Joseph Kuruvilla Vellukunnel vs The Reserve Bank Of India And … on 7 March, 1962

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Supreme Court of India
Joseph Kuruvilla Vellukunnel vs The Reserve Bank Of India And … on 7 March, 1962
Equivalent citations: 1962 AIR 1371, 1962 SCR Supl. (3) 632
Author: Hidayatullah
Bench: Sinha, Bhuvneshwar P.(Cj), Kapur, J.L., Hidayatullah, M., Shah, J.C., Mudholkar, J.R.
           PETITIONER:
JOSEPH KURUVILLA VELLUKUNNEL

	Vs.

RESPONDENT:
THE RESERVE BANK OF INDIA AND OTHERS(With connected petition

DATE OF JUDGMENT:
07/03/1962

BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
SINHA, BHUVNESHWAR P.(CJ)
KAPUR, J.L.
SHAH, J.C.
MUDHOLKAR, J.R.

CITATION:
 1962 AIR 1371		  1962 SCR  Supl. (3) 632
 CITATOR INFO :
 R	    1963 SC1881	 (69,108)
 R	    1964 SC1279	 (5)
 RF	    1966 SC1953	 (6)
 RF	    1967 SC 295	 (62)
 RF	    1969 SC 707	 (24,45)
 RF	    1981 SC 818	 (22)
 RF	    1992 SC1020	 (27)
 RF	    1992 SC1033	 (53)


ACT:
Banking	 Companies-Winding  up-Enactment  providing  for  an
order  for winding up by High Court on the basis of  Reserve
Bank's	opinion-Constitutional	validity-Banking   Companies
Act, 1949 (10 of 1949), ss. 2, 35, 35A, 36, 38 Reserve	Bank
of  India Act, 1934 (2 of 1934), ss 7, 8, 38 Companies	Act,
1956  (1  of 1956), ss. 433, 450(2)-Constitution  of  India,
Arts. 14, 19 (1) (f) and (g), 301, 302.



HEADNOTE:
Sub-section (1) of s. 38 of the Banking Companies Act, 1949,
provided  : "Notwithstanding anything contained in ss.	391,
392,  433  and 583 of the Companies Act, 1956....  the	High
Court shall order the winding up for a banking company	....
if  an application for its winding up has been made  by	 the
Reserve	 Bank under s. 37 of this section." Under  s.  38(b)
(iii)  of the Act "the Reserve Bank may make an	 application
under  this section for the winding up of a banking  company
if in the opinion of the Reserve Bank the continuance of the
banking	 company  is  prejudicial to the  interests  of	 its
depositors."
   In  exercise	 of the powers vested in it by	the  Banking
companies  Act, 1949, as well as the Reserve Bank  of  India
Act,  1934, the Reserve Bank had been inspecting  the  Palai
Central	 Bank Ltd., periodically, and had been	warning	 the
Bank  that  it-, business was being conducted  in  a  manner
detrimental  to	 the interest of its  depositors.   In	June
1960, there was a run on several branches of the Bank.	 The
Reserve Bank was of the opinion that the Palai Bank was	 not
in a position to pay its depositors in full and that the
			    633
continuance  of the Bank was prejudicial to the interest  of
the depositors.	 On August 8, 1960 the Reserve Bank made  an
application   in   the	High  Court  of	 Kerala	  under	  s.
38(3)(b)(iii) of the Banking Companies Act, 1949, read	with
the  Companies	Act, 1956, for the winding up of  the  Palai
Central Bank Ltd.  After hearing the Reserve Bank, the Palai
Bank  and  the	creditors, the High Court  passed  an  order
allowing the application of the Reserve Bank, and  directing
the  winding  up of the Palai Bank.  It	 was  contended	 for
those  who opposed the application that ss. 38(1)  and	3(b)
(iii) of the- Banking Companies Act contravened Arts. 14 and
19  (1)	 (f)  and  (g) of the  Constitution  of	 India	and,
therefore    were   void   because   (a)   they	   permitted
discrimination	between	 a  banking company  and  any  other
company	 by prescribing different laws for their  respective
winding	 up,  (b) they created an  unreasonable	 restriction
upon  the  right  to  carry on banking	and  (c)  the  whole
procedure  was denial of the principles of  natural  justice
chiefly by denying an access to courts, inasmuch as under s.
433 of the Companies Act 1956, when application was made  to
wind up a company, the High Court had to be satisfied  after
a fair trial that an order to wind up the company was called
for,  and the Judge was free to reach a decision  after	 the
company	 had  shown cause, and there was a right  of  appeal
against the decision if adverse to the company, while  under
the  procedure laid down in s. 38 of the  Banking  Companies
Act,  1939,  the  Reserve Bank was made the  sole  judge  to
decide	whether the affairs of a banking company were  being
so  conducted as to be prejudicial to the interests  of	 the
depositors,  and  the court had no option but  to  an  order
windings  up the banking company, when the  application	 was
made.	It was also contended that ss. 38(1)  and  3(b)(iii)
were  ultra  vires being in conflict with Art.	301  of	 the
'Constitution.
   Held,  (Kapur and Shah, JJ., dissenting), that ss.  33(1)
and  (3) (b) (iii) of the Banking Companies Act,  1939,	 did
not offend of Arts. 19(1)(f) and (g) of the Constitution  of
India and were valid.
   In  view  of	 the history of	 the  establishment  of	 the
Reserve Bank as a Central Bank for India, its position as  a
Banker's  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 powers, a law which empowered the  Reserve
Bank to come to a decision to wind up a tottering or  unsafe
banking company in the interest of the depositors could	 not
be challenged as
634
unreasonable, because even if the court were called upon  to
take  immediate action it would almost always be  guided  by
the  opinion of the Reserve Bank.  A law may,  with  reason,
leave  the determination of an issue to an expert body,	 and
such  law is justified on the ground of	 expediency  arising
from the respective opportunities for action.  The exclusion
of courts is however not to be lightly inferred or conceded.
   Held,   further  (per  Sinha,  C.J.,	  Hidayatullah	 and
Mudholkar,  JJ.), that : (1) while ordinary companies  dealt
with the money of the stock holders, banking companies	were
in  a  different class as they dealt with the money  of	 the
depositors  and	 had to be regulated differently ;  and	 the
Reserve Bank having been given by the Banking Companies	 Act
the  power  and	 invested  with the  duty  of  watching	 the
affairs,  of every banking company with a view	to  ensuring
the  safety  of	 the depositors' money, there  was  a  valid
classification	; consequently ss. 38(1) and (3)(b)(iii)  of
the  Banking  Companies Act did not offend Art.	 14  of	 the
Constitution.
   (2)	  ss.  38(1)  and (3)(b)(iii) did not  amount  to  a
conversion  of a judicial process into an executive  action.
The  sections  only  made the court guide  itself  from	 the
decision  of  ail outside agency and  the  judicial  process
commenced thereafter.
   (3)	  ss.  38(1) and (3)(b)(iii) were not in  breach  of
Art. 301 of the Constitution as they were in public interest
and were protected by Art. 302.
   Per	Kapur  and  Shah,  JJ.-Section	33  of	the  Banking
Companies Act, 1949, was an unreasonable restriction on	 the
right of a banking company to carry on its business and was,
therefore,  unconstitutional.	The  vice  of  the  impugned
provision lay in (a) the power vested in the Reserve Bank to
apply  to  the	High Court for an order winding	 up  a	bank
exercisable solely on its subjective satisfaction as to	 the
existence  of conditions prescribed by the section, and	 (b)
the  obligation imposed by law upon the High Court  to	make
the  order  of	winding up without  at	any  time  enquiring
whether the conditions on which the application was  founded
did  in truth exist.  A provision of law providing  for	 the
imposition of restrictions on a citizen's fundamental  right
pursuant to the subjective satisfaction of the Reserve	Bank
even  though it is an expert body, as to the existence of  a
state  of  affairs, and thereby	 permanently  depriving	 the
citizen of his right or property, is wholly unreasonable.
   A.	  K.  Gopalan v. State, (1950) S.G.R. 88,  State  of
Madras v.  Rao, (1952) S.C.R. 597, The Commissioner of Hindu
635
Religious  Endowments,	Madras	v.  Sri	 Lakshmindra  Tirtha
Swamiar	 of Sri Shirur Muth, (1954) S.C.R. 1005, Mahant	 Sri
Jagannath Ramanuj Das v. State of Orissa, (1954) S.C.R. 1046
and  Virendra  v.  State  of  Punjab,  (1958)  S.C.R.	308,
considered.



JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 487 of 1961.
Appeal by special leave from the judgment and order dated
December 5, 1960. of the Kerala High Court in Baking
Companies Petition No. 11 of 1960.

WITH
Petition No. 167 of 1961
Petition under Art. 32 of the Constitution of India for
the enforcement of Fundamental Rights.

M.K. Nambiyar, J.B. Dadachanji, O.C. Mathur and Ravinder
Narain, for the appellant and the petitioner.
M.C. Setalvad, Attorney-General of India, H.N. Sanyal,
Additional Solicitor-General of India, R. Ganapathy Iyer and
R. H, Dhebar, for respondents No. 1 in C.A. No. 487 of 1961.
G. S. Pathak and K. R. Choudhuri, for respondents Nos.
4-6 in C. A. No. 487 of 1961.

M. C. Setalvad, Attorney-General for India, H.N.
Sanyal, Additional Solicitor-General of India, R. Ganapathy
Iyer, R. H. Dhebar and T. M. Sen for respondents Nos. 2 and
3 in Petition No. 167 of 1961.
1962, March 7. The Judgment of B. P. Sinha, C.J., M.
Hidayatullah and J.R. Mudholkar, JJ., was delivered by
Hidayatullah, J. The Judgment of J.L. Kapur and J. C. Shah,
JJ., was delivered by Kapur, J.

HIDAYATULLAH, J.-On August 8, 1960, the Reserve Bank of
India made an application in the High Court of Kerala under
s. 38 of the Banking Companies Act, 1949 (10 of 1949) read
with the Companies Act, 1956 (1 of 1956), for the winding up
of the Palai Central Bank, Ltd. (having its
636
registered office at Palai in the State of Kerala), for the
appointment of the Official Liquidator of the High Court as
the Liquidator with all the Powers under the said Acts and
for the appointment of the Official Liquidator as the
Provisional Liquidater during the pendency of the
application. This application was allowed on December 5,
1960, and the present appeal with special leave, has been
filed against the order.

The Palai Central Bank, Ltd. (herein referred as the
Palai Bank or the Bank) was incorporated in January, 1927
under the Travancore Companies Regulations. Till 1936, it
was known as ,The Central Bank, Ltd.”‘. when the name was
changed. In March 1937, the Palai Bank was included in the
Second Schedule to the Reserve Bank of India Act, 1934 (2 of
1934). According to the balance sheet of the Palai Bank for
the year ending December 31, 1959, the paid-up capital was
Rs. 24,89,639.53. The nominal capital of the Palai Bank was
Rs. 40 lakhs divided into 1,60,000 equity shares of Rs.25/-
The Palai Bank seems to have greatly extended its business
as time passed. In 1928, the deposits were a mere Rs.
77,000/-, but by 1960, they had become almost Rs. 10 crores.
It had, during the years, become the foremost Bank in Kerala
State, and its place was 15th in the whole of India. It had
25 branches in and outside the State of Kerala.
When Kerala became a Part B State, the Reserve Bank of
India Act was extended to that area, and the Palai Bank came
under the supervision of the Reserve Bank, which, in
exercise of the powers vested in it by the Banking Companies
Act as well as the Reserve Bank of India Act, periodically
inspected the Palai Bank. These inspections were made in
1951, July 1953, FebruaryMarch 1956, March 1958 and January-
February, 1960. Every time the Reserve Bank found irre-

637

gularities which were pointed out to the Bank, and special
directions were issued. The main defects were that the
advances made by the Palai Bank were not sound that the bulk
of the advances were either irrecoverable or “‘sticky”
(which means, not easily recoverable), that the income taken
into account represented to a great :extent unrealised
interest on these advances, that large advances were made to
the Directors, their relations and Companies, in which they
were interested, on no security or inadequate security, and
that the Bank was declaring dividends on the basis of
profits which were computed without making provision for bad
and doubtful debt and by issuing up the reserves at an
alarming rate, while the deposits were going down. In the,
beginning, the Reserve Bank contended itself by prohibiting
further advances to Directors, their relations and
individuals, firms or companies, in which the Dircetors were
interested, advising the Palai Bank to reduce clean advances
and to regularise others, warning the Bank that the Reserve,
Bank considered that the business of the Bank was being
conducted in the manner detrimental to the interests of its
depositors, and that if the directions were not carried out,
action under the first proviso to sub-s. (2) of s. 22 of the
Banking Companies Act would be taken by issuing a notice
that a licence could not be granted to the Bank.
From the correspondence which has been filed in this
case, it does appear that the Reserve Bank was not satisfied
at each following inspection that the position had improved;
rather it apprehended that it had worsened, and that the
directions had not been carried out. This was denied on
behalf of the Bank, but nothing depends upon who is right
and who is wrong, because no charge of mala fide conduct is
now made against the Reserve Bank. As a result of the
inspection in FebruaryMarch, 1956, the Reserve Bank avers,
it was found
638
that on December 31, 1955, the advances stood at Rs. 355.02
lakhs, of which Rs. 171-27 lakhs were irrecoverable, and
that the deposits of the Bank had been impaired by Rs. 139-
13 lakhs. The Reserve Bank also avers that the Bank did not
satisfy the requirements of the Banking Companies Act,
particularly s. 11, about the minimum paid up capital and
reserves, and ss. 22(3) (a) and (b) about the ability of the
Bank to pay its depositors, present and future, in full or
conducting its affair in a manner not detrimental to the
interests of the depositors, and did not satisfy the
requirements of ss. 42(6)(a)(i) and (ii) of the Reserve Bank
of India Act. The Reserve Bank at this stage deputed an
observer, and issued further directions and threatened to
remove the name of the Palai Bank from the Second Schedule
to the Reserve Bank of India Act, if the directions were not
faithfully and punctually carried out. All this time, the
Reserve Bank was requiring the Palai Bank to submit
statements and returns In the inspection which was made in
March-May, 1958, the position as on February 28, 1958, was
found to be even worse. Though the deposits had gone up,
the advances had raisen to Rs. 421.56 lakhs, of which Rs.
208.05 lakhs were said to be irrecoverable, and in the
opinion of the Reserve Bank, after writing off the paid-up
capital, reserves etc. of the value of Rs. 41.17 lakhs,
deposits to the extent of Rs. 177.24 lakhs were impaired.
More directions in the game key followed, and the Bank was
warned that it was conducting its affairs in a way which was
detrimental to the interests of the depositors. in the
scrutiny in January-February, 1960, the position as on
December 31, 1959, was said to be that out of the advances
of Rs. 529 lakhs, Rs. 218.51 lakhs were irrecoverable, Rs.
17.71 lakhs were doubtful, and Rs. 111.57 lakbs were frozen
or sticky.

