Reserve
Bank of India Vs. M.Hanumaiah & Ors. [2008] Insc
10 (4 January 2008)
G.P.Mathur
& Aftab Alam
(Arising
out of SLP) No.13664/2005) AFTAB ALAM,J.
Leave
granted.
Whether
the principles of natural justice have any application at the stage when the Registrar
Co-operative Societies, on being so required in writing by the Reserve Bank of
India passes an order removing the Committee of Management of a Co-operative
Bank and appointing an Administrator to manage its affairs for such period, as
may be specified by the Reserve Bank of India? This is the question that falls
for consideration in this case.
The
facts and circumstances in which the question arises are brief and simple and
may be stated thus:
On
inspection of Kalidasa Cooperative Bank Ltd.
(respondent
No.16) (hereinafter referred to as the Cooperative Bank or the
Bank) made on June 30, 1994 under Section 35 read with Section 56 of the
Banking Regulation Act the Reserve Bank of India (the appellant before us)
found a number of serious irregularities in its affairs. It sent a copy of the
inspection report to the Cooperative Bank and called the members of its board
of directors for discussion on the findings in the report. It also forwarded a
copy of the inspection report to the Joint Registrar, Cooperative Societies.
The Joint Registrar advised the Reserve Bank to make requisition for supersession
of the committee of management of the Bank.
The
Reserve Bank, however, withheld any action in that regard but called the
members of the board of directors of the Bank for several rounds of discussions
at different levels. The board of directors was repeatedly urged to take
stringent actions to improve the financial health of the Bank. Apparently, no
remedial measures were taken and the affairs of the Cooperative Bank continued
in a state of financial distress.
Finally,
the Reserve Bank issued a requisition to the Registrar Cooperative Societies,
Karnataka on January
22, 2002 requiring him
to supersede the board of directors of the Cooperative Bank and to appoint an
Administrator for a period of one year as provided under Section 30(5) of the
Karnataka Cooperative Societies Act. The requisition was made in public
interest and for preventing the affairs of the Bank being conducted in a manner
detrimental to the interest of the depositors and for securing proper
management of the Bank.
In
compliance with the requisition made by the Reserve Bank the Registrar
Cooperative Societies issued an order on January 31, 2002 superseding the board of directors
of the Bank and appointing an Administrator in its place.
The
order of supersession issued by the Registrar was challenged before the
Karnataka High Court by respondents 2 to 13 (members of the committee of
management of the Cooperative Bank that was in existence at that time) in
W.P.No.6706 of 2003 (CS-RES). The writ petition was allowed by a learned Single
Judge of the Court by order dated September 21, 2002. It is a brief order in which after
noticing the relevant provision as contained in Section 30(5) of the Karnataka
Cooperative Societies Act, the learned Judge simply observed as follows :
From
the order, I find that the supersession is at the instance of the Reserve Bank
of India since it is referred to in the
impugned order. Further, the reason given by the Reserve Bank of India in order to supersede the Committee
of Management in the public interest has not been disclosed in the impugned
order. Further, no opportunity of hearing also has been afforded before passing
an order by the Cooperative Bank. In the result, I pass the following order :
(a)
Writ Petition is allowed.
(b)
The impugned order is quashed. (Emphasis added)
Against
the order passed by the learned Single Judge, the Reserve Bank of India preferred Writ Appeal No.6120 of
2002 (CS-RES). When the appeal was taken up on March 31, 2003, the Court was told that fresh elections for the committee
of management were to take place on March 20. The Division Bench took the view
that this development had rendered the writ appeal infructuous and disposed it
of as such, leaving it open to the Reserve Bank to proceed against the
Bank, if necessary, in accordance with law.
Mr.R.N.Trivedi,
learned senior counsel, appearing on behalf of the appellant, submitted that
both the learned Single Judge and the Division Bench of the High Court
seriously erred in the matter, the learned Single Judge by introducing the
elements of natural justice where none existed and the Division Bench by
treating the appeal as infructuous.
