial to the interests of its
v. depositors.
(4) Without prejudice to the provisions contained in section 434 of the Companies Act, 1956 (I 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.
The Reserve Bank of India may apply for winding up of a Banking Company if has failed to
comply with the requirements specified in section 11; or has by reason of the provisions of
section 22 become disentitled to carry on banking business in India; or 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 subsection (3A) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);
or having failed to comply with any requirement of this Act other than the requirements laid in
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section 11, has continued such failure, or, having contravened any provision of this Act continued
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such contravention beyond such period or periods as may be specified in that behalf by the
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Reserve Bank from time to time, after notice in writing of such failure or contravention has been
conveyed to the banking company.
Under Section 38 A of the Act10, every High Court has a court liquidator attached to it for the
winding up of a Banking Company. In special cases under Section 39, the Reserve Bank or the
State Bank of India or any other notified bank or any individual can be appointed as the official
Liquidator
LEADING CASES
- Past Director
A past director of a banking company, within the contemplation of Section 45-V of the
Banking Companies Act, 1949, includes a director who has died before the initiation of winding-
up proceedings against the banking company.11
- Summary proceeding for recovery of debts
There is no provision in the Indian Companies Act or the Banking Companies Act which enables
a liquidator of a banking company to recover debts of the company by summary proceedings
such as an application to the company judge or in any way other than by suit.12
11 Bank of Rajasthan Ltd., In Re, (1962) 32 Com Cases 1132 : AIR 1962 Tri 30.
12 Sree Bank Ltd. v. P.C. Mukherjee, (1952) 22 Com Cases 73 : ILR (1951) 2 Cal
356 : 55 CWN 400.
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- Winding-up of company
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Debt Recovery Tribunal does not have any jurisdiction to entertain application for winding-up of
a company whether the same is by any bank and/or financial institution. Neither the RDB Act
nor any other legislation has vested the power and jurisdiction on the Tribunal to declare a
company as insolvent and also to wind-up such a company.13
- Companies winding-up imposing penalty
If an order of winding-up of the company has been passed, no order imposing penalties under
Section 27 of the Consumer Protection Act can be passed, against any of the Directors of the
Company as after the winding-up order, no Director of the Company can deal with finances of
the company. However, as per provisions of Section 446 (1) of Companies Act, it will be open
for the petitioner to seek permission from the company judge to continue with the proceedings
under Section 27 of the Consumer Protection Act.14
- Payment of Companys cheque in winding-up
A petition for insolvent winding-up was pending against a company. After filing of the petition,
the company issued a cheque to a creditor on an account which was in credit. This was held to be
a disposal of the companys property in favour of a creditor but not in favour of the bank. In
honouring the cheque, the bank was acting on the companys mandate merely as its agent. This
involved no disposition of property to the bank.15
- Effect of Bankruptcy or winding up
Where a garnishee order nisi has been served and, before it is made absolute, notice of an act of
bankruptcy or presentation of a petition is received, or if a receiving order has been made, the
13 Bank of Nova Scotia v. RPG Transmission Ltd., (2005) 2 BC 265 (Del-DB).
14 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (DB).
15 Hollicourt (Contractors) Ltd. v. Bank of Ireland, (2002) 2 BC 502 (FB).
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garnishee order fails (See Bankruptcy Act, 1914, Section 40). Where a company is being wound
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up by the Court, any attachment after the commencement of the winding-up is void (Companies
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Act, 1956, Section 433).
Likewise, where an order nisi is outstanding on a companys account and a petition for winding
up is presented; the order will fail (Companies Act, 1948, Section 446 and 447). Where a
company is being wound up voluntarily and a judgment creditor attached the banking account
standing in the name of the liquidator, it was held that the mere fact that the companys account
stood in the name of the liquidator made no difference to the judgment creditors rights, and that
Section 433 of the Companies Act, 1956, only applied to a winding up by the court, by importing
the decision , mutatis mutandis in Gerard v. Worth of Paris Ltd.16
But this decision was overruled in the case of Lancaster Motor Co. (London) Ltd. v. Bredmith
Ltd.17
- Banking Services and Consumer Protection Act, 1986
If an order of winding-up of the company has been passed, no order under Section 27 of the
Consumer Protection Act can be passed against any of the Directors of the Company as after the
winding-up order, no Director of the Company can deal with finances of the company, even if an
order or decree has been passed against the company. However, as per provisions of Section 446
(1) of the Companies Act, it will be open for the petitioner to seek permission from the company
Judge to continue with the proceedings under Section 27 of the Consumer Protection Act.18
- Past Director
16 (1936) 2 All ER 905.
17 (1941) 2 All ER 11.
18 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (Pb).
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A past director of a banking company, within the contemplation of Section 45-V of the
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Banking Companies Act, 1949, includes a director who has died before the initiation of winding-
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up proceedings against the banking company.19
- Summary proceeding for recovery of debts
There is no provision in the Indian Companies Act or the Banking Companies Act which enables
a liquidator of a banking company to recover debts of the company by summary proceedings
such as an application to the company judge or in any way other than by suit.20
- Winding-up of company
Debt Recovery Tribunal does not have any jurisdiction to entertain application for winding-up of
a company whether the same is by any bank and/or financial institution. Neither the RDB Act
nor any other legislation has vested the power and jurisdiction on the Tribunal to declare a
company as insolvent and also to wind-up such a company.21
- Companies winding-up imposing penalty
If an order of winding-up of the company has been passed, no order imposing penalties under
Section 27 of the Consumer Protection Act can be passed, against any of the Directors of the
Company as after the winding-up order, no Director of the Company can deal with finances of
the company. However, as per provisions of Section 446 (1) of Companies Act, it will be open
for the petitioner to seek permission from the company judge to continue with the proceedings
under Section 27 of the Consumer Protection Act.22
19 Bank of Rajasthan Ltd., In Re, (1962) 32 Com Cases 1132 : AIR 1962 Tri 30.
20 Sree Bank Ltd. v. P.C. Mukherjee, (1952) 22 Com Cases 73 : ILR (1951) 2 Cal
356 : 55 CWN 400.
21 Bank of Nova Scotia v. RPG Transmission Ltd., (2005) 2 BC 265 (Del-DB).
22 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (DB).
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- Payment of Companys cheque in winding-up
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A petition for insolvent winding-up was pending against a company. After filing of the petition,
the company issued a cheque to a creditor on an account which was in credit. This was held to be
a disposal of the companys property in favour of a creditor but not in favour of the bank. In
honouring the cheque, the bank was acting on the companys mandate merely as its agent. This
involved no disposition of property to the bank.23
- Banking Services and Consumer Protection Act, 1986
If an order of winding-up of the company has been passed, no order under Section 27 of the
Consumer Protection Act can be passed against any of the Directors of the Company as after the
winding-up order, no Director of the Company can deal with finances of the company, even if an
order or decree has been passed against the company. However, as per provisions of Section 446
(1) of the Companies Act, it will be open for the petitioner to seek permission from the company
Judge to continue with the proceedings under Section 27 of the Consumer Protection Act.24
AN OVERVIEW OF THE CASE: THE

