Bank, Kurundwad Ltd. & Ors Vs. The Union
of India & Ors  Insc 541 (28 August 2006)
Pasayat & C.K. Thakker
out of SLP (C) No. 7188 of 2006) ARIJIT PASAYAT, J.
present appeal is directed against the judgment and order dated 5.4.2006 passed
by a Division Bench of the Bombay High Court in Writ Petition No.337/2006
questioning Notification dated 7th January, 2006 issued by the Government of
India, Ministry of Finance imposing a moratorium in respect of the appellant-Ganesh
Bank of Kurundwad Ltd. (hereinafter referred to as "Bank") for a
period of three months from the date of order upto and inclusive of 6th April,
2006. Amongst others, the said Bank was directed not to grant any loan or
advances or incur liability without the permission in writing of the Reserve
Bank of India (in short the 'RBI''). Further, withdrawal of sums not exceeding
5,000/- by a Savings Bank or Current Account holder was permitted with a
further relaxation of amount not exceeding Rs.10,000/- or the actual balance
whichever is less in the event of certain difficulties such as medical
treatment, higher education and obligatory expenses like marriage etc.
Challenge was also made to the appointment of two Directors on the Board of
Directors of the Bank.
Challenge was made to the Notification dated 9.1.2006 proposing a scheme of
amalgamation of the Bank with Federal Bank, another private sector commercial
bank and to the order dated 24.1.2006 sanctioning amalgamation of Bank with
to be noted that along with the said writ petition filed by the Bank, another
writ petition (WP(C) No. 160/2006) was filed by one Mr. Sunil Mahadev Chavan.
background facts in which the writ petitions were filed are essentially as
Bank was founded sometimes in the year 1920 and is having a banking license
given by the RBI. It has some 32 branches situated principally in districts of Kolhapur and Sangli of Maharashtra and the
adjoining Belgaum District of Karnataka. It has around 1,75,000 depositors in
the rural areas of these three districts.
carrying on its activities smoothly, and it incurred losses only once and that
was in the financial year 2004-05.
was also for the reasons which were beyond its control, viz
the value of the
government securities, wherein it had made deposits, went down, and
norms set up by the RBI were made more stringent by it. It was on this
background that it was shocked to receive the order of moratorium in the morning
of 8th January, 2006. It led to unnecessary long queue
at its Dadar branch, Mumbai, though there was no run on the bank any time in
the past or even on that day as such. Thereafter, the issuance of the
moratorium and the decision of the RBI to take further steps was duly
advertised. The RBI appointed two directors of its own on the Board of
Directors of the appellant-Bank on 7th January, 2006. The RBI then notified the proposed
scheme of amalgamating the appellant-Bank with the Federal Bank on 9th January, 2006. The appellant-Bank objected to it
by filing its objections on 23rd January, 2006, yet a decision was taken by the RBI and the Central Government on 24th January, 2006 sanctioning amalgamation of the
appellant-Bank with the Federal Bank.
order was passed by the High Court in W.P.337/2006 by which operation of the
order dated 24.6.2006 was stayed and status quo was directed to be maintained.
The order was challenged by the RBI and Federal Bank before this Court.
Order dated 30.1.2006 this Court directed that the petitions were to be heard
and decided early by the High Court. However, the interim order was left
the High Court the principal submissions of the writ petitioners were two-fold,
namely that the order dated 7th January, 2006 imposing moratorium and then the
order dated 7th January, 2006 appointing two Directors are both mala fide to
suit the convenience of Federal Bank, ultra vires the power of the RBI and the
Central Government and, therefore, bad in law, illegal and void. Similarly, the
other submission of the writ petitioners was that the subsequent framing of
scheme of amalgamation on 9th January, 2006
and the decision to sanction the amalgamation taken on 24th January, 2006 are motivated and pre-planned
decisions for the benefit of the Federal Bank, mala fide and ultra vires the
powers of the Central Government and the RBI. It was further submitted that
both these decisions are not justified on facts and have been arrived at
without taking into consideration the relevant materials. As far as the first
decision imposing the moratorium is concerned, it was submitted that there were
no good reasons to impose the same and, as far as the decision to amalgamate is
concerned, it was submitted that the said decision was arrived at without
considering the proposals of four other banks which were better placed and had
made better offers.
against these submissions of the writ petitioners, the stand of the RBI and the
Central Government was that the Bank was in serious financial difficulties and
therefore, the moratorium had to be imposed. The moratorium was fully justified
on the facts of the case. The decision to amalgamate the appellant Bank with
the Federal Bank was arrived at in full compliance with the statutory
requirements and after considering relevant materials on record as well as the
suggestions and objections from the appellant-Bank and all concerned, and after
examining the proposals from the four other banks. It was, therefore, submitted
that there is no reason to interfere with the decisions arrived at by the RBI
and the Central Government which essentially were for benefit of the
depositors. It was submitted that the interest of the employees was taken care
of and the interest of the shareholders obviously came last.
