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PETITIONER: THE REGISTRAR, CO-OPERATIVE SOCIETIES

       Vs.

RESPONDENT: DHARAM CHAND AND OTHERS

DATE OF JUDGMENT: 27/04/1961

BENCH: WANCHOO, K.N. BENCH: WANCHOO, K.N. GAJENDRAGADKAR, P.B. SARKAR, A.K. GUPTA, K.C. DAS AYYANGAR, N. RAJAGOPALA

CITATION:  1961 AIR 1743            1962 SCR  (2) 433

ACT: Co-operative Societies-Co-operative Bank Defalcation of bank funds-Show cause notice to committee members and  subsequent removal   by   the  Registrar-Misfeasance   application   by shareholders   against   committee   members-   hearing   of application by the Registrar -Legality-Bias-Natural justice- Co-operative Societies Rules, rr. 17, 18, 30(3)-Co-operative Societies Act, 1912 (2 Of 1912), s. 17.

HEADNOTE: An  investigation  of  the affairs of  a  Co-operative  Bank registered  under the Co-operative Societies Act,  1912,  on the disappearance of the manager of the bank in 1953, showed that  a very large amount of money had been defalcated.   On February 26, 1955, the Registrar of Co-operative.  Societies gave notice to the members of the managing committee of  the bank asking them to show cause why the committee should  not be  suspended, under r. 30(3) Of the Rules framed under  the Act.    In   reply  the  members   denied   allegations   of mismanagement etc., but the Registrar, however, appointed an administrator  of  the  bank  after  removing  the  managing committee.  In the meantime, some of the shareholders of the bank made an application before the Registrar under r. 18 of the  Co-operative  Societies  Rules,  in  the  nature  of  a misfeasance  proceeding against the members of the  managing committee,  praying for an award directing them to  pay  the amount  found  defalcated, on the ground that  it  had  been occasioned by a glaring breach of the law and the rules 434 and  the bye-laws of the bank and betrayal of confidence  by the  members  of the committee.   The  Registrar  originally appointed  an  arbitrator  for this  purpose,  but,  on  the inability  of the arbitrator to act due to his illness,  the Registrar  informed  the parties that he  would  decide  the dispute  himself.  The legality of the procedure adopted  by the Registrar was challenged in a petition filed before  the judicial  Commissioner,  on the ground that he  was  in  the position   of  a  party  and  had  expressed   his   opinion unequivocally  against the members of the committee  in  the