639

On July 21, 1960, the Reserve Bank issued a letter
containing the warnings to which the Palai Bank appeared to
have become indurated, and further gave the Bank 12 month’s
time to improve matters and 30 days to reply to the
inspection report. An Officer of the State Bank of India
(Mr. Sivaraman) had already been deputed as the General
Manager of the Palai Bank, and had taken charge on July 1,
1960. On June 23, 1960,the balance sheet of the Bank was
published showing the position as on December 31, 1959. The
balance sheet showed a loss of Rs. 14-1/2 lakhs. The
Reserve Bank alleges that even in previous years there were
losses, but were hidden. In June 1960, there was a run on
several branches of the Palai Bank. Whether this was due to
the publication of the balance sheet showing a loss, or
whether it was due to the appointment of Mr. Sivaraman, it
is hardly possible now to say. Between June 24, 1960
(deposits, Rs. 9.82 crores) and July 22, 1960 (deposits, Rs.
9.32 crores) there was a withdrawal of Rs. 50 lakhs. By
August 3, 1960 (deposits, 8.50 crores) there was a
withdrawal of Rs. 82 lakhs in 12 days. To meet this run,
the Bank had to borrow against Government securities with
the result that all its Government securities except those
worth Rs. 25 lakhs were pledged. The deposits (Rs. 8.50
crores) consisted of Rs. 4 crores in fixed deposits, Rs.
2.25 crores in current accounts and Rs. 2.25 crores in
savings deposits. Against these, the Reserve Bank found
that the Palai Bank had cash to the extent of Rs. 50 lakhs
and a capacity to borrow Rs.1 crore against its securities.
The appellant, however, urged before us that in the report
of the General Manager dated November 8, 1960, the cash in
hand was shown to be Rs. 42.18 lakhs and at Banks, Rs. 83.68
lakhs, the marketable securities, Rs. 22.98 lakhs and the
estimated surplus from assets specifically pledged, Rs.
142.63 lakhs. These figures do not, of course, show that
all this
640
money would have been available immediately to stem the run.
It is thus evident that if the run continued longer there
was a likelihood that these depositors who were able to
withdraw their money would obtain payment in full, leaving
the others with nothing or next to nothing. The Bank
alleges in its affidavits in reply that the run was
subsiding, while the Reserve Bank maintains that it was
going on unabated. Whether it was abating or continuing,
the reputation and security of the Bank had been
considerably shaken. The learned Company Judge, in his
judgment under appeal, estimated that Rs. 158 lakhs (about
one-sixth of the deposits) represented the sudden
withdrawals. The Directors of the Palai Bank sent Mr.
Sivaraman on August 960, to Bombay for urgent consultations,
and Mr. Sivaraman on his return, announced on the 8th that
in application for the winding up of the Bank had been made
that day, and a provisional Liquidator had been appointed.
He accordingly, issued orders to the Branches to stop
business and close the doors. The ‘Reserve Bank was of the
opinion that the Palai Bank was not in a position to pay its
depositors in full, and that the continuance of the Bank was
prejudicial to the interests of the depositors.
The application, as already stated, was made on August
8, 1960. It was heard by Raman Nayar, J. He dispensed
with notice under s. 450(2) of the Companies Act before
passing the order appointing the provisional Liquidator.
He, however, issued notice of the main application, and
heard the Reserve Bank, the Palai Bank, the creditors
supporting the petition and the creditorsopposing it,
and read several affidavits filed by the parties. On
December 5,1960, he acceptedthe application of the Reserve
Bank, and ordered that thePalai Bank be wound up. He
was moved for a certificate under Art. 13(1) of the
Constitution by the present appellant (Mr. Joseph Kuruvilla
Vellukunnel), a
641
former Director of the Palai Bank and also a contributory,
but he declined to certify the case. The appellant then
obtained special leave of this Court, and filed this appeal.
Some others applied to intervene in the appeal, and were
allowed to be heard. One Mr. D. Chacko Kappon (a
contributory and also a depositor) filed a petition under
Art. 32 of the Constitution. That petition was heard along
with this appeal. This judgment will dispose of the appeal
as well as the writ petition.

In the High Court, the application of the Reserve Bank
was opposed on two grounds. The first was that the action
of the Reserve Bank in making the application for the
winding up of the Palai Bank was malafide. This ground
appears to have been given up in the High Court itself, and
has not been raised before us. The second ground was that
s. 38(3)(b)(iii) of the Banking Companies Act, 1949, was
void, inasmuch as it offends against Arts. 14 and 19 of the
Constitution. In the hearing before us Art. 301 was also
invoked. The decision of the High Court was against the
Bank and other answering respondents, a-rid this ground
alone has been urged before us.

Though the facts cease to play an important part in the
decision of the question of law which survives, those
narrated above were referred to by the learned Attorney-
General as showing the background of the action taken by the
Reserve Bank. The appellant, in his reply, referred to some
other facts in explanation to avoid a possible prejudice to
his case, if the facts as presented by the Reserve Bank only
were considered. While we are not required to express any
opinion upon the correctness or otherwise of the allegations
and counterallegations, we think it necessary to set out in
brief some of the facts, to which our attention was drawn by
the appellant, to show that we have borne in
642
mind the rival contentions in determining the validity of
the section.

The appellant contended that enquiries by the Reserve
Bank in the past were not thorough; but in the application
for winding Up, the Reserve Bank had given specific details
of the advances and their realisability. In this
connection, we were referred to a reply made by the Reserve
Bank in answer to four schemes of compromise between the
Bank and its creditors suggested by the Palai Bank. In that
reply, the Reserve Bank said that no definite opinion could
be expressed on the schemes except “after a detailed
examination of the Bank’s books of account with a view to
assessing the realisability of its assets and the probable
pace of recovery of the realisable assets.” This, in our
opinion, was a proper attitude to take, because by then, the
condition of the Bank had materially altered, and all the
past data had become out of date. The reply did not show
that the Reserve Bank’s inspection was not thorough. Next,
it was argued that the Reserve Bank’s estimate of cash and
realisable assets was wrong, if one reads the report of the
Provisional Liquidator and the General Manager, dated
November 8, 1960. We have already referred in an earlier
part of this judgment to the amounts which, in their
opinion, constituted the available assets, and have also
shown why the Reserve Bank cannot be said to have made
mistake. It was then contended that the run was under
control, and our attention was drawn to certain statements
in which the withdrawals during the months of July and
August are shown in a tabular form. The run on the Bank did
not follow a uniform course. Sometimes, it was more, and
sometimes it was less, but continue, it did; and that is the
main point of the matter. It was said that the Reserve Bank
itself thought well of the Palai Bank, because in the year
1954, it allowed the opening of a now Branch at Madurai, and
even in its last letter of July 21, 1960,
643
it gave the Palai Bank one year to improve matters, and 30
days to show cause against the inspection reports, but took
a hasty action before even the 30 days had expired. The
action of the Reserve Bank was undoubtedly taken during the
period of grace; but after July 21, the situation had
altered so radically that delay might have defeated the very
purpose of the law, under which action was taken.
Finally, it was contended that the Palai Bank began by
being a rural Bank, which was making advances on the
security of land, and such security, though “sticky” was
capable of being realised. Reference was made to the Report
of the Travancore Cochin Banking Enquiry Commission, which
was, appointed in 1956, where, in making a survey of banking
in Travancore-Cochin State, it was pointed out that the
Banks were “spread out into the rural interior of the
State”, and the main business of these banks was “to finance
the rural people engaged in a small business-crop raising,
produce processing, transporting, vending, etc.” It was
argued that to a rural Bank of this kind the standards of a
commercial bank could not be applied and that the Reserve
Bank should have made allowances in respect of the
realisability of the advances, the worse of which belonged
to a period prior to the extension of the Reserve Bank of
India Act to this area. These advances given time, could
have been cleared, and an attempt was, in fact, being
earnestly made with the assistance of Mr. J. A. Frost, a
retired senior grade Officer of the Imperial Bank of India,
who was appointed an adviser. It was pointed out that 3
accounts were closed, 26 were sued upon, and in 13,
substantial remittances were received. All this may be
true; but it is useless for us to speculate as to what would
have happened if the depositors did not take a hand in the
affairs by making a run; and the action of the Reserve Bank
was precipitated
644
by the exigencies of the situation, which had arisen. Those
who made a run for their money, were not going to wait till
the Bank acquired sufficient funds to pay them after
recovering its advance. Those advances, as conceded, could
not so easily be realised as the advance made by a
commercial bank on security other than that of land. If
this rural bank began to arrange its business like a
commercial bank it must necessarily be judged by the same
standard, and the affairs of the Palai Bank, in our opinion,
had long left behind the rural character, and had emerged
into those of a modern commercial bank.

What we have said above is sufficient to show that there
was not enough material on which the action of the Reserve
Bank could strictly be characterised as mala fide. Indeed,
the forbearance with which the Reserve Bank acted (and it
proved unwise) has completely demonstrated the futility of
granting time, and we are not surprised that the answering
respondents in the High Court and the appellant in this
Court have not chosen to raise any issue about the honesty
of the action.

We are thus concerned with the contention that ss. 38(1)
and (3)(b) (iii) are void, being a breach of Arts. 14 and 19
of the Constitution, and ultra vires being in conflict with
Art. 301. The arguments anent Arts. 14 and 19 are based on
the same reasoning, but that under Art. 19 takes a few more
facts into account. Shortly stated, the argument is that
ss.38 (1) and (3)(b)(iii) make the Reserve Bank the sole
judge to decide Nhether the affairs of a banking company are
being so conducted as to be prejudicial to the interests of-
the depositors, and the Court has no option but to pass an
order winding tip the banking company, when the application
is made Section 38 lays down :

“38(1), Notwithstanding anything contained in
section 391, section 392, section 433 and
section
645
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-

(b)if in the opinion of the Reserve Bank

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

It is said that the word “shall” in the first sub-sec-

tion is mandatory, and compels the High Court to pass an
order winding up a banking company when ever the Reserve
Bank chooses to make an application. It is further pointed
out that these powers exclude the operation of s. 433 of the
Companies Act, under which companies arc wound up.
The power conferred on the, Reserve Bank by the section
is said to be bad under Art. 14. because it enables a
discrimination between a banking company and any other
company by prescribing different laws for their respective
winding up, and is
646
bad under Arts. 19(1) (f) and (g) as amounting to an
unreasonable restriction on the holding of property and the
right to carry on business as a banking company. To amplify
the first, it is argued that s. 433 of the Companies Act,
when an application is made to wind up a company, the High
Court has to be satisfied after a fair trial that an order
to wind up the company is called for, and the Judge, who is
independent of executive control, is completely free to
reach a decision after the Company has shown cause, and
there is a right of appeal against the decision, if adverse
to the company. But under the procedure laid down in s. 38
of the Banking Companies Act, the banking company proceeded
against has no opportunity to show cause either before or
after the winding up order, the Reserve Bank .records no
reasons in writing or communicates them, there is no access
to Court and no hearing before the. Court to determine
whether the proposed action is justified, and no redress if
a mistake were made. Under the exercise of that power, it
is said, any banking company can be suppressed by the
Reserve Bank or by the Central Government and the Courts are
powerless, since the opinion of the Reserve Bank and/or the
central Government is not justiciable and there is no appeal
against the decision of the Reserve Bank or of the Court
acting on the application of the Reserve Bank.
It is said that the unreasonableness of the law arises
further from the fact that the Reserve Bank is not an
independent or impartial judge, the members of the Central
and Local Boards whereof, being all nominees of Government
with no security of tenure, such as is enjoyed by the High
Court Judges. The Reserve Bank is subject to directions
from the Central Government, and even if the Reserve Bank be
of a contrary opinion, it has to file an application for the
winding up of a banking company, if directed to do so by the
Central Government. It is further argued that this drastic
power under a law which is
647
characterised as ‘Draconic’ is `uncanalised’, `uncontrolled’
and `despotic’, and in its exercise, every principle of
natural justice is set at nought, and the very fundamental
conception of it, namely, resort to Court is completely
absent. Such a law, it is said, is so patently,
unreasonable as to be a gross violation of all fundamental
rights. Lastly, it is contended that in giving the Reserve
Bank the power to elect to proceed under the Companies Act
or under the Banking Companies Act, there is further room
for discrimination. It is thus contended that s. 38(1) of
the Banking Companies Act cannot be upheld as a valid law on
any principle.

