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K. Sreedhar Rao, J.—W.P. Nos. 34813 and 35163 - 164/2009 pertain to suppression of Grain Merchants Co-operative Bank. Writ Petition Nos. 28148 and 28156/2009 pertain to suppression of Kannika Parameshwari Cooperative Bank. The above writ petitions involve common question of law and fact. Hence, heard together for common disposal.
The Reserve Bank of India (RBI) conducted periodical inspection of Grain Merchants Co-operative Bank and Kannika Parameshwari Co-operative Bank for the period ending with March 31st 2009. In the course of inspection, serious financial irregularities like grant of (1) loan to the relatives of the directors, (2) loan without proper securities, (3) loan to the fictitious persons and (4) misapplications of one time settlement scheme to the loan accounts not covered under the Schemes.
The RBI sent a copy of the inspection report granting four months time to the above Co-operative Banks to rectify the defects and to offer explanation for mis-physicians and male-physicians. The RBI even before the above banks sent their compliance report, directed the Registrar to remove the Managing Committees of the above banks u/s 30(5) of the KCS Act (for short ''Act''). The tenure of the elected committee of both the Banks was to expire by 31st March 2010. The supersession was recommended by the RBI 4 months prior to the expiry of the tenure.
The Grain merchants Co-operative Bank, after supersession but within the period of four months had submitted the action taken report to the RBI. The Kannika Parameshwari Co-operative Bank has not submitted action taken report to the RBI so far. The Registrar of Co-operative Societies, pursuant to the directions of the RBI, passed order of supersession of both the banks and in respect of members of Kannika Parameshwari Co-operative Bank. The Registrar further declared that the committee members of Kannika Parameshwari Co-operative Bank are disqualified to contest the election for a period of 4 years. The members of the committee aggrieved by the order have filed the Writ Petitions.
Respondent No. 6 in WP No. 34813/2009 has come as intervener on record supporting the order of supersession.
The following common questions of law arise for consideration in the above petitions:
(1) Whether it is incumbent on the RBI to provide an opportunity of hearing before recommending the supersession u/s 30(5) of the KCS Act.?
(2) Whether the provision of Section 30(5) of KCS Act, imbibes a scope for post decisional hearing.?
(3) Whether the RBI u/s 30(5) of KCS Act, while recommending the supersession appoint an administrator for a term beyond the period mandated for holding elections?
The provisions of Section 30(1) of the Act, empower the Registrar to supercede the committee at his discretion if the stated irregularities are found. However, the Registrar is obligated to hear the affected committee before the order of supersession is made. The Section 30(1) of the Act, came to be amended with effect from 30.10.2009, where under the Registrar has to seek prior approval from RBI for effecting supersession u/s 30(1) of the Act. Section 30(3) of the Act debars the members of the superseded committee to contest for election for a period of four years from the date of order u/s 30(1) of the Act. The members who are disqualified in an enquiry u/s 29 of the Act, are also disqualified to contest for the elections for a period of four years.
The RBI is empowered to issue direction to the Registrar for removal of the Managing committee of the Bank u/s 30(5) of the Act. For convenient reference, the provisions of Section 30(5) of the Act, are extracted hereunder:
30(5): Notwithstanding anything contained in this Act, the Registrar shall, in the case of a Cooperative 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 roper 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.
The un-amended provision of Section 31 of the Act, invested a discretion with Registrar to supersede on fulfillment of the said requisites. However before such an order could be passed, the Registrar is obliged to hear the committee proposed for supersession. The amended provisions, have taken away the discretion of the Registrar to order supersession u/s 30(1) of the Act, without the approval of RBI. Section 30(3) of the Act, places an embargo on the members of the superseded committee from contesting election for a period of 4 years from the date of order. In contra distinction, the members of the committee who are removed u/s 30(5) of the Act, do not suffer automatic disqualification to stand for election. They would stand disqualified only if an order is passed after enquiry u/s 29(c) of the Act.
Sri Jayakumar S. Patil and Sri D.N. Nanjunda Reddy, learned senior advocates appearing for superseded banks and Sri Madhusudana R. Naik learned Senior Counsel appearing for the Grain Merchants Co-operative Bank strenuously contended that the directions issued by the RBI u/s 30(5) of the Act, would visit with the serious civil consequence of forfeiture of the office by the elected members. Therefore, it is incumbent upon the RBI to provide an opportunity for hearing before any recommendation is made to the Registrar for removal. The rules of natural justice have to be read into the provisions of Section 30(5) of the Act, by implication and right of hearing should be given before any direction is issued to the Registrar. In this regard the learned Counsel relied upon the following decisions:
(1) Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I and Another, ;
(2) K.I. Shephard and Others Vs. Union of India (UOI) and Others, ;
(3) Reserve Bank of India v. M. Hanumaiah and Ors. 2008 AIR SCW 540.
Sri P.S. Rajagopal, learned Counsel appearing for the RBI strenuously contended that when the statute does not provide right for hearing to the parties, rules of natural justice should be construed as excluded by the statute. The banking companies stand out as a distinct and separate class of corporation. The RBI is the sole regulatory authority. The direction/order of RBI becomes inscrutable in the Court of law. In this regard, relied upon the decision of the Supreme Court in Hanumaiah''s case (AIR 2008 SCW 540) wherein the observations of the Supreme Court in Joseph Kuruvilla Vellukunnel Vs. The Reserve Bank of India and Others, is extracted in para 14 which is 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 is its reasonable in the individual circumstances 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 facts 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 postmortem examination of the corpse of the banking company.