to the High Court the following two questions were to be adjudicated:
the decision dated 7th
January, 2006 of the
Central Government imposing moratorium and to appoint two directors was mala
fide, ultra vires the powers of the Central Government and the RBI, bad in law
and void and unjustified on facts?
notification dated 9th
containing the proposed scheme of amalgamation and the decision to sanction the
amalgamation dated 24th
January, 2006 were mala
fide, ultra vires the powers of the Central Government and the RBI and
unjustified on facts?"
note of the factual background the High Court held that the inference drawn by
RBI was a positive inference and cannot be termed to be perverse. The High
Court felt that it is the discretion of the decision maker where two views are
possible and if the regulatory body arrived at a conclusion on the basis of
facts and figures before it and points out that it has been warning the Bank
for last over three years it will not be proper for the High Court to
substitute its judgment for that of the RBI. Therefore, it was held that the
decision of the RBI to impose the moratorium was neither unjustified nor
against the provisions of Section 45(1) of the Banking Regulation Act, 1949 (in
short the 'Act'). It was noted that the RBI is an expert body to regulate the
banking activities and its judgment based on the factual scenario cannot be
substituted by the High Court, may be because another view of the matter was
possible. The High Court held that the allegation of mala fides was not
substantiated. It was also of the view that while dealing with the question of mala
fides, the following questions were also to be dealt with:
one is non-consideration of any scheme for reconstruction before going for
The second is
with respect to proposing amalgamation with Federal Bank on 9th January, 2006 itself.
The third facet
is not considering the proposal of other banks.
The fourth is in
respect to an adequate opportunity under Section 45(6) and (7) of the
Act." After considering the rival submissions, the High Court held that
the allegations were mala fides and were not established. Accordingly, the writ
petitions were dismissed.
stands taken before the High Court were re-iterated by learned counsel
appearing for the appellant and the respondents.
counsel for the appellants submitted that the undue and unseemly haste with
which the order of moratorium dated 7.1.2006 was passed is a clear indication
of mala fides. Moreover, full and correct facts were not placed by the RBI
before the Central Government, in particular, facts regarding bank balances
with the RBI and other banks and cash at hand amounting to Rs.36.62 crores were
not placed before the Central Government. Actual figure of those liquid assets
were Rs.119 crores as against total deposits of Rs.217.43 crores which is 55%
against required 25% as per RBI norms. This was indicative of the bank's strong
liquidity position. Total assets of the bank as on 31.3.2005 were Rs.235.44 crores
as against total liabilities of Rs.220.45 crores. Therefore, the assets were
exceeding the liabilities by Rs.14.99 crores. Even as on 31.12.2005, the assets
were exceeding the liabilities by Rs.17.70 crores. The net loss in the year
2004-05 on which great stress was laid by the RBI and the Central Government
was on account of notional/book entry loss with respect to additional provision
for Non Performing Assets (in short the 'NPAs') and depreciation in the value
of Government securities. In respect of Urban Cooperative Banks, the RBI has
relaxed provisional norms up to 5 years in respect of depreciation in the value
of Government securities. However, the same was denied to the Bank. Majority
advances of the banks were given to the priority sector namely Agricultural
advances to which Securitisation Act is not applicable. Therefore, relaxation
was necessary to be given. The RBI had granted permission to the Bank to open
three new Branches after being satisfied that the Bank was in a sound financial
position. Several awards were given to the Bank for exercising banking
services. There was no complaint from any depositor, customer or shareholder
and the Bank has not defaulted in payment of taxes or other government dues.
objections were called for by the RBI regarding amalgamation within a span of
15 days in January, 2006, out of the total objections received by RBI, 97.49%
of the customers/depositors objected to moratorium and/or amalgamation of the
Bank and have opted for independent entity of the Bank.
factual scenario indicates that the proposal for amalgamation with the Federal
Bank was circulated and in a pre-determined manner the proposal was ultimately
approved on 24.1.2006. The draft scheme of amalgamation was sent to the Central
Government to be operative w.e.f. 27.1.2006.
the appellant-Bank approached the High Court on 24.1.2006 and the copy of the
writ petition was served on the RBI and the Central Government, the
Notification of amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself so
that it could be argued before the High Court that the appellant Bank was no
longer in existence on 25.1.2006. The exercise of power under Section 45 of the
Act was done solely for the purpose of favoring the Federal Bank. Though
Section 36(AB) of the Act empowers the RBI to appoint Additional Directors
there is no provision which empowers RBI to direct that no decision of the
Board of Directors would be valid unless it is approved by the Directors
appointed by the RBI.
entire exercise was pre-conceived under the garb of exercise of statutory
authority. There was a systematic plan to amalgamate the appellant-Bank with
the Federal Bank. The entire proceedings are thus vitiated by malice in law.