The learned Attorney-General appearing for the answering
respondents contends that the action of the Reserve Bank was
fully supported and justified by the facts. According to
him, the, Palai Bank was inspected frequently for ten years
and the reports of the inspecting officers were made availa-
ble to the Palai Bank not only for information but also for
explanation and compliance. The action, says he, drastic
though it may seem, was taken after numerous opportunities
to the Palai Bank to mend matters, that even as late as 1960
the Reserve Bank gave a year’s time for improvement, but
immediate action had to be taken in view of the loss of
confidence among the depositors, a large number of whom made
a run for their money. The learned Attorney-General thus
says that there were many person who were of the opinion
that the Reserve Bank should have acted earlier and that
perhaps the Reserve Bank could be blamed for delaying the
action but not for taking a precipitate action. He urgues
that the Reserve Bank and not the Court was in a position to
take prompt action be cause the Reserve Bank already
possessed all the necessary information. He contends that
the position of the Reserve Bank and its statue as a
responsible body make it the proper authority to make such
an important decision requiring immediate action and
648
that unless the Reserve Bank could be charged with
dishonesty (which is not the case) the action of the Reserve
Bank not only cannot be questioned, but should not be open
to doubt. According to him, banking companies are in a
class by themselves, and special law dealing with their
winding up cannot be described as discriminatory. He con-
tends that the law is neither discriminatory nor un-
reasonable, and that a prior judicial determination of an
issue of this kind is not a condition precedent to the
making of a winding up order against a batik. He therefore,
says that the appeal and the petition should be dismissed.
Before we consider the arguments of the two sides in detail,
we wish to say a few words about the position of the Reserve
Bank in the financial affairs of India and also about its
place in the scheme of the law. The Reserve Bank of India
was established on April 1, 1935, by the Reserve Bank of
India Act, 1934. Even before the establishment of the
Reserve Bank, suggestions were made that there should be a
central bank in India and the Royal Commission on Indian
Currency and Finance had recommended in 1926 that the
currency and credit of the country could only be put on a
firm foundation, if a central bank was established. The
first Bill introduced in 1927 by Sir Basil Blackett was
dropped. The Indian Central Banking Inquiry Committee,
however, reported in 1931 that there was a need for a
central banking institution in India “for securing the
development of the Indian banking and credit system on a
sound and proper basis.” The Committee pointed out that some
of the Provincial Committees had also suggested the
establishment of the Reserve Bank. The Committee ended by
saying:

“We accordingly consider it to be a matter of
supreme importance from the point
649
of view of the development of banking facili-

ties in India, and of her economic advancement
generally, that a Central or Reserve Bank
should be created at the earliest possible
date. The establishment of such a bank would
by mobilization of the banking and currency
reserves of India in one hand tend to increase
the volume of credit available for trade,
industry and agriculture and to mitigate the
evils of fluctuating and high charges for the
use of such credit caused by seasonal
stringency.” (Vol. I, Part I. Chap. XXII,
para, 605)
The White Paper on Indian Constitutional Reforms also
recommended the establishment of a Reserve Bank ‘free from
political influence’. As a result of these findings when a
fresh Bill was introduced by Sir George Schuster on
September 8, 1933, it was accepted and received the assent
of the Governor General on March 6, 1934.

The functions of the Reserve Bank were generally indicated
in the preamble as the regulation of the issue of the Bank
notes and the keeping the reserves with t view to securing
monetary stability in India and generally to operate the
currency and credit system of the country to its advantage.
But to enable the Reserve Bank to function in this manner,
it had to be given other powers, so that it may function
effectively as a central bank. To this end, the Reserve
Bank was given the right to hold the cash balances of
important commercial banks, a right to transact Government
business in India which was also its obligation, and to
enter into agreements with State Governments to transact
their business. In addition to these, the Reserve Bank could
require all Banks included in the Second Schedule to the Act
to maintain with the Reserve Bank a balance not less then 5
per cent, of their demand liabilities and 2 per cent of
their time liabilities. The
650
Reserve Bank also performed the normal functions of a
central bank as well as an ordinary bank, though the latter
functions are not as detailed as those of in ordinary bank.
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. But
its position as a central bank, it acts as an agency for
collecting financial information and statistics. It advises
Government and of-her 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 bank
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. Sometime, 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 ss. 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.

651

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 proved 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
(1).

“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.”

The position of the Reserve Bank being such as we have
stated from the Reserve Bank of India Act, the next thing to
enquire is its powers under
(1) [1962] 3 S.C.R. 269, 299.

652

the Banking Companies Act. The Banking Companies Act, in
its present form, is the product of many legislative
enactments. The Banks’ Liquidation Proceedings Committee
(1962) correctly described it as “made up of shreds and
patches” We were taken through the entire evolutionary
process by the learned Attorney-General; but we do not
consider it necessary to trace the various steps. We shall
content ourselves with a reference to the salient landmarks.
In the Indian Companies Act, 1913, there was no special
procedure for banking companies, particularly relating to
their winding up. Special provisions were introduced in
that Act by the Indian Companies (Amendment) Act, 1936.
Part X-A, which was then introduced, merely enacted certain
regulatory provisions, but of winding up of banking
companies, it ,said nothing. The amendment hardly met the
purpose and the Reserve Bank of India framed a draft bill as
far back as 1939 from which has been fashioned the present
Banking Companies Act.

During the War years, the Indian Companies Act was amended
several times to meet some special exigencies, with which we
are not concerned. But by July, 1946, it was realised that
certain undesirable features in banking had come to exist.
Banks were then getting control of non-banking companies and
by the interlocking of shares, the banking companies were
able to manipulate the finances at their disposal. The main
features were ‘the grant of loans to persons connected with
the management of banks without adequate security extensive
window-dressing at the time of preparing balance-sheets,
and, in general, a tendency to utilise the bank’s funds to
the detriment of the interests of the depositors.” It must
not be forgotten that the Indian Companies Act, 1913, was
concerned primarily with safeguarding the interests of the
stockholders, whereas in a banking company, the interests of
the depositors are invariably many times
653
those of the stockholders, if those interests can be said to
be represented by the monies invested respectively. In
1946, an Ordinance was promulgated consisting of only six
sections of which the operative sections were the last four.
Section 3 enabled the Central Government to direct the
Reserve Bank to cause an inspection to be made of any
banking company and its books and accounts and to make a
report to the Central Government. Section 4 provided the
machinery and the procedure to implement s. 3. Section 5
empowered Government to prohibit a bank from receiving fresh
deposits or to direct the Reserve Bank not to include a
particular bank in the Second Schedule, or to exclude it.,
if already included. Sub-section (2) provided for certain
penalties, and s. 6 authorised the Central Government to
publish, after reasonable notice to the banking company
concerned, any report or parts thereof This was an attempt
to ensure the depositors a certain measure of safety in
regard to their money.

This Ordinance was followed by the Banking Companies
(Restriction of Branches) Act, 1946, which, is its name
shows, put a curb on the indiscriminate opening of branches
by some banks. The evil of indiscriminate advancers and
loans was then sought to be met by an Ordinance promulgated
in 1948 intituled “The Banking Companies Control Ordinance”
(XXV of 1948). In that Ordinance, it was provided that the
Court shall appoint the Reserve Bank as the Official Liqui-
dator of a banking company on the application of the Reserve
Bank in that behalf. The Reserve Bank of India Act was also
amended to enable the Reserve Bank to give a loan or loans
to a banking company with a first charge on the assets, if
wound up. A large number of banking companies had failed
during the years, 1947, 1948 and 1949. Between 1926 and
1937, 23 Banks had suspended payment. In 1938 and 1939, 46
Banks
654
failed, from 1940 to 1946, 95 Banks were involved. But, in
1947, 1948 and 1949 there were as many as 123 failures
involving outside liabilities of Rs. 82 crores ! The largest
number was in Calcutta with 83 Banks. In the winding up
proceeding that followed, many unsatisfactory features
were noticed. It was noticed that the realisations were
insignificant, while the costs were great, and enormous
expenditure of time took place. The winding up of any
company, be it a banking company or any other, requires an
investigation of the affairs, the recovery and realisation
of assets and distribution of what is realised. While these
matters can,, of course, be carried on without undue hurry,
the decision whether there should be a winding up or not,
cannot be unduly deferred in the case of a banking company,
if the interests of the depositors are to be safeguarded.
To achieve solidarity in banking operations and also to
preserve the rights of the depositors while a bank continues
and more so when it cannot, the Banking Companies Act was
the logical, and indeed, the only answers.
We have seen that the Reserve Bank was already functioning
as a central bank with a certain measure of control over the
other banks, scheduled or unscheduled. This control was
tightened in the Banking Companies Act by making provisions
which were intended to protect the interests of the
depositors. Differences noticeable between the Banking
Companies Act, on the one hand and the Companies Act, on the
other, which have been characterised as discriminatory, are
thus explainable on the basis of the object to be achieved.
We shall soon illustrate this by a reference to the sections
themselves. For the present we only wish to emphasise that
banking companies cannot be compared with other companies.
The ordinary companies deal with the money of the
stockholders, who own a share in the assets,
655
who appoint their own Directors, for better or for worse,
and whose liability is also limited. The banking companies
are in an entirely different class, as they deal with the
money of the depositors who have no security except the
solvency of the banking company and its sound dealings with
their money. Ex facie, the banking companies must be
regulated somewhat differently, and the interests of the
depositors must be paramount and the winding up of such
companies depends upon other considerations, chief among
which is the desire to pay off the creditors as far as
possible in full or at least equitably. The action is thus
dictated not from any abstract consideration of a long-range
view of the future ability of a bank to pay its creditors
but its ability to pay them at any given time. In this
connection, the Reserve Bank has been given by the Banking
Companies Act the power and invested with the duty of
watching the affairs of every banking company with a view to
ensuring the safety of the depositors’ money. There is
thus, at the very start, a reasonable classification, which
is also a very just and practical classification, to achieve
the avowed purpose.

It is hardly necessary to examine each and every provision
of the Banking Companies Act. When the Banking Companies
Act was originally enacted, the main objects were to
prescrible minimum capital standards, to prohibits the non-
banking companies to accept deposits repayable on demand and
to limit dividends payable. But included in the Act was a
comprehensive scheme for licensing of banks and a conferral
on the Reserve Bank of power to call for periodical returns
and balance sheets and to inspect books and accounts of
banking companies. The Act also empowered the Central
Government to take action against banks conducting their
affairs in a mariner detrimental to the interests of the
depositors, and
656
provided for a quicker procedure for winding up banking
companies.

When the Banking Companies Act was passed in 1919, it was
explained in the note on cl. 37, which corresponded to s.
38, that the provisions of the Indian Companies Act in
respect of liquidation of companies did not seem to be
suitable for banking companies, that a bank’s business being
of an over-the-counter kind, the bank has to meet
immediately its liability and a provision for winding up of
the banking company when it refuses to meet a lawful demand
within a stated time, was necessary. It was also stated
that the Reserve Bank was given authority to apply for the
liquidation of the banking company, if its affairs were
conducted to the detriment of the interests of the
depositors. An examination of the Banking Companies Act
reveals two things prominently. The first is that the whole
intend and purpose of that Act is to secure the interests of
the depositors. The second is that the Reserve Bank is the
instrumentality by which this intend is to be achieved. The
Act, at every turn, makes the Reserve Bank the authority to
sanction, permits, certify, inspect, report, advise,
control, direct, license and prohibit. There is hardly any
provision where the Reserve Bank’s judgment is not made
final vis-a-vis a banking company except rarely where an
appeal to the Central Government can lie. No useful purpose
will be served in referring to these sections in detail.
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
657
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 relief 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 41-A 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 moratorium, the
Reserve Bank has to satisfy- itself and prepare a scheme,
which, inter alia, must be in the interests of the
depositors.

This brief survey of some of the other provisions of the
Banking Companies Act, in addition to the general provisions
earlier noticed, makes it plain that the legislature
considers that consistent with its position as a central
bank and more so with its duties and obligations, the
Reserve Bank must have a decisive voice in certain matters.
It is in this context and setting that the, provisions of
ss. 38(1) and (3)(b)(iii) of the Banking Companies Act must
be viewed. It must not be overlooked that the legislature,
in view of the sad experiences of the past, was anxious to
devise a machinery for the supervision, inspection and
effective functioning
658
of banking companies in the country. Associated with this
was the speedy closure of banking companies, which were
harmful to the interests of the depositors. The legislature
achieved both these objectives through the Reserve Bank,
which, because of its special powers and advantages, was in
a position to act promptly and effectively. To aid the
Reserve Bank, the Courts were required by law to be guided
in certain matters by the opinion and judgment of the
Reserve Bank, and in the matter of their disposal of winding
up cases relating to banking companies, a special procedure
was enacted in Part IIIA of the Banking Companies Act.
We are now in a position to deal with the argument that ss.
38(1) and (3)(b)(iii) of the Banking Companies Act are void-
firstly because they permit discrimination between banking
companies on the one hand, and non-banking companies on the
other, and also between banking companies inter se, and
secondly because they create an unreasonable restriction
upon the right to carry on banking, and lastly, because the
whole procedure is a denial of the principles of natural
justice, chiefly by denying an access to Courts. Though the
arguments in this appeal have for their immediate object the
declaration that ss. 38(1) and (3)(b) (iii) of the Banking
Companies Act are void, they have ranged over a very wide
field. In support of the first limb of the argument, Art.
14 is invoked, and in support of the second and third, Arts.
19(1)(f) and (g); and the argument proceeds along lines so
well-known now as to need hardly any further amplification.
There being no direct ruling either of this Court or of any
High court, assistance is sought to be derived from
observations in previous decisions of this Court relating to
other laws. In reply, the learned Attorney-General has
relied upon the provisions of certain banking laws in
America and Japan and decisions of the
659
American Courts, where such American laws were tested under
the due process’ clause. We shall refer to those laws and
briefly rulings in the sequel,
As regards the first point, viz., discrimination between
banking companies and non-banking companies, we have already
sufficiently indicated the wide difference that exists
between these two types and the need for special laws
dealing with banking companies. We have also pointed out
the mischief that was sought to be remedied and how the
present law has been evolved after considerable
deliberation. A special Committee called the Banks’
Liquidation Proceeding Committee was appointed in 1952, and
the findings and recommendations of the Committee were
implemented, amending the Banking Companies Act and incor-
porating changes, of which the impugned section in its
present form is one. There being a very clear-cut and valid
classification, the different procedure cannot be said to be
discriminatory, because it is based on differences which are
related to the end sought to be achieved. Further, we do
not think that the possibility that the procedure under ss.
38(1) and (3)(b)(iii) may be invoked in some cases and the
procedure of the Companies Act in others, makes any
difference, because the different procedures will be invoked
to suit different situations, and it cannot be said that the
Reserve Bank would act arbitrarily from case to case. The
Reserve Bank, apart from its being a reasonable body, is
answerable to the Central Government, and the public opinion
is certainly strong and vocal enough for it to heed. If the
Reserve Bank were to act mala fide, the Central Government
and in the last resort, the Courts, will be there to
intervene. In our judgment, the provisions of ss. 38(1) and
(3)(6)(iii) cannot be said to be a breach of Art. 14 of the
Constitution.