The
learned counsel submitted that the Division Bench overlooked the main issue and
failed to appreciate that as long as the Registrar was held obliged to give an
opportunity of hearing to the cooperative bank it was pointless to say that it
would be open to Reserve Bank of India to proceed against the bank, if
necessary, in accordance with law. Counsel further submitted that the
learned Single Judge had set aside the supersession order on two grounds. The
first ground was wrong on facts and the second was flawed legally. It was
incorrect to say that the order of the Registrar did not disclose the reasons
for supersession. The reasons were stated in the preamble of the order.
Moreover, the reasons for supersession were stated in detail in the requisition
made by the Reserve Bank. But it was the second ground in regard to the
opportunity of hearing to the cooperative bank that was fundamentally bad as it
tended to defeat the very object and purpose of supersession of the managing
committee of the bank. Learned counsel submitted that the order of the learned
Single Judge would in effect give rise to a process of adjudication at the
level of the Registrar. In other words, the Reserve Bank which is the apex
expert body in the country in regard to banking affairs would be required to go
to the Registrar and satisfy him about the need for supersession of the
management of the bank. What is worse is that this process of adjudication
might take a few weeks time and thus completely frustrate the need for an
urgent intervention by the Reserve Bank in order to protect the interests of
small depositors.
We are
satisfied that Mr.Trivedi is right in his submission and though the managing
committee of the Cooperative Bank for the supersession of which action was
taken by the Reserve Bank may no longer be in existence the issue involved in
the case needs to be decided as it is likely to crop up in future in regard to
the respondent-bank or other cooperative banks.
In
order to examine the question it would be best to begin with the legal
provision. Section 30 of the Karnataka Co- operative Societies Act, 1959 is as follows
:
30.
Supersession of committee
(1)
If, in the opinion of the Registrar
(a)
the committee of a co-operative society persistently makes default or is
negligent in the performance of the duties imposed on it by this Act or the
rules or the bye-laws or commits any act which is prejudicial to the interests
of the society or its members, or is otherwise not functioning properly; or
(b) a
co-operative society is not functioning in accordance with the provisions of
this Act, the rules or bye-laws or any order or direction issued by the State
Government or the Registrar, including the direction issued under Section
30B.
the
Registrar may, after giving the committee an opportunity to state its
objections, if any, by order in writing remove the said committee, and appoint
an administrator to manage the affairs of the society for such period, not
exceeding [six months], as may be specified by the Registrar.
The
Registrar may for the reasons to be recorded in writing extend the period of
such appointment for a further period of six months at a time and in any case
such extension shall not exceed one year in aggregate.
(2)
The administrator so appointed shall, subject to the control of the Registrar
and such instructions as he may give from time to time, exercise all or any of
the functions of the committee or of any [office bearer] of the co-operative
society and take such action as he may consider necessary in the interest of
the society.
(3) The
administrator shall, before the expiry of his term of office arrange for the
constitution of a new committee after holding the election in accordance with
this Act, the rules and the bye- laws of the co-operative society.
Provided
that in such an election, no member of the committee removed under sub- section
(1) shall, notwithstanding anything contained in this act, the rule or the
bye-laws, be eligible for being elected as a member of the Committee, for a
period of four years from the date of supersession of the committee under the
said sub-section.
(4)
Before taking any action under sub-section (1) in respect of a co-operative
society, the Registrar shall consult the financial banks to which it is
indebted.
(5)
Notwithstanding anything contained in this Act, the Registrar shall, in the
case of a co- operative bank, if so required in writing by the Reserve Bank of
India in public interest or for preventing the affairs of the co-operative bank
being conducted in a manner detrimental to the interest of the depositors or
for securing the proper management of the co-operative bank, by order in
writing, remove the committee of that co-operative bank and appoint an
administrator to manage the affairs of the co-operative bank for such period as
may, from time to time, be specified by the Reserve Bank of India.