The rejection of the proposal of Saraswat Bank is vitiated on account of
misunderstanding of Section 56(zb) of the Act and on account of a failure to
consider the interest of shareholders whose interest would continue to be of
account of heavy floods there was temporary disruption of banking activities
and this aspect has not been considered.
fact that Federal Banks' Board Meeting was preponed from 11.1.2006 to 8.1.2006
is a pointer to the fact that they were very much in know of things to gain
data given by the RBI relating to some other amalgamation i.e. in cases of
Global Trust Bank and Nedgundi Bank have no relevance as in those cases there
were large scale complaints of fraud.
response, learned counsel for the respondent No.4 i.e.
Bank submitted as follows:
procedure, process and yardsticks envisaged under Section 45 of the Act for the
amalgamation of a financially unviable bank with a stronger bank, cannot be the
same as are applicable to a tender process. It is submitted that when acting
under Section 45 of the Act, the primary consideration must be of public
interest. Under the said provision, the RBI has the statutory duty and
responsibility to act swiftly and decisively to protect interests of depositors
and public confidence in the banking system. In contrast, when awarding a
tender, it is primarily commercial considerations that must be the selection
process. It is, therefore, submitted that it is in public interest not to interfere
on commercial consideration with a decision made under Section 45 so long as it
safeguards depositors' interests and public confidence in the banking system in
an emergent situation.
respondent No.4-Federal Bank is a financially strong bank with high net worth,
large capital funds and huge amount of deposits with more than adequate capital
to Risk Weighted Assets Ratio (in short the 'CRAR'). Its net worth is about
Rs.897 crores and its capital is about Rs.85 crores It has deposits to the tune
of Rs.16,448 crores and its CRAR at 11.34%, exceeds the Reserve Bank of India
requirement of 9%.
a very low percentage of NPA with its Gross NPAs being 5.17% and Net NPA being
1.41%. As of 31st
December, 2005 Federal
Bank has recorded a profit of Rs.174.48 crores. The contrast on each of these
parameters with the appellant-Bank is striking. On each parameter, the
performance of the appellant-Bank is abysmal in comparison to Federal Bank.
also pertinent to note that Section 45 of the Act does not contemplate or
require the consent of either the transferor or the transferee bank, although
both are given an opportunity to lodge their objections/suggestions to the
draft scheme, before a final decision is taken.
submitted that Federal Bank was not privy to any information from RBI regarding
the status of the appellant- Bank or any proposal to impose a moratorium at any
time prior to 7.1.2006 when for the first time the order of moratorium and the
RBI's press release was placed on RBI's website.
also submitted that allegations of complicity based on the advancement of the
date of Federal Bank's Board Meeting from 11.1.2006 to 8.1.2006 are completely
unfounded. It was submitted that Federal Bank had indeed vide its Notice dated
29.12.2005 originally scheduled the said Board Meeting for 11.1.2006 at Kochi,
but this date was found to be inconvenient to several directors. Instead,
8.1.2006 was found to be a more convenient date for the meeting, since firstly
many of the directors were congregating at Kochi for the wedding of the son of one of Directors on that date, and
secondly, one other director, an NRI was scheduled to attend a meeting at the
PMO on 7.1.2006. The said director would also have found it convenient to
attend the Board Meeting, if it were to be held on 8.1.2006. In view thereof,
for bona fide reasons and in good faith, the said Board meeting was rescheduled
for 8.1.2006 vide notice dated 4.1.2006.
aspects which have been noted by the High Court to dismiss the appellant's writ
petition need to be noted to test how for the conclusions are correct.
first is whether there were "good reasons" for the RBI to apply to
the Central Government for the moratorium which led to the impugned order dated
24th January, 2006, the concept of "good
reasons" contemplated under Section and as to how the RBI justifies its
decision on the basis of the yardstick applied by it. As far as the appellant
bank is concerned, its case is that it is a small commercial bank and the only
year in which it had made losses was for the financial year 2004-05. That was
because of the value of the Government securities going down and the
provisioning norms being made more stringent by the RBI. According to the RBI's
application to the Central Government, the net worth of the petitioner bank had
become negative and so also CRAR had become negative and was at 5.83.
against this stand of the RBI, it was pointed out on behalf of the
appellant-Bank that Annexure-I to RBI's application under Section 45(1) dated 4th January, 2006 contained the key financial
positions of the Bank. Clause 8 thereof dealt with the NPAs. It was pointed
that the net NPAs had gone down from 10.59% to 8.32%. It was also pointed out
that the Bank had done good resource mobilization in the meantime and its paid
up capital had gone up from Rs.1.52 crore to Rs.1.82 crore.