660

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, 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 made 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 main ground of attack is the way ss. 38(1) and
(3)(b)(iii) make it mandatory for the High Court to pass an
order winding up a banking company whenever the Reserve Bank
under its powers or under an order of the Central Government
makes an application for the winding up of a banking
company. It is argued that such a power to the Reserve Bank
is an uncontrolled and despotic power and to crown all,
access to Courts is not possible because the Court itself
must pass an order without deciding whether the affairs of
the banking
661
company are being conducted in a manner detrimental to the
interests of the depositors–a fact capable of being proved
like any other fact. It is argued as a matter of principle
that any law which bars a decision by the Court is itself
unreasonable without more. Mr. Pathak, in supplementing the
above contentions of Mr. Nambiar, also contends that by the
law in question a judicial process has been converted into
an executive action, and subjective determination has taken
the place of judicial determination. He also contends that
the Reserve Bank accuses a banking company, and then tries
the issue to the complete exclusion of Courts.
It must not be overlooked that the winding up of a banking
company takes place before the High Court and under the
process of law. The judicial process is excluded only in
respect of the momentous decision whether a winding up order
should be made or not. This opinion is left to the Reserve
Bank, and the Court merely passes an order according to the
Reserve Bank’s opinion, and then proceeds to wind up the
banking company according to law. The narrow question is
whether in leaving this decision to the Reserve Bank the law
offends the principles of natural justice, and becomes so
unreasonable, viewed in the light of Art. 19, as to become
void. This is the point on which the respective parties
joined issue and had much to say, and this is the crucial
point in this case.

In support of this contention, reliance on behalf of the
appellant is placed upon certain cases of this Court, and we
shall begin by noticing them in brief. The first case
relied upon is A. K. Gopalan v. The State (1). In that
case, the validity of ss. 3, 7, 10-14 of the Preventive
Detention Act, 1950, was challenged on a petition under Art.
32 of the Constitution for a writ of habeas corpus. Certain
observations of Kania, C.J., and Fazl Ali, J., were
(1) [1950] S.C.R. 88.

662

relied upon to show that the right to be heard and tried is
the very basis of the rule of law, Fazl Ali,J., observed
that there is a fundamental principle that a person whose
rights are affected must be heard. The learned Judge
referred to several cases in which the maxim, audi alteram
partem, has been invoked and applied, particularly the
observations of Lord Macnaghten in Lapointe v. L’ Asso-
ciation, etc., de Montreal (1), who condemned a procedure
which required no hearing as being “contrary to rules of
society and above all contrary to the elementary principles
of justice.”

It cannot reasonably be said that there would be no hearing
in cases of this type. While we agree that it is obnoxious
to the rule of law as it exists among civilized nations,
that a person should be condemned, unheard, we cannot say
that in this case the Palai Bank was not heard, and this
case is really typical of those cases in which such a power
would be invoked. The learned Attorney General was
justified in saying that there was plenty of hearing before
the application was filed. The gist of the objection must
thus be taken to be that the Palai Bank was not heard in the
High Court before the making of the impugned order. If a
valid law could be made leaving to the determination of the
Reserve Bank whether a banking company should be wound up
and the Court to implement that decision, then this petition
must fail ; but if it cannot be made, then it must succeed.
We have thus to see whether there is any inviolable rule
that every determination must always be made by the Court
and by no other authority.

In dealing with the rulings of this Court cited to us, of
which we have already mentioned one, we shall enquire
whether such a wide proposition can be said to have been
established
(1) [1906] A.C.535.

663

before. In A. K. Gopalan’s case(1), s.14 of the Preventive
Detention Act was held void as contravening Art. 22(5) of
the Constitution in so far as it prohibited a person who was
detained from disclosing even to the Court the grounds of
his detention and the representation made by him. It was
said that the right to move an appropriate Court for a writ
of habeas corpus and therein to show that the detention was
improper, was undeniable and it was held that s. 14, which
Stood in the way of this right, was void. No general
proposition that the Court must decide whether the person
should be detained or not was laid down in that case. The
law which allowed a subjective determination of the
executive was in fact, upheld, and there are passages in the
judgments of the majority to show that a judicial trial in
cases of preventive detention was not considered necessary.
In State of Madras v. V. G. Row (2), SS. 15(2)-(b) and
16 of the Indian Criminal Law Amendment Act, 1908 [as
amended by the Indian Criminal Law Amendment (Madras) Act,
1950], were called in question, inter alia, on the ground
that they empowered the State to declare associations
illegal by a notification without a provision for judicial
enquiry. It was held by this Court that the conferral of
authority on the executive Government to impose restrictions
on the right of association without allowing the grounds of
such imposition both in their factual and legal aspects to
be duly tested in a judicial enquiry was a strong element to
be taken into account in judging the reasonableness of the
restriction. It was also added :

“The formula of subjective satisfaction of the
Government or of its. officers, with an
Advisory Board thrown into review the
materials on which the Government seeks to
override a basic freedom guaranteed to the
(1) [1950] S.C.R. 88.

(2) [1952] S.C.R. 597.

664

citizen, may be viewed as reasonable only in very
exceptional, circumstances………

Earlier, in the same judgment it was said
“”…the test of reasonableness, wherever
prescribed, should be applied to each indivi-
dual statute, impugned, and no abstract stan-
dard, or general pattern, of reasonableness
can be laid down as applicable to all cases.”
V. G. Row’s case (1) shows that laws allowing subjective
determination by the executive are not to be struck down out
of hand, but that their reasonableness must be judged
according to the standards appropriate to the circumstances.
It may, however, be mentioned that in V. G, Row case (1) a
distinction was made between a law requiring anticipatory
action particularly on grounds of suspicion, and a law which
authority action based on the factualexistence of certain
grounds. A. K. Gopalan’s case(2) and Dr. N. B.Khare v.
The State of Delhi
(3) were distinguished on this narrow
ground which appears to have been conceded then by the
learned Attorney-General. The factual existence of grounds-
amenable to an objective determination by the Court in the
present case, namely prejudice to the interests of the
depositors was said to place this case within the rule in V.
G. Row’s case (1). But cases of detention and associations
declared unlawful are not in the same class as a banking
company on which there is a run by the depositors and whose
affairs, on inspection, are found to be mismanaged and
conducted in such a way that it is unable to pay all lawful
demands upon it. The factual background will not be one of
suspicion, and action will be based on concrete facts, which
will normally be checked and rechecked before the final
decision, and, in our opinion, it is impossible to equate
such a case with either A. K. Gopalan’s case (2) or V. G.
Row’s case(1).

(1) [1952] S.C.R. 597. (2) [1950] S.C.R. 88.
(3) [1950] S.C.R. 519,
665
The next case to which reference was made is Thakur Raghubir
Singh v. The Court of
wards, Ajmer (1). In that case, s.
112 of the Agra Tenancy and Land Records Act (42 of 1950)
was declared void. That section allowed the Court of Wards
to take over the property of a landlord under the Ajmer
Government Wards Regulation (1 of 1888) if the landlord
habitually infringed the rights of tenants. Such a landlord
was under s. 112 deemed to be “disqualified to manage his
property.” The reason for striking down the section was that
it completely negatived the fundamental right under Art.
19(1)(f)by making the enjoyment of the right to depend on
the mere discretion of the executive. The absence of any
provision which would enable the landlord held to be a
habitual infringer of the rights of his tenants, to have
recourse to a Civil Court to test the correctness of the
determination against him was held to create the invalidity.
It is to be noticed that the learned Attorney-General in
that case conceded the point, but the reason behind the rule
appears to be that the law there prescribed a punishment or
penalty for the bad behaviour of the landlord, and no person
should be punished without having an opportunity to show
cause.. The question, therefore, is, can the ruling be made
applicable ? It does not lay down any general principle
applicable to all cases beyond the one we have mentioned.
The action to wind up a banking company cannot be said to be
a punishment for mismanagement but action designed to
preserve the rights of the depositors, and the two
situations are hardly similar.

The next two cases relied upon were The Commissioner, Hindu
Religious Endowments, Madras v. Sri Lakshmindra Tirtha
Swamiar of Sri Shirur Mutt
(2) and Mahant Sri Jagannath
Ramanuj Das v.The State of Orissa it was
(1) [1953] S.C. R. 1049.

(2) [1954] S.C.R. 1005.

(3) [1954] S.C.R. 1046.

666

conceded by the counsel for the State that certain sections
of the Madras Religious and Charitable Endowments Act (XIX
of 1951) and of the Orissa Hindu Religious Endowments Act,
1939 (as amended in 1952), were ultra vires Arts. 19(1)(f),
25 and 26 of the Constitution. This Court also found in the
former case that the provisions were extremely drastic in
their character and the worst feature ,Was that there was no
access to Courts. The Act in question was considered
drastic because under it a religious institution could be
notified and taken over and vested in an executive officer
merely by stating that the Board “was satisfied that in the
interests of proper administration of the Math and its
endowments, the settlement of a scheme was necessary.” In
the latter case, it was observed as follows
“‘Sections 38 and 39 relate to the framing of
a scheme. A scheme can certainly be settled
to ensure due administration of the endowed
property but the objection seems to be that
the Act provides for the framing of a scheme
not by a civil court or under its supervision
but by a Commissioner who is a mere
administrative or executive officer. There is
also no provision for appeal againsts his
order to the court.”

After commenting upon the amendment of sub-s. (4) of s. 39,
which took away the right of suit and made the order of the
Commissioner final and conclusive, this Court concluded
“We think that the settling of a scheme in
regard to a religious institution by an
executive officer without the intervention of
any judicial tribunal amounts to an un-

reasonable restriction upon the right of pro-
perty of the superior of the religious
institution which is blended with his office.
Sections
667
38 and 39 of the Act must, therefore, be held
to be invalid.”

These words would seem to show that the `intervention of a
‘judicial tribunal is the sine qua non of reasonable
determination of any issue,. But these cases must be read
with the case reported in Sri Sadasib Prakash Brahmachari v.
The State of Orissa
(1). After the judgment of this Court
in the case from Orissa, the Orissa Legislature passed
Orissa Act XVII of 1954 purporting to amend not the Act of
1939 but Orissa Act II of 1952 which had been passed but not
brought into force. The Orissa Act XVIII` of 1954 on
receiving the assent of the President came into force at
once, and Act II of 1952 became amended and modified. The
1952 Act was then brought into force from January 1, 1955,
by a notification.

By the new Act, which provided for the same subject-matter
as the Act of 1939, the right of suit still remained taken
away, but a right of appeal direct to the High Court was
provided. It was contended again that the Act continued to
be bad for the reasons given in the earlier case of 1951.
This Court then observed :

“It is further urged that the initial decision
in a scheme-proceeding is still on the basis
of an executive enquiry by an executive
officer and that in any case a direct appeal
to the High Court as against the
Commissioner’s order cannot be as adequate a
safeguard regarding the rights of Mahants as a
suit and a right of’ appeal therefrom in the
ordinary course to the higher courts would be.
It is undoubtedly true that from a litigant’s
point of view an appeal to the High Court from
the Commissioner’s order is not the same as,
an independent right of suit and an appeal to
the higher courts from the result of that
suit. But in order to judge
(1) [1956] S.C.R. 43,
668
whether the provisions in- the present Act
operate by way of unreasonable restriction for
constitutional purposes what is to be seen is
whether the person affected gets a reasonable
chance of presenting his entire case before
the original tribunal which has to determine
judicially the questions raised and whether he
has a regular appeal to the ordinarily consti-
tuted court or courts to correct the errors,
if any, of the tribunal of first instance.
For that purpose it is relevant to notice that
in the present Act, the Commissioner of
Endowments has, by virtue of section 4
thereof, to be a member of the Judicial
Service (of the State) not being below, the
rank of a Subordinate Judge, while under
section 7 of Act IV of 1939, Commissioner of
Endowments could be a person of either the
judicial or the executive service and that
even where a member of the judicial service is
appointed he may be a person below the rank of
a Subordinate Judge. Another important
difference has also to be noticed, viz., that
while under section 38 of the previous Act the
enquiry has to be conducted in such manner as
may be prescribed’ which means as prescribed
by the Provincial Government by rules made
under the Act and hence changeable by the
Government, under the present Act, Section
42(1)(b) specifically enjoins that the
‘Commissioner shall bold an enquiry in the
manner prescribed and so far as may be in
accordance with the provisions of the Code of
Civil Procedure relating to the trial of
suits”.

This Court, therefore, held that the scheme framed was not
unreasonable. At p. 59 of the Report, a summary of the four
steps which made. for reasonableness was given as follows
“(1) The scheme is to be framed by
669
a Commissioner, who is, by appointment a
judicial officer.

(2)The procedure is far as may be, the same
its that in the trial of suits.

(3)There is a preliminary_ enquiry by the
Assistant Commissioner.

(4)There is an appeal to the High Court.”