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notice he gave on February 26, 1955, and therefore his  con- stituting himself as a tribunal to decide the dispute  under r.  18  was  against  the  principles  of  natural  justice, inasmuch  as  a  party constituted himself  the  judge.  The judicial  Commissioner  took  the  view  that  although  the Registrar  had  no pecuniary or properties interest  in  the dispute  yet in view of the circumstances of the case  there was a strong likelihood of bias and therefore his acting  as the  tribunal  would be against the  principles  of  natural justice. Held, that the notice dated February 26, 1955, was concerned with  the  collective responsibility of the members  of  the managing  committee in the.discharge of their duties,  while the  application  made  under  r.  18  of  the  Co-operative Societies Rules was in the nature of misfeasance proceedings in which their individual responsibility as members to  make good  the  loss  caused  by  the  embezzlement  fell  to  be considered, and consequently there could be no inference  of bias against the Registrar simply because he gave notice  to show cause against the removal of the managing committee, as the two matters were quite different. Held,  further,  that the fact that  Registrar  had  general supervision  over  all co-operative societies could  not  be said  to amount to a bias in him so as to disentitle him  to act as a judge or arbitrator under r. 18.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1 of 1958. Appeal from the judgment and order dated April 18, 1956,  of the  former  Judicial  Commissioner, Ajmer,  in  Civil  Writ Petition No. 1 of 1956. G.   C.   Kasliwal,  Advocate-General  for  the   State   of Rajasthan, S. K. Kapur and D. Gupta, for the appellant. S.   S. Deedwania and K. P. Gupta, for respondent No. 1. B. P. Maheshwari, for respondent No. 9. 1961.  April 27.  The judgment of the Court was delivered by 435 WANCHOO,  J.-This is an appeal on a certificate  granted  by the Judicial Commissioner, Ajmer.  The brief facts necessary for  present purposes are these.,, There is a Bank in  Ajmer known  as  the Commercial Co-operative Bank  Limited,  Ajmer (hereinafter  referred to as the Bank), which is  registered under  the  Cooperative  Societies  Act,  No.  11  of   1912 (hereinafter  referred  to  as  the  Act).   Dharam   Chand, respondent   No.   1  (hereinafter  referred   to   as   the respondent),  along  with  certain  other  respondents  were members of the managing committee of the Bank.  One  Nandlal Sharma  was  the  paid  manager  of  the  Bank.   This   man disappeared in 1953 and thereafter defalcation to the extent of  about  Rs.  6,34,000 was  detected.   Consequently,  the managing  committee  passed  a  resolution  suspending   the business  of  the  Bank  subject  to  the  approval  of  the Registrar.   The  then  Registrar Shri  Nagar  approved  the resolution  and  appointed  an  Inspector  of   Co-operative Societies to hold an immediate inquiry.  He also appointed a firm of Chartered Accountants as investigating auditors.  On investigation by the auditors embezzlement to the extent  of about  Rs.  6,34,000  was found.   Thereupon  the  successor Registrar,  Shri Chitnis, gave notice to the respondent  and other  members  of the managing committee  on  February  26, 1955, asking them to show cause why the committee should not be  suspended under r. 30(3) of the Rules framed  under  the Act.  A reply to the notice was given by the respondent  and

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others  in which they denied allegations  of  mismanagement, etc.   The then Registrar Shri Chitnis however appointed  an administrator  of  the  Bank  after  removing  the  managing committee.   In the meantime, an application was made  under r. 18 of the Rules by seven shareholders of the Bank to  the Registrar  on  April  4,  1956.   Rule  18  authorises   the Registrar  to  decide any dispute brought before  him  under that  rule either himself or through the appointment of  one or more arbitrators.  Any dispute concerning the business of a  Co-operative Society between members or past  members  of the  Society or persons claiming through them, or between  a member or past member or person 436 so claiming and the Committee or any officer can be referred under  r. 18.  Such reference can be made by  the  Committee or by the Society by resolution in general meeting or by any party  to the dispute, or if the dispute concerns a sum  due from a member of the committee to the Society by any  member of the Society.  In consequence of this application the then Registrar  appointed Shri Hem Chand Sogani, an advocate,  as an  arbitrator.   The  application was in the  nature  of  a misfeasance  proceeding against the members of the  managing committee  and the prayer was for an award against  thirteen persons  (including  the respondent) directing them  to  pay certain amounts including the entire loss amounting to about Rs.  6,34,000,  which was said to have  been  occasioned  on account of glaring breach of law and the rules and the  bye- laws  of the Bank and betrayal of confidence by the  members of   the  managing  committee.   The  appointment   of   the arbitrator  was challenged by the president of the  managing committee before the Deputy Commissioner through a  revision petition  but the challenge failed.  As however Shri  Sogani was  in  ill-health, he expressed his inability  to  act  as arbitrator.   Consequently, on December 13, 1955,  the  then Registrar  set  aside the order appointing  Shri  Sogani  as arbitrator and informed the parties that he would decide the dispute himself.  This order was also challenged in revision before  the  Deputy Commissioner; but  the  attempt  failed. Thereafter the present petition was filed by the  respondent before the Judicial Commissioner, Ajmer, and a large  number of  grounds were urged in support of it, and it  was  prayed that  the  Registrar be prohibited from proceeding  to  deal with the application under r. 18 and the proceedings arising therefrom be quashed. The  petition  was decided by the Judicial  Commissioner  on April 18, 1956.  He negatived all the contentions raised  on behalf  of  the respondent except one; and it is  with  that contention only that we are concerned in the present appeal. That contention is that the Registrar is in the position  of a party and had expressed his opinion unequivocally  against the  respondent  and other members of the-committee  in  the notice                             437 which  he  gave  on February 26,  1955,  and  therefore  his constituting  himself  as a tribunal to decide  the  dispute under  r. 18 was against the principles of natural  justice, inasmuch  as  a party constituted himself the  judge.   This contention   found   favour  with   the   learned   Judicial Commissioner and he held that although the Registrar had  no pecuniary or proprietary interest in the dispute yet in view of  the  circumstances  of  the  case  there  was  a  strong likelihood  of bias and therefore the Registrar’s acting  as the  tribunal  would be against the  principles  of  natural justice.   He  further held that if the  Registrar  had  not suffered  from the disability inherent in the situation,  he

