Section 40 of the Banking Regulation Act, 1949 - Stay of Proceedings
Section 40 protects depositors when a banking company is being wound up. It restricts the High Court from staying winding-up proceedings unless the Court is satisfied that an arrangement exists under which the bank can pay its depositors in full as their claims become due.
What Section 40 provides
Section 40 - Stay of proceedings.
Notwithstanding anything to the contrary contained in section 466 of the Companies Act, 1956 (1 of 1956), the High Court shall not make any order staying the proceedings in relation to the winding up of a banking company unless the High Court is satisfied that an arrangement has been made whereby the company can pay its depositors in full as their claims accrue.
Meaning and legal effect
The opening words "notwithstanding anything to the contrary" create an overriding rule for the limited subject covered by Section 40. Even where the general company law permits a stay of winding-up proceedings, a stay concerning a banking company cannot be granted merely on ordinary grounds. The special condition in Section 40 must also be satisfied.
The central condition is protection of depositors. Before staying the winding-up process, the High Court must be satisfied that a workable arrangement has been made under which the banking company can pay depositors in full when their claims fall due.
Key requirements under Section 40
- The provision applies to proceedings relating to the winding up of a banking company.
- The power to stay such proceedings is expressly restricted.
- The High Court must be satisfied about an arrangement for full payment of depositors.
- The arrangement must enable payment as depositors' claims accrue, not merely at an uncertain future date.
- The provision reflects the special public-interest and depositor-protection character of banking law.
Reference to the Companies Act, 1956
The text of Section 40 continues to refer to section 466 of the Companies Act, 1956. Section 466 dealt with the power to stay winding-up proceedings. The Companies Act, 1956 was repealed with effect from 30 January 2019 by the operation of section 465 of the Companies Act, 2013, subject to the savings and transitional provisions contained in law.
Legislative notes
The reference to section 466 of the Companies Act, 1956 was substituted for section 173 of the Indian Companies Act, 1913 by Act 95 of 1956, section 14 and the Schedule, with effect from 14 January 1957.
The expression "High Court" was substituted for "Court" by Act 52 of 1953, section 4, with effect from 30 December 1953.
Why the provision matters
Winding up of a banking company affects a large number of depositors and can involve public confidence in the banking system. Section 40 therefore places depositor repayment at the centre of any request to stop winding-up proceedings. A stay cannot be used in a manner that leaves depositors without a credible arrangement for full payment as their claims become payable.
Official legal sources
For the latest consolidated statutory material, readers should verify the text from the official India Code page for the Banking Regulation Act, 1949. The Department of Financial Services consolidated Banking Regulation Act PDF is also relevant. For the present company-law framework, see the official Companies Act, 2013.
Related provisions
Section 40 appears in Part III of the Banking Regulation Act, 1949, which deals with suspension of business and winding up of banking companies. It should be read with the surrounding provisions, including sections 37, 38, 38A, 39, 39A and 41.