This was a departure from the insistence on the intervention
of a judicial tribunal. It was considered enough if the
person was a judicial officer and the procedure was that of
the trial of suits, as laid down in the Civil Procedure
Code. The Court still went further when it dealt with the
earlier schemes which might have been framed by (a) an
executive officer and (b) in pursuance of procedure
prescribed by the Executive Government. The Court said that
“this was merely a theoretical possibility”. The absence of
a preliminary enquiry in No. (3) was not considered a
serious point. The order of the executive officer in No.
(1) was held not of importance, as the Commissioner was a
Subordinate Judge of the Orissa Judicial Service. The
question of procedure (No. 2) was also not considered impor-
tant, because the procedure prescribed by rules resembled
that of trial of suits. As regards the right of appeal, s.
79A gave a right in all decided cases, and that was
considered enough; but whether it was invoked or not in all
cases does not appear to have been ascertained.
It would appear from these three decisions that the gist of
reasonableness was held to be not so much in the label of
the officer as in a judicial approach to the question to be
decided according to a procedure which gave an adequate
hearing. That the Commissioner was a judicial officer of
the rank ‘of
670
a Subordinate Judge was considered enough for up holding
his action as reasonable. That every decision should be by
the Court was thus not the proposition laid down. In fact,
the case shows that it is not the sine qua non so long as a
person trained to the task of deciding controversies does it
according to a procedure in which parties can be said to
have been heard fully.

We need not consider in detail the case of Ebrahim Vazir
Mavat v. The State of Bombay
(1), in which s. 7 of the
Influx from Pakistan (Control) Act, 1949, was held void.
Section ‘7 authorised the Central Government to remove from
India, any person “who has committed or against whom a
reasonable suspicion exists that he has committed, an
offence under this Act…” In dealing with the section, this
Court said :

“…… section 7 imposes the penalty of
removal not only upon a conviction under
,section 5 but goes further and brings about
the same result even where there is a reason-
able suspicion entertained by the Central
Government that such an offence has been
committed. The question whether an offence
has been committed is left entirely to the
subjective determination of Government.”

This Court pointed out that there was no opportunity to the
offender to clear his conduct, and held that this was
“nothing short of a travesty of the right of citizenship”.
The case is explainable on the ground that an Indian citizen
has a fundamental right to stay in India and if he is to be
removed for committing an offence or under suspicion that he
has committed an offence, the removal is a penalty which
cannot be inflicted without an opportunity to the offender
to clear his conduct. As pointed out by us already, while
dealing with Thakur Raghubir Singh’s Case (2), there is no
question of a
(1) [1954]S.C.R. 933. (2) [1953] S.C.R. 1049.

671

punishment here, and there is, in fact, a hearing, though
not before a Court. There is nothing in the Influx from
Pakistan (Control) Act to show that the opportunity to clear
his conduct of the alleged offence must be by resort to the
Court.

The appellant also relied upon K. T. Moopil Nair v. State of
Kerala (1), where a taxing statute was struck down on the
ground that it provided no procedure for assessment of the
tax, Abdul Hakim v. State of Bihar (2) and State of Madhya
Pradesh v. Baldeo Prasad
(3), but they do not deal with
the point now raised, and were decided on facts which were
entirely different. It will thus be seen that the wide
proposition, that every Determination affecting liberty,
rights or property must always be made by a judicial
tribunal and none else, does not find support from the cases
above considered. It is enough to say that the Reserve Bank
in its dealings with banking companies does not act on
suspicion but on proved facts. These facts are statutorily
required to be submitted to the Reserve Bank, and the
Reserve Bank further inspects the banking companies. It
licenses such banking companies as conduct their affairs in
the interests of the depositors, and can withdraw the
licence if they do not. With such a statutory access to the
affairs of a banking company, there is sufficient guidance
in the words detrimental to the interests of the depositors’
to show to the Reserve Bank when and how the power is to be
exercised. Indeed, in this case itself, the Reserve Bank
has given an easily understandable view of the monetary
position of the Palai Bank. By comparing the total demand
and time liabilities of the Palai Bank with the liquid
assets, borrowing power and realisable advances, the Reserve
Bank has shown the inability of the Palai Bank to meet
lawful demands, and a state of affairs is disclosed, which
is certainly not beneficial to the
(1) [1961] 3 S.C.R.77. (2) [1961] 2 S.C.R. 610.
(3) [1961] 1 S.C.R. 1970.

672

interest of those unfortunate depositors, whose money is
still involved. The Reserve Bank has not yet told us all
that it has found. It will all be found in the winding up
proceedings. But this seems certain that the action would
not be taken without scrutinising all the evidence and
checking and rechecking all the findings. It is impossible
to say that observations in the cases discussed above can
apply to the facts here.

The learned Attorney-General, on the other side, drew our
attention to Virendra v. The State of Punjab (1), 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 an order
in the State, as it alone was in possession of
all material facts it would be the beat
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
(1) [1958] S.C.R. 308.

673

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. Therefore, the deter-
mination of the time when and the extent to
which restrictions should be imposed on the
Press must of necessity be left to the judg-
ment 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, therefore, 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 to
Courts without incurring the penalty of having the law
declared void. The law thus made is justified on the ground
of expediency arising from the respective opportunities for
action. Of course, the exclusion of Courts is not lightly
to be inferred nor lightly to be conceded. The
reasonableness of such a law in the total circumstances
will, if challenged, have to be made out to the ultimate
satisfaction of this Court, and it is only when this Court
considers that 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 Banker’s Bank, its
674
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 deposi-
tors, 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 postmortem
examination of the corpse of the banking company.
It is a matter of not a little interest that a procedure for
winding up other banks and institutions to the exclusion of
the Companies Act is to be
675
found in other statutes. The co-operative Societies, the
State Financial Corporations, the State Bank of India, the
Industrial Finance Corporation, the Life Insurance
Corporation and finally, the Reserve Bank itself are to be
liquidated under special laws to the exclusion of the
Companies Act, under the statutes creating them.
In view of what we have said above, it is not necessary
to refer to American and Japanese precedents. However, if
these laws are examined, they show that even in the United
States of America and Japan, the closure of banks and also
their liquidation proceed from executive action. Under the
Banking Law of Japan(Law No. 21, March 30,1929), Arts. 22,
23, 24 and 27 provide that the competent Minister would
decide such issues. Article 22 may be read in this
connection :

“If the competent Minister finds it necessary
to do in view of the affairs of a bank or the
conditions of its property, he may order it to
suspend business, deposit property with
official depository, or issue any such order
as may be necessary.” (Japanese Laws Relating
to Banks-Eibun-Horei-Sha, Inc. Tokyo Japan,
p. VI (BA 4).

It is also interesting to note that Arts. 22 and 29 of the
Japanese Constitution guarantee to the people the freedom to
own property and choose occupations, much as has been done
under our Constitution.

In the United States of America, Banks are regarded as
proper subject of legislative regulation under the police
power (Corpus Juris Secundum, Vol. IX. paras 4 and 5, p.

32), and this power is not subject to the limitations
arising from the Fourteenth Amendment, except that it must
be reasonably exercised. The Banks in the United States
being
676
either National or State Banks, different laws have been
framed to deal with the winding up of insolvent Banks. In
almost all the States statutes provide special proceedings
for the affairs of insolvent State Banks and the
National Bank Act also makes special provision in respect of
National Banks. The closing of the doors of a National Bank
by the Comptroller of Currency on account of its insolvency_
and the appointment of a receiver do not amount to a breach
of the due process clause. As stated in Corpus Juris
Secundum, Vol. IX, par a 419, p. 835 :

“The courts have generally upheld the,
validity of statutes providing for the
liquidation of state’ banks, including the
control and administration of the assets by
state officials or by receivers or liquidators
appointed by them, the determination of the,
bank’s solvency, claims against the bank……

The power is thus conferred on the Comptroller of Currency
by the National Bank Act and by the State law upon the
superintendents of Banks Under some statutes of the States,
banking officials have no power to liquidate insolvent Banks
independently of the judiciary. But in others, this power
is specifically conferred. These propositions were cited to
us from American Jurisprudence Vol. 7, Vols. IX, XIII and
XVIA of Corpus Juris Secundum and from the Law Reports,
particularly Title Guaranty and Surety Co. v. Idaho Ex Rd.
Allen(1), Bushnell v. Leland (2), Ex parte Chetwood (3) and
some others.

Mr. Nambiar, however, joined issue on the use of the
American precedents on the grounds that banking in America
is by grace of legislature, and is either a franchise or a
privilege, which has no place in our Constitution. He added
that the
(1) (1916) 240) U.S. 130 : 60 L. ad. 566.

(2) (1897) 164 U. S. 684, 41 L. ad. 598.

(3) (1897) 165 U.S. 443,41 L. ad. 782.

677

carrying on of business is not one of the provisions of the
American Bill of Rights, nor a fundamental right, as we
understand it, though by judicial construction the
individual right has been brought within the Fourteenth
Amendment. He, therefore, contended that American cases and
American laws should not be used. ID our opinion, no useful
purpose will be served by trying to establish the
similarities or discrepancies between the American
Constitution and banking laws, on the one hand, and our
Constitution and our banking laws, on the other, and we do
not wish to rest our decision on the American and Japanese
analogies.

We do not also agree that the impugned section amounts to an
encroachment on the judicial power by the legislature. The
statute book is full of instances in which the Courts of
Civil Judicature guide themselves by the decision of an
outside agency. The Arbitration Act itself affords a
readily available instance. Under that Act the Court passes
its decree on an award of almost any one the parties may
choose. Nor is the possibility of a mistake by the Reserve
Bank of such vital consequence. If the Reserve Bank acts in
good faith and with circumspection, there is as much or as
little chance of error as before a Court of law.
Lastly we do not think that this was a case in which some
lesser action like moratorium or amalgamation or
reconstruction would have been feasible. The difficulty of
the Palai Bank was the nature of its advances, which were
either not recoverable or not easily recoverable. A
moratorium with the limitation of time involved in it would
not have been an adequate measure, and amalgamation and
reconstruction were out of question at the stage which had
been reached.

We are thus satisfied that ss. 38(1) and (3)(b)(iii) of the
Banking Companies Act are neither
678
discriminatory nor unreasonable, and cannot be declared void
under Arts. 14 and 19 of the Constitution. Since the
provisions are manifestly in the public interest, they
cannot also be declared ultra vires under Art. 301, because
they are protected by Art. 302 of the Constitution.
The appeal and the petition thus fail, and are dismissed
with costs one set only.

KAPUR, J.-The facts of this case have been set-out in the
judgment of our learned brother Hidayatullah, J., and it is
not necessary to restate them.

The main question for decision is whether the provisions of
s. 38(3)(b)(iii) of the Banking Companies Act (Act X of
1948) are ultra vires of the Constitution as being
unreasonable restriction which infringe the petitioners
right under Art. 14 and Art. 19 (1)(f) and (g) of the
Constitution. Under s. 38(3)(b)(iii) of the Banking
Companies Act the winding up petition was filed by the
Reserve Bank of India against the Palai Bank Ltd., in the
Kerala High Court on August 8,1960. On the same day an
application for the appointment of a Provisional Liquidator
was also made and a Provisional Liquidator was appointed.
On behalf of the Directors an objection was taken in the
High Court that s. 38(3) (b) (iii) was invalid and
unconstitutional because it contravenes Arts. 14 and 19 of
the Constitution and that the petition was mala fide.
After the appointment of the liquidator four scheme of
arrangement under s. 44B of the Banking Companies Act were
presented to the Court. On October 6, 1960, the Court
ordered the Reserve Bank to examine the work ability and
efficacy of the schemes. The Reserve Bank of India filed
its report on October 22, 1960, to the effect that prima
facie the schemes were not workable. The order
679
of winding up was then passed on December 5, 1960. The plea
of mala fides was not pressed and the High Court hold that
there was no infringement of the petitioners’ right under
Arts. 14 and 19. The Court also held that although
according to the, language used in the impugned provision
the Reserve Bank of India need not have disclosed the
material on which it arrived at the conclusion that the
continuance of the Palai Bank was prejudicial to the
interest of the depositors, it had chosen to place all the
materials before the Court which showed that ever since 1952
the Reserve Bank of India was drawing the attention of the
Palai Bank to the grave defects in its working and had given
it opportunities to explain the defects or to remedy them.
The Palai Bank chose to do neither and “the Reserve Bank far
from having acted without material or in a hasty and ill-
considered manner, had, doubtless alive to grave
responsibility placed upon it to preserve the banking
structure of the country, acted with a degree of care and
circumspection which has drawn to it adverse criticism from
those who do not share its responsibility. Faced with the
run it would have failed in its duty by the depositors had
it not acted as it did.”

The history of the Banking Companies Act and how it came to
be enacted is this. The Government of India appointed the
Indian Central Banking Enquiry Committee which made its
report on June 2, 1931. In para. 674 it pointed out the
principal causes of failures of Banks. By Act 2 of 1936 Part
XA was introduced into the Indian Companies Act of 1913 and
that part dealt with Banking Companies but no separate and
special provision was made for the winding up of banking
companies. In 1934 the Reserve Bank of India Act (Act II of
1934) was enacted. There were minor amendments in the
Indian Companies Act in regard to Banking Companies by Acts
21
680
of 1942 and 4 of 1944. On January 15, 1946 Banking
Companies Ordinance (4 of 1946) Was promulgated which
enabled the Central Government to direct the Reserve Bank to
cause inspection to be made of any banking company and its
books and accounts. It empowered the Central Government, on
the receipt of a report that the affairs of a banking
company were being conducted to the detriment of the
interest of the depositors, to prohibit the banking company
from receiving fresh deposits or to refuse it to be placed
in the schedule of the Reserve Bank of India Act or to de-
schedule it. On March 10, 1949, the Banking Companies Act
(Act X of 1949) was passed. On December 31, 1952, the
Banks’ Liquidation Proceedings committee of 1952 made its
report. According to that report the number of bank which
suspended payments during the year 1926 to 1952 was 851.
The total liabilities of these banks were Rs. 96.86 lakhs.
Of these banks 123 were in Travancore-Cochin which were the
most numerous. Then it was stated how many banks failed
during different periods and it was pointed out that the
slow progress of liquidation proceedings was due to the
facts that the advances were mostly unsecured and recovery
involved litigation, so much so that there were not enough
funds to take legal proceedings ; many claims were barred by
limitation : contributories could not be traced and the
unpaid capital could not be recovered. In cases of small
banks advances were small and legal expenses for realisation
were out of proportion to the amounts involved and the
claims had therefore to be given up and the Directors
invariably delayed the submission of their statements under
s. 177A of the Companies Act and this hampered the progress
of the liquidation proceedings. The Banking Companies Act
was then amended from time to time and by s. 26 of Act 33 of
1959 the present s. 38
681
providing for winding up was substituted in place of the
old. s. 38.

