Section 44B of the Banking Regulation Act, 1949: Restriction on Compromise or Arrangement
Section 44B places a special safeguard on compromises or arrangements involving a banking company. The central requirement is that the Reserve Bank of India must certify the proposed compromise, arrangement or modification in writing before it can be sanctioned under the statutory scheme.
Meaning and purpose of Section 44B
Section 44B of the Banking Regulation Act, 1949 deals with a compromise or arrangement between a banking company and its creditors, a class of creditors, its members or a class of members. It creates an additional banking-law safeguard because a banking company deals substantially with public deposits and operates under the regulatory supervision of the Reserve Bank of India.
In practical terms, a scheme cannot be sanctioned merely because the company-law requirements for a compromise or arrangement are otherwise satisfied. Section 44B requires an RBI certificate stating, in substance, that the proposal is workable and is not detrimental to the interests of the depositors of the banking company.
Text of Section 44B
44B. Restriction on compromise or arrangement between banking company and creditors.
(1) Notwithstanding anything contained in any law for the time being in force, no High Court shall sanction a compromise or arrangement between a banking company and its creditors or any class of them or between such company and its members or any class of them, or sanction any modification in any such compromise or arrangement unless the compromise or arrangement or modification, as the case may be, is certified by the Reserve Bank in writing as not being incapable of being worked and as not being detrimental to the interests of the depositors of such banking company.
(2) Where an application under section 391 of the Companies Act, 1956 is made in respect of a banking company, the High Court may direct the Reserve Bank to make an inquiry in relation to the affairs of the banking company and the conduct of its directors and, when such a direction is given, the Reserve Bank shall make such inquiry and submit its report to the High Court.
Section 44B and the Companies Act, 2013
Chapter XV of the Companies Act, 2013 governs compromises, arrangements and amalgamations. Section 230 is the principal provision dealing with a compromise or arrangement proposed between a company and its creditors or members. Applications under this modern framework are dealt with by the National Company Law Tribunal.
For a banking company, however, the special protection in Section 44B of the Banking Regulation Act remains important. The RBI certification requirement is directed to the workability of the proposal and the protection of depositors. This banking-specific control operates in addition to the general corporate-law procedure applicable to the scheme.
Key legal requirements under Section 44B
- Banking company involved: The provision applies when the proposed compromise or arrangement concerns a banking company.
- Creditors or members: The scheme may involve creditors, a class of creditors, members or a class of members.
- RBI certificate in writing: The proposed scheme or its modification must receive the written certification contemplated by Section 44B(1).
- Workability: The certification addresses whether the scheme is capable of being worked.
- Depositor protection: The proposal must not be detrimental to the interests of depositors.
- RBI inquiry: Sub-section (2) contemplates an inquiry by RBI into the affairs of the banking company and the conduct of its directors when directed by the adjudicating court under the text of the provision.
Why RBI certification is significant
A compromise or arrangement involving an ordinary company primarily affects corporate stakeholders. A banking company, by contrast, holds public deposits and forms part of the regulated financial system. Section 44B therefore gives the banking regulator a statutory role before a scheme is sanctioned. The provision focuses expressly on whether the proposal can be worked and whether depositors are protected.
Legislative notes
The earlier page correctly preserved historical amendment notes. They remain useful for understanding how the present wording evolved:
- Section 44B was renumbered and amended through banking-law amendments over time.
- The expression "Court" was replaced by "High Court" by the Banking Companies (Amendment) Act, 1953.
- The wording relating to modification of a compromise or arrangement was amended by the Banking Laws (Miscellaneous Provisions) Act, 1963.
- Sub-section (2) historically referred to section 391 of the Companies Act, 1956 after substitution of the earlier Companies Act reference.
Official resources
Disclaimer: This article is for general legal information. For a live compromise, arrangement, reconstruction or amalgamation involving a banking company, the current statutory text, applicable rules, RBI requirements and orders of the competent forum should be checked before action is taken.