Bari Doab Bank Ltd Vs Union of India and Others - Citation 682049 - Court Judgment

Judgment:

C.M. Nayar J.

1. This judgment will dispose of two writ petitions, C.W.P. No. 3885 of 1996 (Bari Doab Bank, Ltd. v. Union of India) and C.W.P. No. 4046 of 1996 (Punjab Co-operative Bank Ltd. v. Union of India) as they raise common questions of law.

2. The facts of each case may be reproduced as follows :

Bari Doab Bank Ltd. v. Union of India.

The petitioner-bank was started in the year 1915 and initially had two branches till 1947. One branch was in Lahore and the other one was situated in Hoshiarpur (Punjab). It is further alleged that the bank has always been a profit-making company and even at the time of partition in the year 1947, the bank while closing down its business at Lahore repaid all its depositors whatsoever without any deductions. The bank is situated in a backward underdeveloped area and is a small-scale bank having only one branch.

The provisions of section 11(3) of the Banking Regulation Act, 1949 (hereinafter referred to as 'the Act'), are cited in the petition to reiterate that the bank is fully entitled to continue its business and there is no justification for issuance of the impugned order dated September 30, 1996, under section 45 of the Act. The financial position of the bank regarding its total deposits is specified in paragraph 9 of the petition which reads as follows : ----------------------------------------------------------------------30-9-93 31-3-94 30-9-94 31-3-95 30-9-95 31-3-96----------------------------------------------------------------------Total deposits 97.88 122.76 139.23 153.95 166.81 179.84(Rs. in lakhs)Total advances 46.50 49.88 55.10 83.06 78.88 73.95(Rs. in lakhs) Total priority 32.37 29.61 37.08 44.26 46.38 41.57sector advance(Rs. in lakhs)% of priority 69.61 59.36 67.3 53.2 58.8 56.21sector advanceto total bankcredit----------------------------------------------------------------------

3. Similarly, the liquidity position as on September 30, 1996, has been referred to in paragraphs 12 and 13 which read as follows :

'12. That the liquidity position of the bank as on September 30, 1996, has been one of the best in the whole of India. The bank had liquid cash of Rs. 2,08,51,956.93. The details of the liquidity position of the petitioner-bank are as under :

(Rs.)Cash in hand 1,95,687.45In current account with SBI 21,58,288.37 Other banks 2,01,976.70Bonds 20,50,002.00Debentures 11,201.00Government papers 25,26,445.00 Seven-year National Savings Certificates 3,43,700.00 U.T.I. Certificates (at book value) 25,54,013.00Fixed deposits with banks 22,72,100.00Interest accrued on FDRs. 3,47,226.00Shares (at book value) 6,94,143.29Interest accrued on Government securities/bonds 6,75,328.29Loans granted against securities of FDRs/KVPs/IVPs/LIC policies, etc. 6,11,101.00Increase in value of shares over book value 8,25,285.00Amount remitted to RBI for :(i) Purchase of 13.85% Punjab State Loans 4,00,000.00(ii) 13.85% Himachal State Loan 3,00,000.00(iii) 13.85% Maharashtra State Loan 3,00,000.00Amount to IFCI for purchase of 7 years 16.25% Bonds 10,00,000.00Amount receivable from UTI on account ofdividend 2,660.00 Amount remitted to RBI for purchase of 13.80%Government of India loan 2002 12,800.00Amount recoverable from Pal Peugeot Ltd. 25,000.00Motor car 4,50,000.00Amount recoverable on execution of sale deeds N.B.A.(Subject to commission of 1 per cent.) 28,95,000.00-----------------Total 2,08,51,956.93------------------13. That on September 30, 1996, the petitioner-bank is having Rs. 1,89,58,135.90 as depositors' money and Rs. 1,96,000 of other outside liabilities resulting in a surplus of Rs. 16,97,821.03 after paying off all the depositors with complete interest and all its outside liabilities. This is without recalling any of its advances. Apart from the above, the bank has advances to the tune of Rs. 88,20,168.86. The position as referred to in para 15 + 16 above has been verified by Mr. V.O. Gopi, General Manager, Reserve Bank of India, Department of Supervision, New Delhi, on October 1, 1996, when he along with his team of three more men visited the bank at Hoshiarpur to serve the moratorium order.'

4. The bank has three directors and one director is a nominee of the Reserve Bank of India. A detailed discussion took place between the chairman and directors of the petitioner bank and general manager of the Reserve Bank of India at Chandigarh on April 12, 1996, when it was required by the petitioner to take the following steps which are stated in paragraph 15 of the petition :

'(i) Dispose of its non-banking assets before April 12, 1997. The petitioner has already disposed of 70 per cent. of its non-banking assets and will be able to dispose of the rest of the 30 per cent. within the stipulated time.

(ii) Secondly, the petitioner-bank was required to submit a plan for its expansion before May 12, 1996. The petitioner has already submitted their plan for expansion. However, respondent No. 2 has yet to accord its approval to the same for its implementation.

(iii) Thirdly, the petitioner-bank was required to fill up the vacancy on the board of directors of the bank by July, 1996. The said requirement was complied with within the stipulated time and its compliance was reported to the Reserve Bank of India.

(iv) Lastly, the petitioner-bank was required to formulate its investment policy by July, 1996. The petitioner bank also complied with this last requirement of the respondent and submitted the same to respondent No. 2 for its approval.'

5. On the above basis it is contended that the petitioner bank has been successfully discharging its functions and has always been a profit making, tax paying and dividend paying bank. It has never been involved in stock seam and any other seam whatsoever. The Reserve Bank of India has never given any directions to the petitioner-bank under section 35A of the Act. thereforee, it can be assumed that the management of the bank has always been appreciated by the Reserve Bank of India and it has never felt any need to impose any condition or interfere therewith to improve the same. Similarly, no action was ever taken under section 36AA of the Act against any of the directors of the bank, the chairman, managerial staff and/or any other staff of the bank and there has never been any complaint of any public men regarding the functioning of the bank. The bank has survived despite long years of terrorism in Punjab approximately for 10 years which did not have effect on its profits, deposits or advances much less the services rendered to its customers. There has never been any violation of the provisions of law, policy, rules or directions issued by respondent No. 2 or respondent No. 1 and the bank has always acted in furtherance of public interest and masses. The bank was advised, vide letter dated April 30, 1996, to increase its paid-up capital to Rs. 10 crores by June 30, 1996, failing which the Reserve Bank of India will view the matter seriously. The averment in this regard is made in paragraph 27 of the petition which reads as follows :

'27. That, vide letter dated April 30, 1996, the general manager of respondent No. 2 advised the petitioner-bank to increase its paid-up capital to 10 crores by June 30, 1996, failing which the Reserve Bank of India will view the matter seriously. The manager of respondent No. 2, Central Vista, Chandigarh, sent a reminder, vide letter dated May 13, 1996, which was received on May 22, 1996, by the bank, advising the petitioner bank to convene a meeting of the board of directors to consider the advice of the Reserve Bank of India to increase the capital to, 10 crores. Vide letter dated July 26, 1996, a detailed reply was sent to respondent No. 2 on behalf of the petitioner-bank in which it was categorically pointed out that the bank is meeting the capital risk adequacy ratio of 8 per cent. On that date the capital risk adequacy ratio of the petitioner-bank was 69.8 per cent. as against the requirement of 8 per cent. It was further submitted that under the Act, the bank is not required to maintain the capital of Rs. 10 crores. It would be pertinent to submit here that under the Act it is not mandatory for the bank to maintain Rs. 10 crores capital and there are a number of other banks including co-operative banks and respondent No. 2 itself which are having paid-up capital of less than Rs. 10 crores. It will be pertinent to submit that this request of respondent No. 2 was in contravention of section 11(3) of the Banking Regulation Act where under the requirement for the petitioner-bank which is having only one branch in only one State is to have capital of only Rs. 50,000. The request of the Reserve Bank of India, thereforee, was clearly contrary to the provisions of the Act. However, at no point of time respondents Nos. 2 to 5 ever gave any notice under any provisions of law, rules, notifications, etc., for any action for violation of the said directions. The true copies of the letters dated April 30, 1996, May 13, 1996, and the reply of the bank dated July 22, 1996, are enclosed as annexure 'D' (Colly).'

6. The impugned action by the respondents is because of the bias and mala fides and for extraneous considerations by respondents Nos. 3, 4 and 5. The allegations of mala fides are incorporated in paragraphs 28 and 29 of the petition which read as follows :

'28. That the action against the petitioner-bank has been taken by the respondent because of the bias and mala fides and for extraneous considerations by respondent No. 3 to respondent No. 5. Respondent No. 4 about three years back, i.e., somewhere in the year 1993, was working as additional chief officer in the department of banking operations and development, Reserve Bank of India, Central Office, Bombay. As a matter of practice, he used to require the board of directors of the banks under his supervision, to appear before him at Bombay. The petitioner bank - a small bank - requested him that whenever he is visiting the Delhi office and/or the Chandigarh office of the Reserve Bank of India, he may meet the board of directors in either of the said offices so that the huge expenses that this small bank has to meet to go all the way to Bombay, may be saved. On January 29, 1993, respondent No. 4 called the board of directors and the chairman of the petitioner-bank to have a meeting with him at the Delhi office of the Reserve Bank of India regarding the inspection carried out by the inspector/s of the Reserve Bank of India regarding the bank's position as on September 30, 1991. In the said meeting as the board of directors entered the meeting room, respondent No. 4 abusively fired at one director, chairman, manager and the legal adviser of the petitioner-bank as to why they cannot appear before him at Bombay office, and that he will not tolerate this behavior of the officials and board of directors of the bank. The behavior of respondent No. 2 was unexpected of the designation he was holding. He was abusing the director as well as other officials of the bank. The director of the bank took strong objection to the abuses having been hurled at him and the other officials of the bank. When the director objected to the abusive language saying that in the last 82 years of existence of the bank, no official of the Reserve Bank of India has ever behaved in this manner. Respondent No. 3 immediately told the director that he has wide powers and within 78 hours he can get the moratorium imposed on the bank, and finish its identity. When the director objected to this and told respondent No. 4 that he cannot participate in such a meeting in this manner and he is walking out of the meeting, respondent No. 4 finding the situation out of control, immediately cooled down and requested the director and other officials to carry on with the meeting. Pertinent it will be to say that respondent No. 4 has been appointed as executive director recently and is looking after the department of banking operations and development. Respondent No. 4 who was nursing a grudge against the petitioner-bank, it has been reliably learnt, has moved the file for imposition of moratorium.

29. That so far as respondent No. 3 is concerned, about 10 months back, one Mr. Vakil allegedly of Vatsa International Ltd. - a non-banking finance company - supposed to be based at Bombay, called upon the ex-director of the petitioner-bank, namely, Mr. Janak Raj telephonically and told him that he has been asked to contact him by respondent No. 3. He told Mr. Janak Raj that Mr. S.P. Talwar has required him to convey that either the bank be sold to the said company otherwise he will get the moratorium sanctioned on the petitioner-bank. Not only this, on September 29, 1996, i.e., a day before the moratorium notification has been issued, one Mr. Chadha of Phoenix International Ltd. - a company operating from Delhi, called upon Mr. Ashish Raj who is director of the bank, telephonically and told that he has been asked by respondents Nos. 3 and 4 to contact him and inform that moratorium is likely to be sanctioned against the bank and the only way out for them is to sell or amalgamate the bank to his company and that he is in a position to get the orders stalled. These facts clearly go to show that respondents Nos. 3 and 4 were acting with biased and mala fide attitude and for extraneous considerations.'