In order to determine the constitutionality of the impugned
provision it will be helpful to examine the scheme of the
Reserve Bank of India Act and of the, Banking Companies Act.
The preamble of the Reserve Bank of India Act is that it has
been constituted with a view to ensure monetary stability in
India and to operate the currency and credit system of the
country. By s.3 the Reserve Bank has been established for
the purpose of taking over the management of the currency
from the Central Government and of carrying on the business
of banking in accordance with the provisions of the Reserve
Bank Act. Section 7 deals with management and it gives to
the Central Government the power to give such directions to
the Bank after consultation with the Governor of the Bank
which are considered necessary in the public interest. The
Central Board of the Bank is constituted under s. 8 and it
consists of the Governor four Directors nominated by the
Central Government from amongst the local Boards, six
Directors nominated by the Central Government and one
Government official to be nominated by the Central
Government. In other words all the Directors are nominees
of the Central Government. By s. 11 tile Central Government
has the power of removing the Governor or any Director and
casual vacancies are also to be filled by the Central
Government under s. 12. Section 17 deals with the business
which the bank may transact and Chapter III relates to
Central banking functions. Under s. 30 the Central Govern-
ment has the power to supersede the Central Board and to
entrust it to such agency as it may determine It will thus
be seen that the Reserve Bank is an institution established
for the purpose of carrying on central banking functions and
its management is entirely in the hands of the Central
Government or its nominees.

682

Section 2 of the Banking Companies Act provides that the
provisions of that Act are in addition to and not, unless
expressly so provided, in derogation of the Companies Act,
1956, and any other law for the time being in force.
Section 4 gives the Central Government the power to suspend
the operation of the Act on the representation of the
Reserve Bank. Section 5 is the interpretation clause. Part
II deals with “Business of the Banking Companies”. Section
II in that Part deals with requirement as to minimum paid up
Capital and reserve of banking companies. Section 22
empowers the Reserve Bank to give licences to banking com-
panies and prohibits the carrying on of banking business
without a licence issued by the Reserve Bank which may be
issued subject to such conditions as the Reserve Bank thinks
fit. Every banking company in existence at the commencement
of this Act had to apply for such a licence within six
months of the commencement of the Act and every other
company had to apply before commencing banking business but
companies which were in existence could continue their
banking business until the licence was granted or it was
refused. But it could not be refused before the expiry of
three years referred to in sub-s. (1) of s. 11 Sub-section
(3) of that section entities the Reserve Bank to inspect
books of the Banking company to satisfy itself in regard to
matters contained in that sub-section. Under sub-s. (4) the
Reserve Bank can cancel a licence granted to a banking
company provided that before cancelling the licence it gives
an opportunity to the Banking Company to show cause why its
licence should not be cancelled. Under sub-s. (5) any
banking company aggrieved by the order of the Reserve Bank
cancelling its licence can appeal to the Central Government
whose decision is final.

Under s. 24 every banking company has to maintain a
percentage of its assets in cash gold or
683
unencumbered approved securities and an amount which is not
less than 20% of the total of its time and demand
liabilities and return to that has to be furnished
periodically to the Reserve Bank. Section 25 deals with
assets of every banking company in India, s.27 with the
making of monthly returns by the banking companies to the
Reserve Bank and s. 30 with audit. The Reserve Bank under
s. 35 may at any time and on being directed by the Central
Government shall cause an inspection to be made of any
banking company. Sub-section (4) of that section reads:-

“The Reserve Bank shall, if it has been
directed by the Central Government to cause
inspection to be made, and may, in any other
case report to the Central Government on any
inspection 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.”

684

Under s. 35A power is given to the Reserve Bank to give
directions. When quoted it reads:

S.35A(1) “Where the Reserve Bank is
satisfied that-

(a) in the public interest; 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

(c)to secure the proper management of any
banking company generally
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 subsection
(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.”

Section 36 defines further powers and functions of the
Reserve Bank. It has power to caution or to prohibit a
banking company from entering into any particular
transaction or class of transactions, to assist any proposal
for amalgamation of companies, to give loans to banking
companies, to require banking companies to call a meeting of
the directors for the purpose of considering any matter
relating to or arising out of the affairs of the banking
company
685
to depute one or more of its officers, to watch proceedings
at any meeting of the board of directors, to appoint one or
more of its officers to observe the manner in which the
affairs of the banking company are conducted or to require
the banking company to make such changes in the management
as Reserve bank may consider necessary.

Part III deals with suspension of business and winding up of
banking companies. Section 37 provides that on the
application of a banking company the High Court may stay
commencement or continuance of all actions against a banking
company and may impose a moratorium; but 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 if
the application is granted, provided that the High Court may
for sufficient reason grant relief under this section even
if the application is not accompanied by such report. In
that case the High Court shall call for a report from the
Reserve Bank on the affairs of the banking company and pass
such order as may be proper in the circumstances. Under
sub-section 3 the High Court can appoint a special officer
to take into custody or control all assets, books and
documents of the banking company and shall exercise such
other powers as it thinks fit having regard to the interests
of the depositors of the banking company. Under sub-s. 4 if
the Reserve Bank is satisfied that a banking company in
respect of which an order has been so made conducts its
affairs in a manner detrimental to the interests of its
depositors it can make an application to the High Court for
the winding up of the company and where such an application
is made the High Court shall not make any order extending
the
686
period. The impugned provision of section 38 which deals
with winding up reads: –

S.38 (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. (1) of sub-
section (4) of section 35 or under clause (b)
of sub-section 3(A) of section 42 of the
Reserve Bank of India Act, 1934 or;

687

(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
I 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, 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
688
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.”

Section 44A lays down the procedure for amalgamation of
banking companies and s. 44B for restriction on the powers
of the High Court to sanction compromise or arrangement
between a banking company and its creditors unless
compromise or arrangement is certified by the Reserve Bank
as being capable of being worked as not being detrimental to
the interest of the depositors Section 45 gives to the
Reserve Bank the power to apply to the Central Government
for an order of moratorium in respect of banking company
which the Central Government may order and it also gives to
the Reserve Bank the power to prepare a scheme for
reconstitution or amalgamation. Sub-section (1) and (2) of
s. 45 are as follows –

S.45(1) “Notwithstanding anything con-
tained 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 consi-
dering the application made by the Reserve
Bank under sub-section (1) may make an order
of moratorium staying the commencement or
continuance of all action and proceedings
against the company for a fixed period of time
on such terms and conditions as it think fit
and proper and may from time to time
689
extend the period so however that the total
period of moratorium shall not exceed six
months.”

It will thus be seen that the Banking Companies Act gives
very extensive powers to the Reserve Bank in regard to
banking companies. It gives to the Reserve Bank the power
to license existing banking companies or the banking
companies, which want to commence business, and for that
purpose it can inspect the books of the banking company in
order to determine whether it is or will be able to pay its
depositors. It can cancel a licence in certain
circumstances but after giving to the banking company, an
opportunity to be heard. A banking companies is required to
keep a portion of its assets in a liquid form the Reserve
Bank can order inspection of any banking company at any time
it thinks proper and Central Government can order the
Reserve Bank to make an inspection of any banking company
and on that report drastic steps against the company may
follow. The Reserve Bank can give directions as to how the
business of a banking company shall be conducted. It can
appoint observers and give directions to the directors of a
banking company as to what they should do or should not do.
Moratorium can be imposed by the High Court at the instance
of a banking company but the Reserve Bank may have that
order varied and set aside if the order is not in the
interest of the depositors and if the Reserve Bank thinks
that the continuance of a banking company is not in the
interest of the depositors it may apply to the High Court
for winding up of the banking company. In regard to
amalgamation of banking companies through scheme of
compromise and arrangement the Reserve Bank has a great deal
of control and power. The Reserve Bank may apply to the
Government to impose a moratorium on any banking company and
if an application is so made the
690
Government may make such an order. But where it comes to
winding up provisions the Reserve Bank has pre-emptory
powers, in that if it applies for the winding up of’ a
banking company the Court is bound to order winding up
because the words used are “the High Court shall” order the
winding up. Moreover the Government can direct the Reserve
Bank to make such an application so that the Executive
Government can take any banking company into liquidation.
The power given in sub-s. (3)(b)(iii) of s. 38 it; still
more drastic because if the Reserve Bank is of the opinion
that the continuance of a banking company is prejudicial to
the interest of the depositors it may apply for winding up;
in other words on its subjective satisfaction it may apply
and if it does so the High Court has no option but to order
the winding up it is this provision to which strong
objection has been taken by the appellant and is assailed by
him.

This provision was sought to be supported on behalf of the
Reserve Bank by the learned Attorney-General who first drew
our attention to the facts of the present case and to the
various opportunities which were given to the Palai Bank
since 1952 to carry out certain directions and on different
occasions the Palai Bank had made representations and its
Directors had interviewed the officers of the Reserve Bank
and had given explanations till ultimately on July 21, 1960,
the Reserve Bank called upon the Palai Bank to carry out
certain directions which were enclosed with the letter. The
Reserve Bank there wrote as follows :

“The bank should therefore, in the interest of
its depositors remedy within a period of 12
months the features observed in its working.”

It was also stated therein that if the Palai Bank desired to
make any representation in regard to contents of the
inspection report it could make its
691
representation within 30 days of the receipt of the letter
and the complaint of the appellant is that before these
thirty days were over winding up application was made on
August 8.1960, which the Reserve Bank submits was for very
good reasons, the protection of the interest of the
depositors.

The test of reasonableness has to be applied to each
individual statute and no abstract standard or general
pattern can be laid down which will be applicable to all
cases : Patanjali Sastri, C.J., in State of Madras v. V. O.
Row
(1) observed :

“The formula of subjective satisfaction of the
Government or of its officers, which an
advisory Board thrown in to review the mate-
rials on which the Government seeks to over-
ride a basic freedom guaranteed to the
citizen, may be viewed as reasonable only in
very exceptional circumstances and within the
narrowest limits, and cannot receive judicial
approval as a general pattern of reasonable
restrictions on fundamental rights.”

See also Abdul Hakim v. State of Bihar (2) Although the
legislature is the best judge of what is good for the
community ; State of Bihar v. Kameshwar Singh(3) the
ultimate responsibility for determining the validity of the
law must, rest with the Court and the Court must not shirk
that final duty cast on it by the Constitution. Abdul
Hakim’s case (2).

It was submitted by the learned Attorney-General that (1)
reasonableness of the impugned legislation has to be judged
in its own setting and not on any abstract test and (2) that
the absence of judicial scrutiny is not an inviolable rule.
It can be dispensed within certain circumstances as being
unsuitable or defeating the purpose for which an Act is
passed. In support of the former he relied upon the
observations of Patanjali Sastri, C. J., in
(1) [1952] S. C. R. 597,60 7,608. (2) [1961] 2 S.C.R. 610.
(3) [19S2] S.C.R. 889.

692

State of Madras v. V. G. Row (1) where the learned Chief
Justice observed
“The nature of the right alleged to have been
infringed, the underlying purpose of the res-
trictions imposed, the extent and urgency of
the evil sought to be remedied thereby, the
disproportion of the imposition, the
prevailing conditions at the time, should all
enter into the judicial verdict.

and also to the following observation at p.

608 :

“As pointed out by Kania, C. J.,at p. 121
quoting Lord Finlay in Rex v. Halliday (1917)
A. C. 260, 269, the courtwas the least
appropriate tribunal to investigate into
circumstances of suspicion on which such
anticipatory action must be largely based.”
But in that very case the learned Chief Justice pointed out
that the formula of subjective satisfaction of the
Government with an Advisory Board thrown in to review the
materials on which the Government seeks to override a basic
guaranteed freedom can be viewed as reasonable only in very
exceptional circumstances and within the narrowest limits
and cannot receive judicial approval as a general pattern of
reasonable restriction. In that case the court did not find
any reasonableness in the claim of the Government to shut
out judicial enquiry into the underlying facts.
In support of the second submission reference was made to
Virendra v. The State of Punjab (2) where the constitutional
validity of a Punjab Act which prohibited the publication by
the Editor and Printer of any matter relating to the “Save
Hindi” agitation was challenged. The question raised there
was, are the restrictions imposed
(1) [1952] S.C.R. 597, 607, 608.

(2) [1958] S.C.R. 308
693
reasonable in view of all the surrounding circumstances. In
other words were they reasonably necessary in the interest
of public order under Art. 19(2) or in the interest of
general public under Art. 19(6). Das, C.J., there observed
that the legislature had to ask itself the question as to
who would be the proper authority to determine at any given
time as to whether the prevailing circumstances required
some restrictions on the right to freedom of speech and
expression and the answer was obvious that the State
Government was charged with the preservation of law and
order ; it alone had in possession all the material facts
and it would be the best authority’ to investigate the
circumstances and assess the urgency of the situation and
make up its minde as to what anticipatory action must be
taken for prevention of the threatened or anticipated breach
of peace :

“The court is wholly unsuited to gauge the
seriousness of the situation, for it cannot be
in possession of material which are available
only to the executive Government. Therefore
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.”

This passage from the judgment of Das, C.J., and the passage
from the judgment of Patanjali Sastri, C.J., in State of
Madras v. V.G. Row
(1) where reference was made to the
observations of Kania, C.J. were strongly relied upon by the
Attorney-General in support of his contention that the power
given to the Reserve Bank in regard to winding up and the
mandatory provision for the order for winding up by the
court were reasonable restrictions; because the judge of the
urgency and of the measures to meet the urgency could be the
Reserve Bank or the court;

(1) [1952] S.C.R. 597,607, 608.