CRB SCAM
Until March 1997 CRB group was one of the leading groups in the finance industry. Investors
and bankers were too eager to place their money with the group. It was the ban against CRB
Capital Markets placed by RBI in April 1997, to accept fresh deposits, which brought into
limelight another major scam, after the Harshad Mehta scam in the Indian Financial system. The
23 Hollicourt (Contractors) Ltd. v. Bank of Ireland, (2002) 2 BC 502 (FB).
24 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (Pb).
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brain behind the scam was an astute 37-year old C.R. Bhansali 25, who stood out for the
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astonishingly simple methods he employed to hoodwink a large network of institutions and
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people, the Reserve Bank of India, Securities and Exchange Board of India 26, a number of banks,
credit rating agencies, auditors, media and investors. He used his political and religious contacts
to rake in crores of rupees, which probably will never be recovered. He also stood out for his
extraordinary ability to exploit the weakness in the regulatory system that allowed him to
continue for months, if not years, after the irregular nature of his business dealings were first
detected.
The groups overall liabilities were estimated to be around Rs.600 Crore, as against recoverable
of just Rs.230 Crore. Amongst the contenders for the Rs.230 crore assets were several banks who
had extended around Rs.100 crore in secured deposits, small investors who had placed nearly
Rs.180 crore in unsecured fixed deposits and Rs. 40 crore in bonds held by investors of the
company. As can be seen, small investors were to bear the maximum brunt of the debacle.
This project illustrates brings the train of events that led to the second major scam of Indian
financial system, thanks to weak governance on part of all stakeholders.
THE INCEPTION OF THE CRB GROUP

Dr. C.R. Bhansali27, Diploma in Journalism and one of the top 65 billionaires in India. was how
Bhansali described himself. Born in Sujangarh, Rajasthan, Bhansali, the son of a Calcutta jute
merchant, was brought up in a very pious and religious environment seeking the blessings of
saint, munis and rishis.
25 after whom the group was named.
26 SEBI.
27 B. Com (Hons), FCA, ACS, Ph. D, MIIA (US).
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Bhansali made forays in the world of finance by specializing in setting up dummy investment
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companies28 by blending his accountant.s knowledge with that of company Secretarys. He had
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worked out his channels into the Registrar of Companies and the Controller of Capital Issues
with the help of which he would register a company with practically no equity and would then
stage-manage the dummy company.s maiden public issue with a few hundred investors, largely
from Calcutta.s close knit Marwari Jain Community. Having had the company listed on the stock
exchange, he would then sell it for a profit to businessmen who needed dummy companies in a
hurry. The 1985 boom in leasing companies facilitated Bhansali in making money through the
setting up of dummy investment companies.
He then moved to New Delhi where he began to set up his empire.
CRB Capital Markets: Bhansalis flagship company CRB Capital markets was
originally established as a private limited company, called CRB consultants, in New
Delhi in 1985. The name of the company was changed to CRB Capital Markets and it
was converted into a public limited company, whose main activity was managing public
issues. This company went public in 1992 and went back to public another six times by
January 1195, raising a total of 176 crore in three years, compared to Kotak Mahindra
Finance, a leading finance company, who over the same period raised less than Rs. 80
crore.
CRB Mutual funds: In August 1994, CRB Capital Markets launched its mutual
fund company, CRB mutual funds which, through its Arihant Mangal Growth Scheme,
raised Rs 230 crore from the market. Another Rs.180 crore was raised from investors
through fixed deposits.
CRB Corporation LTD: CRB Corporation Ltd. was originally set as a granite
manufacturing company by Bhansali, but much of its activities were in finance area. This
company raised Rs.84 core through three public issues between May 1993 and December
1995.
CRB Share Custodial Services: CRB Share Custodial Services another of
Bhansali.s company raised a further Rs.100 crore in January 1995 to set up operations.
28 These are those companies which have no intention of investing and doing
business but rather siphon money.
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In the space of five years between 1992 and 1995, Bhansali managed to raise a total of close to
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Rs. 900 crore from the capital markets 29 and he became the chairman of the top three finance
companies in India.
THE GROUPS STRATEGIES FOR

GROWTH
To raise money from the market, Bhansali used his own money to rig prices. In the months
leading up to January 1995, when CRB capital markets came to the market with Rs.86.75 crore
at a premium of Rs90, the companys share price doubled to Rs.142 and then went to drop
dramatically after the issue. CRB Corporations share price history follows a similar trend
peaking at around Rs.65 at the time of the big issue in late 1994. The prices were later quoted at
29 when the market was going through the post-Harshad Mehta bear phase.
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Rs.5 and Rs.3 when the scam broke out. Hence, most of the funds that the company raised by
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way of equity were by way of premium issues.
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Bhansali used two methods to rig prices. First, he siphoned money into his private finance
companies, which would then buy his stock. And then he used his other public companies to buy
into each other as cross-holdings.30 CRB Custodian invested Rs. 15 crore into CRB Capital
markets, which in turn invested Rs.17 crore in CRB Mutual fund. The latter holds 24 lakh shares
of CRB Corporation, which again has a 16 crore investment in CRB capital markets.
Simultaneously, Bhansali was also elaborately dressing up his balance sheet for the benefit of the
public shareholders and the banks. In the three years starting March 1994, CRB capital markets
income jumped nearly five times to Rs.129 core, while its net profit jumped three times to Rs.52
crore. This profit growth came when the company was showing negative cash flows from
operations -Rs.88 crore in 1995-96 and -Rs. 79 crore in 1994-95.
For two consecutive accounting years, CRB Capital Markets has reported high level of cash
deficit from its operating activities. The net cash outflow from operating activities increased
by 11.8 percent from 79.25 crore in 1994-95 to Rs.88.63 crore in 1995-96. This increase in
net cash outflow from operating activities has been mainly due to a steep increase in interest
cost and high credit period. Interest cost has more than doubled from Rs.12.7 crore in 1994-
95 to Rs.29.7 crore in 1995-96 resulting in higher average cost on its borrowed funds. The
interest incidence has increased to 16.7 per cent in 1995-96 from a mere 11.2 per cent in
1994-95. At the same time, the debtors balance has increased from a mere Rs.4.6 crore in
1994-95 to Rs.31.4 crore in 1995-96.
CASH FLOW STATEMENT Rs. Crore