7. Respondents Nos. 1 and 6 have filed a counter-affidavit repudiating the averments made by the petitioner-bank. Paragraphs 6, 7 and 8 read as follows :

'6. That in the application under section 45(1) the Reserve Bank of India clearly explained about the shortcomings in the functioning of the petitioner-bank. The finding in regard to the shortcomings of the petitioner-bank were based on the enquiries conducted by the Reserve Bank of India from time to time.

7. I say that after considering the application under section 45(1) and the report of enquiry conducted by the Reserve Bank it was decided by the Ministry of Finance that the order of moratorium is necessary in the interest of public, depositors and the banking system and, thereforee, the order of moratorium was passed under section 45(2) of the Act by the Ministry of Finance on September 30, 1996.

8. While considering the application dated July 16, 1996, moved by the Reserve Bank under section 45(1) of the Act the public interest, the interest of depositors was kept in mind as of paramount consideration. Keeping in view all these factors and after carefully going through the statutory provisions, i.e., the provisions of the Banking Regulation Act, the application under section 45(1) and the report submitted by the Reserve Bank in regard to the petitioner-bank it was decided by the Central Government that the order of moratorium should be passed.'

8. Similarly, a counter-affidavit is filed on behalf of respondent No. 2 wherein it is pleaded that (a) it is necessary to set out the salient features of the statutory scheme of the Acts made by Parliament for regulation of banking business, which unlike any other business, is a special kind of business. Banking business is the business of acceptance of with drawable deposits of money from the public for the purpose of lending or investment. While that describes the ordinary nature of banking, that activity in a developing society and economy has acquired an evolutionary nature, in that the essence of banking business in such an economy involves banks operating as basic financial intermediaries and playing a key role in the country's economy in general and mobilisation and distribution of the country's savings in particular. Banks are the largest repositories of the nation's savings. The conduct and affairs of the banks influence the various sectors of the economy. The economic development of the country depends largely on the safety and soundness of banking institutions. Banks are also the principal means for transmitting the credit policies of the country. Having regard to the delicate position of a bank in the country's economy, the failure of one bank can have a disastrous effect on the whole banking system, having the potential of leading to systematic crisis with prejudicial effect on the economy as a whole. In view of all these considerations, the banking sector has been a highly regulated area all over the world. These principles governing the banking business have been embodied in the banking laws of India, namely, the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949;

(b) The significance of the Reserve Bank's position as the central bank of the country needs no emphasis. As the central bank and as the primary regulator of the banking business, the Reserve Bank has been vested with very wide powers and is also charged with certain duties as reflected in the preambles to and the provisions of the two legislations referred to above. The preamble to the Reserve Bank of India Act states that the bank is established, inter alia, generally to operate the currency and credit system of the country to its advantage. The powers under the Reserve Bank of India Act as also under the Banking Regulation Act have been conferred on the bank with a view to fulfill these objectives. It is submitted that various powers under the Banking Regulation Act are related to public interest or the interest of banking policy. The expression 'banking policy' has been defined in clause (ca) of section 5 of the Banking Regulation Act as under :

'(ca) 'banking policy' means any policy which is specified from time to time by the Reserve Bank in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.'

9. This definition and power conferred there under on the Reserve Bank to specify the policy clearly reflect the abject that the banks truly become the instruments of transmitting economic policies including the credit policies of the country in a manner expected of them and serve the cause of public interest. It is the Reserve Bank's function to ensure, as best as it can, that the said object is achieved. Further, in view of the adverse effect that a bank's failure may have on the economy, the statutes also aim that the Reserve Bank's powers are exercised not only to effectively handle the crisis in the affairs of a banking company, but also to prevent a perceived failure or crisis in the affairs of the banking company. In respect of such matters, Parliament has vested full discretion in the Reserve Bank and the Central Government so that it should be open for these authorities to decide, depending upon the contingencies, the various alternatives or combination of them as provided by law to ensure protection of the interest of the depositors, the public interest and the interest of banking policy;

(c) It is beyond dispute that banks, as financial instrumentalities are required to strive to fulfill, not only the object of achieving commercial efficiency, but also to serve the object of public interest. In fact, without serving public interest, no bank can legitimately claim any right to exist. It is inconceivable that a bank, as an instrumentality of, and also being capable of, wielding powerful weapons for transformation of the socioeconomic structure of the society, can act without taking into account public interest and can act for furtherance of private interests of a limited group of persons. It is submitted that the petitioner-bank was not contributing and was not capable of contributing, and moreover, not even desirous of contributing, to conduct its affairs in a manner appropriate to fulfill the object of public interest;

(d) It also needs to be appreciated that with the liberalisation in the economy, the banking sector is widely expanding necessitating basic changes in the profiles of the banks in relation to the pattern of their shareholding, capital structure, management composition, as also operational systems, and even the very manner of conduct of banking business. The recent failures of some private sector banks and huge losses of public sector banks have only underlined the need for such changes. Taking note of this, and the changing economic scenario as also the emerging competitive environment, it has become imperative for the banks to become more professionally managed, widely capital based, to have more diversified activities, to be more technically advanced. This, in turn, has also resulted, in a policy by the Reserve Bank for consolidation of the banking system and other measures in the interest of the banking system of the country as a whole. Further, the recent failures of some banks raising concern for the banking system have constrained the Reserve Bank to take many steps to strengthen the financial soundness of the banking system. Increasing the capital base of the banks is one such measure. Similarly, various other policy measures have been initiated to ensure better quality of assets, induction of professional management, diversified credit portfolio, improved accounting systems, transparency in balance-sheets, etc.;

(e) The petitioner-bank was an unlicensed non-scheduled unit bank. Established in 1915, with a low capital base, the petitioner continued to maintain the same profile throughout, without any change. It is submitted that though purporting to be doing the business of banking, the petitioner's income generation was not from banking business. This is clearly demonstrated by the following facts and figures :

(i) The broad financial indicators of the petitioner-bank for the years ended March, 1993, 1994 and 1995 are as under :

(Rupees in lakhs)1993 1994 1995(i) Paid-up capital 2 2 2(ii) Reserves 44 54 60(iii) Owned funds (i + ii) 46 56 62(iv) Deposits 75 119 150 (v) Advances 37 50 80(vi) Investments - 43 60(vii) Net profit 3 8 7(viii) Dividend - 25% NilThe significant increase in profits of the bank for the last two years was mainly due to income from sale of land which was Rs. 9.27 lakhs and Rs. 6 lakhs in 1993-94 and 1994-95 respectively.

(ii) The bank's request for declaration of dividend at the rate of 50 per cent. for the year ending March 31, 1995 was not acceded to by the Reserve Bank for the reason that the profit was mainly due to sale of non-banking assets of the petitioner-bank. The profit at Rs. 7.34 lakhs for the year 1994-95 was inter alias on account of inclusion of income to the extent of Rs. 6 lakhs from the sale of agricultural land which constituted 81.7 per cent. of the profit. But for this income from the sale of fixed assets, the petitioner-bank's operative profit would have been substantially reduced to Rs. 1.34 lakhs. Similarly, for the year 1993-94, the bank had taken to income account a sum of Rs. 9.27 lakhs representing the profit on sale of fixed assets. But for this income, the bank would have suffered a loss of Rs. 1.21 lakhs;

(iii) The other major source of the bank's income earning was its investment in fixed deposits in other banks and Government securities. It is submitted that the petitioner-bank was keeping a substantial portion of its funds in fixed deposits which is an activity more akin to non-banking business. A bank is expected to deploy funds judiciously for the development and promotion of economic activities and not merely to make investments in fixed deposits and securities;

(iv) Of the petitioner-bank's total assets at Rs. 274.92 lakhs as on March 31, 1996, only Rs. 73.95 lakhs constituted advances, which was only 26.89 per cent. Further, of the bank's total earnings at Rs. 32.21 lakhs, the income by way of interest on advances was only Rs. 13.42 lakhs (constituting only 41.6 per cent.);

(v) The petitioner-bank has claimed that against a stipulation of 8 per cent. capital adequacy ratio, it maintained a capital adequacy ratio of 40.63 per cent. as on March 31, 1996. A scrutiny of its asset portfolio reveals that the bank had been deploying its resources in non-banking areas like deposits with banks, post offices, Government securities, etc., which carry zero risk weight, instead of providing credit to needy sectors of the economy. No doubt then, while the major banks having much larger capital base are having CRAR of 10-12 per cent. the petitioner-bank by investing its valuable resources in non-banking activities had been able to achieve a CRAR of 40 per cent. This only supports the Reserve Bank's view that the petitioner-bank's major activities were of non-banking nature;

(f) In the name of carrying on banking business, the petitioner-bank as a matter of fact was mainly concentrating on investments in deposits with other banks, securities/shares and non-banking assets. Even as regards its banking business, the factual position did not reveal the essential characteristics of genuine banking. It is relevant to note the following facts and figures in this regard :

(i) The bank had made hardly any progress in terms of deposit mobilisation. The deposits were mainly received from the bank's directors and the concerns/companies/trusts in which the directors were interested.

(ii) Similarly, the bank had also not made progress in terms of expansion in advances portfolio. Over 70 per cent. of the bank's total advances were concentrated in the hands of 10 borrowers as on August 2, 1991. Further, a major portion of total advances, i.e., advances aggregating to Rs. 30.42 lakhs and constituting 65.4 per cent. of the total advances were outstanding in the names of 10 borrowers as on September 30, 1993. It was also revealed that 26 per cent. of total advances were concentrated in the hands of two concerns, namely, Shadi Lal Purl and Kailash Farms as on September 30, 1995. It is significant to note that Shri Deepak Purl of Hoshiarpur who is the owner of Kailash Farms and whose farm is financed by the petitioner-bank was a director of the Punjab Go-operative Bank Ltd. (now under moratorium) which bank was also controlled by the owners of the petitioner-bank.

(g) The nature of operations of the petitioner-bank was such as by no stretch of imagination, it could be treated as carrying on genuine banking business as such. It is further submitted that whatever little banking business was being conducted by the petitioner-bank, it was mainly for the benefit of the majority shareholders and the directors of the bank. In this connection, it is pertinent to note the shareholding and management pattern of the petitioner-bank.

(i) The major chunk, i.e., 90 per cent. of the petitioner-bank's capital was shared by one family, viz., the family of Shri Janak Raj, his relatives and concerns/trusts in which one or more of them was/were interested.

(ii) Consistent with the extent of shareholding, the management powers were also wielded by the said family group. The overall management of the petitioner-bank was overtly vested in its board of directors which consisted of three directors; one RBI nominee director and the chairman. As the major chunk of the bank's capital was shared by Shri Janak Raj's family, one of the directors, Shri Ashish Raj, son of Shri Janak Raj, was playing a dominant role in the bank's management. There were instances where decision in regard to sanction of advance, revision of interest rate, etc., were approved by only one director, namely, Shri Ashish, which used to be invariably approved subsequently by the board. The chairman of the board had no effective role to play in the management as he had been delegated very limited powers, including power to grant advances which was restricted to Rs. 25,000 only. All the seven meetings of the board during the year 1994-95 were held at Saharanpur, U.P., which was the place of residence of the aforesaid director though the bank's registered/head office was at Hoshiarpur and it did not have any business interest at Saharanpur.

(h) Similarly, the following instances were cited by the respondents to justify the order of moratorium

(i) The bank was holding shares of Straw Board Management Company aggregating to Rs. 1.59 lakhs which was managed by Shri Janak Raj and Shri Ashish Raj. This investment did not yield any income and was also against section 19(3) of the Banking Regulation Act.

(ii) The credit appraisal system of the bank continued to suffer from various deficiencies.

(iii) The bank had no system of internal audit or concurrent audit.