(Emphasis added) Sub-sections (1) to (4) relate to removal of the committee of
the cooperative society and sub-section (5) relates to supersession of the
managing committee of a cooperative bank. It is to be seen that in case of
removal of the committee of a cooperative society compliance with the
principles of natural justice is expressly required inasmuch in sub-section (1)
it is stipulated that the Registrar would pass the order of removal only after
giving the committee an opportunity to state its objections. On the other
hand the requirement of any hearing is absent in sub- section (5) which starts
with a non-obstante clause that also covers the provisions of the earlier
sub-sections of Section 30.
Mr.Trivedi
submitted that in case of supersession of the management of a cooperative bank
there was no application of the principles of natural justice for two reasons;
one was that the Reserve Bank of India was the apex expert body in the country
in banking matters and once the Reserve Bank of India was satisfied in regard
to the need of supersession of the banks management, the Registrar
cooperative societies who had no experience in the affairs of banks was simply
obliged to carry out the instructions of the Reserve Bank; secondly, once the
decision of supersession was taken it was necessary to have it effected
speedily because any delay would cause irreparable loss and harm to the
interests of small depositors of the bank.
It
was, therefore, by design that no opportunity of hearing was mentioned in
sub-section (5) even though it was stipulated earlier (in sub-section (1)) in
the same section.
Mr.Trivedi
submitted that a similar question arose before this Court when the validity of
section 38 of the Banking Companies Act, 1956 came in question in the case of
Joseph Kurnvilla Velukunnel vs. Reserve Bank of India & Ors. [AIR 1962 SC
1371] relating to the winding up of the Palai Central Bank Ltd., Kerala. The
Reserve Bank of India made an application in the High
Court of Kerala under Section 38 of the Banking Companies Act read with some
allied provisions of the Indian Companies Act for the winding up of the Palai
Central Bank Limited and for appointment of the official liquidator etc.
The
High Court allowed the application and the decision of the High Court came to
be challenged before this Court in appeal in which the main question related to
the constitutional validity of Section 38 of the Banking Companies Act. A
Constitution Bench upheld the validity of the provision by a majority of 3 to
2.
Section
38 of the Banking Companies Act laid down as follows :
38(1).
Notwithstanding anything contained in Section 391, Section 392, Section 433 and
Section 583 of the Companies Act, 1956, but without prejudice to its powers
under sub-section
(1) of
Section 37 of this Act, the High Court shall order the winding up of a banking
company
(a) if
the banking company is unable to pay its debts; or
(b) if
an application for its winding up has been made by the Reserve Bank under
Section 37 of this Section.
(2)
The Reserve Bank shall make an application under this section for the winding
up of a banking company if it is directed so to do by an order under clause (b)
of sub-section (4) of Section 35.
(3)
The Reserve Bank may make an application under this section for the winding up
of a banking company --- xxx xxx xxx xxx
(b) if
in the opinion of the Reserve Bank -- xxx xxx xxx xxx
(iii) the
continuance of the banking company is prejudicial to the interests of its depositors.
Mr.Trivedi
argued that in case of Palai Bank the issue was far more fundamental and grave
than the issue in the case in hand. In Palai Bank the provision of Section 38
ousted the authority and power of the High Court and not merely that of a Registrar,
Cooperative Societies; furthermore, the provision allowed for the winding up of
a banking company and thus interfered with the fundamental right to carry on
business. In the case in hand the business of the cooperative bank would go
unhindered and interference was limited only to the management of the bank.
One of
the grounds on which the validity of Section 38 was challenged was that it
offended the principles of natural justice. In paragraphs 30 to 31 of the
judgment this Court noticed the grounds on which the provisions were assailed
and observed as follows :
(30)
The main ground of attack is the way Ss.38(1) and (3)(b)(iii) make it mandatory
for the High Court to pass an order winding up a banking company whenever the
Reserve Bank under its powers or under an order of the Central Government makes
an application for the winding up a banking company. It is argued that such a
power to the Reserve Bank is an uncontrolled and despotic power and to crown
all, access to Courts is not possible because the Court itself must pass an
order without deciding whether the affairs of the banking company are being
conducted in a manner detrimental to the interests of the depositors a fact
capable of being proved like any other fact. It is argued as a matter of
principle that any law which bars a decision by the Court is itself
unreasonable without more. Mr.Pathak, in supplementing the above contentions of
Mr.Nambiar, also contends that by the law in question a judicial process has
been converted into an executive action, and subjective determination has taken
the place of judicial determination. He also contends that the Reserve Bank
accuses a banking company, and then tries the issue to the complete exclusion
of Courts.
