Ephrem Ambooken, Poyya, Via Chalakudy Vs. Asst. Chief Officer, Reserve Bank of India, Trivandrum - Court Judgment

Excerpt:
banking - fundamental right - section 35 of banking companies act, 1949 and articles 19 and 226 of constitution of india - whether provisions of section 35b (1) (b) violative of article 19 (1) (g) - section 35b (1) (b) does not specify grounds on which approval can be refused - it does not indicate matters that should be weighed before approval is declined - section 35b (1) (b) contained in statute which has been promulgated for protection of special class of institutions-banking institutions that has been set up by act in interest of general public and depositors in banking institutions - power granted under impugned section not arbitrary. - - the proposition is well settled, and it will be sufficient to refer to certain passages from one of the decisions of the supreme court......orderp. govindan nair, j.1. the short question arising for decision in this original petition is whether the provisions of section 35b(1)(b) of the banking companies act, 1949 (hereinafter referred to as the act), is violative of article 19(1)(g) of the constitution. section 35b(1) of the act is in these terms:'35b. (1) in the case of a banking company-- (a) no amendment of any provision relating to the appointment or re-appointment or remuneration of a managing director or any other director, whole-time or otherwise or of a manager or a chief executive officer by whatever name called, whether that provision be contained in the company's memorandum or articles of association, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its.....

Judgment:
ORDER

P. Govindan Nair, J.

1. The short question arising for decision in this Original Petition is whether the provisions of Section 35B(1)(b) of the Banking Companies Act, 1949 (hereinafter referred to as the Act), is violative of Article 19(1)(g) of the Constitution. Section 35B(1) of the Act is in these terms:

'35B. (1) In the case of a banking company--

(a) no amendment of any provision relating to the appointment or re-appointment or remuneration of a managing director or any other director, whole-time or otherwise or of a manager or a chief executive officer by whatever name called, whether that provision be contained in the company's memorandum or articles of association, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or by its Board of Directors shall have effect unless approved by the Reserve Bank:

(b) no appointment or re-appointment of a managing or whole time director, manager or chief executive officer by whatever name called, shall have effect unless such appointment or re appointment is made with the previous approval of the Reserve Bank.

Explanation: For the purposes of this sub-section, any provision conferring any benefit or providing any amenity or prerequisite, in whatever form, whether during or after the termination of the term of office of the manager or the chief executive officer by whatever name called or the managing director, or any other director, whole-time or otherwise, shall be deemed to be a provision relating to his remuneration'.

And Article 19(1)(g) of the Constitution reads :

'19(1) All citizens shall have the right--

x x x x x(g) to practise any profession or to carryany occupation, trade or business'.

2. The petitioner was re-elected as a Director of the Kerala Union Bank Ltd.. Mala (hereinafter referred to as the Bank) at the General Meeting of the shareholders held on 25-2-1961, Thereafter he was re-appointed as the Managing Director of the Bank in the meeting of the Hoard of Directors held on the same day And, by the resolution dated 2nd April 1961 (copy of which is Ext R-2 produced by the respondent to this writ application. the Assistant Chief Officer. Reserve Bank of India, Trivandrum, along with the counter-affidavit filed on the 3rd July 1962), the remuneration of the petitioner was fixed at Rs. 225 per mensem. This included all travelling expenses and this was to lake effect from 1st September 1960. This was, of course, made subject to the approval of the Reserve Hank in view of Section 35B(1)(b) of the Act. An application was thereafter made to the respondent for approval of the appointment of the petitioner. This application was forwarded to the Reserve Bank of India and it appears that the Deputy Chief Officer, Reserve Bank of India. Trivendrum, received Ext. R-3 communication from the Central Office of the Reserve Bank of India dated 7th August 1961 and by this the Reserve Bank refused to approve the appointment. Pursuant to Ext. P. 3, the respondent wrote to the Chairman of the Bank Ext. R.4 reading:--

''With reference to your bank's application dated 22nd April 1961 seeking our approval to the re-appointment of Shri I. E. Ambookken as the Managing Director (Chief Executive Officer), of the Bank, we have to advise that having regard to all the relevant factors, the Reserve Bank regrets its inability to accord its approval to the proposed re-appointment'.