(iv) The bank did not dispose of the non-banking assets (land) in spite of being pointed out repeatedly in the inspection reports of RBI. This was also in contravention of section 9 of the Banking Regulation Act.

(v) As regards management systems, there was no system of putting up the review notes to the board on important areas of the bank's functioning.

(vi) The bank had been incurring huge expenses towards maintenance of car used by its director, Shri Ashish Raj, as also towards paying his telephone bills.

(vii) The post-sanction supervision and control of advances portfolio was deficient in several aspects.

(viii) The RBI directions on selective credit control were not properly followed.

10. On the above reasoning, the respondent Reserve Bank of India, was of the view that in order to decide the future set up of the petitioner-bank, it was necessary to impose a moratorium in terms of the powers conferred under section 45(2) of the Act. The proposal to convert the petitioner-bank into a non-banking company was mooted as long back as in 1984. The board resolution in this regard was made in May, 1984, followed by the shareholders' resolution in June, 1984. The petitioner-bank, however, had not taken any effective steps in that direction though it had been repeatedly advised to take concrete steps to implement the decision to convert itself into a non-banking company. The Reserve Bank of India's letters dated June 13, 1988, October 6, 1988, and December 2, 1988, addressed to the petitioner-bank which also suggested the amending of the name of the bank as Bari Doab Finance and Trading Ltd. have been filed with the counter affidavit. A no-objection certificate was issued in October, 1991, for alteration of its memorandum of association under section 49C of the Act. However, in the extraordinary general meeting held on May 2, 1992, the petitioner-bank had rescinded its earlier resolution regarding conversion into a non-banking company. In this background, no option was left with the Reserve Bank of India or the Central Government and this was a fit case for exercise of the powers and denial of exercise of powers and in such cases, it is contended, would have an adverse bearing on the Reserve Bank's powers and duties to regulate the banking system in national and public interest. The order of moratorium dated September 30, 1996, was, accordingly, issued and the notification reads as follows :

'F. No. 17/15/96-BOA

Government of India,

Ministry of Finance,

Department of Economic Affairs,

(Banking Division)

Dated September 30, 1996.8, Asvina, 1918 (Saka).NOTIFICATION

S.O. No. .... (E). In exercise of the powers conferred by sub-section (2) of section 45 of the Banking Regulation Act, 1949 (10 of 1949), the Central Government, after considering an application made by the Reserve Bank of India under sub-section (2) of that section hereby makes an order of moratorium in respect of the Bari Doab Bank Ltd. for the period from the close of business on September 30, 1996, up to and inclusive of December 31, 1996, and hereby stays the commencement or continuance of all actions and proceeding's against that banking company during the period of moratorium, subject to the condition that such stay shall not in any manner prejudice the exercise by the Central Government of its powers under clause (b) of sub-section (4) of section 35 of the said Act or the exercise by the Reserve Bank of India of its powers under section 38 of the said Act.

2. The Central Government hereby also directs that during the period of moratorium granted to it, the Bari Doab Bank Ltd. shall not, without the permission in writing of the Reserve Bank of India -

(a) grant any loan or advance, incur any liability, make any investment or agree to or disburse any payment, whether in discharge of its liabilities and obligations or otherwise, or enter into any compromise or arrangement, except to the extent and in the manner provided hereunder :

(i) Payment of a sum not exceeding Rs. 5,000 of the total balance in every savings bank or current account or any other deposit by whatever name called, provided that no amount shall be paid to any depositor who is indebted to the bank in any way;

(ii) Incurring expenditure which has necessarily to be incurred in connection with any suits or appeals filed by or against the decrees obtained by the said bank or for Realizing any amounts due to it, provided that if the expenditure in respect of each such suit or appeal or decree or proceeding is in excess of Rs. 2,500, the permission in writing of the Reserve Bank of India shall be obtained before it is incurred;

(iii) Incurring expenditure on any other item in so far as it is in the opinion of the banking company necessary for carrying on the day to day administration of the banking company, provided that where the total expenditure on any item in any calendar month exceeds the average monthly expenditure on account of that item during the six calendar months preceding the order of moratorium, or if no expenditure has been incurred on account of that item in the past exceeds a sum of Rs. 2,500, the permission in writing of the Reserve Bank of India shall be obtained before the additional expenditure is incurred;

(iv) Payment of the amounts of any drafts or pay orders issued by the said bank and remaining unpaid on the date on which the order of moratorium comes into force; and

(v) The amounts of the bills received for collection on or before September 30, 1996, and realised before, on or after that date.

(b) Sell, transfer or otherwise dispose of any of its immovable properties.

3. The Central Government hereby also directs that the Bari Doab Bank Ltd. may, during the period of the moratorium granted to it, make the following further payments, namely, the amounts for repaying loans or advances granted against Government securities or other securities, to the Bari Doab Bank Ltd. by the Reserve Bank of India or the State Bank of India or any of its subsidiaries or by any other bank and remaining unpaid on the date on which the order of moratorium comes into force.

4. The Central Government hereby further directs that during the period of moratorium the Bari Doab Bank Ltd. shall be permitted to operate its accounts with the Reserve Bank of India or with any other bank for the purpose of making the payments aforesaid, provided that nothing in this order shall be deemed to require the Reserve Bank of India or any other bank aforesaid to satisfy itself that the conditions imposed by this order are being observed before any amounts are released in favor of the Bari Doab Bank Ltd.

5. The Central Government hereby further directs that the Bari Doab Bank Ltd. may, during the period of moratorium, return any bills which have remained unrealised to the persons entitled to receive them on a request being made in this behalf by such persons, if the bank has no right, or title to, or interest in, such bills.

6. The Central Government hereby also directs that the Bari Doab Bank Ltd. may release or deliver goods or securities which have been pledged, hypothecated or mortgaged or otherwise charged to it against any loan, cash credit or overdraft :

(i) in any case in which full payment towards all the amounts due from the borrower or borrowers, as the case may be, has been received by the bank, unconditionally; and

(ii) in any other case, to such an extent as may be necessary or possible, without reducing the proportions of the margins on the said goods or securities below the stipulated proportions or the proportions which were maintained before the order of moratorium came into force, whichever may be higher.

(Sd.) D.R.S. Chaudary,

Joint Secretary to the Government of India.'

11. Punjab Go-operative Bank. Ltd. v. Union of India :

12. This bank was also put under moratorium, vide notification issued on September 30, 1996, and the same is impugned in this petition.

13. The petitioner-bank herein was started in the year 1905 and initially had eight branches up to the year 1947. At the time of partition, five branches of the bank which were situated in Pakistan were closed. While closing down its business at the branches situated in Pakistan the bank repaid all its depositors whatever in full without any deduction. Earlier moratorium was imposed upon the petitioner-bank in the year 1961 and on representation to the then Finance Minister, Mr. Morarji Desai, the same was revoked as the bank was in a position to repay all its depositors, if so required, within 24 hours. The bank today is having nine branches, two of which are situated in the backward areas of Punjab and one in a semi-urban area of Punjab. Two other branches are situated in two important cities of Punjab, viz., Amritsar and Jalandhar. It is further submitted that it has always been the policy of the Government to encourage the small scale enterprises especially serving the rural masses and backward areas. Section 11(3) of the Act is cited to contend that the required paid-up capital and reserves is Rs. 5 lakhs for any banking company situated in India having all its business in one State, none of which is situated in the cities of Bombay and Calcutta and it has only one place of business. The provision, thereforee, is that the maximum paid-up capital as well as reserves the petitioner is required to maintain is only Rs. 5 lakhs. The financial position of the bank is stated in paragraphs 9 and 10 of the writ petition which read as follows :

'9. That the financial position of the bank regarding its total deposits, total advances, from March 31, 1994, to March 31, 1996, is as under :

The following figures shall highlight the bank's growth :

(000's omitted)----------------------------------------------------------------------As on 31-3-1996 31-3-1995 31-3-1994----------------------------------------------------------------------Deposits 355323 246820 182333Advances 145869 97819 7298Investments 104673 71434 59467Total business 501192 344139 252631Operating profits 5916 2790 1.05Net profit 2780 1802 67.43C/D ratio 41.05% 39.71% 38.55%N.P.A.'s 12.20% 13.93% 27.47%----------------------------------------------------------------------10. The growth per cent. in the financial year ended March 31, 1996, and its comparison to the average growth of nationalised banks and old private sector banks, for the year 1995-96 are furnished below :

----------------------------------------------------------------------Growth % Punjab Co-op Nationalised Old privateBank Ltd. bank* sector banks*----------------------------------------------------------------------Deposits UP by 44.25% Up by 13.5% Up by 12.5%Advances UP by 49.12% Up by 15% Up by 24%Investments Up by 46.53% Up by 10% Up by 5%----------------------------------------------------------------------*Data based on figures published in the Business Standard, dated August 29, 1996.

Period from 1-4-96 to 30-9-96

During this period the bank has made still further progress despite the fact that the present chairman joined on August 3, 1996.

(000's omitted)----------------------------------------------------------------------As on 30-9-1996 31-3-1996 % increase insix months----------------------------------------------------------------------Deposit 400289 355323 12.65%Advances 149282 145869 2.34%Investments 130688 104673 24.85%Operating profits 3300* 5916** -Capital adequacy Over 7%* 04.79% -----------------------------------------------------------------------*Provisional *Unedited figures for half-year **Audited figures forfull year'.

14. Similarly, in paragraphs 12 and 13, the liquidity position of the bank is quoted. These paragraphs as well as other paragraphs raising the plea of mala fides may also be reproduced as under :

'12. The petitioner-bank is a financially sound profit-making bank whose deposits are not only sound but liquidity of the bank is such that it can pay off 67.7 per cent. of its deposits, i.e., Rs. 2,706.51 lakhs of deposits out of total deposits of Rs. 4,002.89 lakhs without calling back on its advances. The details of the liquidity position of the petitioner-bank are as under :

(Rs.) (approx.)Cash in hard 52,55,000In current account of SBI 69,09,000Other banks 98,12,000With RBI 4,47,85,000Central, State/other Governmentapproved securities 10,01,68,000Fixed deposits with banks 7,32,05,000Shares and debentures (at book value) 3,05,19,000Loans granted against securities of FDRs/KVPs/IVPs/LIC policies, etc. 3,96,000Motor car 80,000----------------------Total 31,03,33,000----------------------'13. That on September 30, 1996, the petitioner-bank is having Rs. 4,003 lakhs as depositors money and Rs. 201.81 lakhs of other outside liabilities and borrowings of Rs. 129.44 lakhs. Apart from the above, the bank has advances to the tune of Rs. 1,492.82 lakhs.'

'21. That it will be pertinent to submit here that in December, 1993, the board of directors of the petitioner-bank and the chairman held discussions with the Chief Officer, Department of Banking Operations and Development, RBI. In the said meeting, the said officer required the bank to increase its capital to at least Rs. 10 crores. Respondent No. 4 also was insisting in almost all the meetings of the board of directors that respondent No. 3 desires it to increase its capital to Rs. 10 crores. He has been telling the board of directors that in case they will not increase it, he will search for a group who may inject finances into the bank and in that event he will manage to get the bank merged with some other bank or group.

