Prakash Narain, J.:— By this petition under Article 226 of the Constitution of India the Punjab National Bank Ltd., New Delhi and three of its shareholders pray for the issue of a writ, order or direction in the nature of a mandamus to the Union of India, the Reserve Bank of India and the Custodian, Punjab National Bank, New Delhi, to discharge their obligations under Section 5 (1) of Act 5 of 1970 and pay the interim dividend declared by and in the resolution dated July 16, 1969 of the Board of Directors of the Punjab National Bank Ltd.

On July 16, 1969 the Board of Directors of the Punjab National Bank Ltd. passed a resolution declaring an interim dividend for the half year ending on June 30, 1969 at the rate of Rs. 1.20 gross per share. This resolution was passed by virtue of the authority vested in the Board of Directors under Article 84 of the Articles of Association of the said Bank. The Members' Share Register was directed to be closed for recording any transfer of shares from August 12 to August 23, 1969 and it was decided that the interim dividend declared by the Board of Directors will be paid to those whose names were entered in the Share Register of the said bank as on August 23, 1969. This fact was notified by sending information to the Bombay, Calcutta, Madras and Delhi Stock Exchanges wherein the shares of the Punjab National Bank Ltd. were being quoted. A notice was also published in the Press to this effect in the newspapers of July 17 and July 18, 1969. Action in terms of Section 154 of the Companies Act, 1956 closing the Register of Members could not, however, be taken, possibly due to subsequent developments.

On July 19, 1969 the President of India promulgated an Ordinance taking over the undertaking of 14 Banks including that of petitioner No. 1. This Ordinance came into effect immediately. On August 9, 1969 the parliament enacted the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969. Under the provisions of the said Ordinance and the said act 22 of 1969 the undertaking of petitioner No. 1 was transferred to the corresponding new bank (Punjab National Bank) with effect from July 19, 1969. The shareholders of Petitioner No. 1 moved respondents for payment of the interim dividend declared by the Board of Directors on July 16, 1969. It was not paid. It is averred that the Central Government and the Reserve Bank advised the third respondent not to pay the interim dividend. Accordingly, on October 17, 1969 an extraordinary general meeting of the members of petitioner No. 1 was convened in which a resolution was passed asking for payment of the aforesaid interim dividend. This was forwarded to the third respondent. By his letter of February 6, 1970 the third respondent wrote that the interim dividend was not payable.

In the meanwhile, act 22 of 1969 was challenged as violative of the provisions of the Constitution in the Supreme Court of India. By its judgment dated February 10, 1970 the Supreme Court held that act 22 of 1969 was ultra vires various provisions of the Constitution.

On February 14, 1970 the President of India promulgated another ordinance known as the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1970, hereinafter referred to as the 1970 Ordinance. The 1970 Ordinance was given retrospective effect and the entire undertaking of petitioner No. 1 was deemed to have been taken over with effect from July 19, 1969. The Parliament enacted the Banking Companies (Acquisition and Transfer of Undertakings) Act 5 of 1970 which received the President's assent on March 31, 1970. This Act replaced the 1970 Ordinance and came into force from July 19, 1969.

The case of the petitioners is that (a) the interim dividend declared by the Board of Directors on July 16, 1969 was an obligation of the Punjab National Bank Ltd. which the shareholders could enforce at law; and (b) with the transfer of the undertaking this obligation was also transferred and must be deemed to have been taken over and vested in the corresponding new bank, the Punjab National Bank, by virtue of Act No. 5 of 1970. According to the petitioner they were entitled to recover from the Punjab National Bank Ltd. the interim dividend declared by the Board of Directors on July 16, 1969 and inasmuch as the said interim dividend was a liability of the Punjab National Bank Ltd. in relation to its undertaking which was taken over the amount is payable to the shareholders by the corresponding new bank. The only contentions raised by the respondents are (a) that since the interim dividend was not a debt due, it cannot be regarded as a liability taken over or transferred under act 5 of 1970 and (b) alternatively as compensation is payable for the taking over of the undertaking of the first petitioner its shareholders have no right to claim anything from the respondents. It is further contended that no relief can be granted against the Reserve Bank of India, respondent No. 2.

