Elampal Service Co-operative Bank Ltd. vs Government of Kerala

J.B. Koshy, J.—The first appellant is a Co-operative Bank registered under the Kerala Cooperative Societies Act. The Bank was classified as Class IV Primary Agricultural Credit Society with effect from 1.7.95. The business of the Bank includes acceptance of deposits of money for interest, distribution of loan amount to eligible members of the society, conducting chitty business, giving out loan amount to members against gold security, distribution of fertilizers to the agriculturists etc. According to the appellants working capital is more than Rs. 1.82 crores and the present deposit is more than Rs. 2 crores. It is also averred that appellant Bank was selected for the award of Banks Trophy. Considering the working capital, deposits, loan outstanding etc. The Board of Directors resolved to classify the Bank into Class III and a resolution was passed and forwarded to the Joint Registrar. Even though no action was taken to cancel the resolution, when prior approval was asked for appointing additional staff on account of reclassification and additional work load, it was refused by Ext. P5 on the ground that the society was running on a loss of Rs. 19 lakhs and as per Circular No. 77/93 Registrar of Co-operative Societies ordered that no permission should be given for appointing additional staff on account of upgradation to societies whenever the society is running on a loss.

The learned single Judge observed that there is a specific provision in the second proviso to Rule 188 of the Kerala Co-operative Societies Rules that for change in the pattern of staff including the scale of pay, prior approval of the Registrar of Cooperative Societies is necessary and therefore appellants'' request to set aside Ext. P5 cannot be allowed and therefore under the second proviso to Rule 188, for appointment of additional staff consequent upon change of staff pattern, prior approval from the Registrar of Co-operative Societies is necessary. Rule 188 reads as follows:

Staff Pattern:- Every society shall adopt the staff pattern indicated in Appendix III to these rules, according to the type and class to which it belongs:

Provided that where any society cannot adopt such staff pattern due to its financial position, the members of the committee may work in an honorary capacity in lieu of appointing any paid employee:

Provided further that where any society is in need of any change in the pattern of staff including the scale of pay under special circumstances the same may be made by the society with the prior approval of the Registrar of Co-operative Societies.

To understand the meaning of Rule 188, we may have to look into Section 80 of the Co-operative Societies Act. Section 80(1) and (2) are quoted below:

Officers, etc. of Co-operative Societies:- (1) The Government shall classify the societies in the State according to their type and financial position.

(2) The Government shall, in consultation with the State Co-operative Union, fix or alter the number and designation of the officers and servants of the different classes of societies specified in Sub-section (1).

In Appendix III, Societies are classified into different classes and types and also staff pattern and salary scale are accordingly prescribed.

A reading of the above Rule and Appendix III makes it clear that staff pattern is fixed by the Rule itself. Therefore, normally society will be free to appoint staff as per the staff pattern fixed in Appendix III. Ist proviso allows the society from not adopting the staff pattern due to financial position and allows the members of the committee to work in a honorary capacity. That is for the society to decide. Second proviso only makes it obligatory for the society to get prior approval from the Registrar only if there is a ''need of any charge in the pattern of staff including the scale of pay under special circumstances. The above wordings make it clear that for appointing staff as per the staff pattern fixed in Appendix III and the rules according to the type and class to which the society belongs, no prior approval is necessary. Only if a change in the pattern is necessary, approval is required. In this connection we refer to the decision reported in Sherthallai Urban Co-operative Bank v. State of Kerala 1984 KLT 971. A similar view was taken in O.P. No. 8097/90 decided on 28.2.91 and O.P. No. 10078/85 decided on 27.3.1987.