Total Sources of
Mar-95 Mar-96 Cash
Opening cash balance 3.9 88.96 92.86
Revenue inflow 68.53 78.14 146.67
Non-operating income 9.9 39.13 49.03
30 For e.g., both CRB Mutual Fund and CRB Custodian services featured in the top
10 companies in which CRB Mutual Fund invested in 1994-95..
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Sale of fixed assets 16.24 16.24
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Capital proceeds 146.49 100.64 247.13
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Loan proceeds 162.02 57.05 219.07
Total cash inflow 407.08 363.92 771
Application of cash
Purchase of fixed assets 92.77 128.41 221.18
Purchase of investments 66.53 32.64 99.17
Interest payment 12.66 29.73 42.39
Tax payment 0.45 0.45
Dividend paid 7.62 11.51 19.13
Other cash expenses 3.4 2.27 5.69
Net increase in working capital 134.67 137.04 271.71
Closing cash balance 88.96 22.32 111.1
Total Cash outflow 407.08 363.92 771
While nearly Rs.466.2 crore has been raised from the capital market in the last two years,
Rs.320.35 crore has gone in the purchase of assets and investments Most of the funds that
the company raised by way of equity were by way of premium issues. Reportedly, CRB
Capital Market issued Rs.200 crore of secured debentures in April 1996. These debentures at
present stands unsecured, as the company did not register the charge on the assets.
The company has also in the last two years raised Rs.135.24 crore by way of fixed deposits
from the public with outstanding deposits as on March 1996 being Rs.139.83 crore. The
director.s report has also mentioned,
"There are about 1,00,000 deposit holders who have reposed their confidence by making
deposits with the company. The fixed deposit of your company has received a CARE A+ FD
rating, indicating adequate safety towards payment of principal and interest."
With more than 80 per cent of the funds raised being in nature of unsecured loans, there are
doubts whether the company has adequate asset backing to pay off these loans. The crisis that
has unfolded has already had a direct fallout in post dated cheques of depositors being
dishonored - creating panic amongst deposit holders.
Source: Prowess, 1997
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On the investment side, the company was refusing to mark its investment to the market. The
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company reported that the market value of its investments rose from Rs.76 crore to Rs.109 crore
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in 1995-96. Analysts say that actual worth of this investment could be half its value, considering
that most of them are duds that cannot be traded or disposed off.
The story is similar in the case of CRB Corporation, whose total income more than doubled to
Rs.129 crore from March 1994 to March 1996, and profits rose five times to Rs.15 crore.
Expectedly, the reverse was happening in the case of CRB Mutual fund. Having collected Rs.230
crore, Bhansali did not have much use of the fund, and consequently the net asset value 31 was on
a steady decline from Rs.9 in November 1994 to Rs.6.7 by March 1996. But even here it is
difficult to establish the truth, because the NAV came from the company itself.
CRB capital markets had invested in the equity of 130 quoted companies and nearly a dozen
unquoted companies. Bhansali invested in three classes of companies:
1. His own privately owned companies

2. Private companies owned by his friends and those on the boards of his companies
3. Many small companies whose issues were managed by CRB capital, but which would not
get full subscription.
Many of the companies that feature in the investment portfolio are ones that Bhansali invested in
to generate paper profits for the group. His modus operandi was to buy into IPOs of those
companies that CRB Capital markets could not get subscription for. He would then buy them at a
much lower price than the issue price and then do a ready forward deal with the finance company
thereby he would sell the holding at higher price. Thus he would show profits in the books of
CRB Capital markets or CRB Corporation for the same from the sell of investment. He would
then repeat this on a continuous circle.32 First, the IPOs price would go up on the stock market
and he would be able to sell the stock at a profit. Simultaneously, he was reaping the benefit of
the paper profits that were accruing to CRB Capital markets. Higher profits meant that the share
price continued to remain high, which would mean that raising money from the public in the
31 NAV.
32 He was hoping for benefits out of this on several fronts.
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future would be that much easier. Also, higher profit would mean that the company would look
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much stronger and enable it to get a high credit rating and bring in the public deposits. Lastly, a
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better balance sheet would enable him to leverage himself further to raise money from the banks.
As for the auditors of the group companies - D.P. Bhaiya & Co and Jain & Swakia it was found
that D.P. Bhaiya s address was actually a collection of open sheds near the Manicktalla crossing
specializing in scrap and low quality steel items. Whereas, Jain & Swakia have been alleged that
it is a fictitious chartered accountants firm available against a fee to fix almost any set of
accounts. None of the above firms has a telephone listed in its own name.
CRB capital markets was given an A+ rating by the credit rating agency CARE 33, despite the fact
that another rating agency, ICRA, had given a lower rating to the company and CRB refused to
accept it. CARE.s own executives recommended an AAA rating for the company but the rating
considering of auditors and their acceptability lowered it to A+.
The banks were also very eager to lend money to CRB. As for the banking system, Bank of
Baroda, Indusind Bank, Reliance capital, UTI Bank, Bank of Tokyo, Bank of Rajasthan, Bank of
India and some more bankers had lent Rs.75 crore. In addition, State Bank of India 34 lost Rs.60
crore. CRB capital markets had opened a current account with main branch in Mumbai in May
1996 for the purpose of payment of interest, dividend and redemption cheques. Payment
warrants were allowed to be presented at as many as 4000 of the SBI.s branches, which were to
honour them immediately. These payment obligations were estimated at Rs. 50 lakh every
fortnight. But, since Bhansali was granted a facility to open a current account and did not have
any overdraft facility, he was expected to deposit cash upfront into the current account, along
with the list of payments to be honoured. But the logistics of payment are so complex that it was
not possible for the branches to check with the head office before honouring the dividend
warrant. The branches purchased these instruments at par just like a demand draft. These
instruments were then sent to the Mumbai service branch, which cleared them and debited it to
the company account. The time taken between the encashing of the warrants of outstation
branches and then reaching the main branch for tallying was almost 14 days. Once the amount
33 Credit rating agency identify the risks and returns in the investment.
34 SBI.
Banking Law
reached the main branch, it credited the branches, which had paid warrant holders out of pocket.
23
CRB took advantage of those 14 days. It worked very well for about nine months. But they
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realised in March 97 that between 6 and 13 March the account had been withdrawn for few
crores. On being called by SBI he immediately paid the money, but the same situation arose
again within next fortnight. On discovering that bank had been defrauded, SBI issued a circular
asking all the branches to stop honouring any warrants of CRB capital markets. SBI alleged that
Bhansali had printed 1800 fake dividend warrants, which were drawn in favour of friends and
relatives and presented at various SBI branches. Rupees 59 crore were siphoned off and credited
to these accounts which were allegedly benami accounts owned by Bhansali himself. Inspite of
taking all the normal precautions and receiving satisfactory reports from Bank of Baroda, 35 SBI
was defrauded in this account only out of 450 companies which have a current account facility.
In the 101-year history of the bank, the SBI had never ever been defrauded on these accounts the
way Bhansali had done.
SBI, on detecting the fraud, tried to persuade Bhansali into compensating for the loss instead of
lodging a complaint. Bhansali handed over the ownership of 300 acres of land in Jaipur, which
was estimated to be worth between Rs.3 to 12 crore 36. Though SBI claims to have informed RBI
immediately on detecting the frauds, it took more than three weeks to notify the CBI, which in
turn took no action.
Similarly around 16 commercial banks were stuck with share certificates issued by CRB.
Atmaram Patel, the then Gujarat Finance Minister, complained to RBI that the states cooperative
banks lent loans worth Rs.50 crores to CRB.
As regards deposits, CRB was giving upfront cash incentives to the tune of 7 to 10 per cent and
in some cases, 16 percent to those willing to put in the money. So typically, an investor would
end up making as much as 36 percent on a one-year deposit. Thereby lured by the incentives and
high returns, the depositors trusted CRB with as much as Rs. 1800 crores in about 3 years time.
35 CRBs main banker.
36 but Bhansali claimed it worth Rs.30 crore.
Banking Law
Fixed deposits constituted as much as one-third money that he raised to fund his various
24
operations.
Page
Bhansali also came up with an idea of CRB clubs, where franchises were given to influential
people to raise money. Fifty percent of the money raised was lent back to them. The
Vizagapatnam club franchise raised about Rs. 1.5 crore a month. The Pondicherry and Pune
clubs were equally active. He also got his guru Acharya Tulsi to persuade rich Jains from Gujarat
and Rajasthan to invest their money in the fixed deposits. Almost Rs.70 crore of the deposits
came from these two states alone.
Bhansali also used his political connections to get rich members from these two states to deposit
their money in CRB. With the photographs of Bhansali and senior political leaders appearing in
the newspapers, the political connections of Bhansali were quite apparent.
THE SCAM CAME INTO LIMELIGHT