(31)
It must not be overlooked that the winding up of a banking company takes place
before the High Court and under the process of law. The judicial process is
excluded only to respect of the momentous decision whether a winding up order
should be made or not. This opinion is left to the Reserve Bank, and the Court
merely passes an order according to the Reserve Banks opinion, and then
proceeds to wind up the banking company according to law. The narrow question
is whether in leaving this decision to the Reserve Bank the law offends the principles
of natural justice and becomes so unreasonable, viewed in the light of Art.19,
as to become void. This is the point on which the respective parties joined
issue and had much to say, and this is the crucial point in this case. (emphasis
added) Rejecting the submissions the majority decision referred to an earlier
decision of this Court in Virendra vs. The State of Punjab [1958 SCR 308]
relied upon by the Attorney General and in paragraphs 44 and 45 observed as follows
:
(44)
These observations lay down clearly that there may be occasions and situations
in which the legislature, may with reason, think that the determination of an
issue may be left to an expert executive like the Reserve Bank rather than to
Courts without incurring the penalty of having the law declared void. The law
thus made is justified on the ground of expediency arising from the respective
opportunities for action. Of course, the exclusion of Courts is not lightly to
be inferred nor lightly to be conceded. The reasonableness of such a law in the
total circumstances will, if challenged, have to be made out to the ultimate
satisfaction of this Court and it is only when this Court considers that it is
reasonable in the individual circumstance that the law will be upheld.
(45)
In the present case, in view of the history of the establishment of the Reserve
Bank as a central bank for India, its position as a Bankers Bank, its
control over banking companies and banking in India, its position as the
issuing bank, its power to license banking companies and cancel their licenses
and the numerous other powers, it is unanswerable that between the court and
the Reserve Bank, the momentous decision to wind up a tottering or unsafe
banking company in the interest of the depositors, may reasonably be left to
the Reserve Bank. No doubt, the Court can also, given the time perform this
task. But the decision has to be taken without delay, and the Reserve Bank
already knows intimately the affairs of the banking companies and has had
access to their books and accounts. If the Court were called upon to take
immediate action, it would almost always be guided by the opinion of the
Reserve Bank. It would be impossible for the Court to reach a conclusion
unguided by the Reserve Bank if immediate action was demanded. But the law
which gives the same position to the opinion of the Reserve Bank is challenged
as unreasonable. In our opinion such a challenge has no force. The situation
that arose in this case is typical of the occasions on which this extraordinary
power would normally be exercised, and, as we have said already, if the power
is abused by the Reserve Bank, what will be struck down would be the action of
the Reserve Bank but not the law. An appeal against the Reserve Banks
action or a provision for an ex post fact finding by the Court is hardly
necessary. An appeal to the Central Government will be only an appeal from
Caesar to Caesar, because the Reserve Bank would hardly act without the
concurrence of the Central Government and the finding by the Court would mean,
to borrow the macabre phrase of Raman Nayar,J. a post-mortem examination of the
corpse of the banking company. (emphasis added) The decision in the case
of Palai Bank undoubtedly goes a long way to support the contention of the
appellant in the case in hand.