22. In January, 1995, respondent No. 4 got issued a letter dated January 4, 1995, giving totally illegal and unjustified advice, firstly, regarding the board of directors to involve itself in the key areas of the functioning of the bank and in monitoring recovery of sticky advances. It may be pointed out here that the said advice is contrary to the company law as well as the Reserve Bank of India guidelines in this regard. Under the law the board of directors is not entitled to involve itself in the functioning of a company and/or its day to day functioning. The second advise, vide that letter, was that the bank should take immediate steps to increase its capital to at least Rs. 10 crores and if it is not possible it should initiate action for the bank's merger with some other suitable bank or any other proper groups which are willing to bring in sufficient capital. Pars 4 of the letter clearly shows that respondent No. 4 was bent upon dislodging the management of the bank and compel the management to hand it over to some other group or to sell it off. It is worthwhile to submit here that it is none of the functions of the Reserve Bank of India to compel the management of a small bank to merge with large group and/or compel it to increase its capital beyond what is required under the statutes especially section 11(3)(i) of the Act. The Reserve Bank of India does not have any power to issue any advice which is in contravention of the statutory limits prescribed by Parliament. In the present case, the requirement of the statutes under section 11 of the Act that the bank should have the capital reserves of Rs. 5 lakhs. thereforee, the said advice by the Reserve Bank of India was totally illegal, unjustified and uncalled for and were beyond their jurisdiction. As a matter of fact this clearly establishes the mala fide and arbitrary attitude of respondent No. 4. A true copy of letter dated January 4, 1995, is enclosed herewith as annexure 'III'.

23. In continuation of its earlier mala fide actions, respondent No. 4 got issued another letter to the bank on June 13, 1995, again categorically telling the bank that it has to meet the capital adequacy ratio by March 31, 1996, and for the said purpose it was advised that the bank shall increase the capital base or initiate action for its merger with any suitable bank or approach appropriate groups who are willing to bring in sufficient capital. A true copy of the letter dated June 13, 1995, is enclosed herewith as annexure 'IV'.

25. The above letters of the Reserve Bank of India were replied to. In December, 1995, to raise the capital of the bank, the management decided to issue rights issue and raised its capital. In the first step, rights issue of Rs. 15 lakhs was issued as against existing capital of Rs. 10 lakhs, simultaneously increasing the authorised capital to Rs. 1.25 crores from Rs. 25 lakhs. The rights issue was issued as per the SEBI guidelines and provisions of company law which the bank is bound to follow. The bank further decided to increase its paid-up capital to Rs. 50 lakhs by raising another issue issued in March, 1996. Intimation in this regard was given to respondent No. 2.

31. That, vide letter dated October 21, 1995, the Reserve Bank of India sent report of the inspection under section 35 of the Banking Regulation Act, 1949, pertaining to the financial inspection as on December 30, 1994. It will be pertinent to submit here that inspection under section 35 is carried on by the officials of respondent No. 2 at regular intervals for all nationalised banks and private sector scheduled and unscheduled banks. Whatever observations are made by the inspectors are being brought to the notice of the management of the bank and wherever the Reserve Bank of India wants to advise the bank to improve, it is being pointed out to the bank. In the said gist of the report of October, 1995, because of the above biased and mala fide attitude, the officials of respondent No. 2 at the instance of respondent No. 4 based their report on distorted figures, tried to show that the financial position of the bank is unsatisfactory and tried to level unfounded and baseless allegations against the bank. However in para 4 of the gist of the report again it was advised to the bank that it shall increase its paid up capital to at least 10 crores and or initiate action for its merger, as was advised to the bank, vide earlier letters of officials of respondent No. 2. However, in the directions issued along with the letter, there was no direction to the bank in this regard. The directions contained basically were regarding the involvement of the board of directors in the key areas of the functioning of the bank, monitoring of the non-performing advances, reviewing the progress of the bank quarterly, to improve the organisational set up, super vision and control over the credits, improve profitability and better fund management, improve the credit appraisal system of the bank and review the credit reports periodically and submit its progress reports to respondent No. 2.

33. Pursuant to the inspection carried out as on December 29, 1995, i.e., a few days after the issuance of the earlier directions dated October 21, 1995, received on November 9, 1995, another letter containing the gist of the inspection report seems to have been prepared by the officials of respondent No. 2. The said letter containing the gist of the inspection report has so far not been served on the petitioner-bank by respondent No. 2 officially. However, a copy of the said letter containing the gist of the inspection report dated September 4, 1996, has been handed over by Mr. M.P. Kothari, who is the RBI nominee director on the board of directors of the petitioner-bank. In the said letter containing the gist of the inspection report again, distorted figures of the assets and liabilities of the bank have been shown. However, even the latest inspection report which inspected banks working till December 29, 1995, highlighting the following points :

(i) Deposits grew by 37.7 per cent. and advances by 39.5 per cent.

(ii) All the branches reported profits.

(iii) Total amount of NPAs had come down to Rs. 174.97 lakhs as on December 29, 1995 (13.5 per cent. of total advances) as compared to Rs. 263.95 lakhs at the time of last inspection (28.4 per cent. of advances).

(iv) No new account with large balance had turned NPA since last inspection, i.e., from December 29, 1994.

(v) Average deposits in current accounts with other banks had come down to 3.4 per cent. as compared to 4.7 per cent. during the previous year.

(vi) Yield on investments had improved from average of 11.5 per cent. to 12.2 per cent. in 1994-95.

(vii) Bank had complied with CRR and SLR requirement.

Even in this report again it has been categorically mentioned that the board of directors of the petitioner bank have not responded to the RBI advice issued as early as January 4, 1995, for strengthening the bank's capital base by additional infusion of an amount of Rs. 10 crores. The steps taken by the bank to increase its capital base were said to be unsatisfactory and the bank was required to advise respondent No. 2 within a month of receipt of the letter, steps taken by the bank to increase the capital funds. Again, in para 4, it was suggested that the bank should make serious efforts towards the alternative suggestion of the respondents of merger. However, again in the directions issued along with the gist of the inspection report, there was no direction issued regarding increase of capital base to 10 crores. The directions were general in nature regarding review of the progress, strengthening of the advance department, policy framework and for carrying out inspection of the branches, monthly review of recovery of non-performing advances, improve organisational set up, take effective steps in the funds management, improve the advance department submission of progress reports, etc.'

15. A counter-affidavit has been filed by respondents Nos. 1 and 6 wherein, inter alia, it has been pleaded that, (a) the Reserve Bank of India submitted an application under section 45(1) of the Act to the Ministry of Finance on July 15, 1996; (b) in the application the Reserve Bank of India clearly explained about the shortcomings in the functioning of the petitioner-bank. The finding in regard to the shortcomings of the petitioner-bank were based on the enquiry conducted by the Reserve Bank of India from time to time and it was decided by the Ministry of Finance that the order of moratorium was necessary in the interest of public, depositors and the banking system and, thereforee, the order of moratorium was passed under section 45(2) of the Act by the Ministry of Finance an September 30, 1996.

16. Similarly, counter-affidavit is filed on behalf of the Reserve Bank of India, respondent No. 2 wherein the following facts are pleaded :

'5. The financial inspection of the petitioner-bank carried out with reference to its position as on September 30, 1993, showed a substantial erosion in the value of its assets. The erosion as on September 30, 1993, was estimated at Rs. 193.41 lakhs as against Rs. 75.08 lakhs as on September 30, 1992. The provisions made on September 30, 1993, against bad or doubtful debts at Rs. 19.75 lakhs were grossly inadequate to cover the estimated loan losses at Rs. 111.55 lakhs. As against depreciation of Rs. 8.47 lakhs in the bank's current investments, provision held with the bank was Rs. 6.20 lakhs which was inadequate. As a result of erosion in assets, not only the entire provisions (Rs. 19.75 lakhs), reserves (Rs. 32.95 lakhs) and paid-up capital (Rs. 10 lakhs) but also the deposits to the extent of Rs. 130.75 lakhs had stood eroded. The continuous deterioration in the financial position of the petitioner-bank was a matter of great concern for the Reserve Bank. Despite directions issued to it by the Reserve Bank, the petitioner-bank had not taken effective steps to improve its working.

6. In view of the growing unsatisfactory financial position and the various deficiencies observed in the methods and operations of the petitioner-bank, it was decided to continue to keep the bank's affairs under close surveillance of the Reserve Bank of India. Accordingly specific directions were issued to the petitioner-bank from time to time. Another financial inspection of the petitioner-bank with particular reference to its position as on December 30, 1994, was carried out by the Reserve Bank. The said inspection disclosed instances/persistence of several shortcomings/adverse features in the bank's working. Despite directions issued by the Reserve Bank, the bank had not taken effective steps to improve its working except some improvement in balancing of books of certain branches and reduction in the number of loss making branches. The inspection revealed that the financial position of the petitioner-bank continued to be unsatisfactory. An estimated erosion in the value of the assets at Rs. 263.63 lakhs comprising loan losses (Rs. 129.86 lakhs), accumulated losses (Rs. 104.03 lakhs) and erosion in the value of other assets (Rs. 29.74 lakhs) had affected not only the entire paid-up capital, reserves/provisions of the book value of Rs. 250.72 lakhs, but deposits also stood eroded to the extent of Rs. 12.91 lakhs. It is submitted that the erosion in deposits would have been much more but for a notional revaluation of premises to the extent of Rs. 116.69 lakhs. There was a published net loss of Rs. 67.43 lakhs. This also did not reflect the correct position inasmuch as there was also a shortfall in the provisions estimated at Rs. 32.73 lakhs. Had a full provision been made, the losses would have been much more.

7. The bank was last inspected with reference to its position as on December 29, 1995. The financial position of the bank continued to be unsatisfactory. The estimated erosion in the value of its assets at Rs. 182.44 lakhs had affected the provisions fully and reserves partly. The erosion would have affected the reserves and paid-up capital fully and deposits also to the extent of Rs. 110.37 lakhs but for a notional revaluation reserve of Rs. 423.17 lakhs.

8. Although the bank reported a profit of Rs. 18.02 lakhs as on March 31, 1995, the same was achieved by recognising non-realized interest of Rs. 15.84 lakhs of non-performing assets, which was not correct and was also in violation of the Reserve Bank guidelines. The petitioner-bank had also not booked a refund of excess interest of Rs. 3.97 lakhs to its profit and loss account. It is submitted that but for these irregular adjustments, the petitioner-bank would have incurred a net loss for the year 1994-95 also.

9. The position may be summarised as under :

30-9-93 30-12-94 29-12-95---------------------------------------74.90 250.72 517.95.1. Book value of paid-up capital, (after revaluation as stated inreserves (including revaluation item 3 below)reserve) provisions and otheritems not in the nature of outside liabilities.2. *Real and exchangeable value (-) 136.69 (-) 12.91 312.80of item (1) after accounting forerosion of assets.3. Revaluation reserve out ofitem (1) 116.69 423.174. Real and exchangeable value (-) 136.69 (-) 129.60 (-) 110.37minus revaluation reserve*The real and exchangeable value of capital and reserves is defined as the excess of realisable value of assets as determined by the Inspecting Officer over the total outside liabilities of the bank. If the outside liabilities exceed the realisable value of assets, it means that not only the bank's owned funds including paid-up capital, reserves, provisions, credit balance in the profit and loss account, etc., have been eroded but its deposits have also been eroded to the extent of difference.

It will be seen from the above figures that consequent on erosion of its capital and reserves, the provisions of section 11 of the Banking Regulation Act could also not be complied with by the petitioner-bank. For the purposes of that section, value of capital and reserves means the real or exchangeable value and not nominal value which may be shown in the books of the banking company concerned. The position stated above clearly demonstrates that the real or exchangeable value of the capital and reserves of the petitioner-bank was fully eroded and there was also erosion of the deposits of the bank. Reference is further invited to sub-section (6) of section 11 in terms whereof if any dispute arises in computing the aggregate value of the paid-up capital and reserves of any banking company, determination thereof by the Reserve Bank shall be final for the purposes of the said section.