WHEN...
The CRB group came under scrutiny for the first time in September 1996, when it approached
the RBI for registration of the group under the NBFC 37. Around the same time the Tourism
Finance Corporation of India lodged a complaint that the latter was defaulting on its loan
repayments. Simultaneously RBI received complaints from many sources regarding the
company.s dealings. The RBI, not satisfied with some responses given, launched a detailed
inspection of CRB offices through November and December. By February, the RBI had enough
information of irregularities in the balance sheets and operations to give a one-month show-cause
notice. When the group failed to give a suitable reply, RBI placed the ban on acceptance of
deposits from the public with effect from 8th April 1997 and also withdrew an earlier clearance
given to set up a private sector bank. .
37 Non-Banking Financial Company.
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25
The post dated interest cheques issued by CRB Capital Markets Ltd. to the depositors bounced
Page
creating panic among the depositors immediately after the ban. RBI asked CRB to explain how it
plans to return the deposits worth Rs.1.39 crore as on March 31, 1996. The Vice President of
CRB group Mr. A.K.Katiar told the depositors that he was not responsible for the company and
that he would not be able to give any guarantee that they would get back their principal amount.
The company.s interest burden in mid-May 1997 was Rs.8 to 9 crore per week. Depositors
approached various consumer organisations.
The RBI filed a petition in the New Delhi high court seeking the winding up of CRB Capital
Markets ltd when the company failed to respond to the RBI show cause notice within stipulated
time i.e. 20 May 1997. The Delhi high court had asked the official liquidator to take over the
assets of CRB Capital Markets Ltd taking police assistance if necessary. The State Bank of India
lodged a complaint with Central Bureau of Investigation for recovering Rs.600 million against
which it had the companys Jaipur holding worth Rs.3 to12 crore only as collateral. The Bank of
Baroda moved the Bombay high court for appointment of a receiver to collect its dues worth
Rs.40 million.
Meanwhile, the SEBI issued orders to the custodian of the CRB Mutual Fund to stop transactions
in CRB shares held in custody. SEBI acted after CRB officials did not turn up at the meeting
called regarding the next course of action with regards to the company. It also took steps to halt
the group.s activities and asked CRB Mutual Fund not to launch more schemes. The ban was
imposed for the second time on the company. Later CRB Share Custodial Services Ltd informed
the BSE that it had discontinued services as the registrar and share transfer agent for CRB
Capital Markets and CRB Corporation Ltd.
There was a lot of confusion about how to act against the CRB, considering its NBFC 38 status.
Loopholes in the law ensured the SEBI, the RBI and the Department of Company Affairs have a
limited role to play in NBFCs. It was only in 1995 that the RBI began monitoring activities of
NBFCs. After the CRB crash, the RBI was planning to establish norms covering NBFCs better
with the market regulator favouring a system through which mutual funds can be monitored
better. SEBI was also considering more open disclosure norms for mutual funds and fixed
38 Non Banking Financial Company.
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deposits. A possibility of bringing the fixed deposits in NBFCs under the Deposit Insurance Act
26
was to be handed over to the RBI39.
Page
THE INVESTIGATIONS REVEALED...