Before I proceed to deal with the contentions of the parties it is requisite that the relevant provisions of act 5 of 1970 be read.

Section 3 (1) lays down that on the commencement of the Act there shall be constituted such corresponding new banks as are specified in the first schedule. The corresponding new bank vis-a-vis the first petitioner is the Punjab National Bank. Sub-section (3) of Section 3 lays down that the entire capital of the corresponding new bank shall vest in and allotted to the Central Government.

Section 4 lays down that on the commencement of the Act the undertaking of every existing bank shall be transferred to and shall vest in the corresponding new bank. Thus, the undertaking of the first petitioner stood transferred to and vested in the Punjab National Bank with effect from July 19, 1969 as Act 5 of 1970 by virtue of the provisions of sub-section (2) of Section 1 was deemed to have come into force on that date.

Section 5 lays down the general effect of vesting of the undertaking of the existing bank in the new bank. Sub-section (1) of Section 5 reads as under: —

“ (1) The undertaking of each existing bank shall be deemed to include all assets, rights, powers, authorities and privileges and all property, movable and immovable, cash balances, reserve, funds, investments and all other rights and interests in, or arising out of, such property as were immediately before the commencement of this Act in the ownership, possession, power or control of the existing bank in relation to the undertaking, whether within or without India, and all books of accounts, registers, records and all other documents of whatever nature relating thereto and shall also be deemed to include all borrowings, liabilities and obligations of whatever kind then subsisting of the existing bank in relation to the undertaking.”

Section 6 of the Act provides for payment of compensation. Sub-section (1) lays down: —

“ (1) Every existing bank shall be given by the Central Government such compensation in respect of the transfer, under Section 4, to the corresponding new bank of the undertaking of the existing bank as is specified against each such bank in the Second Schedule.”

Sub-section (2) of Section 6 deals with the manner in which the compensation set out in the Second Schedule is to be paid. We are not concerned with the other sub-sections.

The Second Schedule, referred to in sub-section (1) of Section 6 specifies the amount of compensation payable to the first petitioner at Rs. 1020 lakhs.

The first point to be considered is as to what is meant by the term “Undertaking” because that is what was taken over by act 5 of 1970. According to the petitioners, “Undertaking” would include all the business activity of a bank and the banking company. It is contended that the declaration of dividend etc. is a normal business activity of any company registered under the Companies Act or any banking company. In any case dividend is a business result of the normal activity of a banking company. In Rustom Cavasjee Cooper v. Union Of India, A.I.R 1970 Supreme Court 564, (1) the Supreme Court was concerned with challenge to act 22 of 1969 and the Ordinance which was replaced by that Act. It had been contended by the petitioners in that case that the taking over of the undertaking was an infringement of the fundamental rights of the shareholders of the banking companies guaranteed by Articles 14, 19, 31 and 32. It was in this context that the question arose as to what was the meaning of the term “Undertaking”. The petitioner's counsel had contended that the undertaking of banking companies could not be the subject of acquisition and acquisition of all properties in the undertaking must satisfy public purpose as contemplated in Article 31 (2) of the Constitution. This contention was amplified to mean that undertaking was not property capable of being acquired and some assets like cash money could not be the subject matter of acquisition. The Attorney General on the other hand contended that undertaking is property within the meaning of Article 31 (2) and undertaking in its normal meaning would first be a going concern besides the fact that it is a complete unit as distinct from the ingredients composing it. It was urged that if this was correct, it could not be said that acquisition of the undertaking was an infraction of any constitutional provision. Their Lordships construed the term “Undertaking”. It was noticed that in Halsbury's Laws of England, Third Edition, Volume VI, paragraph 75 at page 43 the term “Undertaking” is explained as one meaning not the various ingredients which go to make up an undertaking but the completed work from which the earnings arise. As an illustration reference was made in Halsbury to mortgage of the undertaking of a company. After referring to Gardner v. London Chatham and Dover Rly. Co., (1867) 2 Chancery Appeals 201 (2) and various other cases it was observed as under: —