Sri P.S. Rajagopal, learned Counsel, further submitted that the aggrieved members of the superceded committee can avail the right of post-decisional hearing. In this regard, relied upon a decision in Liberty Oil Mills and Others Vs. Union of India (UOI) and Others, . The counsel further submitted that the RBI had directed the Registrar to enquire into the matter. Therefore, necessarily enquiry would be held u/s 64 and 65 and as well u/s 29(c) of the Act. Therefore, the petitioners have an opportunity of post-decisional hearing.
The RBI independent of the provisions of KCS Act is invested with the jurisdiction of Section 35 and 36AA of the Banking Regulation Act, 1949 to remove the directors of the Bank.
A close reading of the provisions of Sec. 30(5) of the KCS Act does not disclose that the RBI has any further control over the functions of the Registrar after directing removal of the committee in the sense the RBI cannot legally direct enquiry by the Registrar u/s 29(c) or 64 and 65 of the Act. The enquiry by the Registrar under the said provisions is in the independent discretion of the Registrar. In other words, the RBI has no legal jurisdiction to insist Registrar to hold enquiry against the members under the above said provisions.
The Supreme Court in Hanumaiah''s case in para-18 has made the following observations which are extracted hereunder for convenient reference:
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 co operative 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.
The close reading of the above observation makes it clear that Supreme Court has refrained from going into the question without giving a concluded opinion about the possible options available to the affected members. The said observations cannot be interpreted that the affected members can avail the post-decisional hearing. In the context of the provisions contained in Section 30(5), 29(c) and 64 and 65 of the Act., it cannot be inferred that the affected members have a legal scope for post-decisional hearing because enquiry u/s 29(c), 64 and 65 of the Act, is solely at the discretion of the Registrar and RBI cannot legally compel the Registrar in that regard.
On a thorough consideration of the analogous provisions relating to supersession of the Managing Committee under Sec. 30(1) of the Act, 35 and 36AA of the Banking Regulations Act, the pre-decisional hearing is mandatory. It cannot be gainsaid that an order of removal of the Managing Committee under Sec. 30(5) of the Act, visit with civil consequences to the affected members. Therefore, in the fitness of things, it cannot be said that the RBI can issue directions to the Registrar for removal of the members of the Managing Committee without providing an opportunity of hearing. More so, when there is no scope for affected members to avail the benefit of post- decisional hearing. It is incumbent upon the RBI while issuing directions Under Section. 30(5) of the Act, should adhere to the principles of natural justice. Otherwise, the affected members stand almost eternally condemned without an opportunity of hearing.
The un-amended provisions of Sec. 30(5) of the Act, declared that "appointment of an administrator to manage the affairs of the Co-operative Bank for a period not exceeding 5 years in aggregate as may from time to time specified by the Reserve Bank". By Act 25/98 w.e.f. 15.9.88 the words "not exceeding 5 years" is omitted. A close reading of the provisions of Sec. 30(5) of the Act, discloses that the order of the removing committee should be co-terminus with the tenure of the committee, because after the expiry of the term, the committee would cease exist by operation of law, the tenure of the members of the committee comes to an end.
The provisions of Section 30(1) of the Act, mandate that when once committee is removed, the administrator should be appointed for six months and further extension by six months and in any case, such extension shall not exceed by one year in aggregate. In other words, the elections are to be held immediately after one year. The provisions of Sec. 39A of the Act, declares that the general elections for electing the >members of the committee to be held within 15 days before the date of expiry of the term of office of the committee and the out going committee shall fix the date for election. In the absence of committee, the administrator or the Special Officer will fix the date of election. Sec. 39(A)(4) of the Act, empowers the Government to post-pone the conduct of elections for the reasons stated in the said provisions for a period not exceeding six months and in any case not exceeding two years in aggregate.
The conduct of elections is an inviolable democratic process in the scheme of the Act. The RBI has no right to continue appointment of an Administrator without elections contrary to the spirit and provisions of Sec. 31 and 39A of the Act. Therefore, the power of the RBI u/s 30(5) of the Act, for removal of the committee and appointment of an Administrator should be in consonance and consistent with the other allied provisions of the Act. The Administrator once appointed has the discretion of holding elections in accordance with the provisions of the Act and the postponement of election is necessary u/s 39A(4) of the Act, and he can recommend accordingly.
In respect of Grain Merchants Co-operative Bank, during the hearing of the petition, the tenure of the elected committee came to an end and fresh elections have been held. Therefore, the relief prayed for in Writ Petition Nos. 34813 and 35163-164/2009, is only of an academic interest.
The tenure of the Kannika Parameshwari Cooperative Bank is also expired. The elections are to be held. The order passed by the Registrar u/s 30(5) of the Act, disqualifying the Managing Committee members to contest elections for a period of four years is bad in law. The Registrar is however, empower to conduct separate enquiry u/s 29 of the Act and pass appropriate order, but while passing orders u/s 30(5) of the Act, the Registrar does not get jurisdiction to disqualify the members from contesting elections.
Accordingly, WP Nos. 28148 - 28156/2009 are partly allowed in the terms indicated above and WP Nos. 35163-164/2009 and WP No. 34813/2009 are disposed of.