5 of the letter, the RBI wrote to the Additional Secretary, Ministry of Finance
that infusing fresh capital did not appear to be feasible. There was reluctance
on the part of the shareholders and directors to merge with the stronger Bank.
It was therefore imperative to make immediate arrangement to protect the
interest of the depositors to merge with another bank. It is for this purpose
that the moratorium was proposed under Section 45(1) In the counter affidavit
filed before the High Court, it was stated on behalf of RBI that in June 1998,
the Chairman of the appellant Bank was advised that old private sector banks
having present net worth of Rs.5 lakhs should attain the level of Rs.50 crores
within a period of 3 years On 12th January, 1999, the appellant -Bank sent the
plan to augment resources up to Rs.20.08 crores over the period of 5 years. At
on 31st March, 2002 its net worth stood at only Rs.6.62
crores and its paid up capital as on 31st March, 2005 was Rs.1.82 crore. It was further
stated that as per the Bank's Balance Sheet as on 31st March, 2005, it had reported the net loss of Rs.5.97 crores. In view of
the deteriorating financial position, further meetings were held on 12th August, 2005, 26th August, 2005 and 12th September, 2005 to point out the major concerns of RBI vis. low paid
up capital of Rs.182 crore, high level of gross NPAs (18.04%) and net loss of
Rs.5.97 crores. On 14th
October, 2005 the bank
was asked to submit a detailed plan for capital augmentation. It is on the
background that the moratorium was imposed on 7th January, 2006.
stand was that since deposits with the Bank were Rs.92 crores, it was
irrational to insist that it should have capital funds of Rs.50 crores. It was
however pointed out that the Bank was consistently increased its capital and it
stood at Rs.2.95 crores by 5th January, 2006 which included Rs.1.13 crore in
the form of share application money. It was nothing but a part of share
capital. Again, as far as NPAs are concerned, they had gone down from 14.10% to
9% and, as far as loss of Rs.5.97 crores is concerned, it is because of the
change in the provisioning norms.
Court noted that the Bank had paid up capital of Rs.1.82 crores only, high
gross NPAs at 18.04% and net loss of Rs.3.97 crores. It was in these
circumstances that the RBI had to decide as to whether the depositors of the
Bank required any protection. RBI had been monitoring the financial position of
the Bank since June 1998 and since December 2003 the Bank had been placed under
monthly monitoring as provided under Section 27 of the Act. According to High
Court, expression "good reasons" under Section 45(1), primarily
relates to interest of the depositors and the interest of the Bank. This is
because the primary objective of the Act is protection of the interest of
depositors as against the primary objective of the Company Law which is to
safeguard the interest of shareholders. This is what is specifically stated in
the Objects and Reasons of the Act. On these facts, the RBI was of the view
that an appropriate action was necessary. It could not be said that the
decision was lacking in the absence of good reasons. It is difficult to say
that it was taken for the benefit of the Federal Bank since these reasons go
back to December 2003 when Federal Bank was not in picture.
been submitted that a small bank like the appellant cannot be expected to have
the Capital Adequacy of Rs.50 crores as advised in June 1998 and which was
later on revised to Rs.300 crores by circular dated 20th February 2004. Reference is made to Section 11(3)(i) of the Act
which provides that if a banking company has places of its business in more
than one State, it is required to have the aggregate value of its paid-up
capital and reserves at not less than Rs.5 lakhs. If that is the expectation,
the RBI cannot insist on the requirement of Rs.50 crores and then go on
increasing it further. Reliance is placed on the decision of this Court in
Assam Co. Ltd. v. State of Assam (2001 (4) SCC 202), which lays down that a
delegate cannot over-ride the Act either by exceeding the authority or by
making provision which is inconsistent with the Act. On the other hand, stand
of RBI is that the language of Section 11(3)(i) is that in the case of such a
banking company, the aggregate value of paid-up capital and reserves shall not
be less than Rs.5 lakhs. Therefore, insistence of Rs.50 crores or a higher
amount cannot be said to be erroneous. With globalisation, finance and banking
in rural areas also have to improve and it is from that point of view that the
RBI had expected the above referred enhancement. That was expected from all
similarly situated banks and not merely from the appellant-Bank alone.
is made to the expectations under the Basle Committee on Banking Supervision,
1988 and the first Narasimham Committee Report on Financial System, 1991 which
recommended on the basis of the Basle Committee that India also must conform to the
international standards of capital adequacy in a phased manner. Second Narsimham
Committee Report on Banking Sector Reforms of 1998 led RBI to issue guidelines
to revise the minimum paid-up capital for the private sector banks.
actual scenario shows that when the paid-up capital of the Bank is so low,
namely Rs.1.82 crore, its gross NPAs are at higher level (8.04%), its net worth
had turned negative and the net loss is Rs.5.97 crores. There was nothing wrong
on the part of the RBI to expect an appropriate plan of capital augmentation.
