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PETITIONER: UTTAR PRADESH CO-OPERATIVE FEDERATION

       Vs.

RESPONDENT: THE STATE OF U.P. & ORS.

DATE OF JUDGMENT19/01/1973

BENCH: RAY, A.N. BENCH: RAY, A.N. SIKRI, S.M. (CJ) PALEKAR, D.G. BEG, M. HAMEEDULLAH DWIVEDI, S.N.

CITATION:  1973 AIR 1068            1973 SCR  (3) 402  1973 SCC  (1) 398

ACT: U.P. Cooperative Societies Act, 1965 (Prior to amendment  by U.P.  Act No. 1 of 1972) & Rules-State Government  power  to nominate  upto  2/3rds  of total number of  members  of  the committee of the management. U.P.  Cooperative Societies Rules 19618-Reduction  of  share capital unless a member is removed according to Rules  share capital  not affected.-Shares kept in security  remained  in specie-No reduction of share capital.

HEADNOTE: The petitioner challenged the order passed by the U.P. State Government  on  26-1-1971 nominating 2/3rds of  the  total number of members of the committee of the management of  the petitioner  purporting to act under section 34 of  the  U.P. Cooperative  Societies  Act, 1965.  The subscribed  paid  up capital of the Federation on 30-6-1969 was Rs. 34.04  lakhs. of  this, the State Government owned shares of the value  of Rs. 20 lakhs.  The percentage of the State Government in the share holding was 58.75%. The State Government’s  contention Was  that the membership of some co-operative bank had  been terminated  and, therefore the share capital was reduced  by Rs.  53,000/-.   The State Government  also  contended  that another member, District Cooperative Federation,  Saharanpur retired  Rs.  50,0001-  out of his share  capital  with  the Federation.   The State Government, therefore, claimed  that its  share  holding had gone to 60% and,  therefore,  had  a right under s. 34 to nominate its nominees to the  committee of  the management.  The petitioner challenged the order  on the  ground  that  the  condition  precedent  of  the  State Government holding 60% of the shares in the share capital of the  Federation was not fulfilled.  It also  raised  several other grounds including the constitutional validity of  Sec. 34 of the Act. Allowing the writ petition, HELD : (i) The provisions of the Act and Rules indicate that the  Co-operative banks did not cease to be the members,  as there was no resolution removing the banks from  membership. Rule  32  indicates  that there is  no  reduction  of  share

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capital  a& the shares of the banks were not transferred  to any other person.  The shares still stood in the name of the co-operative banks and the share capital was not reduced  by Rs. 53,000/-. [408H; 409A-C]  403 (ii) Saharanpur District Cooperative Federation was still  a member,  as  it was not removed from membership.   It  share money  cannot  be  taken out of  share  capital  fund and treated  as  security money.  The shares were  not  kept  in security.   Even if the shares were in security, the  shares remained in specie.  The share capital of the petitioner was not reduced by Rs. 50,0001-. [409F-H; 410A-C] (iii)     As the shares in both the cases were still part of the share capital, the State Government was not justified to exercise right under section 34 of the Act. [410DL-F]