3. In view of the refusal of the Reserve Bank to accord its approval, another Managing Director was chosen by the Board of Directors. The Board of Directors also passed a further resolution to pay the sum of Rs. 1750/- to the petitioner for the period from 25-2-1961 to 20-8-1961, and wrote a further letter to the respondent for permission to pay that amount to the petitioner. By Ext. R. 5, the Central Office of the Reserve Bank of India informed the petitioner that:

'since we have not approved your re-appointment as the bank's Managing Director under the above mentioned section beyond the annual general meeting held in 1981, the question of our independently approving of the remuneration for the period does not arise '

4. The main point urged by counsel on behalf of the petitioner is that Section 35-B (1) (b) conferred arbitrary and naked powers on the Reserve Bank, that there is nothing in the section which helps to canalise or guide this power and, therefore, the section is violative of Article 19(1)(g) of the Constitution. Reliance was placed on a number of decisions for the proposition that when the enjoyment of a right is made snbject to a mere discretion of the executive without any check or control, that amounts to an unreasonable restriction on the fundamental right guaranteed by the Constitution. I do not think it necessary to refer to all these cases. The proposition is well settled, And it will be sufficient to refer to certain passages from one of the decisions of the Supreme Court. In Kishan Chand Arora v. Commr. of Police, Calcutta. AIR 1961 S. C. 705 Wanchoo, J. said:

'There is no doubt that if the section em-powers the Commissioner to grant or refuse a licence without any criteria to guide him, it would be an unreasonable restriction on the right to carry on trade We have therefore to see whether there is any guidance either in the section or in the Act to regulate the exercise of discretion of the Commissioner in the matter of granting such licences'

And in the same case Subba Rao, J., who wrote the minority Judgment, said:--

'A fundamental right to do business can be controlled by the State only by making a law imposing in the interest of the general public reasonable restrictions on the exercise of the said right; restrictions on the exercise of a fundamental right shall not be arbitrary or excessive or beyond what is required in the interest of the general public; the reasonableness of a restriction shall be tested both from substantive and procedural aspects; an uncontrolled and uncanalised power conferred on an officer is an unreasonable restriction on such right; though a legislative policy may have been clearly expressed in a statute, it must also provide a suitable machinery for implementing that policy in accordance with the principles of natural justice; whether a restriction is reasonable or not is a justiciable concept and it is for the Court to come to one conclusion or the other having regard to the considerations laid down by Patanjali Sastri, C. J., in State of Madras v. V. G. Row, AIR 1952 SC 196 and similar others.'

5. I am assuming for the purpose of this case that the right to function as a Managing Director of a Banking Company, if elected to such an office, is a fundamental right, though this is doubtful. In fact, counsel for the respondent has invited my attention to two decisions of the Orissa High Court reported in Digambar Aruk v. Nanda Aruk, AIR 1957 Orissa 281 and Bharat Naik v. Asst. Registrar,. Co-operative Societies, Cuttack, AIR 1958 Orissa 217 for the position that the right to get elected as a Managing Director or appointed as a Chief Executive Officer of a Banking Company is only a right created by statute and that such right is not a common law right. And the Supreme Court dealing with the validity of the Patiala Recovery of Slate Dues Act (4 of 2002 Bk) had occasion to consider whether the provisions in that Act are violative of Article 19(1)(f) of the Constitution and the following passage from the judgment reported in Lachhman Dass v. State of Punjab, AIR 1963 SC 222 is apposite.

'The learned Advocate-General who appeared for the respondents, contends at the very outset, that Article 19(1)(f) could have no application to a case like the present, that the liability of the appellants arises under a contract, that the provisions of the Act and the Rules are binding on them as terms of that contract, that the provision that disputes shall be settled in the first instance by the Managing Director is similar to an arbitration clause in an agreement, and that the restrictions enacted in the Act and the Rules are in the nature of self-imposed restraints, for which no redress can be sought under Article 19(1)(f) In our opinion this contention deserves consideration. It is arguable that when Article 19 speaks of laws imposing reasonable restrictions, it has in mind laws which are imposed on subjects, which they have no option but to obey. But when the operation of a law is attracted by reason of a contract, which a person is free to enter into at his own will and choice, it may be said that the inhibition under Article 19 has no application, the parties being left to their rights and remedies under the contract'.

6. It may perhaps be argued that when a person exercises the option to become the Managing Director of a banking concern be is accepting an office created by a statute and therefore is bound by the terms of that statute and that he should not he allowed to complain that the statutory provisions introducing restriction are-laws violalive of Article 19(1)(g). However, the Supreme Court has not expressed any final opinion in the case referred to. In fact, they have expressly left the question open by remarking:

'But in the view we have taken of the contentions of the appellants on their merits, we do not think it necessary to pronounce on this question'.

7. I am, therefore, proceeding on the basis that it is open to the petitioner to invoke the provisions of Article 19(1)(g) of the Constitution. The question then is, whether Section 35-B (1) (b) is violative of Article 19(1)(g).