The Bank has not been able to do that and it was quite likely that it would
land into difficulties.
phrase "good reasons" in sub-section (1) of Section 45 is a term of
wide amplitude and it will not be correct to restrict it only to the actions
mentioned under sub-section (2) of Section 45 of the Act as is contended by the
appellant. The provision is concerned with preparing a scheme of reconstruction
or amalgamation which would become necessary where the RBI is satisfied about
the existence of any of the four grounds mentioned in Section 45(4). Apart from
public interest and the interest of the banking system, which are provided in
sub-clause (a) and (d) thereof, Section 45(4) provides for the necessary action
in the interest of the depositors or with a view to secure proper management of
the bank which are grounds (b) and (c) in that sub-section.
to the framing of the scheme is the imposition of the moratorium which is
provided in sub-sections (1) and (2) of Section 45. Existence of court
proceedings, mentioned in section 45(2), would certainly be one of the good
reasons to impose moratorium, but that certainly cannot be the only one.
that object of the Act is protection of the interest of the depositors, such an
interpretation of the concept of "good reasons" will have to be
adopted, and not a narrow one.
been contended that there was a negative impact when moratorium was imposed,
and there were long queues at four branches of the appellant Bank on 8th January 2006.
RBI arranged to send an amount of Rs.2 crores to the Bank from its Current
Account to meet the depositors' demands. The manager of the Appellant Bank's
branch at Dadar has made an affidavit to state that he had not asked for an
amount of Rs.2 crores and yet it was sent by RBI. The branch manager has
further stated that depositors were unhappy with the decision of RBI. These are
all disputed questions as rightly noted by the High Court. As far as the views
of the depositors are concerned, they are bound to vary from person to person
and no definite conclusion can be drawn merely on the bank manager's affidavit
that people were angry against RBI. Besides, no depositor has questioned
legality of the action. It can be said that the action of the RBI is a
pre-emptive action which it took considering the then financial position of the
appellant Bank and to prevent further difficulties which were likely. It is not
that when there is a run on the bank then only RBI must intervene or that it
must intervene only when there are good number of court proceedings against the
concerned bank. The RBI has to take into account the totality of the
circumstances and has to form its opinion accordingly.
ultimate question is whether the inference drawn by the RBI is a possible
inference or is something which can be said to be a perverse one. Even if two
views are possible since the regulating body has arrived at a conclusion on the
basis of the facts and figures before it, and it has pointed out that it has
been warning the appellant Bank for last over 3 years, it will not be proper
for the Courts to substitute their judgment for that of RBI. In the
circumstances, it cannot hold that the decision of RBI to impose the moratorium
was unjustified or against the provisions of section 45(1) or such that one can
call it a perverse one and interfere with it. The RBI is an expert body to
regulate the banking activities. The moratorium has been challenged on the
ground of malafides also. This challenge along with the challenge to
amalgamation also on the basis of malafides needs to be considered.
as the challenge to the appointment of two directors on the Board of Directors
of the appellant Bank is concerned, the RBI has the necessary power under
Section 36AB of the Act. In the circumstances, it cannot be faulted for
appointing the two directors.
brings into focus the question as to whether the decision of RBI to recommend a
scheme for amalgamation on 9th January 2006
and the decision of the Government to sanction the amalgamation on 24th January 2006 could be said to be mala fide or
bad in law. As far as this question is concerned, it contains many
sub-questions which are as follows:-
The first one is
non-consideration of any scheme for reconstruction before going for
The second is
with respect to proposing amalgamation with Federal Bank on 9th January 2006 itself.
The third facet
is not considering the proposal of four other banks.
The fourth is
with respect to an adequate opportunity under Section 45(6) and (7) of the Act.
as far as the first two questions of non- consideration of reconstruction and
proposing merger with Federal Bank, the RBI has noted that the Bank was in
difficulties from 1990 and particularly from December 2003 when it was placed
under monthly monitoring. RBI in its application for moratorium to the Central
Government dated 4th
January 2006 had
clearly stated that during the discussion with the appellant-Bank, major
shareholders and directors had shown total reluctance to merge into the
stronger bank. In view thereof, it was imperative that immediate arrangement to
protect the interest of the depositors was to be made through its merger with a
bank under Section 45 of the Act. RBI had, therefore, made an effort and called
upon the appellant-Bank, that if possible, to explore the possibility of merger
with another stronger bank. It had also made an effort to impress that there
should be infusion of fresh capital. That was not coming. There could be a
reconstruction by bringing in more money or by narrowing the size of the
appellant-Bank which did not appear to be feasible. The only option left was
that of amalgamation.
moratorium is imposed, RBI was duty bound to prepare a scheme either of
reconstruction or of amalgamation under Section 45(4) with any other banking
institution. Thus, RBI had to give a scheme. Federal Bank had responded
immediately and unconditionally. The fact that the appellant- Bank was put
under moratorium was advertised on web site on 7th January 2006 itself. It is at that stage that Federal Bank promptly gave
its proposal on 8th
January 2006. The
Federal Bank gave three reasons in its letter to RBI which were as follows:-
Ganesh Bank of Kurundwad
Ltd. has 32 branches situated in Western Maharashtra and Belgaum area of Karanataka. Our presence in
this area is very minimal and adding up of the branches of Ganesh Bank of Kurundwad
Ltd. will enable us to have significant presence in the area.
