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Banking Regulation Act, 1949 · Section guide

Section 40: Stay of proceedings

Reviewed by CA Nikhil Gupta · Last reviewed 18 September 2026

Section 40 restricts the High Court’s ability to stay winding-up proceedings of a banking company. Despite the contrary Companies Act provision referred to in the section, the High Court cannot stay the winding-up proceedings unless it is satisfied that an arrangement has been made under which the company can pay its depositors in full as their claims accrue.

Official statute linkedProvision-specific anatomyPractical case + evidence file
Official text: DFS consolidated Act

Statutory structure and clause/subsection decode

Override

Section 40 operates notwithstanding the contrary Companies Act provision referred to in the statutory text.

Restriction on the High Court

The High Court shall not make an order staying proceedings relating to the winding up of a banking company unless the statutory condition is met.

Depositor-payment condition

The court must be satisfied that an arrangement exists under which the company can pay depositors in full as their claims accrue.

Scope

The section is not a general rule for staying all suits or centralising all claims; those issues arise under other provisions in the winding-up framework.

Practical example

A banking company already in winding up asks the High Court to stay those winding-up proceedings. Evidence shows a proposed restructuring, but no arrangement demonstrating full payment of depositors as their claims accrue. Section 40 prevents the court from granting the stay on those facts.

Evidence / working-paper checklist

  • Section 40 evidence: High Court/Central Government/RBI order initiating the process.
  • Section 40 evidence: liquidator/scheme records and creditor/debtor lists.
  • Section 40 evidence: service/publication and statutory-timeline evidence.
  • Section 40 evidence: orders settling claims, calls, transfers, moratorium or amalgamation.

Retain the event date and source version with the file so the conclusion remains reproducible after later amendments.

Common mistakes to avoid

  • For Section 40, avoid applying ordinary Companies Act procedure without the banking-specific override.
  • For Section 40, avoid missing the special limitation or accelerated filing period.
  • For Section 40, avoid treating a private scheme as effective before the statutory sanction/order.

Current-law source control

Source control: Section 40 is anchored to the official DFS consolidated text; later changes require separate Gazette verification.

Dated matters: verify any later Gazette, RBI direction or binding judgment affecting Section 40 on the event date.

Section 40 Q&A

What does Section 40 restrict?

An order staying proceedings relating to the winding up of a banking company.

When may the High Court stay the winding-up proceedings?

Only when satisfied that an arrangement has been made whereby the company can pay depositors in full as their claims accrue.

Is Section 40 a general stay-of-suits provision?

No. It is specifically framed around staying winding-up proceedings.

What evidence is central to a Section 40 application?

Evidence of the arrangement and its ability to pay depositors in full as their claims accrue.

Disclaimer

This Finin2min page is an educational and professional reference. Banking regulation is fact-, entity- and date-sensitive. Verify the current Act, Gazette amendments and commencement notifications, applicable RBI Rules/directions and the transaction record before acting or filing.