8. It is necessary in this context to briefly refer to the history of the legislation regarding the restrictions imposed on the Managing Directors of Companies, and also to glean the purposes sought to be achieved by introducing such restrictions. The Indian Companies Act, 1913. was amended by the Indian Companies Amendment Ordinance 1951 which was replaced by Act 52 of 1951. By such amendment, Section 80 J was introduced to the Indian Companies Act, 1913. This section deals with the restrictions on appointment, re-appointment and the number of Directors, their remunerations, etc., and provided thus in regard to Managing Directors:

'86 J. (1) Notwithstanding anything to the contrary contained in any other provision of this Act or in the articles of, or any agreement with, any company, ---

x x x x x(c) the appointment of a managing director for the first time after the 21st day of July, 1951, or the re-appointment after the said date of a managing director holding office as such on that date or thereafter, if the terms of such re-appointment purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration that the managing director was receiving immediately before such re-appointment shall be void unless approved by the Central Government'

The Statement of Objects and Reasons for the Amending Act is in these terms:--

'Trafficking in managing agency rights and cornering of shares in the open market with a view to acquiring control over the management of well-established and reputable companies for anti-social purposes have, since the war, reached such proportions as to make it necessary for the Government to lake Immediate steps to check the evils arising therefrom The comprehensive amendment of the Company law after receipt of the report of the Expert Committee which has been appointed to make recommendations after examining the operation of the existing law will take considerable time. Meanwhile, evidence has accumulated showing that the malpractices referred to have become very serious.

Government have therefore had to promulgate an Ordinance to curb the growing evils, The Ordinance provides for:

(i) The prior approval of the Central Government to be obtained to any change in the controlling interests of an existing company and/or in the terms of appointment of new managing agents so as to prevent the imposition of any onerous terms on it either by the present or the incoming management;

(ii) such remedial action as the Court may deem fit to order in cases of gross mismanagement of a company's affairs by directors or managing agents or in cases of oppression of some members of the company; and

(iii) the selling up of a Commission to advise the Government on all applications for approval to changes in controlling interests and terms of the managing agency.'

And in the Select Committee Report on the Indian Companies (Amendment) Bill, 1951, the report on Clause (2) of the Indian Companies (Amendment) Bill. 1951. was as follows:--

'Clause 2: The original clause does not prevent the directors or share-holders of a company, when so empowered by its articles from increasing the number of directors even beyond the maximum number specified in the articles and thereby from indirectly getting round its provisions; nor does it specifically prohibit an increase in the remuneration of a managing director or any other director except with the approval of the Central Government. It has also come to our notice that in some cases undesirable elements corner shares in companies and I hereafter get themselves elected as directors with the object of exercising an unhealthy influence on managing agents. We think Government should he armed with adequate powers to meet this evil wherever necessary.

We have accordingly recast this clause so as to cover all the aforesaid matters, but at the same time we are of opinion that there is no need to make this provision applicable to private companies unless they happen to be subsidiary companies of public companies'.

9. Similar provisions are contained in the Companies Act, 1966, in Sections 268, 269, 310, 311 and 388. Banking Companies are special companies and they form a class by themselves Apart from the public interest, the interest of the depositors will have to be safeguarded. Provisions similar to those contained in the Companies Act which have been adverted to, have, therefore, been incorporated in the Banking Companies Act as well. Instead of the Central Government being the approving authority, the Reserve Bank is constituted the controlling body. This Re-serve Bank is an expert body and is in control of the banking business in the country and it is only appropriate that such an expert body should be entrusted with the control of the banking institutions. The Reserve Bank has also been conferred vast powers and have been enabled not only to watch the day-to-day working of the banking institutions but to gather information regarding the working of the banking institutions by inspection or otherwise. I is this body, the Reserve Bank, that has been given the power to approve the appointment or re-appointment of a Managing Director. It is in the light of the above that the arguments advanced in this case have to be considered.

10. The first of these is that there is a violation of the principles of natural justice in that a person like the petitioner who has been elected as the Managing Director is not even given an opportunity of placing his case before the decision is made by the Reserve Bank giving or declining the approval. Dealing with Section 38(3) (b) (iii) of the Act. this court in the decision reported in Reserve Bank of India v. Palai Central Bank Ltd., 1961 Ker LT 54: (AIR 1961 Ker 268) had to consider the question whether the opinion formed by the Reserve Bank is reached by a judicial process Raman Nayar, J. said:

'Action under Section 38(3) (b) (iii) is dictated by the subjective satisfaction of the Reserve Bank and that satisfaction though of course not to be capriciously entertained is not reached by the judicial process and is not amenable to judicial review'.