“By the word undertaking is meant the entire organisation. These provisions indicate that the company whether it has a plant or whether it has an organisation is considered as one whole unit and the entire business of the going concern is embraced within the word ‘Undertaking’ . . . . Under Section 5 of the Act of 1969 (similar to Section 5 of the Act of 1970) the undertaking of each existing bank shall be deemed to include all assets, rights, powers, authorities and privileges and all property, movable and immovable, cash balances, reserve funds, investments and all other rights and interests arising out of such property as were immediately before the commencement of this Act in the ownership, possession, power or control of the existing bank in relation to the undertaking. This Court accepted the meaning of property given by Rich, J. in the Minister for State for the Army v. Dalziel, 68 CIR 261 (3) to be a bundle of rights which the owner has over or in respect of a thing tangible or intangible or the word ‘property’ may mean the thing itself over or in respect of which the owner may exercise those rights. In the case of Commr. Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar or Sri Shirur Mutt, 1954 SCR 1005 — (A.I.R 1954 S.C 282 (4) this Court again gave wide meaning to the word ‘property’ and Mukherjea, J. said that there is no reason why the word ‘property’ as used in Article 19 (1) (f) of the Constitution should not be given a liberal and wide connotation and would not be extended to those well-recognised types of interest which have the insignia or characteristics of proprietary right. In the case of J.K Trust, Bombay v. Commr. of Income-tax Excess Profits Tax, Bombay, 1958 SCR 65 — (A.I.R 1957 S.C 846) (5) this Court held the managing agency business to be a property. The undertaking of a bank will, therefore, be the entire integrated organisation consisting of all property, movable or immovable and the totality of undertaking is one concept which is not divisible into components or ingredients. That is why in relation to a company the word ‘Undertaking’ is used in various statutes in order to reach every corner of property, right, title and interest therein . . . . . The undertaking is an amalgam of all ingredients of property and is not capable of being dismembered. That would destroy the essence and innate character of the undertaking. In reality the undertaking is a complete and complex weft and the various types of business and assets are threds which cannot be taken apart from the weft. . . . .”

In my view, therefore, dividend declared would be a business result of the activities of the undertaking and part and parcel of the whole that has been taken over.

As noticed earlier, in this case interim dividend was declared under due authority by the Board of Directors of the first petitioner. The question that arises is whether it became a debt due or whether it was merely a pious obligation not enforceable at law. It has been contended that the resolution of the Board of Directors is nothing more than in the nature of declaration of intention to pay. The resolution of the Board of Directors did not create an enforceable obligation.

In J. Dalmia v. Commissioner of Income-tax, Delhi, (1964) 53 I.T.R 84, (6) the Supreme Court held “that the rule that when a company declared a dividend on its shares a debt immediately became payable to each shareholder in respect of his dividend, applied only in the case of dividends declared by the company in general meeting. A mere resolution of the directors resolving to pay a certain amount as interim dividend did not create a debt enforceable against the company for it was always open to the directors themselves to rescind the resolution before payment of the dividend. The fact that the articles of the company authorised the directors to declare an interim dividend and not to pay an interim dividend as provided in regulation 95 of Table A of the Indian Companies Act, 1913, made no difference in true character of the right arising in favour of the members of the company on the exercise by the board of directors of the power.” The reasoning for the above rule enunciated by the Supreme Court is to be found in the speech of Shah, J. on page 88 of the report. After quoting from Halsbury's Law of England, Third Edition, Volume VI at page 402, it was observed: —

“Therefore a declaration by a company in general meeting gives rise to an enforceable obligation, but a resolution to pay interim dividend or even resolving to declare interim dividend pursuant to the authority conferred upon them by the articles of association gives rise to no enforceable obligation against the company, because the resolution is always capable of being rescinded . . . . ”