JUDGMENT: ORIGINAL/CIVIL  APPELLATE JURISDICTION : Writ  Petition  No. 243 of 1971 and Civil Appeal No. 592 of 1972. Writ Petition No. 243 of 1971 Petition  under Article 32 of the Constitution of India  for the  enforcement of fundamental rights and Civil Appeal  No. 592 of 1972. Appeal by a special leave from the judgment and order  dated December  8,  1970 of the Allahabad High Court  Civil  Misc. Writ No. 4700. A.   K.  Sen, A. P. Singh Chauhan, Y. C. Prashar and  Dharam Pal Singh Chauhan, for the petitioner and appellant. C.   K.  Daphtary,  B. Sen and O. P. Rana,  for  respondents Nos. 1-4, 10-11 (in W.P. No. 243) and respondents Nos. 1 & 2 (in C.A. No. 592). The Judgment of the Court was delivered by RAY,J. The  Civil  Appeal is by  special  leave  from  the judgment  dated  8  December,  1970 of  the  High  Court  at Allahabad  dismissing the petition of the  appellants.   The appellants  in the Allahabad High Court impeached the  first order  dated 19 September, 1970 passed under section  34  of the  Uttar Pradesh Cooperative Societies Act, 1965  referred to  as the Act nominating two-thirds of the total number  of members of the committee of management of the Uttar  Pradesh Co-operative  Federation.   The  appellants  are  the  Uttar Pradesh Co-operative Federation Ltd., Lucknow referred to as the  Federation  and  Veerpal Singh who are  both  also  the petitioners in the writ petition. 404 This  writ petition is directed against the second order  of the  Uttar  Pradesh  State Government dated  26  June,  1971 passed under section 34 of the Act nominating two-thirds  of the  total number of members of the committee of  management of the Federation. The  question  which  falls for determination  in  the  writ petition   and  the  civil  appeal  is  whether  the   State Government  under section 34 of the Act could nominate  two- thirds  of the total number of members of the  committee  of management of the Federation. The  annual  general meeting of the Federation was  held  on 30th March 1970.  The committee of management of the Federa- tion  was  elected  at  the  annual  general  meeting.   The appellant  petitioner  Veerpal  Singh on 8  April  1970  was unanimously elected as Chairman of the Federation. On  19 September, 1970 the State Government passed an  order under section 34 of the Act and nominated two-thirds of  the members  of the committee of management of  the  Federation.

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It may be stated here that under section 34 of the Act where the  share capital subscribed to by the State Government  is 60  per cent or more of the total share capital of  the  co- operative society the State Government shall have the  right to nominate up to two-thirds of the total numbers of members of  the  committee  of management.   The  State,  Government passed the order on that basis that it had share capital  of more than 60 per cent in the Federation. The  Federation moved the Allahabad High Court  against  the said  order of the State Government.  The High Court  stayed the operation of the said order nominating two-thirds of the members  of  the committee of management.   The  High  Court dismissed  the  petition of the Federation  on  8  December, 1970.   On 18 December, 1970 the State Government  cancelled the order dated 19 September, 1970. The Additional Registrar, Co-operative Societies, Uttar Pra- desh  submitted an inspection report to the effect that  the State  Government  had  been  misinformed  about  the  share capital  of  the State Government in  the  Federation.   The report  stated that in fact the share capital of  the  State Government  in  the Federation was never 60 per  cent.   The report  further stated that the matter should be  thoroughly investigated and guilty persons should be punished. The appellant petitioner Veerpal Singh wrote a letter on  12 June, 1971 to the Chief Minister of Uttar Pradesh and  asked for   immediate  action  pursuant  to  the  report  of   the Additional  Registrar  of Co-operative Societies.   In  that letter  Veerpal Singh stated that Om Prakash  Tyagi,  Deputy Registrar, Co-operative Societies had  405 been  working  as Secretary of the  Federation  Since  1970. Veerpal  Singh  also stated in the letter  that  on  being elected Chairman he examined the accounts and found that  Om Prakash Tyagi had been responsible for mal-practices. On  26  June, 1971 the State Government  passed  the  second orders tinder section 34 of the Act nominating two-thirds of the  total number of members of the committee of  management of  the Federation.  After the State Government  had  passed the said order nominating two-thirds of the total number  of members  of the committee of management the elected  members of  the committee under rule 3 8 (b) of the by-laws  of  the Federation  were  moved by draw of lots to  accommodate  the nominated  members.  The appellant petitioner Veerpal  Singh survived  the  process  of draw by  lots  and  retained  his membership of the committee of management of the Federation. In  the Allahabad High Court the appellants  challenged  the first order of the State Government dated 19 September, 1970 on inter alia the ground that the share holding of the State Government on facts and in law was not 60% and therefore the State  Government was not competent to pass an  order  under section  34 of the Act.  The Allahabad High Court held  that if the appellants denied and disputed facts as to  ownership by  the  State  Government of 60 per cent  or  more  of  the Capital of the Federation the High Court could not  normally decide controverted facts and the petition would fail.   The High  Court  however  held that  the  State  Government  was justified  in  taking the view that the  share  holding  had crossed the mark of 60 per cent and therefore the order  was valid. The  petitioners in the writ petition challenged the  second order  dated  26 June, 1971 passed by the  State  Government under  section  34 of the Act nominating two-thirds  of  the total number of members of the committee of management.  The contentions  are  four.  First, that section 34 of  the  Act gives  a  naked power without any guidance as to  when  that