11. Section 38(3) (b) (iii) of the Act enacts:

'(3) The Reserve Bank may make an application under this section for the winding up of a bunking Company--

x x x x x(b) If in the opinion of the Reserve Bank--

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

12. Regarding this opinion of the Reserve Bank, this court said in the decision in 1961 Ker LT 54: (AIR 1961 Ker 268)

'that opinion it is for the Reserve Bank to form on the basis of its own subjective satisfaction, and, it is again for the Reserve Bank to say whether il entertains She opinion or not, not for the court to determine whether or not adequate, or in fact, any, grounds exist for entertaining such an opinion'

13. If the decision is arrived at by the subjective satisfaction, it is not a conclusion reached by judicial process and cannot be questioned on the grounds on which a judicial or quasi-judicial decision can be challenged.

14. The further argument that even the grounds of the decision are not indicated either in Ext. R. 3 or R. 4 is also not of any moment in the above view. What has been said in this regard in the decision in 1961 Ker LT 54 (AIR 1961 Ker 268) is:

'in such circumstances a refusal by the authority concerned to place before the court the material on which it formed the opinion would be proper''

15. This leads me to the discussion of the further question whether there is any violation of Article 19(1)(f) of the Constitution. And the point to be decided is whether the restriction imposed by Section 35-B (1) (b) of the Act is a reasonable restriction imposed in the interests of the general public. The decisions of this court in 1901 Ker LT 54: (AIR 1961 Ker 268) went up in appeal to the Supreme Court wherein it was confirmed & the decision of the Supreme Court is reported in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 S. C. 1371 and talking with reference to the Reserve Bank, the Supreme Court observed:

'In the instant 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 in the Reserve Bank'.

And this Court had observed in 1961 Ker LT 54: (AIR 1961 Ker 268).

'The Reserve Bank is the one authority which has all the information and all the expert knowledge necessary for swift and effective action. It is a high, independent and impartial body with no master to serve except the public interests, no interest of its own and no competing claims to reconcile, in fact nothing which can induce bias or cloud or away its judgment, and if the legislature has thought fit to repose in such a body the confidence that, in the light of the guidance given by the statute, it would act rightly on its own subjective satisfaction that is not to invest it with the power to deal differently with persons similarly circumstanced or to act in an arbitrary manner'.

16. The above observations were made by this Court with reference to the contention that Section 38(3) (b) (iii) of the Act is violative of Article 14 of the Constitution and the learned Judge dealing with the question whether Article 19 of the Constitution has been violated said.

'The restriction in the impugned provision passes the test of reasonableness in the interests of the general public imposed by Clauses (5) and (6)'.

17. But it was contended that this Court as well as the Supreme Court dealt with the provisions of Section 38(3) (b) (iii) of the Act which itself gave an indication of the circumstances under which the opinion of the Reserve Bank could be formed That opinion, it is urged, the section itself indicates, is a conclusion reached on the basis that the continuance of the Banking Company will be prejudicial to the interests of its depositors. My attention was also invited to Section 22 of the Act and emphasis was laid on the provisions contained in Section 22(3) (a) & (b) which formulate the conditions subject to which a licence can be granted to a Banking Company These provisions, which provide, that the Reserve Bank may require to be satisfie that the company is or will be in a position to pay its present or future depositors in full as their claims accrue and 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, have, it is submitted, canalised the powers vested and, therefore, these powers conferred on the Reserve Bank stand on an entirely different footing from the power granted by Section 35-B (1) (b) of the Act which section has not given any indication about the matters that should be considered or the grounds on which an approval can be declined.

18. Section 35-B (1) (b), of course, does not specify the grounds on which approval can be refused. Nor does it indicate the matters that should be weighed before the approval is declined. But this section contained in a statute which has been promulgated for the protection of a special class of institutions--banking institutions--is but a small wheel in the machinery that has been set up by the Act for a purpose, and the Supreme Court has held that such a machinery is in the interests of the general public and the depositors in the banking institutions. I cannot conceive of Section 35-B (1) (b) being pressed into service for any purpose or object other than what is provided in the statute to serve the interests of the depositors and the general public. It cannot, therefore, be said that the power granted under the section is so arbitrary or naked that it can be exercised in a capricious manner. There are sufficient indications in the statute as to the circumstances under which such power can be exercised.

19. In the light of the above, I dismiss this Original Petition with costs Counsel's fee Rs. 150/.