Mr.Trivedi
also submitted that the Maharashtra Cooperative Societies Act, 1960 had a
similar provision in Section 110A like the one contained in Section 30(5) of
the Karnataka Act. Sub-section (ii) of Section 110A provided that an order for
the winding up of the bank would be made by the Registrar, if so required by
the Reserve Bank of India in the circumstances referred to in section 13-D of
the Deposit Insurance Corporation Act, 1961. Dealing with the provisions the
Bombay High Court had held that the power conferred under Section 110A of the Maharashtra
Cooperative Societies Act should not be hindered by reading into it the
requirement of show cause notice. Learned counsel cited before us two decisions
of the Bombay High Court. One in Mahendra Husanji Gadkari vs. State of Maharashtra
& Ors. [1992 Mah.L.J.1442] and the other in Ishwardas Premkumar Choradiya
& Anr. vs. State of Mahrashtra & Ors. [2002 (2) Mah.L.J.844]. In the
latter decision, a learned Single Judge of the Bombay High Court held as follows
:
The
question is : whether under Section 110A of the Maharashtra Cooperative
Societies Act, 1960, respondent No.5 was duly bound to give a show cause notice
to the petitioners herein. In the first instance, the section does not provide
for a show cause notice. Once that be so, the question is :
whether
it can be implied in the absence of provision of show cause notice whether by
implication it is required that a show cause notice must be issued as it
involves civil consequences.
Sub-section
(3) of Section 110A of the Mahrashtra Cooperative Societies Act, 1960, came up
for consideration before a Division Bench of this Court in the case of Mahendra
Husanji vs. State of Maharashtra, 1992 Mah.L.J.1442. The Division Bench of this
Court, after considering the provisions of sub-section (3) of Section 110A of
the Maharashtra Cooperative Societies Act, has held that the Reserve Bank of
India can issue directions only when the situation contemplated by Section 110A
of the Act exists. The directions issued are binding on the Registrar. In other
words, once a direction is issued by the Reserve Bank of India, the Registrar
has no discretion in the matter, but to supersede and appoint an Administrator.
Once that be so, and as there is no discretion left in respondent No.5, it must
mean that the right of hearing is excluded. Once that be so, there was no
question of issuing a show cause notice to the petitioner herein before passing
the impugned order. In fact, though not directly in issue in the case of L.V.Sasmile
vs. State of Maharashtra 1992 CTJ 729, another Division Bench, considering the
material on record, had directed the appointment of an Administrator under
Section 110A of the Maharashtra Cooperative Societies act. That also would
indicate that there is no requirement under Section 110 for hearing. In
our opinion the Bombay High Court has taken the correct view of the matter.
On
hearing Mr.Trivedi, counsel for the appellant, and on a careful consideration
of the relevant provisions of law and the decisions cited before us we have no
hesitation in accepting the submissions made on behalf of the appellant. We
accordingly answer the question (framed in the beginning of the judgment) in
the negative and hold and find that on receipt of a requisition in writing from
the Reserve Bank of India the Registrar Cooperative Societies is statutorily
bound to issue the order of supersession of the committee of management of the
cooperative bank. At that stage the affected bank/its managing committee has no
right of hearing or to raise any objections.
The
question may here arise whether the principles of natural justice are
completely excluded from the process or it may be that against the requisition,
the affected bank may move the Reserve Bank itself and try to show that it had
wrongly arrived at the decision for its supersession. The other course may be
that after the supersession order was issued by the Registrar that may be
challenged before a court of law and in that proceeding one of ground for
assailing the order might be that the decision of the Reserve Bank was arrived
at without giving the affected cooperative bank a proper opportunity of
hearing. We, however, refrain from going into that question as it does not
arise in the facts of the present case.
In
light of the discussions made above, both the orders passed by the learned
Single Judge and the Division Bench appear quite untenable. Both the orders are
accordingly set aside. However, since the matter has become quite old it needs
to be clarified that the order of supersession passed by the Registrar on
January 31, 2002 shall not be automatically revived but in case the Reserve
Bank of India is of the opinion that the situation so warrants it may issue a
fresh requisition to the Registrar Cooperative Societies, Karnataka, who would
on that basis pass the order of supersession as held in the judgment.
The
appeal is, accordingly, allowed but with no order as to costs.
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