In the meantime, Bhansali had absconded and CBI sought Interpols help to nab him. All the
airports had been asked to keep a look out for Bhansali though he was believed to have left the
country. Besides the SBI, the IndusInd Bank40 and Reliance Cap, the CBI also investigated the
role of Credit Analysis & Research Ltd, which gave a clean chit to CRB Caps. fixed deposit
instrument. CBI filed its FIR at the special CBI court regarding involvement of SBI officials with
Bhansali in cheating SBI of Rs. 600 million. The CBI questioned former SBI managing director
M K Sinha, who was the acting chairman of CRB Global Bank.
On 11th June 1997, three officials of the Mumbai main branch were suspended for .procedural
lapses. following the investigations. In retaliation, the SBI Officers. Association went on a flash
strike in five major branches of the city, terming the move as one-sided and taken without calling
for an explanation from the executives. Following the strike, the National Organisation of Bank
Officer had extended support to the ongoing strike.
39 Reserve Bank of India.
40 Hinduja-owned.
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An inspection of CRB books and accounts by the RBI.s Dept. Of Supervision 41 had revealed that
27
there was inadequate provision against non-performing assets42. Only Rs.0.25 crore was provided
Page
as against a required amount of Rs.3 crore when actual amount was Rs.21.10 crore. DOS also
found that the company had violated provisions of the directives for NBFCs issued by the RBI.
The DOS report also said that the company invited deposit from the public, projecting itself as an
equipment leasing company when it was actually carrying out loan business as its principal
activity, and consequently was entitled to accept a lesser quantum of deposits. CRB collected
deposits aggregating to Rs.139.83 crore in excess of its entitlement of Rs.107.19 crore violating
the ceiling restriction. Also, according to the deputy governor, RBI, Mr. S.P. Talwar, CRB Caps
had issued Rs.200 crore secured debentures in April 1996, but the debt paper stood unsecured as
CRB did not register the charge against its assets.
The investigations also revealed that CRB received special favours from the Central Board of
Direct Taxes for availing of benefits under sections 54 EA 88 of the Income Tax Act for CRB
Power Bonds.
The provisional liquidator was appointed following RBI.s petition for winding up who took
charge of the assets and liabilities of the company. The liquidators on examining the
computerised accounts reported that the accounts fed into the computers were erased. Therefore
it was difficult for them to decode the computerised data without the help of experts.
In June 97, six persons were arrested including four directors of CRB Capital Markets. Later
C.R. Bhansali and five members of his family including his wife and parents were escorted from
Hong Kong by CBI sleuths. He was formally arrested after reaching the Indira Gandhi
International Airport43.
On the condition of anonymity, SBI officials confirmed details of Bhansali.s modus operandi to
The Indian Express. Under an earlier arrangement with the SBI in June 1996, Bhansali could
issue warrants totalling Rs. 50 lakh and no warrant was to be of an amount over Rs.25000.
Despite a ceiling of Rs.25,000, the SBI inserted a special clause that allowed Bhansali to alter the
41 DOS.
42 NPA.
43 New Delhi.
Banking Law
warrant with his signature. As a result, he would cancel the amount himself and write the
28
warrants in the name of shell companies of which he was the ultimate beneficiary. When
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questioned by The Indian Express44, all that SBI officials had to say was that this .manual
override was permissible and that a few other companies have also been extended similar
facilities.
WHERE DID THE MONEY GO...

An amount of Rs.900 crore was involved in the CRB scam and the preliminary view held by
both finance ministry officials and other analysts was that much of the money may have been
lost through imprudent investments. However foreign links of Mr. Bhansali emerged through the
investigations and some sources said that at least part of the money could have been siphoned
abroad through hawala. Mr. Bhansali siphoned a part of the money for personal investments
within the country.
According to a senior official of North Block, Mr. Bhansali had become very ambitious. He took
deposits from small investors for fixed deposit schemes of his companies promising very high
interest rates and also for his mutual funds. But in order to pay such high rates of interest he
would have to earn higher rates of returns on the deployment of the money that he borrowed. In
the event, however Mr. Bhansali was unable to earn higher rates of returns and therefore fell into
a trap, he added. According to this finance ministry official, Mr. Bhansali was unable to earn
high returns partly because of the poor showing in the stock markets and also because much of
the investments he made in the property market did not pay off because of the slump. Once he
fell into a trap, Mr. Bhansali sought to extricate himself by borrowing more money from the
44 Indian Express is a leading English daily.
Banking Law
market. This money he used to repay the interests on his earlier borrowings. To repay the interest
29
rate on amounts he borrowed in the second round, Mr. Bhansali was forced to borrow once
Page
again. This went on and an ever expanding vicious circle was set in motion. In between, Mr.
Bhansali made a determined effort to get out of the trap by investing in some very high-risk
ventures, which promised very high returns. An example of this is the investment that he is
believed to have made in a Hindi commercial film. But again the gamble failed. In the end, Mr.
Bhansali borrowed funds from banks through questionable means to bail himself out. In such a
case, there will be little that can be recovered. Speculation that a part of the money could have
been siphoned off is based on the information that Mr. Bhansali used the money with his mutual
funds to by into the equities of numerous companies that he allegedly spawned. However what
these companies did with the money that was invested was not known precisely.
According to Mr. Karan Jain, Vice-chairman of the CRB Capital Markets LTD, all was well with
CRB till as late as December 1996 and that C R Bhansali pressed the panic button only after the
RBI refused banking status to CRB and contemplated action against it for various irregularities.
Jain told police that Bhansali panicked when he realized that he could not keep the RBI 45 . which
was moving towards liquidating the CRB group of companies at bay. A nervous Bhansali
collected over 3000 interest warrants46 and began issuing them in frenzy. He said Bhansali began
misappropriating investors. Money only during the period between January to March 97.
According to additional commissioner of police, crime, S P S Yadav . In those three months,
Bhansali issued all the interest warrants either in favor of one of his fictitious companies or in the
name of his relatives and some non existent persons. Nobody realized it until it was too late.
Although the group had dealing with some 42 banks all over the country, Jain says that IWs were
issued mainly to banks based in Jaipur, Calcutta and Ahmedabad, the cities where most of the
relatives of Bhansali were concentrated and mostly between January and March 1997.
Further, in December 1997, the Bombay High Court directed all 133 companies of the CRB
group which received Rs.550 crore from the parent company, CRB Capital Markets, be made
respondents to the petition filed by the Investors Grievances Forum 47 seeking a probe into the
scam. The official liquidator also submitted to the court the list of 133 companies whose
45 Reserve Bank of India.
46 IW.
Banking Law
accounts had been frozen last month by the Delhi High Court. The Delhi High court came
30
following the revelation by the official liquidator that C R Bhansali had siphoned off Rs.550
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crore from the parent company.
THE LOOPHOLES....
SEBI48 first detected the irregularities in CRBs operations in December 1995 during a routine
inspection. Analysts say that even a cursory look at CRB Mutual funds balance sheet would
reveal that the trustees and the fund managers did everything but run a proper fund.
SEBI informed the RBI that the inquiry conducted by them in respect of CRB was completed
and later further confirmed that they were free to launch new schemes from 1 July 1996.
However CRB group had not mended its ways. Another investigation revealed that there were
other irregularities such as not maintaining arms length distance from its broking subsidiary and
investments above set limits. CRB was directed not to enter the market for nine months.
According to media sources, SEBI failed to warn the public in spite of detecting all these
irregularities.
RBI failed to inspect the activities of CRB capital markets and CRB Corporation, both of whom
were raising fixed deposits, and hence were governed by NBFC rules for similar irregularities.
RBI tried to cover up its mistakes by pointing out to some loopholes in law, which prevented it
from inspecting the assets side of an NBFC 49 balance sheet. In October 1996, RBI received
several complaints from several sources regarding the working of CRB during which time CRB
47 IGF.
48 Securities and Exchange Board of India.
Banking Law
Capital applied for registration. SBI complained in late March regarding the fraud. Between
31
October and March RBI took its own time to inspect and issue show cause notices after which it
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finally issued the ban on the collection of the fixed deposits on 8th April.
It took another six weeks for RBI to issue winding up notice and appoint a liquidator. In the
meantime Bhansali had destroyed all evidences, gave written assurances to depositors stating
that the company had started fresh dialogues with more bankers and requested the depositors to
extend their co-operation at that hour of need.
In April 1994, CRB applied for its banking license as part of his strategy to get into banking,
offshore funds, insurance, custodial services, multimedia and credit rating. Here again CRB
received political support. In July 1996, following the clean chit by SEBI to CRB Mutual Fund,
it issued an in-principle-banking license. Ideally though RBI had the prerogative to conduct its
own investigations into the working of the various group companies before issuing a banks
license it did not do so.
The fallout of the CRB scam had prompted the ministry of finance 50 to work on several issues
related to the functioning of NBFCs. The ministry was planning to give another look at the recent
act which set the guidelines for NBFCs and also review the powers of the Securities of Exchange
Board of India51 and the RBI. This was to see if both the government bodies have sufficient
power to tackle situations such as those that have emerged following the CRB scam. The RBI
was asked to study closely the functioning of all NBFCs.
Meanwhile SEBI decided to conduct a study to find out if there was any systematic failure that
led to the CRB scam. It felt that the system required studying so as to define the faults and find
remedies to the shortcomings. Even though NBFCs did not fall within its jurisdiction, it was
decided to improve the communication with the Reserve Bank of India. Action against NBFCs
can only be taken when they violate SEBI norms though RBI governs NBFCs. It was decided
that some leading NBFCs would be put on the RBIs watch list in consultation with SEBI.
49 Non Banking Financial Company.
50 MOF.
51 SEBI.
Banking Law
According to SEBI chairman, the rating and regulation of NBFCs was necessary. He also
32
reiterated SEBIs intention to regulate credit rating agencies.
Page
RESERVE BANK OF INDIA
V.
CRB CAPITAL MARKETS LTD.(PROVN. LIQN.) P.LTD.