Ganesh Bank of Kurundwad
Ltd. has mot of the branches in the agricultural heartland which would enable
us to augment our credit disbursal to agricultural sector.
Small size of Ganesh
Bank of Kurundwad Ltd. ensures that there will not be any difficulty in the
merger process between our bank and them.
it stated as follows:- We also inform our unconditional acceptance to make full
payment to depositors and that we will not demand any regulatory
forbearance." Thus, the Federal Bank was ready to honour full liabilities
of the depositors and did not ask for any concessions. Therefore, on the basis
of a standard scheme, the opinion of the appellant-Bank was sought on 9th January 2006 with respect to merger in Federal
Bank. The scheme was described as a "cut and paste scheme" and of
RBI's action as a regulator in the interest of the depositors was highlighted.
appears that the action of the RBI was based on the finding about the negative
net worth and CRAR of the Appellant-Bank, its inability to infuse fresh capital
and the continued existence of a high level of NPAs. It has been rightly
pointed out that once it was decided to amalgamate by reason of Section 45 of
the Act, the RBI had to move with utmost expedition. This is of paramount
importance to prevent erosion of the confidence of the depositors. Once such
confidence is lost it becomes difficult to revive the confidence and the
Court had occasion to deal with need for expedition in Joseph Kuruvilla Vellukunnel
v. Reserve Bank of India and Ors. (1962 (Supp.) 3 SCR 632)
and Reserve Bank of India and Ors. v. Timex Finance and
Investment Co. Ltd. and Ors. (1992 (2) SCC 344). It is not in dispute that
there were long queues and on 8.1.2006 the one branch of the appellant-Bank
actually faced cash shortage and had to draw its funds with the RBI protecting
the interest of the depositors because during such period there are severe
restrictions on the ability of the depositors to operate their bank accounts.
Therefore, with a view to protect the interest of the depositors, the RBI has
to act expeditiously to identify another bank prepared to take over the
appellant-Bank and keeping in view the background principles governing merger
and amalgamation RBI had to act with expedition. The factual scenario does not
show that there was any undue haste or mala fides involved.
Section 45 of the Act, the primary consideration is public interest. There is
an underlying object of acting swiftly and decisively to protest interests of
depositors and ensure public confidence in the banking system. The emergent
situation which warrants action with expedition cannot be lost sight of while
deciding the legality of the action.
brought on record that Federal Banks' strength lay on the fact that it is a
strong bank with huge net worth, large capital funds and huge amount of
deposits with more than adequate CRAR. Its net worth is about Rs.897 crores,
capital is around Rs.85 crores, and deposits to the tune of Rs.16,448 crores.
Its CRAR (11.34%) exceeds the RBI requirement (9%) and percentage of NPAs
(Gross and Net) is (5.17% and 1.41% respectively). For the accounting period
ending 31st December,
2005 its profit is
observed by this Court in Bari Doab Bank Ltd. v. Union of India and Ors. (1997 (6) SCC 417) the provisions
of Section 45 of the Act provide adequate opportunity of a representation and
no additional opportunity is required to be given. The objection filed by the
appellant-Bank was duly considered. In fact, certain objections were raised and
comments of the RBI on them were forwarded to the Central Government along with
the final recommendations. The RBI was of the view that the proposal received
from the Federal Bank was best under the circumstances and, therefore, the same
appears to have been accepted.
this juncture it is to be noted that offer of Federal Bank was an unconditional
offer, whereby it proposed to take over the responsibility of any regulatory
forbearance. Three reasons given by the Federal Bank to take over the
appellant's Bank were considered cogent reasons and, therefore, RBI's decision
cannot be faulted. As rightly contended the offers received from the City Bank,
Standard Chartered Bank were neither comprehensive nor unconditional. In fact,
they were not concluded offers, since they were both dependent upon a request
for due diligence and in certain instances regulatory forbearances. Ratnakar
Bank's offer was not accepted as it was itself an ailing bank.
counsel for the appellants has highlighted that Sarastwat Bank's offer was an
equally good offer if not better and should have been accepted. It has been
pointed out by learned counsel for the respondents that Saraswat Bank is a
Multi State Co-operative Bank and its functioning is governed by Multi State
Cooperative Societies Act, 2002 (in short '2002 Act'). The legal opinion
available to the RBI was that it was not feasible or permissible to amalgamate
a commercial bank with a cooperative Bank by reason of the provisions of the
Act as well as 2002 Act. The RBI was of the view that such amalgamation is not
possible under Sections 17 and 18 of the 2002 Act as also Section 56 (zb) of
the Act. It was pointed out that Saraswat Bank cannot be considered to be a
banking company for the purpose of Section 45(4) to 45(15) of the Act.