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would  have  been  the  most proper  person  to  decide  the dispute.   The petition was therefore allowed and a writ  of prohibition was issued to the Registrar directing him not to proceed  with the dispute before him.  This was followed  by an   application   to  the  Judicial  Commissioner   for   a certificate  of fitness in order to file an appeal  to  this court,  which  was granted; and that is how the  matter  has come up before us. The official bias of the Registrar is sought to be based  on two  circumstances:  the first is the notice issued  by  the then  Registrar on February 26, 1955, asking the members  of the  managing committee (including the respondent)  to  show cause  why they should not be suspended, and the  second  is that   the  Registrar  is  the  head  of  the   Co-operative Department and as such has certain legal powers over all Co- operative   Societies   (including   the   Bank)   in    his administrative  capacity  and therefore he would not  be  an impartial  person  to decide this dispute,  particularly  in view of the provisions of s. 17 of the Act. We  are of opinion that there is no force in either  of  the contentions.  Turning to the notice of February 26, 1955, we are  of  opinion  that there can be  no  inference  of  bias against  the Registrar as such because he gave  that  notice and   afterwards  ordered  the  removal  of   the   managing committee.   That  notice  was based on the  report  of  the investigating auditors and was concerned with the collective responsibility of the 56 438 managing  committee in the discharge of their  duties.   The proceedings  under that notice have nothing in ,common  with the  proceedings  in the present dispute which, as  we  have already  said, are in the nature of misfeasance  proceedings against  certain  members of the managing committee  and  in which  their  individual responsibility as  members  of  the managing  committee  to  make good the loss  caused  by  the embezzlement  falls  to  be  considered.   So  far  as   the proceedings  under  the  notice  are  concerned,  the   only question was whether on the facts found by the investigating auditors the managing committee should as a whole be allowed to act as such and all that the Registrar in that connection did  was to decide on the facts found by  the  investigating auditors  that  the managing committee should no  longer  be allowed  to manage the affairs of the Bank.  That is a  very different  matter  from  the dispute  in  the  present  pro- ceedings,  namely,  whether the particular  members  of  the managing committee against whom the application under r.  18 has  been  made  are responsible for making  good  the  loss caused to the Bank by the embezzlement, the fact of which is not  in dispute.  In the present proceedings  therefore  the Registrar will have to decide the individual  responsibility of the various members of the managing committee  (including the respondent) in the matter of making good the loss caused to the Bank.  We are therefore of opinion that the fact that the  Registrar  gave  that notice for  the  purpose  of  the removal of the managing committee is no reason to hold  that he  would  be  biased in  the  investigation  of  individual responsibility of various members of the managing  committee in this matter.  We cannot therefore agree with the Judicial Commissioner  that  there can be any official  bias  in  the Registrar  on  this ground in connection  with  the  present dispute and that such bias disentitles him to act as a judge or arbitrator under r. 18. The  next  contention  is  that  the  Registrar  being   the administrative  head of the Department is in control of  all