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power  is  to  be exercised and  under  what  circumstances. Secondly,  it is said that the naked power under section  34 infringes  Article  14  of the  Constitution  by  subjecting societies to directors of societies being picked and  chosen by  the  Government without ’any principle  being  involved. Thirdly, it is said that the exercise of power was arbitrary and on extraneous (,rounds without any hearing being  given. Fourthly,  the condition precedent of the  State  Government holding  60 per cent of shares in the share capital  of  the Federation was not fulfilled. It  is  not necessary to express any opinion  on  the  first three   contentions  because  in  our  opinion  the   fourth contention succeeds. 406 The  subscribed and paid up share capital of the  Federation on  30  June, 1969 was Rs. 34.04 lakhs.  Of this  the  State Government  owned shares of the value of Rs. 20 lakhs.   The percentage of the State Government in the share holding  was 58.75  per  cent.   The State Government case  was  that  in January,  1970 the Federation terminated the  membership  of the co-operative banks.  The co-operative banks at that time held  shares worth Rs. 53,000.  Subsequently, an  individual co-operative  society brought shares worth Rs. 1,000 in  the Federation.   Thus, the total paid up share capital  of  the Federation  came down to Rs. 33.52 lakhs, according  to  the version  of the Government.  The further Government case  is that  in the first week of September, 1970 the District  Co- operative Federation.  Saharanpur retired Rs. 50,000 out  of its  share capital of Rs. 1,51,000 in the  Federation.   The result, according to the Government, was that the total paid up  share capital of the Federation was further  reduced  to Rs.  33.01  lakhs.   On  this  basis  the  State  Government contended  that  the share capital of the  State  Government worth  Rs. 20 lakhs was more than 60 per ,cent.   The  State Government  on this footing of ownership of 60 per  cent  or more  of  the share capital of the Federation  passed  order under section 34 of the Act and nominated two-thirds of  the total  number of members of the committee of  management  of the Federation. The petitioners as well as the appellants on the other  hand contended that neither the shares owned by the  co-operative banks  to the extent of Rs. 53,000 nor the shares worth  Rs. 50,000  owned  by  the  District  Co-operative   Federation. Saharanpur  could  be said by the Government to  be  reduced from  the total share capital to allow the State  Government to take the plea that the State Government owned 60 per cent or more of the total share capital in the Federation.  It is further  contended  by  the  petitioners  as  well  as   the appellants that on 26 June, 1971 the total share capital  of the  Federation was Rs. 40,17,000.  According to them,  this share capital included the share holdings of the cooperative banks  at Rs. 53,000 and the further share holdings  of  Rs. 50,000   belonging  to  the  Saharanpur   Federation.    The petitioners  therefore contended that the share  capital  of the State Government at Rs. 20 lakhs was not more than 49.81 per cent at the relevant date on 26 June, 1971. Two  questions arise.  First, whether it could be said  that the  share holding of the co-operative banks at  Rs.  53,000 was reduced from the share capital on the relevant dates  in September,  1970  or  in the month  of  June,  1971  Second, whether  the sum of Rs. 50,000 out of share capital held  by the  District  Co-operative, Federation, Saharanpur  in  the share  capital of the Federation had been retired  with  the result of reduction of the share capital of the Federation.  407