It has been urged that if the resolution of the Board of Directors is not rescinded or became incapable of being rescinded or was ratified in any manner subsequently the rule regarding interim dividend declared by Board of Directors laid down in J. Dalmia's case (6) would not be attracted and the interim dividend would be a legal obligation of the company. The contention is that once the Directors pass the resolution it is binding till rescinded and can be enforced against the company by a shareholder. It is not in dispute that the Articles of Association of the first petitioner were in consonance with Table A of Schedule I to the Companies Act. Looking at Table A we find that clause 85 speaks of dividend to be declared by a general meeting. Clause 86 gives the power to the Board of Directors to pay interim dividend to shareholders from time to time as it may appear to the Board to be justified by the profits of the company. Section 207 of the Companies Act provides for a penalty for failure to distribute dividends declared by a company but not paid. It is urged that the ratio of section 207 should apply even in the case of interim dividend declared by Board of Directors by a resolution which has not been rescinded. Section 291 of the Companies Act defines the powers of the Board of Directors. According to this provision the Board of Directors of a company are entitled to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do provided that the Board shall not exercise any power or do any act or think which is required by law or the memorandum or articles of the company or otherwise to be exercised or done by the company in general meeting. It is urged that inasmuch as the declaration of interim dividend was within the powers of the Board of Directors and till rescinded payment of the interim dividend would be an act of the company the action of the Board of Directors could be regarded as the act of the company. Inasmuch as the resolution was passed by the Board of Directors on July 16, 1969 to pay interim dividend and this resolution was never rescinded the resolution created an enforceable obligation on the company to pay the interim dividend so declared. Thus, it was a legal obligation which could be enforced against the company.

As against the above contention of the petitioner, as noticed earlier, the stand of the respondents is that the resolution is in the nature of a declaration of intention only and did not create an obligation to pay. Reliance was placed on the observations in J. Dalmia's (6) case which has already been noticed.

In Lagunas Nitrate Company Limited v. Schroeder and Co. and Schemidt, 85 Law Times Report (7) a question arose whether declaration of interim dividend created an indefeasible right in shareholders to payment. The Board of Directors of the company in this case had declared interim dividend in accordance with the provisions of the articles of association of the company. Some time later but before payment the Directors resolved that having regard to certain litigation then pending, the payment of the proposed interim dividend should be postponed. The amount which would have been paid by way of interim dividend was, however, set aside out of the money of the company in the hands of its bankers and kept in a special account. The litigation came to an end and it then transpired that as the matters then stood it would not be proper to pay any interim dividend. The shareholders and the bankers claimed otherwise. Consequently the company claimed a declaration that neither it nor its bankers were bound to apply the sum set apart or any part thereof in payment of the interim dividend. Applying the ratio that the Directors were entitled to re-consider the matter and rescind their earlier resolution and also noticing that the shareholders had acquiesced in the action of the Directors the declaration sought for was granted in favour of the company. To my mind the ratio of this case is not attracted here as the resolution in the present case has not been rescinded and, indeed, in an extraordinary general meeting of the company held on October 17, 1969, re-affirmed it.

The main question, therefore, to be decided is whether an un-rescinded resolution declaring interim dividend is a legal obligation of the company and formed part and parcel of the undertaking that was taken over by the Act of 1970.

The judicial interpretation of the expression “Undertaking” by the Supreme Court has already been noticed earlier. In my view the undertaking would include not only the running business of a concern, its assets and liabilities but all that which the company was to do or was obliged to do in the normal course of its business activity. The payment of dividend, if declared, is a normal activity of a company and so, an obligation to pay dividend would be an obligation which in turn would form part and parcel of the undertaking. I therefore, hold that the interim dividend declared by the Board of Directors of the first petitioner was one of the liabilities included in the expression “Undertaking” and taken over by the Act of 1970.