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the Co-operative Societies in Ajmer, including the Bank.  It is  said that because of that administrative  control  which the Registrar exercises through his                             439 subordinates in the Department, he is interested to see that the  blame  is put on the managing committee  and  that  his Department  is  freed from all blame.   In,  particular  our attention  has  been drawn to s. 17 which enjoins  that  the Registrar shall audit or cause to be audited by some  person authorised  by him the accounts of every registered  society once  at  least in every year.  It is said that  under  this provision  the  Registrar  has  been  appointing   Chartered Accountants  to  audit  the accounts of the  Bank  and  that nothing  wrong was discovered in the annual audits till  the paid manager Nandlal absconded and the defalcations came  to light.   We fail to appreciate how this general  supervision of the Registrar over all Co-operative Societies can be said to amount to a bias in him so as to disentitle him to act as a   judge  or  arbitrator  under  r.  18.  It  is  not   the respondent’s   case  that  the  Registrar  is  in  any   way responsible  for  the day to day working of the  Bank.   All that he is concerned with is to see that the accounts of the Bank   are  audited  yearly,  and  if  necessary,  to   make inspections of the Bank, if so authorised by the Act and the Rules.   That, however, does not mean that the Registrar  is bound  to shield the auditors or his subordinates who  might have  made the inspection of the Bank and would  so  conduct the  proceedings as to put the blame on the members  of  the managing  committee.   Even if some blame  attaches  to  the auditors  appointed by the Registrar or to his  subordinates who might have inspected the Bank, their fault would be that they failed to detect the embezzlement till the paid manager absconded.  That, however, does not mean that the  Registrar was  at any time a party to the fraud which resulted in  the embezzlement.   Even  the Judicial  Commissioner  recognises that  the Registrar has no personal interest in  the  matter and  that  he would but for the bias found by  the  Judicial Commissioner  have been a most proper person to  decide  the dispute.   Therefore even if we bear in mind the  fact  that the Registrar is the administrative head of the  Department, we  see  nothing inherent in the situation which  shows  any official  bias whatsoever in him so far as  adjudication  of this dispute is concerned. 440 We have no reason to suppose that if any of his subordinates or the auditors appointed by him are in any way found to  be connected with the fraud he would not put the responsibility where  it should lie.  We are therefore of opinion that  the Judicial  Commissioner was wrong in the view that there  was anything inherent in the situation which made the  Registrar a  biased  person  who  could  not act  as  a  judge  or  an arbitrator in this case. It  seems  to  us,  therefore,  that  the  learned  Judicial Commissioner was in error in thinking that the Registrar was biased.  For the reasons earlier mentioned, we do not  think that any such blemish attached to the Registrar.  That being so, no question of his inability to act as a judge under the rule  of natural justice that no man shall be judge  in  his own  cause,  arises.  The judgment of the  learned  Judicial Commissioner has to be set aside on this ground alone. We  do not wish however to be understood as having made  any pronouncement that if it had been proved that the  Registrar was  suffering  from any bias, then the present  would  have been  a fit case for the issue of a writ of  prohibition  as asked by the respondent.  Before the writ could be issued  a

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further question would have to be decided whether in view of the statute, that is, r. 18 of the Rules framed under s.  43 of  the  Act, there was any scope for applying the  rule  of natural  justice on which the contesting respondent  relied. A question of this kind was mentioned in Gullapalli Nageswar Rao  and Others V. State of Andhra Pradesh and  Others  (1). In the view that we have taken it is unnecessary to go  into that question and we do not do so. The result is that the appeal is allowed and the judgment of the  Judicial Commissioner is set aside.  The petition  will stand  dismissed.   Respondent  No. 1  will  pay  the  costs throughout.   We trust that there will be no further  reason to delay the termination of the proceedings under the  rules by the Registrar. Appeal allowed. (1)  [1960] 1 S.C. R. 580, 587.                             441