16. It is submitted that the decision to impose moratorium with a view to deciding the future set up of the bank was taken based on the findings of inspection of the bank conducted from time to time, the latest being with reference to its financial position as on December 29, 1995. The decision was taken after due consideration of all relevant aspects, some time in May-June, 1996, and a recommendation made to Government of India in this regard in July, 1996. The financial position of the bank as on March 31, 1996, as submitted by the petitioner-bank, was neither available at the time of review nor is likely to affect the decision so taken after careful consideration of all facts/related aspects. The bank's financial position as on March 31, 1996, can, thereforee, have no bearing on the moratorium order.'

17. The provisions of law as contained in the Banking Regulation Act, 1949, which are relevant may be reproduced as follows :

'5. Interpretation. - In this Act, unless there is anything repugnant in the subject or context, - ...

(b) 'banking' means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise;

(ca) 'banking policy' means any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.'

'11. Requirement as to minimum paid-up capital and reserves - ...

(3) In the case of any banking company to which the provisions of sub-section (2) do not apply, the aggregate value of its paid-up capital and reserves shall not be less than -

(i) if it has places of business in more than one State, five lakhs of rupees, and if any such place or places of business is or are situated in the city of Bombay or Calcutta or both, ten lakhs of rupees;

(ii) if it has all its places of business in one State none of which is situated in the city of Bombay or Calcutta, one lakh of rupees in respect of its principal place of business, plus ten thousand rupees in respect of each of its other places of business situated in the same district in which it has its principal place of business, plus twenty-five thousand rupees in respect of each place of business situated elsewhere in the State otherwise than in the same district :

Provided that no banking company to which this clause applies shall be required to have paid-up capital and reserves exceeding an aggregate value of five lakhs of rupees :

Provided further that no banking company to which this clause applies and which has only one place of business, shall be required to have paid-up capital and reserves exceeding an aggregate value of fifty thousand rupees :

Provided further that in the case of every banking company to which this clause applies and which commences banking business for the first time after the commencement of the Banking Companies (Amendment) Act, 1962 (36 of 1962), the value of its paid-up capital shall not be less than five lakhs of rupees;

(iii) if it has all its place of business in one State, one or more of which is or are situated in the city of Bombay or Calcutta, five lakhs of rupees, plus twenty-five thousand rupees in respect of each place of business situated outside the city of Bombay or Calcutta, as the case may be :

Provided that no banking company to which this clause applies shall be required to have paid-up capital and reserves exceeding an aggregate value of ten lakhs of rupees.

Explanation. - For the purposes of this sub-section, a place of business situated in a State other than that in which the principal place of business of the banking company is situated shall, if it is not more than twenty-five miles distant from such principal place of business, be deemed to be situated within the same State as such principal place of business.'

'22. Licensing of banking companies. - (1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a license issued in that behalf by the Reserve Bank and any such license may be issued subject to such conditions as the Reserve Bank may think fit to impose.

(2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a license under this section :

Provided that in the case of a banking company in existence on the commencement of this Act, nothing in sub-section (1) shall be deemed to prohibit the company from carrying on banking business until it is granted a license in pursuance of this section or is by notice in writing informed by the Reserve Bank that a license cannot be granted to it :

Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the commencement of this Act before the expiry of the three years referred to in sub-section (1) of section 11 or of such further period as the Reserve Bank may under that sub-section think fit to allow.

(3) Before granting any license under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions as fulfillled, namely :-

(a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue :

(b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors;

(c) that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors;

(d) that the company has adequate capital structure and earning prospects;

(e) that the public interest will be served by the grant of a license to the company to carry on banking business in India;

(f) that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the license would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth;

(g) any other condition, the fulfillment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.'

'35. Inspection. - (1) Notwithstanding anything to the contrary contained in section 235 of the Companies Act, 1956, the Reserve Bank at any time may, and on being directed so to do by the Central Government shall, cause an inspection to be made by one or more of its officers of any banking company and its books and accounts; and the Reserve Bank shall supply to the banking company a copy of its report on such inspection.

(1A)(a) Notwithstanding anything to the contrary contained in any law for the time being in force and without prejudice to the provisions of sub-section (1), the Reserve Bank, at any time, may also cause a scrutiny, to be made by any one or more of its officers, of the affairs of any banking company and its books and accounts; and

(b) a copy of the report of the scrutiny shall be furnished to the banking company if the banking company makes a request for the same or if any adverse action is contemplated against the banking company on the basis of the scrutiny.

(2) It shall be the duty of every director or other officer or employee of the banking company to produce to any officer making an inspection under sub-section (1) or a scrutiny under sub-section (1A) all such books, accounts and other documents in his custody or power and to furnish him with any statements and information relating to the affairs of the banking company as the said officer may require of him within such time as the said officer may specify.

(3) Any person making an inspection under sub-section (1) or a scrutiny under sub-section (1A) may examine on oath any director or other officer or employee of the banking company in relation to its business, and may administer any oath accordingly.

(4) The Reserve Bank shall, if it has been directed by the Central Government to cause an inspection to be made, and may, in any other case, report to the Central Government on any inspection or scrutiny made under this section, and the Central Government, if it is of opinion after considering the report that the affairs of the banking company are being conducted to the detriment of the interests of its depositors, may, after giving such opportunity to the banking company to make a representation in connection with the report as, in the opinion of the Central Government, seems reasonable, by order in writing -

(a) prohibit the banking company from receiving fresh deposits;

(b) direct the Reserve Bank to apply under section 38 for the winding up of the banking company :

Provided that the Central Government may defer, for such period as it may think fit, the passing of an order under this sub-section, or cancel or modify any such order upon such terms and conditions as it may think fit to impose.

(5) The Central Government may, after giving reasonable notice to the banking company, publish the report submitted by the Reserve Bank or such portion thereof as may appear necessary.

(6) The powers exercisable by the Reserve Bank under this section in relation to regional rural banks may (without prejudice to the exercise of such powers by the Reserve Bank in relation to any regional rural bank whenever it considers necessary so to do) be exercised by the National Bank in relation to the regional rural banks, and, accordingly, sub-sections (1) to (5) shall apply in relation to regional rural banks as if every reference therein to the Reserve Bank included also a reference to the National Bank.

Explanation. - For the purposes of this section, the expression 'banking company' shall include -

(i) in the case of a banking company incorporated outside India, all its branches in India; and

(ii) in the case of a banking company incorporated in India -

(a) all its subsidiaries formed for the purpose of carrying on the business of banking exclusively outside India; and

(b) all its branches whether situated in India or outside India.'

'35A. Power of the Reserve Bank, to give directions. - (1) Where the Reserve Bank is satisfied that -

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or

it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect.'

'38. Winding up by High Court. - (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 -

(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 or 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 -

(a) if the banking company, -

(i) has failed to comply with the requirements specified in section 11; or

(ii) has by reason of the provisions of section 22 become disentitled to carry on banking business in India; or

(iii) has been prohibited from receiving fresh deposits by an order under clause (a) of sub-section (4) of section 35 or under clause (b) of sub-section (3A) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934); or

(iv) having failed to comply with any requirement of this Act other than the requirements laid down in section 11, has continued such failure, or, having contravened any provision of this Act has continued such contravention beyond such period or periods as may be specified in that behalf by the Reserve Bank from time to time, after notice in writing of such failure or contravention has been conveyed to the banking company; or

(b) if in the opinion of the Reserve Bank -

(i) a compromise or arrangement sanctioned by a court in respect of the banking company cannot be worked satisfactorily with or without modifications; or

(ii) the returns, statements or information furnished to it under or in pursuance of the provisions of this Act disclose that the banking company is unable to pay its debts; or

(iii) the continuance of the banking company is prejudicial to the interests of its depositors.

(4) Without prejudice to the provisions contained in section 434 of the Companies Act, 1956 (1 of 1956), a banking company shall be deemed to be unable to pay its debts if it has refused to meet any lawful demand made at any of its offices or branches within two working days, if such demand is made at a place where there is an office, branch or agency of the Reserve Bank, or within five working days, if such demand is made elsewhere, and if the Reserve Bank certifies in writing that the banking company is unable to pay its debts.

(5) A copy of every application made by the Reserve Bank under sub-section (1) shall be sent by the Reserve Bank to the Registrar.'

'45. Power of Reserve Bank. to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation. - (1) Notwithstanding anything contained in the foregoing provisions of this part or in any other law or any agreement or other instrument, for the time being in force, where it appears to the Reserve Bank that there is good reason so to do, the Reserve Bank may apply to the Central Government for an order of moratorium in respect of a banking company.

(2) The Central Government, after considering the application made by the Reserve Bank under sub-section (1), may make an order of moratorium staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time on such terms and conditions as it thinks fit and proper and may from time to time extend the period so, however, that the total period of moratorium shall not exceed six months.

(3) Except as otherwise provided by any directions given by the Central Government in the order made by it under sub-section (2), or at any time thereafter, the banking company shall not during the period of moratorium make any payment to any depositors or discharge any liabilities or obligations to any other creditors.

(4) During the period of moratorium, if the Reserve Bank is satisfied that -

(a) in the public interest; or

(b) in the interests of the depositors; or

(d) in the interests of the banking system of the country as a whole, -

it is necessary so to do, the Reserve Bank may prepare a scheme -

(i) for the reconstruction of the banking company, or

(ii) for the amalgamation of the banking company with any other banking institution (in this section referred to as 'the transferee-bank').

(5) The scheme aforesaid may contain provisions for all or any of the following matters, namely :-

(a) the constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, the liabilities, duties and obligations of the banking company on its reconstruction or, as the case may be, of the transferee bank;

(b) in the case of amalgamation of the banking company, the transfer to the transferee bank of the business, properties, assets and liabilities of the banking company on such terms and conditions as may be specified in the scheme;

(c) any change in the board of directors, or the appointment of a new board of directors, of the banking company on its reconstruction or, as the case may be, of the transferee bank and the authority by whom the manner in which, and the other terms and conditions on which, such change or appointment shall be made and in the case of appointment of a new board of directors or of any director, the period for which such appointment shall be made;

(d) the alteration of the memorandum and articles of association of the banking company on its reconstruction or, as the case may be, of the transferee bank for the purpose of altering the capital thereof or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation;

(e) subject to the provisions of the scheme, the continuation by or against the banking company on its reconstruction or, as the case may be, the transferee bank, of any actions or proceedings pending against the banking company immediately before the date of the order of moratorium;

(f) the reduction of the interest or rights which the members, depositors and other creditors have in or against the banking company before its reconstruction or amalgamation to such extent as the Reserve Bank considers necessary in the public interest or in the interest of the members, depositors and other creditors or for the maintenance of the business of the banking company;

(g) the payment in cash or otherwise to depositors and other creditors in full satisfaction of their claim -

(i) in respect of their interest or rights in or against the banking company before its reconstruction or amalgamation; or

(ii) where their interest or rights aforesaid in or against the banking company has, or have been reduced under clause (f), in respect of such interest or rights as so reduced;

(h) the allotment to the members of the banking company for shares held by them therein before its reconstruction or amalgamation whether their interest in such shares has been reduced under clause (f) or not, of shares in the banking company on its reconstruction or, as the case may be, in the transferee bank and where any members claim payment in cash and not allotment of shares, or where it is not possible to allot shares to any members, the payment in cash to those members in full satisfaction of their claim -

(i) in respect of their interest in shares in the banking company before its reconstruction or amalgamation; or

(ii) where such interest has been reduced under clause (f) in respect of their interest in shares as so reduced;

(i) the continuance of the services of all the employees of the banking company (excepting such of them as not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947), are specifically mentioned in the scheme) in the banking company itself on its reconstruction or, as the case may be, in the transferee-bank at the same remuneration and on the same terms and conditions of service, which they were getting or, as the case may be, by which they were being governed, immediately before the date of the order of moratorium :