It has already been noticed that the general effect of vesting by virtue of the provisions of Section 5 of the Act are that all assets, and all property, movable and immovable, case balances, reserve fund etc. immediately before the commencement of the Act in the ownership, possession, power or control of the existing bank shall stand transferred to and vest in the corresponding new bank. It follows, therefore, that profits of the existing bank would also stand transferred to the corresponding new bank. Dividends can be declared and paid only out of profits of a Company. This is a cardinal principle of Company Law. No dividend can be paid otherwise than out of profits. The definition of divisible profits, i.e, which legally may be distributed to the shareholders, is one of the most difficult questions but the Company Law leaves it to the Directors or the Shareholders in general meeting to determine whether there are any divisible profits and, if so, what should be distributed by way of dividend. Quoting from Palmer's Company Law, 21st Edition:

“Subject to any restrictions which may be imposed by its memorandum, every company has implied power to apply its profits to the distribution of dividend amongst its members . . . The inherent power of dividing its profits amongst its members, which a company normally possesses, reflects the fact that the company is conceived as a form of organisation of private enterprise and as such is motivated by the profit motive.”

Thus, if on the basic of profits earned for the half year the Board of Directors under authority vesting in it decided that a portion of the profits earned by them be distributed and distributable profits stood transferred to the corresponding new bank, it should be said that it is the legal obligation of the corresponding new bank to distribute the profits earmarked for this purpose.

Apart from the fact that mere declaration of interim dividend by itself may create no right in the shareholders which is enforceable against a Company, as distinguished from the liability of the Company, there are other difficulties in the way of the petitioners. The first petitioner, viz., the Punjab National Bank Ltd., cannot claim payment of interim dividend as that is payable to the shareholders and not the banking company. The other petitioners, who are the shareholders, cannot claim the interim dividend for other reasons. Although it was not urged on behalf of the respondents in that way, I cannot lose sight of the provisions of sub-section (7) of Section 10 of the Act of 1970. This reads:

“ (7) After making provision for bad and doubtful debts, depreciation in assets, contributions to staff and superannuation funds and all other matters for which provision is necessary under any law, or which are usually provided for by banking companies, a corresponding new bank shall transfer the balance of profits to the Central Government.”

Despite the resolution dated July 16, 1969, no distributable profits can be said to be available as by law all the profits, if any, for the year 1969 on the close of the year became payable to the Central Government. The effect of Section 10 (7) would be a recision of the resolution dated July 16, 1969 for interim dividend, if payable, could be paid out of profits alone. Those profits not being available for division amongst the shareholders, nothing can be paid as interim dividend. The relief the petitioners seek is that the respondents discharge their statutory obligations. The third respondent, by virtue of Section 10 (7) is obliged to pay to the Central Government and none else, the profits, if any, of the year 1969. He cannot, therefore, be directed to pay anything to the petitioners in violation of the statutory provision.

Coming now to the question regarding payment of compensation and the contention that since compensation is payable no dividend is to be paid I find there is no force in the respondents' contention. Compensation under the Act is payable to the banking company which is an entity distinct from the shareholders who alone could claim dividend. Apart from this on the normal rule of interpretation compensation is assessed by taking into account the assets and the liabilities; indeed by subtracting the latter from the former for that is to be paid by way of compensation. Compensation is, as the term is normally understood, payment for what is lost or taken away. What would be lost or taken away is the net value and not the gross value. It is, however, unnecessary to dilate on this aspect for in the present case the Act of 1970 fixes the amount of compensation and it is not known whether the compensation is for the gross value of the undertaking or the net value of the undertaking or some other value has been fixed. Therefore, the contention that compensation is sufficient to compensate the shareholders or loss of dividend does not arise.

It was urged on behalf of the respondents that the shareholders have no locus standi to enforce the provisions of Section 5 (1) of the Act of 1970. The argument does not appeal to me. If an enforceable right could be made out the shareholders who could claim payment of dividend could enforce their rights and the obligation taken over under Section 5 (1) of the Act of 1970. However, it is not necessary to dilate further on this point.

In the result, this petition is dismissed with costs. Counsel's fee Rs. 350.

Petition dismissed.