There were two cases that were filed against the CRB Capital Markets Ltd., it was by :
1. Central Government, and

2. The Reserve Bank of India.
1. CENTRAL GOVERNMENT
(Union Of India v. Crb Resources Private Limited And Ors52.,)
The Central Government has filed this petition under Sections 397/398 of the
Companies Act, 1956 ( the Act) complaining of mismanagement in the affairs of M/S
CRB Resources Private Limited (the company). This matter was adjourned from time to
time as it was reported that certain matters connected with various other companies of
Shri C.R. Bansali were pending before Delhi High Court. Later on, it was found that the
respondent company was not before the High Court and as such the petition was heard
on merits.
A perusal of the petition indicates that the entire foundation of the petition is on the
basis of actions taken by statutory authorities against CRB Capital Market Limited which
are pending in other fora. As far as the allegations in respect of the 1st respondent
52 2005 128 CompCas 766 CLB.
Banking Law
company are concerned, they are not substantive in nature warranting any order in terms
33
of Section 397/398 of the Act and as a matter of fact, even the Central Government has
Page
not sought for any substantive order or direction other than an observation that the
affairs of the company are not being carried out in the public interest and as such are
prejudicial in the interest of the public and for a direction to the company to prevent the
conduct of the affairs of the company in a manner prejudicial to the public interest and
give other appropriate directions. The company is a closely held private limited company
with an issued and paid up capital of Rs. 2.48 lacs. Of the total unsecured loan of about
Rs. 75 lacs as on 31^st March, 1997, about Rs. 59 lacs were from the shareholders. The
fixed assets amounted to about Rs. 8 lacs and there were no secured loans. This will
indicate that no public interest is involved at all. I also find from the directors' report for
the year 2002-2003 that the company has not been carrying on any business effective
from 15.5.1997. Thus, on an over all assessment of the facts of the case, I do not find
scope to pass any order in terms of Sections 397/398 of the Act and accordingly I dismiss
the petition.
Hence the petition was dismissed by the court and winding up of the company was not allowed
by the court.
2. RESERVE BANK OF INDIA.
(Crb Capital Markets Limited vs Reserve Bank Of India53 ,.)
1. The Reserve Bank of India(in short the `RBI') under the powers conferred under
Section 45MC(1)(d) of the Reserve Bank of India Act, 1934(hereinafter referred to as
the `RBI Act') filed the winding up petition, CP.No.191/97 in this Court.
2. The allegations in the winding up petition are as follows:-