Provided that the scheme shall contain a provision that -

(i) the banking company shall pay or grant not later than the expiry of the period of three years from the date on which the scheme is sanctioned by the Central Government, to the said employees the same remuneration and the same terms and conditions of service as are, at the time of such payment or grant, applicable to employees of corresponding rank or status of a comparable banking company to be determined for this purpose by the Reserve Bank (whose determination in this respect shall be final);

(ii) the transferee bank shall pay or grant not later than the expiry of the aforesaid period of three years, to the said employees the same remuneration and the same terms and conditions of service as are, at the time of such payment or grant, applicable to the other employees of corresponding rank or status of the transferee bank subject to the qualifications and experience of the said employees being the same as or equivalent to those of such other employees of the transferee bank :

Provided further that if in any case under clause (ii) of the first proviso any doubt or difference arises as to whether the qualification and experience of any of the said employees are the same as or equivalent to the qualifications and experience of the other employees of corresponding rank or status of the transferee bank, the doubt or difference shall be referred, before the expiry of a period of three years from the date of the payment or grant mentioned in that clause, to the Reserve Bank whose decision thereon shall be final;

(j) notwithstanding anything contained in clause (i) where any of the employees of the banking company not being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947), are specifically mentioned in the scheme under clause (i), or where any employees of the banking company have by notice in writing given to the banking company or, as the case may be, the transferee bank at any time before the expiry of one month next following the date on which the scheme is sanctioned by the Central Government, intimated their intention of not becoming employees of the banking company on its reconstruction or, as the case may be, of the transferee bank, the payment to such employees of compensation, if any, to which they are entitled under the Industrial Disputes Act, 1947, and such pension, gratuity, provident fund and other retirement benefits ordinarily admissible to them under the rules or authorisations of the banking company immediately before the date of the order of moratorium;

(k) any other terms and conditions for the reconstruction or amalgamation of the banking company;

(l) such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

(6) (a) A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the banking company and also to the transferee bank and any other banking company concerned in the amalgamation, for suggestions and objections, if any, within such period as the Reserve Bank may specify for this purpose;

(b) The Reserve Bank may make such modifications, if any, in the draft scheme as it may consider necessary in the light of the suggestions and objections received from the banking company and also from the transferee bank, and any other banking company concerned in the amalgamation and from any members, depositors or other creditors of each of those companies and the transferee bank.

(7) The scheme shall thereafter be placed before the Central Government for its sanction and the Central Government may sanction the scheme without any modifications or with such modifications as it may consider necessary; and the scheme as sanctioned by the Central Government shall come into force on such date as the Central Government may specify in this behalf :

Provided that different dates may be specified for different provisions of the scheme.'

18. Learned counsel for the petitioner has contended as follows :

(i) the impugned notification dated September 30, 1996, is invalid as there has been non-application of mind by the Central Government and cannot be held to be issued in public interest. The same is, thereforee, arbitrary, unjustified and smacks of nepotism. The financial position of the banks is quite sound and there was no reason for imposition of moratorium orders. The petitioner banks were fully qualified to continue to do business under the provisions of section 11(3) of the Act and it was erroneous on the part of the respondents to ask the petitioners to raise the capital to Rs. 10 crores by effecting merger. This advice was unreasonable, unjustified and in violation of the principles of law;

(ii) the approach of respondents Nos. 3 and 4 and other officials of respondent No. 2 is arbitrary, mala fide and unjustified. The order of moratorium has been issued on extraneous considerations and cannot be sustained in law;

(iii) section 45(1) of the Act requires the Reserve Bank to make an application to the Central Government for grant of moratorium. thereforee, the RBI should have communicated the reasons to the petitioner banks for making the said application and as a matter of fact should have called upon them to state their shortfalls, if any, under section 35A by giving sufficient opportunity to comply with the directions;

(iv) the test of reasonableness and fair play has not been satisfied in this case and the decision is clearly arbitrary and vocative of the provisions of article 14 of the Constitution of India. The concept of fair play is part of public policy and cannot be given a go-by in the present set up and the rules of natural justice have been violated by the impugned action.

19. The following judgments have been cited to support the proposition as canvassed in this writ petition :

20. Commissioner of Police v. Gordhandas Bhanji, : [1952]1SCR135 , K.I. Shephard v. Union of India : (1988)ILLJ162SC , Food Corporation of India v. Kamdhenu Cattle Feed Industries : AIR1993SC1601 , Life Insurance Corporation of India v. Consumer Education and Research Centre : AIR1995SC1811 and Anirudhsinhji Karansinghji Jadeja v. State of Gujarat : 1995CriLJ4154 .

21. In Commissioner of Police v. Gordhandas Bhanji, : [1952]1SCR135 , the Supreme Court held as follows (at page 18) :

'Turning now to the language used we are clear that by no stretch of imagination can this be construed to be an order which in effect says - 'I, so and so, by virtue of the authority vested in me, do hereby order and direct this and that'. If the Commissioner of Police had the power to cancel the license already granted and was the proper authority to make the order, it was incumbent on him to say so in express and direct terms. Public authorities cannot play fast and loose with the powers vested in them, and persons to whose detriment orders are made are entitled to know with exactness and precision what they are expected to do or forbear from doing and exactly what authority is making the order.'

22. In paragraph 20 of this judgment, the Supreme Court has highlighted the fact that the ultimate authority which is to exercise its powers must apply its mind independently in exercise of powers conferred on it. Para. 20 is cited in this regard (at page 20) :

'It was contended that this would work great hardship in some cases and that if money had already been expended on the building an estoppel at least would arise. No question of estoppel has been raised here, so that is not a question we need consider nor need we answer the converse question whether an estoppel would hold good in the face of a law enacted for the public good on grounds of public policy; also whether there can be an estoppel when a person builds knowing the risk he runs of cancellation at any time under rule 250.'

23. Reliance is next placed on the judgment as reported in K.I. Shephard v. Union of India : (1988)ILLJ162SC . The court was dealing with the plea of the petitioners with regard to the challenge to the exclusion of the names of the employees in the scheme at a later stage in exercise of powers under section 45 of the Act. In this case some excluded employees had filed a petition on the ground that they were not given hearing and the relief of continuance of service was not granted. The court directed that the excluded employees should be absorbed on the same terms and conditions of employment under the respective banking companies prior to amalgamation. The contentions as taken read as follows (at page 250 of 63 Comp Cas) :

'Allegation advanced on behalf of the excluded employees is that the draft scheme contemplated under sub-section (6)(a) did not specifically mention the names of the excluded employees and at a later stage when the scheme was sent up by the RBI to the Central Government a schedule containing the names of the excluded employees was attached to each of the schemes. Section 45 of the Act provides a legislative scheme and the different steps required to be taken under this section have been put one after the other. A reading of this section indicates a sequence oriented pattern. What would ordinarily be incorporated in the draft scheme is indicated in sub-section (5). After the requirements of sub-section (5) are complied with and the scheme comes to a presentable shape, sub-section (6)(a) requires a copy thereof as prepared by the RBI to be sent to the banking company (transferor) as also to the transferee bank. Clause (b) of sub-section (6) authorises RBI to make modifications in the draft scheme as it may consider necessary in the light of suggestions and objections received from the banking company and the transferee bank. On a simple construction of sub-sections (5) and (6) and on the basis of the sequence pattern adopted in section 45, it would be legitimate to hold that the Act contemplates the employees to be excluded to be specifically named in the draft scheme. Since it is a draft scheme prepared by RBI and the right to object or to make suggestions is extended to both the banking company as also the transferee bank, and in view of the fact that clause (i) of sub-section (5) specifies this item to be a matter which may be included in the scheme, it must follow that the legislative intention is that the scheme would incorporate the names of such employees as are intended to be excluded in accordance with the scheme. Once it is incorporated in the scheme, the banking company as also the transferee bank would be entitled to suggest/object to the inclusion of names of employees. It may be that the names of some of the employees may have been wrongly included and the banking company - the hitherto employer would be in a position to suggest/object to the inclusion of the names or it may even be that names of some undesirable employees which should have been left out have been omitted and the banking company as the extant employer of such employees would be most competent to deal with such a situation to bring about rectification by exercising the power to suggest/ object to the draft scheme. The contention advanced on behalf of RBI that since it is open to it under sub-section (6)(b) of section 45 to make modifications to the draft scheme, even if the names were not included earlier, at the stage of finalising the scheme for placing it before the Central Government as required under sub-section (7), the earlier non-inclusion is not a contravention is not acceptable. We are of the view that in case some employees of the banking company are intended to be excluded, their names have to be specifically mentioned in the scheme at the draft stage. The requirement of specific mention is significant and the Legislature must be taken to have intended compliance with the requirement at that stage. Mr. Salve for the RBI adopted the stand that the provisions of section 45 did not specifically concede a right of objection or making of suggestions to employees and in sub-section (6)(b) mention was made only of members, depositors or other creditors. For the reasons we have indicated above, this aspect of the contention does not impress us.'

24. The findings are recorded in para. 15 as below (at page 258 of 63 Comp Cas) :

'Fair play is a part of the public policy and is a guarantee for justice to citizens. In our system of rule of law every social agency conferred with power is required to act fairly so that social action would be just and there would be furtherance of the well being of citizens. The rules of natural justice have developed with the growth of civilisation and the content thereof is often considered as a proper measure of the level of civilisation and rule of law prevailing in the community. Man within the social frame has struggled for centuries to bring into the community the concept of fairness and it has taken scores of years for the rules of natural justice to conceptually enter into the field of social activities. We do not think in the facts of the case there is any justification to hold that rules of natural justice have been ousted by necessary implication on account of the time frame. On the other hand we are of the view that the time limited by statute provides scope for an opportunity to be extended to the intended excluded employees before the scheme is finalised so that a hearing commensurate with the situation is afforded before a section of the employees is thrown out of employment.'

25. The following passage from Food Corporation of India v. Kamdhenu Cattle Feed Industries : AIR1993SC1601 has been referred to :

'In the contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to article 14 of the Constitution of which non-arbitrariness is a significant facet. There is no unfettered discretion in public law. A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is 'fair play in action. Due observance of this obligation as a part of good administration raises a reasonable or legitimate expectation in every citizen to be treated fairly in his interaction with the State and its instrumentalities, with this element forming a necessary component of the decision-making process in all State actions. To satisfy this requirement of non-arbitrariness in a State action, it is, thereforee, necessary to consider and give due weight to the reasonable or legitimate expectations of the persons likely to be affected by the decision or else that unfairness in the exercise of the power may amount to an abuse or excess of power apart from affecting the bona fides of the decision in a given case. The decision so made would be exposed to challenge on the ground of arbitrariness. Rule of law does not completely eliminate discretion in the exercise of power, as it is unrealistic, but provides for control of its exercise by judicial review.'

26. Reference is next made to the judgment in Life Insurance Corporation of India v. Consumer Education and Research Centre [1995] 84 Comp Cas 168 of which paragraphs 23 and 24 have been relied upon which read as follows :

'Every action of the public authority or the person acting in public interest or where its acts give rise to public element, should be guided by public interest. It is the exercise of the public power or action hedged in with a public element which becomes open to challenge. If it is shown that the exercise of the power is arbitrary, unjust and unfair, it should be no answer for the State, its instrumentality, public authority or person whose acts have the insignia of public element to say that their actions are in the field of private law and they are free to prescribe any conditions or limitations in their actions as private citizens, simpliciter, do in the field of private law. Its actions must be based on some rational and relevant principles. It must not be guided by irrational or irrelevant considerations. Every administrative decision must be hedged in by reasons. The Administrative Law by Wade, 5th edition, at page 513 in Chapter 16, Part IV, dealing with remedies and liabilities, stated thus :

'Until a short time ago anomalies used to be caused by the fact that the remedies employed in Administrative Law belong to two different families. There is the family of ordinary private law remedies such as damages, injunction and declaration and there is a special family of public law remedies particularly certiorari, prohibition and mandamus, collectively known as prerogative remedies. Within each family, the various remedies can be sought separately or together or in the alternative. But each family had its own distinct procedure'.

