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CASE NO.: Appeal (civil)  9 of 2008

PETITIONER: Reserve Bank of India

RESPONDENT: M.Hanumaiah & Ors.

DATE OF JUDGMENT: 04/01/2008

BENCH: G.P.Mathur & Aftab Alam

JUDGMENT: J U D G M E N T (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 \021Cooperative  Bank\022 or \021the Bank\022) 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

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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 : \023From 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.\024 (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 \021to the Reserve Bank to proceed against the Bank, if  necessary, in accordance with law\022.      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  \021would be open to Reserve Bank of India to proceed against the  bank, if necessary, in accordance with law\022.  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\022 time and thus completely

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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 : \02330. Supersession of committee \026 (1) If, in the  opinion of the Registrar \026

(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, \023including the direction issued  under Section 30B\024.

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.

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(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.\024

(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 \021after  giving the committee an opportunity to state its objections\022.  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 bank\022s  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 :

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\02338(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 \026

(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 : \023(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 \026 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

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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 Bank\022s 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.\024                                         (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 : \023(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\022 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

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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 Bank\022s 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.\024   (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 : \023The 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

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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.\024

    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.