order to be a banking company within the meaning of the Act, the entity in
question must be a company. Section 56(zb) of the Act excludes the
applicability of Section 45(4) to 45(15) so far as cooperative banks are
concerned. It was pointed out that even if it is conceded for the sake of
argument that legally amalgamation is permissible it could have taken a very
long time to get requisite clearance from several other agencies under the 2002
Act and could not have gone through expeditiously. It is also pointed out that
an amalgamation of Multi State Cooperative Bank is subject to far less
regulatory control of the RBI especially in relation to non banking matters.
There is no dispute that the application made by Saraswat Bank was duly
considered by the RBI.
scope of Judicial review in administrative matters has been the subject matter
of consideration before this Court in several cases.
should be judicial restraint while making judicial review in administrative
matters. Where irrelevant aspects have been eschewed from consideration and no
relevant aspect has been ignored and the administrative decisions have nexus
with the facts on record, there is no scope for interference.
duty of the court is
itself to the question of legality;
whether the decision making authority exceeded its powers
error of law
of the rules of natural justice and
decision which no reasonable Tribunal would have reached or
powers. Administrative action is subject to control by judicial review in the
means the decision- maker must understand correctly the law that regulates his
decision-making power and must give effect to it.
namely, Wednesbury unreasonableness.
the points that falls for determination is the scope for judicial interference
in matters of administrative decisions.
action is stated to be referable to broad area of Governmental activities in
which the repositories of power may exercise every class of statutory function
of executive, quasi- legislative and quasi-judicial nature. It is trite law
that exercise of power, whether legislative or administrative, will be set
aside if there is manifest error in the exercise of such power or the exercise
of the power is manifestly arbitrary (See State of U.P. and Ors. v. Renusagar
Power Co. and Ors. (AIR 1988 SC 1737). At one time, the traditional view in England was that the executive was not answerable
where its action was attributable to the exercise of prerogative power.
Professor De Smith in his classical work "Judicial Review of
Administrative Action" 4th Edition at pages 285-287 states the legal
position in his own terse language that the relevant principles formulated by
the Courts may be broadly summarized as follows. The authority in which
discretion is vested can be compelled to exercise that discretion, but not to
exercise it in any particular manner. In general, discretion must be exercised
only by the authority to which it is committed. That authority must genuinely
address itself to the matter before it; it must not act under the dictates of
another body or disable itself from exercising discretion in each individual
case. In the purported exercise of its discretion, it must not do what it has
been forbidden to do, nor must it do what it has not been authorized to do. It
must act in good faith, must have regard to all relevant considerations and
must not be influenced by irrelevant considerations, must not seek to promote
purposes alien to the letter or to the spirit of the legislation that gives it
power to act, and must not act arbitrarily or capriciously. These several
principles can conveniently be grouped in two main categories:
exercise a discretion, and
excess or abuse
of discretionary power. The two classes are not, however, mutually exclusive.
discretion may be improperly fettered because irrelevant considerations have
been taken into account, and where an authority hands over its discretion to
another body it acts ultra vires.
present trend of judicial opinion is to restrict the doctrine of immunity from
judicial review to those classes of cases which relate to deployment of
troupes, entering into international treaties, etc. The distinctive features of
some of these recent cases signify the willingness of the Courts to assert
their power to scrutinize the factual basis upon which discretionary powers
have been exercised. One can conveniently classify under three heads the
grounds on which administrative action is subject to control by judicial
first ground is 'illegality' the second 'irrationality', and the third
'procedural impropriety'. These principles were highlighted by Lord Diplock in Council
of Civil Service Unions v. Minister for the Civil Service (1984 (3)
All.ER.935), (commonly known as CCSU Case). If the power has been exercised on
a non-consideration or non-application of mind to relevant factors, the
exercise of power will be regarded as manifestly erroneous. If a power (whether
legislative or administrative) is exercised on the basis of facts which do not
exist and which are patently erroneous, such exercise of power will stand
vitiated. (See commissioner of Income-tax v. Mahindra and Mahindra Ltd. (AIR
1984 SC 1182) . The effect of several decisions on the question of jurisdiction
has been summed up by Grahame Aldous and John Alder in their book
"Applications for Judicial Review, Law and Practice" thus:
is a general presumption against ousting the jurisdiction of the courts, so
that statutory provisions which purport to exclude judicial review are
are, however, certain areas of governmental activity, national security being
the paradig, which the courts regard themselves as incompetent to investigate,
beyond an initial decision as to whether the government's claim is bona fide.