At page 514, it was elaborated that 'this difficulty was removed in 1977 by the provision of a comprehensive, 'application for judicial review', under which remedies in both the facilities became inter-changeable.' At page 573, with the heading Application for Judicial Review in Chapter 17, it is stated thus :

All the remedies mentioned are then made interchangeable by being made available 'as an alternative or in addition' to any of them. In addition the court may award damages, if they are claimed at the outset and if they could have been awarded in an ordinary action'.

27. The distinction between private law and public law remedy is now settled by this court in Life Insurance Corporation of India v. Escorts Ltd. : 1986(8)ECC189 , by a Constitution Bench thus (at page 637 of 59 Comp Cas) :

'If the action of the State is related to contractual obligation or obligations arising out of the contract the court may not ordinarily examine unless the action has some public law character attached to it. Broadly speaking, the court will examine actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty will lie in demarcating the frontier between the public law domain and the private law field. It is impossible to draw the line with precision and we do not want to attempt it. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances.'

28. In Dwarkadas Marfatia and Sons v. Board of Trustees of Port of Bombay, : [1989]2SCR751 , it was held that the Corporation must act in accordance with certain constitutional conscience and whether they have so acted must be discernible from the conduct of such Corporations. Every activity of public authority must be informed by reasons and guided by the public interest. All exercises of discretion or power by public authority must be judged by that standard. In that case when the building owned by the port trust was exempted from the Rent Act, on terminating the tenancy for development when possession was sought to be taken, it was challenged under article 226 that the action of the port trust was arbitrary and no public interest would be served by terminating the tenancy. In that context, this court held that even in contractual relations the court cannot ignore that the public authority must have constitutional conscience so that any interpretation put up must be to avoid arbitrary action, lest the authority would be permitted to flourish as imperium a imperia. Whatever be the activity of the public authority, it must meet the test of article 14 and judicial review strikes at arbitrary action.

29. Similarly, reliance is placed on the judgment of the Supreme Court in Anirudhsinghji Karansinghji Jadeja v. State of Gujarat : 1995CriLJ4154 to reiterate the proposition that there is failure to exercise jurisdiction and discretion on the part of the Central Government as it is only the Reserve Bank which has been instrumental in issuance of the order of moratorium and has exercised powers which are not vested in it by statute.

30. The learned Solicitor-General appearing for respondents Nos. 2 to 5 has argued that on careful consideration of the matter the moratorium was imposed under the provisions of section 45 of the Act and there were good reasons so to do. The Reserve Bank of India as well as the Central Government have applied their mind and as a consequence made an order of moratorium which is presently impugned in these petitions. Moratorium means suspension of business and the subsequent provisions of the section have to be followed and an appropriate scheme has to be framed in public interest as well as in the interest of the depositors. These provisions are so stated in sub-sections (4) and (5) of section 45 of the Act. The respondents have carefully analysed the entire thing and have decided to amalgamate the petitioner banks with the Oriental Bank of Commerce which will be in the public interest. The petitioner can, thereforee, participate at that stage to put forward their view-points and the present petition cannot be entertained. It is not denied that the petitioner banks are operating without license in view of the provisions as contained in section 22. The more drastic remedy, in view of the current position of the banks, would be to apply the provisions of section 38 which relate to winding up by the High Court but the Reserve Bank refrained from making any such application in this regard to safeguard the interest of the depositors.

31. It is next contended that the petitioners are not in fact carrying on banking business to fulfill the economic purpose and the policy to serve the needs of the banking business. Although the petitioners have been in existence for over 80 to 90 years they could hardly record any progress in terms of the branch expansion, growth of business capital base, etc. The banks are family controlled and are hardly doing any genuine banking business. The total advances are concentrated in the hands of a few borrowers and they are practically zero from few banking operations. The position of Punjab Co-operative Bank Ltd. is alleged to be in a perilous condition. The provisions of section 11 of the Act for minimum paid-up capital and reserves can also not be complied with as its capital and reserves were wiped out. Sub-section (6) of section 11 of the Act specifically states that if any dispute arises in computing the aggregate value of paid-up capital and reserves of the banking company, a determination thereof by the Reserve Bank of India shall be final for the purpose of this section. thereforee, it is not open to the petitioners to dispute the real and exchangeable value of the capital and reserves of the petitioner-banks. It has been in loss for the year ending 1993 of Rs. 48 lakhs, for the year ending 1994 of Rs. 67 lakhs and for the year ending March 31, 1995, a nominal profit of Rs. 18 lakhs was shown but there was a carried forward loss of Rs. 97 lakhs. The Reserve Bank of India told the Punjab Co-operative Bank Ltd. to take steps to bring at least Rs. 10 crores by way of capital which would have helped to stop the deterioration and a number of communications were sent in this regard but no steps were taken. The Reserve Bank of India has categorically stated in this court that in the circumstances of the case, the Reserve Bank does not think that reconstruction of the bank is the alternative but it is proposed to amalgamate the bank with another bank i.e., Oriental Bank of Commerce Ltd., a nationalised public bank which will safeguard the interest of the depositors. thereforee, the allegation of the petitioners with regard to mala fides has no basis either in fact or in law. Similarly, submissions have been made with regard to Bari Doab Bank Ltd. This bank was also informed from 1984 onwards that it should take steps to convert itself into a non-banking company if it desired to function in the way in which it was functioning but the bank took no concrete steps to convert itself. In the above background, it is reiterated that the respondents have carefully analysed the entire issues and found it just and practical to issue the orders of moratorium and ultimately to frame the scheme for amalgamation of the two banks with the Oriental Bank of Commerce.

32. The question now arises as to whether it will be open for this court to review the decisions which have been taken by a specialised body like the Reserve Bank of India and arrive at different conclusions. The scope of jurisdiction in such matters has been settled by various judgments of the Supreme Court and the same may be referred to at this stage.

33. In Joseph Kuruvilla Vellukunnel v. Reserve Bank of India : AIR1962SC1371 , the position of the Reserve Bank of India is clearly stated in the following paragraphs which are referred to from (pages 650-652 and 656 of 32 Comp Cas) :

'But the most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as a bankers' bank. Under the Reserve Bank of India Act, the scheduled banks maintain certain balances and the Reserve Bank can lend assistance to those banks 'as a lender of the last resort'. The Reserve Bank has also been given certain advisory and regulatory functions. By its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises Government and other banks on financial and banking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other banks and inspects the books and accounts of scheduled banks and advises Government after inspection whether a particular bank should be included in the Second Schedule or not. Every scheduled bank is required to send to the Reserve Bank and to the Central Government a weekly return of its position in a form, which is prescribed. Sometimes, however, the Reserve Bank allows a particular bank to send its returns once a month instead of every week. From these returns, the Reserve Bank prepares and publishes consolidated statements showing the monetary position in the country. The inclusion of a bank in the Second Schedule is the function of the Reserve Bank, and under sections 42(6)(a)(iii) and (b)(ii) it satisfies itself, inter alia, that the affairs of the particular bank are not being conducted in a manner detrimental to the interests of its depositors. The Reserve Bank has further the power to prohibit any scheduled bank from receiving, after a week, any fresh deposits.

The above analysis of some of the provisions of the Reserve Bank of India Act show that the Reserve Bank of India has been created as a central bank with powers of supervision, advice and inspection, over banks, particularly those desiring that they be included in the Second Schedule or those scheduled already. The Reserve Bank thus safeguards the economy and the financial stability of the country. No doubt, the board is composed of nominated members; but from the nature of things, it could not be otherwise. Neither election nor competitive examinations can effectively take the place of nominations, if the board is to be composed of men of proven worth and standing, and there is no other method which can even be contemplated. No doubt, the members of the board are subject to removal, but neither integrity nor efficiency is secured only by such guarantee, and we have no reason to think that the Reserve Bank acted in this case, or acts in other cases under pressure or from oblique motives. As was pointed out in another connection by this court in All India Bank Employees Association v. National Industrial Tribunal : (1961)IILLJ385SC :

'If it was not the Reserve Bank of India, the only other authority that could be entrusted with the function would be the Finance Ministry of the Government of India and that department would necessarily be guided by the Reserve Bank having regard to the intimate knowledge which the Reserve Bank has of the banking structure of the country as a whole and of the affairs of each bank in particular.

Nor do the powers of the Reserve Bank end there. The Reserve bank not only has powers over banking companies while they are functioning, but it has also powers when the banking companies wish or are forced to cease to function. If a banking company wants to suspend its business and applies to the High Court for a moratorium, the application is not maintainable, unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts. When the High Court grants the reliefs without such report, it has to call for a report from the Reserve Bank. The High Court is also required to have regard to the interests of the depositors, and even during the period of moratorium granted by the High Court, the Reserve Bank can apply for the winding up of the banking company. Sections 39 and 41A give special powers to the Reserve Bank in winding up proceedings. Even in voluntary winding up of a banking company, the Reserve Bank has to certify that the banking company is able to pay in full all its debts to its creditors, as they accrue. In amalgamation of banking companies, the scheme has to be approved by the Reserve Bank. Similarly, in compromises or arrangements between the banking company and its creditors, the Reserve Bank has to be satisfied. In all these matters, the satisfaction, inter alia, must be as to the interests of the depositors. In reconstruction of banking company after an application by the Reserve Bank for an order of moratorium, the Reserve Bank has to satisfy itself and prepare a scheme, which inter alias must be in the interests of the depositors.'

34. The feasibility and practicability of granting hearing, recording of reasons and communicating the same to the parties has been explained in the following paragraphs from : AIR1962SC660 :

'That leaves over the second and third arguments, which proceed upon the same materials. In this connection, the main grounds of attack have already been set out in this judgment. Before we deal with the central point, we shall deal with certain others which proceed said so to speak, from the side lines. The objection that the Reserve Bank gives no hearing, records no reasons in writing and does not communicate them is met at least in this case by the admitted facts. The numerous inspection reports and directions issued by the Reserve Bank over a period of nearly nine years, together with the application filed in this case, prove amply that there was enough hearing of and enough communication of the grounds of action to the Palai Bank. The Bank had also sufficient time and opportunity to establish its own point of view before the Reserve Bank. It was impossible that the Reserve Bank, with the run on the bank, would sit down to decide after hearing whether to take action or not, while withdrawals were being at the rate of Rs. 7 lakhs per day. The emergency of the situations which may arise, is itself the justification for the procedure open under the Act and taken in this case. In our opinion, these grounds cannot be entertained. It is difficult to imagine that the Reserve Bank would act differently in another case.