694

and the legislature had rightly given the power to the
Reserve Bank, because it was in possession of all the
material facts and was the best authority to investigate the
circumstances and assess the urgency of the situation. The
analogy between Virendra’s case(1) and the present case is,
in our opinion, wholly in apt. In Virendra’s case(1) there
was an agitation by a section of the Punjab public which was
likely to have serious consequences on the public order and
the tranquility of the state. It required quick measures to
control it. The order was to meet an emergency, the order
Could at the most remain applicable for two months and there
was a provision for making a representation to the
Government. In the case of a banking company, assuming that
an urgency like that which existed in Virendra’s case(1)
arises and a proper case is made out the Court will act with
promptitude make such interim orders as the facts of the
case may require e.g. the appointment of a provisional
liquidator. There is one essential difference between V. G.
Row’s case(2) and Virendra’s case (1) and the one before us.
In the former two cases executive action of State Government
was challenged. The Court there had not to give a judicial
verdict in accordance with the opinions of the executive but
had to determine the constitutionality of action already
taken. It did not pass an order, judgment or decree in
accordance with the subjective determination of the
Executive but expressed the opinion that in the
circumstances there was no infringement of constitutional
rights. In the present case the Court is debarred from
deciding the adequacy of the acts of mismanagement and the
parlous state of its finances alleged against the Palai
Bank. Besides the complaint before us is not that the
Reserve Bank should not have filed an application but that
the court could not order liquidation till after it had
heard the Palai
(1) [1958] S.C.R. 308.

(2) [1952] S.C.R. 597, 607, 608.

695

Bank in its defence and had afforded it an opportunity of
meeting the allegations in the winding up petition. In
other words a law which authorises a banking company to be
condemned unheard merely on the subjective satisfaction of
one of the suitors even though it was the Reserve Bank is
unconstitutional.

It was next contended that the provision of s.38 of the
Banking Companies Act were not so unusual and that in other
countries in similar circumstances much wider powers had
been given in regard to the winding up of banking companies.
Reference was made to the National Bank Act in the United
States Code, s.191 of which deals, with general grounds for
appointment of receivers. It provides inter alia that
whenever the Comptroller shall be satisfied of the
insolvency of a national banking association he may, after
due examination of its affairs appoint a receiver who shall
proceed to close up such association and enforce the
personal liability of the shareholder. It also empowers the
Comptroller to appoint receivers for insolvent national
banks and to make rateable assessments upon the stockholders
but do not vest judicial power in him in violation of the
Constitution. The power of the Comptroller is exclusive and
not subject to review of all matters properly within his
discretion. A national bank in America is a banking
corporation organised by private persons and operated for
private gain, the power and duties of which are defined and
limited by Acts of Congress, providing for creation and
liquidation of such institutions and being established to
aid or promote governmental purpose and to provide national
currency they are often regarded as public or quasi-public
institutions.

Reference was next made to 92 American L.R, (Annotated),
pp.1257-58, which deals with the constitutionality of the
power given under the
696
statute conferring authority upon the Bank Commissioner to
wind up the affairs of the Bank. It is there stated that
the fact of insolvency having been discovered the statute
directs the Bank Commissioner’s course and the designation
by him of a person to wind up the affairs of the Bank which
is no more a judicial act than his order to the Board of
Directors to remove a dishonest cashier. “His powers are
purely administrative, and in no way infringe upon the
ancient authority of courts determine rights of person and
property in specific controversies pending before them”
Reference was also made to Corpus Juris Secundum, Vol. IX,
p.844, para 425, where it is stated that under some statutes
banking officials liquidating a Bank are not subject to the
directions of a court.

Again reference was made to Corpus Juris Secundum, Vol. 16A,
pp.1219-1220, para. 711, where similar statement is made in
regard to the same statutes. But the following passage from
that paragraph is significant:

“Legislation is in contravention of the
guaranty where it takes away one’s property
and leaves him no remedy whatever by which he
can regain it or obtain redress.”

In Corpus Juris Secundum, Vol. 16, p.506, para. 117, it is
stated that appointment of a receiver, in certain instances,
does not perforce violate constitutional provisions with
regard to separation of legislative and judicial powers. So
the appointment of a receiver by the legislature to settle
the affairs of an insolvent bank has been held not to be a
judicial act but where the cause is properly before a court
the appointment of a receiver constitutes a judicial
function without the scope of legislative control.

697

It was then submitted that in America closing the doors of a
bank without awaiting court’s orders is not, a violation of
due process of law. See Title ‘Guaranty & Surety Company of
Scranton v. State of Idaho (1) where it was held that the
State’s power to put upon a Bank Commissioner the duty of
closing the doors of State Bank if, on examination, it is
found to be insolvent without awaiting judicial proceedings
is not a violation of the due process of law, but it appears
that the proposition that such a power was a violation of
the 14th Amendment had not been argued in the State Court.
The following observations of Mr. Chief Justice White at
p.569 are significant.

“We say this because, in its opinion, the
court observed that if that was the conten-
tion, it was irrelevant, as the statute did
not authorise liquidation except as a result
of judicial proceedings although they did
impose upon the bank commissioner the duty,
after he found a bank to be insolvent, to
close its doors and prevent the further
transaction of business until, in the orderly
course of procedure, a judicial liquidation
might be accomplished.”

The only question there was whether the State could empower
the Commissioner to close the doors of a bank. It was not a
case where the statute authorised any liquidation except as
a result of judicial proceedings. Therefore it was not a
case of liquidation being ordered by an authority other than
a court.

Another case relied upon was Bushnell v. Leland (2) where
the assessment made upon stockholder of a national bank by
the Comptroller of Currency was held to be evidence in an
action brought by the receiver of a bank against a stock-
holder to enforce payment of double liability imposed
(1) (1916] 240 U.S. 136. 60 L. Ed. 566.

(2) (1897) 164 U.S., 684. 41 L. Ed 598.

698

by law. It was also held that the giving of authority on
the Comptroller empowering him to make a rateable call upon
stockholder was not tantamount to vesting that officer with
judicial power. In Ex parte Johan Chetwood (1) it was held
that the receiver of a national bank appointed by the
Comptroller of Currency is not an officer of any court but
agent and officer of the United States.

The aid of American concepts, laws and precedents in the
interpretation of our laws is not always without its dangers
and they have therefore to be relied upon with some caution
if not with hesitation because of the difference in the
nature of those laws and of the institutions to which they
apply. Mr. Nambiyar relied upon these different concepts
and submitted that in U.S.A. the right to carry on business
is not a fundamental right but is a “franchise”, though, it
has by legal interpretation, been brought within the
fourteenth amendment arid the doctrine of “franchise” has no
place in the Indian Constitution : C.S.S. Motor Service v.
State of Madras (2) approved in Saghir Ahmad v. State of
U.P.
(3) Similarly the right to form a corporation is in
U.S.A. a “franchise” or a “privilege” which can be
withdrawn. To apply the analogy of Banks in U.S.A. to those
in India or the mode of exercise by and extent of the powers
of a Controller of Currency or some similar authority will
more likely than not lead to erroneous conclusions.
To support the submission that this procedure for winding up
in the case of banking companies was not unreasonable, it
was submitted that there are many other corporations and
societies which are not wound under the Companies Act but
under a different procedure-by the orders of the Central
Government—e.g. the Life Insurance Corporation, the State
Finance Corporation, the State Bank of
(1) [1897] 165 U.S. 413 41 L. Ed. 782
(2) I.L.R. [1933] Mad. 304.

(3) [1955] 1 S.C.R. 707, 718.

699

India and some others. They are all owned by the Central
Government and are therefore not comparable with the
respondent company. Besides merely because some other
corporations or societies of a different kind can be wound
up in a different manner or under a special procedure is
hardly a ground for holding in favour of the
constitutionality of the impugned provision. To further
support the reasonableness of the impugned provision it was
argued that because of the special knowledge of financial
matters possessed by the Reserve Bank and to protect
financial structure of the country special powers have been
conferred on the Reserve Bank and the learned Attorney-
General relied on the observations of Rajagopala Ayyangar,
J., All India Bank Employees’ Association v. National
Industrial Tribunal
(1) :

“From what we have stated earlier as the
genesis of the legislation now impugned it
would be apparent that Government bad to
effect a reconciliation between two conflict-
ing interests ; one was the need to preserve
and maintain the delicate fabric of the credit
structure of the country by strengthening the
real as well as the apparent credit-worthiness
of banks operating in the country.”

But that was in a different context. That was a matter in
regard to the provisions s.34A of the Banking Companies Act,
sub-s. (1) of which gives immunity under certain
circumstances to books and accounts of a banking company
against production and inspection in a proceeding before the
Industrial Tribunal and sub-section (2) of which provides
that if in any proceedings in relation to any company other
than the Reserve Bank any question arises whether the amount
of reserves should be taken into account by the authority
before which such proceeding is pending the authority may
refer the question to
(1) [1962] 3 S.C.R. 269, 298.

700

the Reserve Bank and the Reserve Bank shall, after taking
into account, the principle of sound banking and other
circumstances furnish to the authority a certificate,
stating that the authority shall not take into account any
amount as such reserve and such certificate shall be final.
All that this case laid down was that such a provision
balanced the interests of the parties and the delicate
fabric of the credit structure of the country. Besides that
provision relates to production and inspection of documents
and relates to what facts can be taken into consideration by
an Industrial Tribunal or whether a certificate by the bank
is proof of a particular fact or not. Again what is
applicable to a quasi-judicial authority like an Industrial
Tribunal adjudicating upon industrial disputes seeking to do
social justice may be inapplicable to Courts of law
adjudicating upon the rights of a citizen to carry on his
trade and avocation or not.

Next case cited was Sajjan Bank v. Reserve Bank (1).
That was a case where the validity of s. 22 of the
Banking Companies Act was challenged on the ground of Art.
19(1) of the Constitution and it was held not to be ultra
vires on the ground that power of licensing is not vested
with a mere officer of the bank and the standard for
exercise of power has been laid down in the section it-self
and the power granted to the Reserve Bank is not an
arbitrary one.

The vital question for decision is whether a law which
requires the High Court to order winding up because the
Reserve Bank is of the opinion that a banking company should
be wound up is constitutional. In other words can a statute
which takes away the power of the Court to proceed in a
normal judicial manner to determine a question submitted to
it for its decision on the
(1) [1959] 2 M L.J. 455.

701

materials proved before it and requires it to decide it
merely in accordance with the subjective satisfaction of one
party to the dispute ‘and without giving the other party the
right to be heard at any stage of the proceeding and prove
its defence be called a reasonable restriction under Art.
19(1)(f) and (g)of the Constitution. Will the law which
excludes the application of the judicial process, and
compels the Court to merely carry out the behests of one of
the parties by giving effect to that party’s subjective
satisfaction and thus to abdicate its judgment to the
opinion of a suitor be valid. Dealing with emergence of
judicial power Griffith, C.J., in Waterside Workers’
Federation of Australia v. J. W. Alexander Ltd. (1) said
that as soon as man emerged from the savage state and formed
settled communities it became necessary to have rules to
regulate conduct for the enforcement of which provision was
made and this ‘power vested in some person or authority
representing the community. Hence arose law givers and
Judges and as civilisation advanced distinction began to be
drawn between the diverse functions of the community and
these functions were called “the judicial power” as distin-
guished from the legislative and executive powers. The
learned Chief Justice then defined what ,Judicial power” is.
He said :

“Without attempting an exhaustive definition
of the term ‘,judicial power,” it may be said
that it includes the power to compel the
appearance of person before the tribunal in
which it is vested, to adjudicate between
adverse parties as to legal claims, rights,
and obligations whether their origin, and to
order right to be done in the matter.”

Lord Macnaghten in Lapointe v. L’ Association de
Bienfaisance et de Retraite de la Police de Montrial
(2)condemned in the case of persons, other than, judges
performing judicial functions,
(1) (1918) 25 C.L.R. 434, 442.

(2) [1906] A.C. 535, 539.

702

following a procedure “contrary to the rules of the ,society
and above all contrary to the elementary principles of
justices.”

The importance of the judicial process, was emphasised by
Patanjali Sastri, C. J. in Ram Prasad Narain Sahi v. The
State of Bihar (1), a case where the dispute was between the
State of Bihar and a private individual about the settlement
of lands belonging to Bettiah Raj :

“This is purely a dispute between private
parties and a matter for determination by duly
constituted courts to which is entrusted, in
every free and civilised society, the impor-
tant function of adjudicating on disputed
legal rights after observing the well
established procedural safeguards which
include the rights to be heard, the right to
produce witness and so forth. This is the
protection which the law guarantees equally to
all persons and our Constitution prohibits
by Article 14: every State from denying such
protection to anyone.”

No doubt there the question was raised under Art. 14 ; but
it is the importance of the judicial process in disputes
between the State and a private individual that was
emphasised. At p. 1133 the learned Chief Justice pointed
out the dangers inherent in special enactments in a system
of Government by political parties depriving particular
named persons of their liberty or property. In Mahant Sri,
Jagannath Ramanuj Das v. The State of Orissa
(2), objection
was taken to certain provisions in the Orissa Hindu
Religious Endowments Act which related to the framing of a
scheme. Under those provisions a scheme could be settled to
ensure due administration of the endowed properties but the
objection
(1) [1953] S.C.R. 1129, 1134.

(2) [1954] S.C.R. 1046, 1052.

703

was that the Act provided for the framing of a scheme not by
the Civil Courts nor under provisions of the Civil Procedure
Code but by a ‘Commissioner who was merely an administrative
officer. There was no provision for appeal against his
order. Mukherjea, J. (as he then was), said at p. 1052 as
follows
“We think that the settling of a scheme in
regard to a religious institution by an
executive officer without intervention of any
judicial tribunal amounts to an unreasonable
restriction upon the right of property of the
superior of the religious institution which is
blended with his office. Sections 38 and 39
of Act must, therefore, be held to be
invalid.”