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Under  section  34  of  the  Act  where  the  share  capital subscribed by the State Government is 60 per cent or more of ;the total share capital of a co-operative society the State Government shall have the right to nominate up to two-thirds of the total number of members of  the     committee      of management.    Under  section  34  of  the  Act  the   State Government  in such a case has also the power to nominate  a Government  servant or a non-official as a Chairman  of  the committee.    This  power  of  nominating  a   Chairman   is notwithstanding  the provisions contended in section  30  of the  Act.  Section 30 of the Act speaks of  Chairman,  Vice- Chairman  of the society elected, nominated or appointed  in accordance  with the provisions of the Act, rules  and  bye- laws.  Section 34 further provides that the State Government may  exercise right mentioned ,therein during the period  of five  years from the time the share of the State  Government in  the share capital of the Federation becomes 60 per  cent or more or until such share in the capital goes down to less than 50 per cent whichever is earlier. It  may be noticed here that section 34 of the Act has  been amended  by Uttar Pradesh Act 1 of 1972.  The rights of  the parties  in the present appeal as well as the  petition  are governed by section 34 of the Act as it. stood prior to  the amendment. In  view  of  the fact that the first  order  of  the  State Government dated 19 September, 1970 which was challenged  in the  Allahabad  High  Court  was  cancelled  by  the   State Government in the month of December, 1970 only the  validity of   the   second  order  dated  26  June,   1971   requires consideration. The  case  of  the Government is that under the  Act  a  co- operative bank cannot be a member of a co-operative society. Prior  to the Act co-operative banks could be  share-holders of  a  co-operative society.  It is said on  behalf  of  the Government  ,that the Federation modified its  bye-laws  and made  them  consistent  with the Act  by  deleting  the  co- operative  bank  from  the category of  persons  who.  could become  members of the Federation.  On 30 June, 1970  it  is said   that  Rs.  53,000  being  the  share  money  of   the cooperative  bank  was transferred from  the  share  capital account  into  the  suspense account in  the  books  of  the Federation.   Therefore, the case of the Government is  that the  share capital of ,the Federation stood reduced  by  Rs. 53,000 on 30 June, 1970. It  appears that prior to the coming into force of  the  Act the   District  Co-operative  Banks  were  members  of   the Federation.   After the Act came into force the bye-laws  of the  Federation  were  amended.   Under  bye-law  5  of  the Federation the membership was limited to two classes,  viz., the  District  Co-operative Federation’  and  the  Marketing Societies.   The District Co-operative Banks therefore  were not eligible to be members under the amended 408 bye-laws.   The question therefore arises as to  what  would happen  to  the  shares of the co-operative  banks  who  had become members prior to the coming into force of the Act. Section  17 of the Act speaks of persons who may be  members of a co-operative society.  Such persons are an  individual, any  other co-operative society, the State  Government,  the Central Government, the State Warehousing Corporation and  a body corporate not covered by any other clause and  approved by  the  Registrar.  It is also enacted that a  joint  stock company  or  an  individual  shall not  be  admitted  as  an ordinary  member.   Section  22  of  the  Act   contemplates restrictions on individuals in regard to holding of  shares.

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Section 23 of the Act speaks of_restrictions on transfer  of shares  or  of interest.  Section 24 of the Act  deals  with transfer  of interest on death of a member.  Section  27  of the  Act speaks of removal or expulsion of a member  by  the Registrar of the Society. Rule  56 of the Uttar Pradesh Co-operative Societies  Rules, 1968 referred to as the Rules broadly deals with removal  of members  from membership of the society and expulsion  of  a member from the membership of the society.  Rule 5 6 (a) (i) states  that a person may be removed from membership  if  he has ceased to fulfil ;the qualifications laid down under the Act,  rules  and  bye-laws  of  the  society  or  (iv)   his membership   of  the  society  is  inconsistent   with   the provisions  of  rule 8 (b).  Rule 57 states  that  a  person sought  to  be removed or expelled under Rule  56  shall  be called upon by the committee of management to show cause why he  should not be removed or expelled.  Rule 58 states  that the  committee of management may by a resolution  passed  in (the  meeting remove or expel a member, Rule 59 states  that no  resolution for removal or expulsion shall  be  effective unless  it  is carried by a majority of  two-thirds  of  the members present and voting.  Rule 63 states that a member of the  co-operative society shall cease to be a  member  inter alia   on  his  removal  or  expulsion  from   society or retirement, transfer or forfeiture of all the shares held by him. The  provisions in the Act and the Rules indicate  that  the removal  can  only  be  under a  resolution.   There  is  no provision  for :automatic cessation of membership.   In  the absence  of  a resolution there is no valid removal  of  co- operative bank from membership. In the case of removal of a member the shares of such a mem- ber may under section 23(3) of the Act be transferred to  or acquired  or retained by a member.  Chapter VI of the  Rules consisting  of  Rules 65 to 82 deals with shares.   Rule  82 states that where a member of a co-operative society  ceases to  be such a member the value of his share or  interest  in the share capital of  409 the society to be paid to him or his nominee shall be  equal to  the  actual amount paid by the member  to  the  society. These provisions indicate that there, is no reduction of the share  capital.  There was no removal of co-operative  banks from  the  membership  of the  Federation.   There  was no resolution  to  that effect.  The shares owned  by  the  co- operative  banks are still in existence.  These shares  have not  been yet transferred to any one.  The shares  have  not been  transferred  to, acquired or retained by  any  person. The  shares  still  stand in the name  of  the  co-operative banks.   The share capital is not reduced.  It is  therefore not valid on the part of the State Government to reduce  the shares worth Rs. 53,000 owned by the co-operative banks, and not  to take the same into consideration in calculating  the total share capital. The other plea of the State Government is that shares  worth Rs.  50,000  belonging  to,  the  Saharanpur  District   Co- operative Federation were retired with the result that there was reduction of total share capital by a sum of Rs. 50,060. Retirement of shares is dealt with by rule 66 of the  Rules. It is stated in the rule that under section 23(3) of the Act a co-operative society may retire the shares of a member  in the.  instances mentioned therein.  The fourth  instance  in rule  66 is that if a member of a co-operative  society  has ceased  to be a shareholder on account of adjustment of  his membership to any other class under rule 44(c) or if he  has