a. that the company was originally incorporated on 16th May, 1985 and
became a public limited company on 4th March, 1991 and was re-
christianed as CRB Capital Markets Limited on 18th November, 1991.
53 2007 135 CompCas 86 Delhi.
Banking Law
b. that the company was initially provisionally classified as a limited
34
company on 4th May, 1993 and the status was changed to Equipment
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Leasing Finance Company.
c. that the company has applied for registration as a non-banking financial
company (NBFC) on 24th October, 1996 and consequently the RBI
carried out inspection of the company. Large scale complaints were
received against the petitioner of in fact carrying loan and investment
business and holding excess deposits to the tune of Rs.34.72 crores in
violation of the NBFC (RBI directions 1997) as well as payment of
brokerage in excess of the maximum permissible rates and acceptance of
other deposits beyond the period permitted by the RBI and violation of
other norms as well as the degradation of the credit rating from CARE
(FD) C.
3. The following other allegations have also been made against the respondent
Company:-
a. that the complaints were received from Tourism Finance Corporation
Limited.
b. that the RBI also received information from State Bank of India about
large scale misuse at par discounting facility.
c. that on 26th April, 1997 the RBI asked the company to submit its Schedule
of Assets which could be used for discharging its obligations and liabilities
but the reply only disclosed liabilities and no mention was made about its
assets as discernible from the letter dated 7th May, 1997 sent by the
Company.
d. that the company was also asked by the RBI by letter dated 15th May,
1997 to furnish a month-wise FDR maturity, loan of public deposits and it
was found that all offices of the company were closed since 9th May, 1997
nor was the Chairman of the Company, Shri C.R. Bhansali traceable.
e. that the company's directors informed that they had resigned from the
Company Board from 6th March, 1997.
f. that a complaint was also received from the Ministry of Revenue,
Government of Gujarat that the cooperative banks in Gujarat had been
duped by CRB Capital Markets Ltd., to the tune of Rs.50 crores.
Banking Law
g. that the Chairman of the Company was directed to meet RBI to explain the
35
financial position but he failed to appear before the RBI. In view of the
Page
above averments, the winding up petition had been filed and various
interim orders were passed.
Therefore the Delhi High Court ordered provisional liquidation in the ongoing case. It shall be
also brought to notice that this case is still pending in the Delhi High Court.
CASE STATUS
CO.PET. 191 of 1997 PENDING
RESERVE BANK OF INDIA

Vs.
CRB CAPITAL MARKETS LTD.(PROVN. LIQN.) P.LTD.
Advocate (s) : MS.MANISHA,MR.R.NIROOP,
Last Listing Date : Tuesday, April 06, 2010
Category : NO CATEGORY MENTIONED
Orders/Judgment
Order(s)/Judgment(s) after Sep'2006 are also available through

"Judgewise Orders / Judgements Search"
TRUST FUND DOCTRINE

Banking Law
36
The trust fund doctrine can be traced back to the War of 1812, when the British capture of
Page
Washington, D.C., created a financial panic that precipitated the failure of many banks. One such
failing bank was the Hallowell and Augusta Bank (the "Bank"), chartered by the Massachusetts
legislature in 1804 for a term expiring in 1812.54 The term was subsequently extended to 1816,
solely for purposes of winding up the Bank's affairs. 1812 Mass. Acts 57. In the course of wind
up, the Bank's directors authorized a liquidating dividend to stockholders, which caused a loss to
the Bank's noteholders. Thereupon, two noteholders, Josiah Vose and Paul Spear, sued Peter
Grant, a director and stockholder, to recover the loss on their notes.
Vose, having alleged that Grant negligently authorized the liquidating dividend, was non-suited
on the ground that a creditor's evidence of negligence or mistake was insufficient to impose
liability on a director. According to the court, to impose liability it must appear that the director
"acted willfully or maliciously or fraudulently, with intent to injure" the noteholder.55
Spear, on the other hand, having alleged that Grant had breached an implied contract, was non-
suited, because the court could:
[c]onceive of no case in which an action at common law will lie, without evidence
of a fraudulent contrivance on the part of the person sued, to withdraw his share
of the capital stock, and to cheat the creditors of the bank.56
Notwithstanding Vose and Spear, other unpaid noteholders of the Hallowell and Augusta Bank
sued the Bank's incorporators, principals and stockholders, Nathaniel Drummer, Benjamin Porter
and Thomas Agry, in Federal Court to recover the liquidating dividend distributed during the
54 1804 Mass. Acts, 44.
55 Vose v. Grant, 15 Mass. 505 at 518 (1819).
56 Spear v. Grant, 16 Mass. 9 at 15 (1819).
Banking Law
Bank's insolvency. In Wood v. Drummer,57. Justice Story, who wrote the opinion in Wood,
37
confirmed there was no evidence of any fraudulent activity in declaring the liquidating dividend
Page
to the stockholders. Id. at 436. However, Justice Story decided that pursuant to the Bank's
charter, its capital should be deemed a "trust fund" for the payment of Bank debts; and, therefore,
the Bank's creditors had equitable claims to such capital. Id. at 436. Justice Story then proceeded
to exercise the equitable power of the Federal Court to permit the Bank's noteholders to recover
the liquidating dividend from the stockholders.
Thus, as originally conceived and applied, the trust fund doctrine was nothing more than a
constructive trust that enabled creditors with preferred equitable rights to recover corporate
assets distributed to stockholders.
EVOLUTION OF THE TRUST FUND DOCTRINE

As a practical matter, in Massachusetts and other states the need for the trust fund doctrine, as
applied in Wood, has been supplanted by modern statutes that prohibit insolvent corporations
from distributing their assets to stockholders ahead of creditors. 58 Also, while both the Supreme
Judicial Court in Vose and Spear, and Justice Story in Wood expressed some concern for
creditors in the event of director fraud, these concerns have largely been alleviated by statutes
prohibiting fraudulent conveyances.
However, despite the emergence of such statutory protection for creditors' interests, the trust fund
doctrine may pose a new threat of personal liability for directors, by imposing a duty to manage
corporate affairs for the benefit of creditors, when the corporation enters the zone of insolvency.
As so many corporations are formed under Delaware law, it is important to note that the
Delaware Chancery Court has been aggressive in applying the trust fund doctrine to business
corporations, taking the doctrine far afield of its roots in the relationship between creditors and
57 30 F. Cas. 435, 436 (C.C.D. Me. 1824).
58 Mass. Gen. Laws ch. 156B, 61
Banking Law
stockholders. In 1923 the Delaware Chancery Court followed Wood by construing Delaware's
38
receivership statute to create an equitable right in the creditors of an insolvent corporation to
Page
have corporate assets "impressed" with "a trust to be administered for their benefit."59 Also in
keeping with Wood, the Chancery Court limited the application of the doctrine to situations
where receivership or bankruptcy proceedings had commenced against the insolvent
corporations, because:
The risks of liability on the part of honest directors ... are so great and hazardous, that ... the
courts should not subject them to [such risks] by applying the 'trust fund doctrine' before
receivership or bankruptcy.
Notwithstanding such decisions, in Credit Lyonnais Bank Nederland, N.V. v. Pathe