The learned Attorney General, on the other side, drew our attention to Virendra v. State of Punjab, : [1958]1SCR308 , where it has been pointed out that in judging the reasonableness of any particular law 'the surrounding circumstances in which the impugned law came to be enacted, the underlying purpose of the enactment and the extent and urgency of the evil sought to be remedied' must also be considered. That case concerned the freedom of speech and its alleged curtailment by the Punjab Special Powers (Press) Act, 1956. In judging the reasonableness of the law from the angle of the exclusion of courts, this court observed :

'Legislature had to ask itself the question : who will be the appropriate authority to determine at any given point of time as to whether the prevailing circumstances require some restriction to be placed on the right to freedom of speech and expression and the right to carry on any occupation, trade or business and to what extent The answer was obvious, namely, that as the State Government was charged with the preservation of law and order in the State, as it alone was in possession of all material facts it would be the best authority to investigate the circumstances and assess the urgency of the situation that might arise and to make up its mind whether any and, if so, what anticipatory action must be taken for the prevention of the threatened or anticipated breach of the peace. The court is wholly unsuited to gauge the seriousness of the situation, for it cannot be in possession of materials which are available only to the executive Government. thereforee, the determination of the time when and the extent to which restrictions should be imposed on the Press must of necessity be left to the judgment and discretion of the State Government and that is exactly what the Legislature did by passing the statute... Quick decision and swift and effective action must be of the essence of these powers and the exercise of it must, thereforee, be left to the subjective satisfaction of the Government... To make the exercise of these powers justiciable and subject to the judicial scrutiny will defeat the very purpose of the enactment.'

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 the 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.

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 licences 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 interests 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 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 Bank's action or a provision for an ex post facto 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.'

35. The facts of the present cases, it is argued, required immediate action and the right to a prior notice and an opportunity to be heard 'before an order was passed would have obstructed the taking of prompt action'. The Supreme Court in Union of India v. Tulsi Ram Patel : (1985)IILLJ206SC elaborated the concept. The following portion from paragraph 101 may be noticed :

'Not only, thereforee, can the principles of natural justice be modified but in exceptional cases they can even be excluded. There are well-defined exceptions to the nemo judex in causa sua rule as also to the audi alteram partem rule. The nemo judex in causa sua rule is subject to the doctrine of necessity and yields to it as pointed out by this court in J. Mohapatra and Co. v. State of Orissa : [1985]1SCR322 . So far as the audi alteram partem rule is concerned, both in England and in India, it is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct the taking of prompt action, such a right can be excluded. This right can also be excluded where the nature of the action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion; nor can the audi alteram partem rule be invoked if importing it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, as pointed out in Maneka Gandhi's case, : [1978]2SCR621 . If legislation and the necessities of a situation can exclude the principles of natural justice including the audi alteram partem rule a fortiori so can a provision of the Constitution, for a constitutional provision has a far greater and all-pervading sanctity than a statutory provision.'

36. The scope of powers of the Reserve Bank of India is further amplified in the judgment reported as Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India : 1991CriLJ1391 . Paragraphs 30, 31 and 52 may be reproduced as under :

'30. Before examining the scope and effect of the impugned paragraphs (6) and (12) of the Directions of 1987, it is also important to note that the Reserve Bank of India which is bankers' bank is a creature of statute. It has a large contingent of expert advisers relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the impugned directions of 1987. The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country. It is the duty of the Reserve Bank to safeguard the economy and financial stability of the country. While examining the power conferred by section 58A of the Companies Act, 1956, on the Central Government to prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by non-banking companies, this court in Delhi Cloth and General Mills Co. Ltd. v. Union of India [1983] 54 Comp Cas 674:

'Mischief was known and the regulatory measure was introduced to remedy the mischief. The conditions which can be prescribed to effectuate this purpose must, a fortiori, to be valid, fairly and reasonably, relate to checkmate the abuse of juggling with the depositors/investors hard earned money by the corporate sector and to confer upon them a measure of protection namely availability of liquid assets to meet the obligation of repayment of deposit which is implicit in acceptance of deposit. Can it be said that the conditions prescribed by the Deposit Rules are so irrelevant or have no reasonable nexus to the objects sought to be achieved as to be arbitrary The answer is emphatically in the negative. Even at the cost of repetition, it can be stated with confidence that the rules which prescribed conditions subject to which deposits can be invited and accepted do operate to extend a measure of protection against the notorious abuses of economic power by the corporate sector, to the detriment of depositors/investors, a segment of the society which can be appropriately described as weaker in relation to the mighty corporation. One need not go so far with Ralph Nader in America incorporated to establish that political institutions may fail to arrest or control this ever-widening power of corporations. And can one wish away the degree of sickness in private sector companies To the extent companies develop sickness, in direct proportion the controllers of such companies become healthy. In a welfare State, it is the constitutional obligation of the State to protect socially and economically weaker segments of the society against the exploitation by corporations. We, thereforee, see no merit in the submission, that the conditions prescribed bear no relevance to the object or the purpose for which the power was conferred under section 58A on the Central Government.'

31. The function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority. It is well settled that a public body invested with statutory powers must take care not to exceed or abuse its power. It must keep within the limits of the authority committed to it. It must act in good faith and it must act reasonably. Courts are not to interfere with economic policy which is the function of experts. It is not the function of the courts to sit in judgment over matters of economic policy and it must necessarily be left to the expert bodies. In such matters even experts can seriously and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts.

52. This court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962] 32 Comp Cas 514 held that the RBI is 'a bankers' bank and 'lender of the last resort'. Its objective is to ensure monetary stability in India and to operate and regulate the credit system of the country. It has, thereforee, to perform a delicate balance between the need to preserve and maintain the credit structure of the country by strengthening the rule as well as apparent credit structure of the banks operating in the country and the interest of depositors. In an underdeveloped country like ours, where majority of the population are illiterate and poor and are not conversant with banking operations and in underdeveloped money and capital market with mixed economy, the Constitution charges the State to prevent exploitation and so the RBI would play both promotional and regulatory roles. Thus the RBI occupies a place of 'pre-eminence' to ensure monetary discipline and to regulate the economy or the credit system of the country as an expert body. It also advises the Government in public finance and monetary regulations. The banks or non-banking institutions shall have to regulate their operations in accordance not only with the provisions of the Act but also the rules and directions or instructions issued by the RBI in exercise of the power thereunder. Chapter 3-B expressly deals with regulations of deposit and finance received by the RNBCs. The directions, thereforee, are statutory regulations.'

37. The law is, thereforee, well settled that the Reserve Bank which is described as the banker's bank is empowered to regulate the banking system and certain regulatory functions have been assigned to it by the provisions of the Act. The question now arises as to whether the Reserve Bank has exceeded its brief and applied to the Central Government for an order of moratorium without application of mind when there were no good reason so to do. The Central Government duly considered the application made by the Reserve Bank of India and passed orders of moratorium in terms of sub-section (2) of section 45 of the Act. The record which has been produced and the submissions made at the Bar would clearly establish that the Reserve Bank of India carefully determined the matter and applied to the Central Government to accept its opinion on the necessity of moratorium for the reasons as stated by the Reserve Bank of India in its counter affidavits filed in this court. The Reserve Bank of India possesses the expertise to arrive at its finding which cannot be questioned in the present proceedings under article 226 of the Constitution of India as it will involve examination of facts and figures. There is no evidence of non-application of mind as the matter has been examined in detail by the Reserve Bank of India as well as by the Central Government. The plea that the figures as given by the petitioners bear a sound position cannot be accepted as the opinion of the Reserve Bank of India, which is based on cogent evidence on record, cannot be discarded. Similarly, the submissions that the petitioners should have been heard before the moratorium was issued cannot be sustained in law as to give any notice of such a measure would be defeating the whole purpose of moratorium and this plea has been clearly discarded and overruled in matters of urgent nature and the feasibility and practicability of granting a hearing and recording of reasons have been explained in the judgment in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India : AIR1962SC1371 in the paragraphs which have earlier been cited in this judgment. I am in respectful agreement with the same.

38. The judgments as cited by learned counsel for the petitioners will also have no relevance to the facts which arise for consideration on the present petitions. Reliance on the judgment of the Supreme Court in the case of K.L. Shephard v. Union of India : (1988)ILLJ162SC , by learned counsel for the petitioners is misplaced. The court was dealing with the scheme of amalgamation with regard to the status of employees of the amalgamated bank who were excluded from the service of the transferee bank while retaining other similarly situated employees. In this background the court came to the conclusion that rules of natural justice were not excluded and an opportunity had to be extended to the employees intending to be excluded before the scheme was finalised and for that purpose, hearing was considered necessary. Similarly, the other judgments which have been rendered on general proposition of granting hearing by application of the rules of natural justice and fair play can be of no assistance to the questions which arise for consideration in the present cases in view of the fact that the principles of natural justice can be suitably modified and in exceptional cases they can even be excluded in the larger interest.

39. The record has been produced before this court and elaborate details have also been given in the respective affidavits filed by the respondents. This will indicate that the matter has been examined by respondent No. 2 and it has found 'that there is good reason so to do' and as a consequence applied to the Central Government for orders of moratorium in respect of the petitioner banks. The Central Government duly considered the application made by the Reserve Bank and made the orders by finding no cogent ground to differ from the recommendations. It is quite possible that some pleas of the petitioners with regard to the financial position of the respective banks may not have been considered with mathematical accuracy but will this court go into the question of sufficiency or insufficiency of material to determine the validity of impugned orders. I am afraid this course is not permissible. The Reserve Bank of India has been assigned a certain role under the Act and this court does not have the expertise to hold that the decision taken is without any foundation or basis, particularly, when certain material is already placed on record by the respondents to justify the impugned action.

40. The law is well-settled that the 'function of the court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority'. The provisions of section 45 of the Act are substantially complied with and it will not be open if this court to reappraise the material to arrive at a contrary conclusion as it is not the function of the courts to sit in judgment over such matters. The plea of mala fides as raised in the petition also has no basis or foundation. The fear of the petitioner that the Reserve Bank is indulging in this exercise to enable it to pass on the banks to other interested financial institutions cannot be accepted as it has been categorically stated at the Bar by the learned Solicitor-General that there are no such plans and a decision has been taken to amalgamate the petitioner-banks with the Oriental Bank of Commerce.

41. Learned counsel for the interveners who has appeared for the employees of the two banks has supported the moratorium orders as well as the proposed amalgamation with the Oriental Bank of Commerce.

42. Learned counsel for the petitioner has lastly contended that the petitioners may be granted an opportunity to convert themselves into non-banking companies and they will undertake to discharge all their liabilities within three months and will protect the interests of all the employees as well. The learned Solicitor-General, on the other hand, has, however, argued that such an alternative was offered to the petitioners but they took no concrete steps to convert themselves and on the contrary rejected the suggestion. The petitioners, in any case, shall have further opportunity to represent their case when the Reserve Bank of India prepares a scheme of amalgamation and invites objections from them and the transferee-bank under the provisions of sub-sections (5) and (6) of section 45 of the Act. The order of moratorium in each case will run itself out on March 31, 1997, and it will be open for the petitioners to submit their objections at an appropriate time in accordance with law including the plea that they may be permitted to apply to convert themselves into non-banking companies in public interest and in the interests of depositors.

43. In view of the above, the present petitions have no merit and the same are dismissed. There will be no order as to costs.

Subject	Company
Court	Delhi High Court
Decided On	Mar-05-1997
Case Number	C.W.P. Nos. 3885 and 4046 of 1996
Judge	C.M. Nayar, J.
Reported in	AIR1998Delhi95; [1997]89CompCas438(Delhi)
Acts	Companies Act, 1956 - Sections 58A, 235, 391, 392, 433, 434 and 583; Banking Regulation Act, 1949 - Sections 45(2); Constitution of India - Article 226
Appellant	Bari Doab Bank Ltd. ;punjab Co-operative Bank Ltd.
Respondent	Union of India and Others;union of India and Others
Advocates:	R.K. Jain, Senior Adv. and; Rakesh K. Khanna, Advs; Inderji
Cases Referred	K.L. Shephard v. Union of India

Bari Doab Bank Ltd. Vs. Union of India and Others - Court Judgment