See also The Commissioner of Hindu Religious Endowments v.
Sri Lakshmindra
(1). In Sri Sadasib Prakash Brahmachari v.
The State of Orissa
(2) which was a decision in regard to
the same Act after its amendment after ss. 38 and 39 had
been declared to unconstitutional. By the amendment
although the scheme was to be prepared by the Commissioner a
right of appeal direct to the High Court was given against
the determination of the Commissioner settling the scheme.
It was held that although from the litigant’s point of view
an appeal to the High Court from the Commissioner’s order is
not the same as an independent right of suit and an appeal
to the higher court but in order to judge whether the
operation of the provision was or was not an unreasonable
restriction what had to be seen was whether the person
affected got a reasonable chance of presenting his entire
case before the original tribunal which has to determine
judicially the question raised and whether he has a right to
regular. appeal to the ordinary constitution court or courts
to correct the errors if any of the tribunal of first
instance. It was also
(1) [1954] S.C.R. 1005, 1037.

(2) [1956] S.C.R. 43.

704

emphasised in that case that the Commissioner had to be a
member of the judicial service and the enquiry before the
Commissioner was assimilated to and was governed by the
provisions relating to the trial of suits by enjoining that
as far as it might be it was to be in accordance with the
provisions of the Code of Civil Procedure relating to trial
of suits. The framing of a scheme in this manner was held
not to be an unreasonable restriction on the rights of the
Mahant under Art. 19(1) (f ). It is important to notice that
there the right of appeal was in very wide and general terms
both on facts and on law and it could relate not merely to
the merits of the scheme but also to all basic matters the
determination of which was implicit in the very framing of
the scheme.

The importance of the judicial power was pointed out by the
Privy Council in Attorney-General for Australia v. The Queen
and the, Boilermakers’ Society of Australia (1) where it was
held that the function of an industrial arbitrator is
completely outside the realms of judicial power and is of a
different order. At p. 315 Viscount Simonds observed as
follows :-

“On the other hand, in a federal system the
absolute independence of the judiciary is the
bulwark of the constitution against
encroachment whether by the legislature or by
the-executive. To vest in the same body exe-
cutive and judicial power is to remove a vital
constitutional safeguard”.

A great deal of emphasis was laid by the learned Attorney-
General on the fact that the Reserve Bank is a body of
expert bankers which could more appropriately determine as
to when the continuance of a banking company is prejudicial
to the interests
(1) [1957] A.C. 288.

705

the depositors than a judicial tribunal. This argument is
in our opinion fallacious because the liquidation of banking
companies in this country as of any other company is a
judicial function and therefore within the jurisdiction of
Courts and it has never been seriously suggested that the
Courts have found or will in future find any difficulty in
adjudicating on any technical matter dealing with the
peculiar nature of banking companies. It cannot with any
justification be argued that in dealing with such matters
the exercise of jurisdiction by Courts is less desirable
than any other matters which are litigated before them.
Indeed it would be a negation of the rule of law if the
citizen were to be denied to have his rights adjudicated by
an independent tribunal like a Court of law and it will not
subserve the interests of the Rule of Law in a free
democratic society, if adjudication of the question of the
solvency of banking houses’ was left to the subjective
opinion of an executive body like the Reserve Bank even
though it may be expert in banking. The following
observations of Lord Morton, of Henryton in Baldwin &
Francis Ltd. v. Patents Appeal Tribunal (1) which was a case
relating to patents are very relevant :-

“It would, indeed, be regrettable in. present
times, when certiorari lies to so many
tribunals dealing with scientific matters, if
the courts were precluded from considering
whether there was an errors of law on the face
of the record because they did not know the
meaning of certain technical terms.”

In an American case Ohio Valley Water Company v. Ben Avon
Borough 2) it was held that withholding from courts power to
determine question of confiscation according to their own
independent judgment must be deemed to deny due process of
law.

(1) [1959] A.C 663, 679.

(2) (1920) 253 U.S. 287, 64 L Ed. 908.

706

In Halsbury’s Laws of England, Vol. 7, (Simonds Edition), at
p. 198 it has been stated that it is the right of a subject
to have any dispute affecting him brought before a judicial
tribunal and tried in accordance with the principles of
natural justice and that no party ought to be condemned
unheard or to have a decision given against him unless he
has been given a reasonable opportunity of putting forward
his case.

It was further submitted by the appellant that the Reserve
Bank is entirely an executive body, and therefore a
mandatory provision like s. 38 (1) and 38(3)(b)(iii)
practically leaves the question of liquidation of banking
companies in the hands of the Executive. By s. 7 of the
Reserve Bank Act the Reserve Bank is required to act
according to the orders of the Government. The directors of
the Reserve Bank, according to s. 8 are all nominated by the
Government. Under s. 38(2) the Reserve Bank is enjoined to
apply for the liquidation of a bank if it is so directed by
the Central Government and therefore any opinion formed by
the Reserve Bank in regard to the insolvency or otherwise of
a bank must necessarily be the determination of an important
branch of the Executive and when s.38(1) requires the court
to order the winding up of a banking company if an
application in that behalf is made by the Reserve Bank then
it is the substitution of executive power in place of
judicial determination and judicial decision is one of the
main features of the rule of law. To quote from Stephen’s
Commentaries on the Laws of England, Vol. III, p. 565 :

“The importance of the judicial element in our
Constitution can hardly be exaggerated, for it
rests with the Courts to ensure the conformity
of Government with law……………… The
,Rule of Law’ which Dicey held to be a leading
principle of our Constitution, does not
707
involve the decision of every dispute by
Courts of law. But it does imply that all
authorities in the State act under the eye of
the Courts, and are liable to have the
legality of their conduct inquired into.”

What then is the position in the present case. It is
claimed on behalf of the Reserve Bank that the position of
the Palai Bank was very precarious and that its assets were
not sufficient for the purpose of the payment to its
depositors in full or to meet its liabilities. It was also
alleged that on several occasions directions had been given
to the Palai Bank to conduct its affairs in the manner
required by the Reserve Bank and that many opportunities had
been given to it to give its explanation as to the defects
and irregularities in its working and to carry out the
directions of the Reserve Bank and it had failed to comply
with them. The allegation that the bank was in a precarious
position, unable to meet its demands and it had no liquid
assets to pay off it’s depositors, has been challenged by
the appellant. The High Court would have adjudicated upon
that question if it had been competent to do into it. That
is exactly what is required in a judicial determination and
that is what the Palai Bank, has been deprived of and it is
that which affects the constitutionality of the impugned
statute. The position under s. 38 of the Banking Companies
Act is that if the Reserve Bank is of the opinion that the
continuation of a banking company is deterimental to the
interests of the depositors and it makes an application for
winding up, the Court is bound to order winding up
irrespective of whether the banking company has or has not a
good defence. Therefore the Court has to put its judicial
seal on the opinion of another which is absolute negation of
the exercise of the judicial process. It was argued that
the Reserve Bank, before it takes action, inspects, gives
instructions, takes explanations and hears the banking
company but it is not bound to do so.

708

The vice of the impugned provision lies in (a) the power
vested in the Reserve Bank to apply to the High Court for an
order winding up a bank exercisable solely on its
subjective satisfaction as to the existence of conditions
prescribed by s. 38, and (b) the obligation imposed by law
upon the High Court to make the order of winding up without
at any time enquiring whether the conditions on which the
application is founded do in truth exist. In adjudging the
reasonableness of the restriction imposed by a statute the
Court has to consider its purpose, the evil it intends to
remedy and it tries to strike a balance between the interest
of the aggrieved citizen and the larger public interest
sought to be served by the statute ; the Court in each case
considers whether the restriction imposed is appropriate,
fair and reasonable. The Court will not uphold a res-
triction which is not necessary for achieving the purpose of
the statute or is a arbitrary. Are the circumstances so
compelling in the present case that unless the provision
requiring a Court to order winding up of a banking company
because the Reserve Bank feels satisfied that it should be
wound up to protect the interests of the depositors is up-
held the interests of the public cannot be safeguarded ? In
considering this question it may be legitimate to enquire
whether the High Court which normally exercises jurisdiction
in the matter of ordering winding up of companies is
incompetent or its procedure inadequate to, examine the
charges against a banking company. The credit of a banking
institution is undoubtedly very sensitive. It thrives upon
the confidence of the public in the honesty of its
management, and its reputation of solvency. There is
however nothing peculiar in the business of a banking
company that it must be ordered to be wound up on the
subjective satisfaction of the Reserve Bank.
The Reserve Bank is undoubtedly an expert body with vast
facilities for making enquiries into
709
the affairs of banking companies in India. But on that
account it cannot be presumed that the view of the Reserve
Bank that any banking institution should be liquidated must
always be correct. It cannot be said that the Reserve Bank
can never act mistakenly or even negligently. The Reserve
Bank may even be directed by the Central Government for
reasons of its own to apply for liquidation of a Bank.
Under the Constitution the Courts are the custodians of the
fundamental rights of citizens ; but by this extra-ordinary
piece of legislation these Very custodians are made the
instruments of the Reserve Bank for imposing an order which
prima facie is destructive of a guaranteed fundamental
freedom. Under our Constitution the legislative and
executive actions are subject to judicial review within
certain well defined limits. But by s. 38(1)(b) read with
ol. (iii) the Court is not only deprived of its
Constitutional functions but is commanded to lend its aid in
defeating a fundamental freedom of banking companies. The
impugned provision makes the Reserve Bank the complainant
and Judge in its own cause ; it authorises the Reserve Bank
on it subjective satisfaction as to the existence of a state
of affairs prescribed by the statute even without an enquiry
if it deems, fit, to demand that the High Court shall order
liquidation of a banking company without making any enquiry
as to the sufficiency or even the existence of the material
on which its satisfaction depends. The provision making a
litigant the Judge in his own cause is an absolute negation
of the rule of law. It is the foundation of the edifice of
our judicial system that no one shall be condemned unheard,
however strong the circumstances against him may appear to
be. He is entitled to be told., if the freedom of citizen
is to have any reality, what he has done to merit punishment
or penalty, be must be afforded an opportunity to deny the
correctness of the charge
710
and to set up his plea in denial or extenuation, and also be
afforded an opportunity to persuade the authority imposing
penalty or punishment that the appropriate order is not the
one proposed against him. But by a stroke of the
legislative pen all these protections which are the
foundation of the rule of law are destroyed and the
satisfaction of the Reserve Bank is made conclusive for
entering a verdict for determination of the right of a
banking company to continue to exist.

In our view it would be a tragedy if by this and similar
legislation citizens are to be convicted of offences,
penalties are to be imposed upon them, their property
sequestered, and their rights trampled upon without enquiry
by the courts by the simple expedient of requiring the
courts to lend their aid in imposing their authority and
thereby creating a judicial facade to what is in truth
exercise of purely executive authority. It is a matter of
no moment that the executive authority invested with the
power to call upon the court to lend its aid, is an expert
body which performs an important function directly or
indirectly in the governance of the State. However august
the body so set up may be, a provision of law providing for
imposition of restrictions on a citizen’s fundamental right
pursuant to its subjective satisfaction as to the existence
of a state of affairs, and thereby permanently depriving the
citizen of his right or property is in our judgment wholly
unreasonable.

The plea of constitutionality of a statute infringing a
fundamental right cannot be negatived on the assumption that
the autocratic power of imposing penalty or punishment is
entrusted to the executive authority which will exercise it
only in proper cases and there will be no abuse of power.
In the larger interest, our Constitution makers have been
averse to conferral of auto cratic power
711
and have tried to protect the citizen against the exercise
of such power by guaranteeing him the fundamental freedoms
and have also provided protection against infringement or
those freedoms by legislative or executive action.
We are prepared to assume, though counsel for the Palai Bank
very vehemently challenged the truth of the case of the
Reserve Bank, that the affairs of the Palai Bank were
mismanaged and that there was a mounting run on the bank and
it was practically in an insolvent condition. The validity
of a statute is not to be judged in the light of the
propriety or otherwise of executive action, or its
beneficient effects, in a given ease. The invalidity of
this statute arises because of the exclusion of any
opportunity of judicial investigation into the fairness,
propriety and reasonableness of executive action involving
deprivation of a fundamental rights. It if; unnecessary to
consider the steps which it is claimed the Reserve Bank had
taken from time to time to obtain information and to give
advice and direction and also the allegation that the
application to wind up was submitted because the condition
of the Bank was deteriorating as each day passed. These are
it must be observed, matters in dispute. Normally, ‘it is
the function of the judicial power to investigate whether a
banking company should continue to function or should be
liquidated. By the impugned provision the exercise of that
judicial power is excluded. That exclusion is, in our
opinion, not based on any inappropriateness of exercise of
the judicial power, or existence of other compelling
circumstances in the public interest, and is invalid because
the statute, examined in the light of its repercussion on
the fundamental right of the citizen is unreasonable.
As we have shown above, under the Constitution the courts
are the bulwark for the protection
712
of the right of the citizens and they are a check on the
vagaries, negligence and mistakes of the executive or on the
high-handedness of one party before it against another.
This Court has emphasised that the deprivation of the right
to resort to court is an unreasonable restriction. It is
true that in the present case an appeal to this Court has
not been taken away but what is left is a wholly ineffective
right of appeal because if the law is constitution then all
that a court can do is to act according to the opinion of
the Reserve Bank and abdicate its judicial function in
favour of the opinion of an executive body.
We are therefore of the opinion that s. 38 is an
unreasonable restriction on the right of the Palai Bank to
carry on its business and is therefore unconstitutional. We
need express no opinion on the question of hostile
discrimination by the adoption of the procedure prescribed
but the statute, if it be found unreasonable, is liable to
be declared invalid. For these reasons the appeal must be
allowed and the order of the High Court set aside.
BY COURT-In accordance with the opinion of the majority, the
appeal and the writ petition fail, and are dismissed with
costs, one set only.

Appeal and petition dismissed.

_____________________
713

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