Communications Corp.,60 , which involved the failed leveraged buyout of MGM Studios, the
Delaware Chancery Court said that: "[a]t least where a corporation is operating in the vicinity of
insolvency, a board of directors is not merely the agent of the residue risk bearers but owes its
duty to the corporate enterprise." Id. at *34. Then, the Chancery Court went on to suggest that
when a solvent corporation is in such vicinity, the right course for the directors to follow may
diverge from protecting the corporation's stockholders toward protecting a larger corporate
constituency that includes creditors.
59 Mackenzie Oil Co. v. Omar Oil & Gas Co., 120 A.852, 847 (Del. Ch. 1923).
60 1991 WL 277613 (Dec. 30, 1991, Del. Ch.).
Banking Law
39
EFFECTS OF WINDING UP
Page
Where a garnishee order nisi has been served and, before it is made absolute, notice of an act of
bankruptcy or presentation of a petition is received, or if a receiving order has been made, the
garnishee order fails (See Bankruptcy Act, 1914, Section 40). Where a company is being wound
up by the Court, any attachment after the commencement of the winding-up is void (Companies
Act, 1956, Section 433).
Likewise, where an order nisi is outstanding on a companys account and a petition for winding
up is presented; the order will fail (Companies Act, 1948, Section 446 and 447). Where a
company is being wound up voluntarily and a judgment creditor attached the banking account
standing in the name of the liquidator, it was held that the mere fact that the companys account
stood in the name of the liquidator made no difference to the judgment creditors rights, and that
Section 433 of the Companies Act, 1956, only applied to a winding up by the court, by importing
the decision , mutatis mutandis in Gerard v. Worth of Paris Ltd.61
But this decision was overruled in the case of Lancaster Motor Co. (London) Ltd. v. Bredmith
Ltd.62
61 (1936) 2 All ER 905.
62 (1941) 2 All ER 11.
Banking Law
CONCLUSION
40Page
The CRB case is a classical example of lax oversight and complacency on part of all
stakeholders concerned. The following questions, according to Business Week (October 2002),
need to be answered by all boards to ensure corporate governance.
1. What kinds of ties should be banned between directors and the companies they oversee?
2. How many boards can directors serve on without being stretched too thin?
3. How should the audit committee be staffed and run?
4. How much additional consulting, if any, is acceptable for the outside accounting firm?
If these questions had been taken care of with the oversight of regulatory authorities, all the
small investors and banks would not have faced the kind of losses that they had to face.
BIBLIOGRAPHY
Banking Law
BOOKS REFERRED
41Page
1. Davies, Peter W.F (1997), Current Issues in Business Ethics, Routledge, London
2. Donaldson, Thomas in Mathias, T.A, (1994), Corporate Ethics, Allied Publishers Ltd.,
New Delhi
3. Lavelle Louis, (2002), The Best and Worst Boards, Business Week, McGrawhill
Companies, New York, October 7.
4. Mathias, T.A, (1994), Corporate Ethics Allied Publishers Ltd., New Delhi
5. Shekhar R.C. (1997), Ethical Choices in Business, Response Books, Division of Sage
Publications Ltd, New Delhi.
6. Stiles Peter in Davies, Peter W.F (1997), Current Issues in Business Ethics, Routledge,
London
7. Stoner, James A.F. and Freeman, Edward R. (1989), Management, Prentice-Hall if India
Private Limited, New Delhi
8. Subramaniam (1993a), The Mahabharata, Bharatiya Vidya Bhawan, Bombay
DATABASES REFERRED
1. Centre for Monitoring Indian Economy.s Prowess

2. Vans Electronic Library* 1997
Banking Law

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WINDING UP OF

SUBMITTED TOWARDS THE FULFILMENT OF THE

Submitted to: Submitted by:

1. Winding Up By High Court.

3. An Overview Of The Case: The Crb Scam.

4. The Inception Of The Crb Group.

5. The Groups Strategies For Growth.

6. The scam came into limelight when...

7. The investigations revealed...

8. Where did the money go...

10. Reserve bank of india v. Crb capital markets ltd.

(provn. Liqn.) P.ltd.

12. Effects Of Winding Up.

Whether Doctrinal or Non Doctrinal?

Whether Primary or Secondary?

Now coming on to whether my research is primary or secondary. Our research is a totally

However, in the past 10 years or so an increasing number of models aiming at explaining

WINDING UP BY HIGH COURT

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

a. if the banking company

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

8 Banking Regulation Act, 1949.

9 Banking Regulation Act, 1949.

b. if in the opinion of the Reserve Bank

- Summary proceeding for recovery of debts

10 Banking Regulation Act, 1949.

- Companies winding-up imposing penalty

- Payment of Companys cheque in winding-up

- Effect of Bankruptcy or winding up

13 Bank of Nova Scotia v. RPG Transmission Ltd., (2005) 2 BC 265 (Del-DB).

14 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (DB).

15 Hollicourt (Contractors) Ltd. v. Bank of Ireland, (2002) 2 BC 502 (FB).

- Banking Services and Consumer Protection Act, 1986

16 (1936) 2 All ER 905.

17 (1941) 2 All ER 11.

18 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (Pb).

- Summary proceeding for recovery of debts

- Companies winding-up imposing penalty

21 Bank of Nova Scotia v. RPG Transmission Ltd., (2005) 2 BC 265 (Del-DB).

22 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (DB).

- Banking Services and Consumer Protection Act, 1986

AN OVERVIEW OF THE CASE: THE

23 Hollicourt (Contractors) Ltd. v. Bank of Ireland, (2002) 2 BC 502 (FB).

24 Puranchand v. Pioneer Forests India Ltd., (2006) 3 CPJ 371 (Pb).

THE INCEPTION OF THE CRB GROUP

25 after whom the group was named.

27 B. Com (Hons), FCA, ACS, Ph. D, MIIA (US).

He then moved to New Delhi where he began to set up his empire.

THE GROUPS STRATEGIES FOR

CASH FLOW STATEMENT Rs. Crore

Sale of fixed assets 16.24 16.24

Source: Prowess, 1997

1. His own privately owned companies

32 He was hoping for benefits out of this on several fronts.

35 CRBs main banker.

36 but Bhansali claimed it worth Rs.30 crore.

THE SCAM CAME INTO LIMELIGHT

37 Non-Banking Financial Company.

38 Non Banking Financial Company.

THE INVESTIGATIONS REVEALED...

39 Reserve Bank of India.

WHERE DID THE MONEY GO...

44 Indian Express is a leading English daily.

45 Reserve Bank of India.