If large volume of business is carried on by a society, sufficient staff is required for doing that work, whether the society is working on loss or profit. For reclassification, the question to be looked into is whether the conditions mentioned in Appendix-III are satisfied or not. If those conditions are satisfied, depending upon the working capital and other parameters mentioned therein consequential staff strength also will be necessary and loss incurred in one or two years is not the sole criteria for refusing the approval. However, if there is no sufficient work at all, it is not necessary for appointment of additional staff and then question of reclassification also should be reconsidered by the Registrar If reclassification is correct, society should be allowed to appoint staff as per staff strength fixed in Appendix III unless there are compelling reasons. Here it is not stated that depending upon the working capital and the volume of work reclassification was not correct. If the reclassification is correct rule itself gives the staff strength. Request for prior approval was rejected only by Ext. P5 dated 25.6.99 merely on the basis of loss even though resolution for reclassification was passed on 1.7.97.

In the decision reported in Pararneswaran Kartha v. Asst. Registrar 1992 (2) KLT 77 this Court held that prior approval necessary for reclassification, but once the resolution for reclassification was passed, prior approval of Registrar is necessary for appointment of the staff. But it was also held that approval cannot be rejected merely on arbitrary grounds and merely because of the loss and it is incumbent on him to grant approval If conditions in Appendix III are satisfied.

Learned Judge in Parameswaran Kartha''s case (supra) held as follows:

The result of the discussion therefore is that while the up gradation of a society does not require the approval of the Registrar, increase in the staff strength consequent thereon does require his approval, and any additional staff can be appointed only after such approval of the Registrar is obtained.

But this does not mean that the Registrar can refuse approval to increase the staff strength arbitrarily or unreasonably or any ground whatsoever. If the decision of the society to upgrade itself is regular and valid, the Registrar will not be entitled to refuse approval for increase in the staff strength, taking shelter under Note 2 to Appendix III. The only questions which will open to him for consideration will be whether the conditions specified in column 3 of Appendix III regarding working capital, loan outstandings etc., appropriate to the society in question are satisfied. If these conditions are satisfied, it is incumbent on the Registrar to accord approval for the increase in the staff strength. He cannot take other factors into account to refuse such approval. This is the effect of the decisions in O.P. No. 10078 of 1985, O.P. No. 5321 of 1990 and O.P. No. 8628 of 1990. He cannot for example, rely on the fact that the society is working at a loss as a ground for declining approval.

In Appendix III after the end of each class Notes are added. For example under Serial No. 2 i.e. Credit Societies Class I Special grade following notes are added.

Notes:

(1) For every additional working capital of Rs. 1 Crore, one additional Clerk subject to a maximum of 5 additional Clerks will be admissible.

(2) For every additional 3 Clerks one additional Head Clerk will be admissible.

Under Class II there are two notes. Under Class III no notes are mentioned. Under Class IV two notes are mentioned. Under Class VI where only one Secretary and one Clerk are allowed only one note is there. Note says that "Requirement for additional Staff, if any, will be sanctioned by the Registrar of Co-operative Societies". Thereafter general notes applicable to all societies under Serial No. 2 are mentioned. Note ''2'' mentioned in judgment is applicable only to societies mentioned in Serial No. 8 i.e., Miscellaneous Societies where approval is necessary for increase in staff strength. Therefore wherever approval is necessary, that is mentioned in Appendix HI itself specifically. finder Serial No. 2 Class III or in the general notes to Serial No. 2 no such notes are mentioned. Serial No. 8(e) relates to unspecified societies wherein staff pattern can be varied. If Note ''2'' mentioned under Sl. No. 8(c) (last note in Appendix III) is applicable to all societies, there was no necessity to add the same under Sl. No. 2 Class VI or under various serial numbers and classes separately. Hence Note ''2'' mentioned by the learned judge makes no obligation to the society to ask for prior approval for appointments if classification under Class III in Sl. No. 2 is not disputed.