In this kind of non-justiciable area judicial review is not entirely excluded,
but very limited. It has also been said that powers conferred by the Royal
Prerogative are inherently unreviewable but since the speeches of the House of
Lords in council of civil Service Unions v. Minister for the civil Service this
is doubtful. Lords Diplock, Scaman and. Roskili appeared to agree that there is
no general distinction between powers, based upon whether their source is
statutory or prerogative but that judicial review can be limited by the subject
matter of a particular power, in that case national security. May prerogative powers
are in fact concerned with sensitive, non- justiciable areas, for example,
foreign affairs, but some are reviewable in principle, including the
prerogatives relating to the civil service where national security is not
nonjusticiable power is the Attorney General's prerogative to decide whether to
institute legal proceedings on behalf of the public interest." (Also see Padfield
v. Minister of Agriculture, Fisheries and Food (LR (1968) AC 997).
court will be slow to interfere in such matters relating to administrative
functions unless decision is tainted by any vulnerability enumerated above;
like illegality, irrationality and procedural impropriety. Whether action falls
within any of the categories has to be established. Mere assertion in that
regard would not be sufficient.
famous case commonly known as "The Wednesbury's case" is treated as
the landmark so far as laying down various basic principles relating to
judicial review of administrative or statutory direction.
summarizing the substance of the principles laid down therein we shall refer to
the passage from the judgment of Lord Greene in Associated Provincial Picture
Houses Ltd. v. Wednesbury Corpn. (KB at p. 229: All ER p. 682). It reads as
is true that discretion must be exercised reasonably. Now what does that mean?
Lawyers familiar with the phraseology used in relation to exercise of statutory
discretions often use the word 'unreasonable' in a rather comprehensive sense.
It has frequently been used and is frequently used as a general description of
the things that must not be done. For instance, a person entrusted with a
discretion must, so to speak, direct himself properly in law. He must call his
own attention to the matters which he is bound to consider. He must exclude
from his consideration matters which are irrelevant to what he has to consider.
If he does not obey those rules, he may truly be said, and often is said, to be
acting 'unreasonably' . Similarly, there may be something so absurd that no
sensible person could even dream that it lay within the powers the authority. .
. . In another, it is taking into consideration extraneous matters. It is
unreasonable that it might almost be described as being done in bad faith; and
in fact, all these things run into one another." Lord Greene also observed
(KB p.230: All ER p.683) "..it must be proved to be unreasonable in the
sense that the court considers it to be a decision that no reasonable body can
not what the court considers unreasonable The effect of the legislation is not
to set up the court as an arbiter of the correctness of one view over
another." (emphasis supplied) Therefore, to arrive at a decision on
"reasonableness" the Court has to find out if the administrator has
left out relevant factors or taken into account irrelevant factors. The
decision of the administrator must have been within the four corners of the
law, and not one which no sensible person could have reasonably arrived at,
having regard to the above principles, and must have been a bona fide one. The
decision could be one of many choices open to the authority but it was for that
authority to decide upon the choice and not for the Court to substitute its
principles of judicial review of administrative action were further summarized
in 1985 by Lord Diplock in CCSU case as illegality, procedural impropriety and
irrationality. He said more grounds could in future become available, including
the doctrine of proportionality which was a principle followed by certain other
members of the European
Lord Diplock observed in that case as follows:
review has I think, developed to a stage today when, without reiterating any
analysis of the steps by which the development has come about, one can
conveniently classify under three heads the grounds on which administrative
action is subject to control by judicial review. The first ground I would call
'illegality', the second 'irrationality' and the third 'procedural
impropriety'. That is not to say that further development on a casebycase basis
may not in course of time add further grounds. I have in mind particularly the
possible adoption in the future of the principle of 'proportionality' which is
recognized in the administrative law of several of our fellow members of the European Economic Community." Lord Diplock explained
"irrationality" as follows:
'irrationality' I mean what can by now be succinctly referred to as Wednesbury
unreasonableness'. It applies to a decision which is to outrageous in its
defiance of logic or of accepted moral standards that no sensible person who
had applied his mind to the question to be decided could have arrived at
it." In other words, to characterize a decision of the administrator as
"irrational" the Court has to hold, on material, that it is a
decision "so outrageous" as to be in total defiance of logic or moral
standards. Adoption of "proportionality" into administrative law was
left for the future.
principles have been noted in aforesaid terms in Union of India and Anr. v. C. Ganayutham
(1997  SCC 463).
essence, the test is to see whether there is any infirmity in the decision
making process and not in the decision itself. (See Indian Railways
Construction Co. Ltd. v. Ajay Kumar (2003 (4) SCC 579).
at from the aforesaid angle, the judgment of the High Court does not suffer
from any infirmity to warrant interference. The appeal is dismissed.