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been  removed from membership under rule 56(a),  his  shares may be retired.  Again under Rule 70 a Central  Co-operative Society  may reduce the share capital according to a  scheme approved  by the Registrar.  Such a scheme may  provide  for (i)  extinguishing or reducing the liability on any  of  its shares  in  respect of share capital not paid  up,  or  (ii) cancelling  any paid up share capital or (iii)  paying  back any paid up share capital which is in excess of the needs of the central society. The Saharanpur District Co-operative Federation never ceased to be a member.  There has been no removal or expulsion.  If the  Saharanpur District Co-operative Federation is still  a member its share money cannot be taken out of share  capital fund  and  treated as security money.  Retirement  of  share money under Rule 66 is in four cases.  First, if a member at the  time of his admission to membership enters  into  share participation  agreement between the society and the  member his  share may be retired, Secondly, the shares of a  member in  a  salary earning co-operative society in the  event  of transfer  of such member from the area of operation  of  the society  or cessation of his service by virtue of  which  he held membership of the society may be retired.  Thirdly, the shares  of  a member of a cooperative society  organised  in educational  institutions  if  the member  ceases  to  be  a student  or a member of the staff of the institution by  the virtue of which he 410 was holding membership of the society may be retired.   None of these three contingencies of retirement of shares applies to   the  case  of  the  Saharanpur  District   Co-operative Federation.  The fourth instance mentioned in rule 66 is the retirement of a member who has been removed from  membership or  has ceased to be a shareholder on account of  adjustment of  membership under rule 44 (c). The District  Co-operative Federation, Saharanpur does not fall in this class also. The amount of Rs. 50,000 representing the shares of the Dis- trict  Co-operative Federation, Saharanpur was said  by  the State Government to be kept in security. if the shares  were in security the shares remained in specie. , It could not be said  that  the shares were converted by  sale  into  money. Rule 75 forbids by pothecation of shares as security for any loan.   It is therefore not open to the State Government  to contend  that the shares worth Rs. 50,000 belonging  to  the District Co-operative Federation, Saharanpur were taken  off the share capital of the Federation. The  condition  precedent to the exercise of rights  of  the State  Government  under  section  34  is  that  the   State Government owns 60 per cent or more of the share capital  of the  Federation.  The entire basis of exercise of ’right  of the Government was that shares worth Rs. 53,000 owned by the Co-operative banks and shares worth Rs. 50,000 owned by  the District Co-operative Federation.  Saharanpur were no longer part  of the share capital.  There is no foundation for  the State  Government to take up that plea.  The shares in  both the  cases are still part of the share capital.  The  result is  that it could not be said that the State Government  was justified to exercise right under section 34 of the Act. For the foregoing reasons the petition succeeds.  The  order of the State Government dated 26 June, 1971 is quashed. The  appeal  is also allowed and the judgment  of  the  High Court is set aside for the reasons indicated hereinbefore. Each party will pay and bear its own costs. S.B.W.                                 Appeal allowed. 411

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