We have already held that no prior approval is necessary for appointment of staff as per staff pattern and scale of pay mentioned in Appendix III depending upon the classification and type of society in view of Section 80 and Rule 188. Question of approval arises only when society need a change in the pattern as laid down in Appendix 111 depending upon special circumstances and not otherwise. Therefore we agree with the views expressed in the judgment reported in 1984 KLT 971 (supra) and not with the decision in 1992 (2) KLT 77 (supra) with regard to the prior approval of appointment and hold that no prior approval from the; Registrar is necessary for appointment of staff unless such a condition is mentioned specifically in respect of any classes of society in Appendix III.

liven though u/s 27 decision of the final authority of the society vest in the general body, that power is only subject to the Act, Rule and Bye-laws, of the society. If a resolution is passed by the society reclassifying the society against the conditions In Appendix III, that resolution will be against Rule 188 and hence under Rule 176 Registrar has got power to set aside that resolution. Rule 176 is as follows:

Registrar''s power to rescind resolution:- Notwithstanding anything contained in the bye-laws of a registered society, it shall be competent for the Registrar to rescind any resolution of any meeting of any society or the committee of any society, if it appears to him that such resolution is ultra vires of the objects of the society, or is against the provisions of the Act, Rules, Bye-laws or of any direction or instructions issued by the Department, or calculated to disturb the peaceful and orderly working of the society or is contrary to the better interest of the society.

If reclassification made by the petitioner Bank is incorrect, the Registrar is not helpless in setting aside the resolution passed.

In Ext. P5, reclassification is not set aside. It is also not stated that in this society there is a need for financial constraint as it is continuing in the red and there is maladministration and unless restraints are made, it may go with liquidation. Here prior approval for appointment was rejected solely on the ground that there is a net loss of Rs. 19 lakhs in the audit certificate. Ext.P6 Audit Certificate dated 31.3.99 shows that loss was reduced in the subsequent year. When Working Capital is more than Rs. 1.8 crores and deposits arc more than Rs. 2.1 crores, the loss suffered is not so alarming. The Registrar has to look into the questions whether the conditions specified in the Column 3 of Appendix-III are satisfied and whether reclassification is correct or not. We also note that for agricultural credit societies for grading as Class I as per Appendix III, it should have declared dividend on share at least for one year during the 5 preceding years and should have worked on profit for two years in the previous 5 year period. For Class II society should have work on profit at least for one year during the preceding 3 years (No declaration of dividend is necessary), But for Class III and downward working on profit or declaration of dividend is not made a condition at all. What is necessary for classification as Class III is stated as follows;

Class II 1. Working Capital Rs. 1.50 Crores & above but below Rs. 2.5 Crores. Secretary 2. Deposits Rs. 1 Crore & above Assistant Secretary 3. Loans Outstanding Rs. 1 Crore & above Internal Auditor 4. Audit Classification for previous year Not less than ''C'' Sr. Clerk/Cashier/Jr. Clerk/Cashier. 5. Over due under Loans Should not exceed 2.5% of Attender, Peons the demand Night-Watchman. Therefore, working on profits not a criteria for classification under Class III. If the Society is not satisfying the conditions of classification as per the resolution, it is for the Registrar to act under Rule 176 and society needs no previous approval for appointment of staff strictly as per staff pattern without any change as prescribed under Appendix III according to it''s classification and type.

Registrar also can act under Note (ii) of Rule 15 which is as follows:

Classification of societies according to types: After the registration of a society the Registrar shall classify the society into one or other of the following types according to the principal object provided in the bye-laws....

Note:- (ii) If the Registrar alters the classification of a society from one class of society to another or horn the sub class thereof to another, he shall issue to the society/and the Financial Bank a copy of his order and the society shall fall under that category with effect from the date of that order.

But he cannot pass an order ignoring classification under Rule 188 read with Appendix III. Here reclassification done by resolution is not altered at all. In the above circumstances, Circular No. 77/93 referred to in Ext. P5 cannot be acted upon. Such a circular is even against the dictum laid down in 1992(2) KLT 77 (supra) relied on by the Registrar.

For the reasons stated above, we set aside Ext. P5 order and the appellant society is free to take steps as per law for appointment of employees as per the staff, pattern prescribed under Appendix III according to classification and type of the society unless it is reclassified by the registrar according to rules.

The Writ Appeal is allowed.