{"id":115401,"date":"2006-08-28T00:00:00","date_gmt":"2006-08-27T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/ganesh-bank-kurundwad-ltd-and-vs-the-union-of-india-and-ors-on-28-august-2006"},"modified":"2016-04-20T16:46:17","modified_gmt":"2016-04-20T11:16:17","slug":"ganesh-bank-kurundwad-ltd-and-vs-the-union-of-india-and-ors-on-28-august-2006","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/ganesh-bank-kurundwad-ltd-and-vs-the-union-of-india-and-ors-on-28-august-2006","title":{"rendered":"Ganesh Bank, Kurundwad Ltd. And … vs The Union Of India And Ors on 28 August, 2006"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Ganesh Bank, Kurundwad Ltd. And … vs The Union Of India And Ors on 28 August, 2006<\/div>\n
Author: A Pasayat<\/div>\n
Bench: Arijit Pasayat, C.K. Thakker<\/div>\n
           CASE NO.:\nAppeal (civil)  3698 of 2006\n\nPETITIONER:\nGanesh Bank, Kurundwad Ltd. and Ors.\n\nRESPONDENT:\nThe Union of India and Ors.\n\nDATE OF JUDGMENT: 28\/08\/2006\n\nBENCH:\nARIJIT PASAYAT & C.K. THAKKER\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T
\n(Arising out of SLP (C) No. 7188 of 2006)<\/p>\n
ARIJIT PASAYAT, J.\n<\/p>\n
\tLeave granted.\n<\/p>\n
 \tThe present appeal is directed against the judgment and
\norder dated 5.4.2006 passed by a Division Bench of the
\nBombay High Court in Writ Petition No.337\/2006 questioning
\nNotification dated 7th January, 2006 issued by the
\nGovernment of India, Ministry of Finance imposing a
\nmoratorium in respect of the appellant-Ganesh Bank of
\nKurundwad Ltd. (hereinafter referred to as “Bank”) for a period
\nof three months from the date of order upto and inclusive of
\n6th April, 2006. Amongst others, the said Bank was directed
\nnot to grant any loan or advances or incur liability without the
\npermission in writing of the Reserve Bank of India (in short the
\n‘RBI”). Further, withdrawal of sums not exceeding 5,000\/- by
\na Savings Bank or Current Account holder was permitted with
\na further relaxation of amount not exceeding Rs.10,000\/- or
\nthe actual balance whichever is less in the event of certain
\ndifficulties such as medical treatment, higher education and
\nobligatory expenses like marriage etc. Challenge was also
\nmade to the appointment of two Directors on the Board of
\nDirectors of the Bank.\n<\/p>\n
Further Challenge was made to the Notification dated
\n9.1.2006 proposing a scheme of amalgamation of the Bank
\nwith Federal Bank, another private sector commercial bank
\nand to the order dated 24.1.2006 sanctioning amalgamation of
\nBank with Federal Bank.\n<\/p>\n
\tIt is to be noted that along with the said writ petition filed
\nby the Bank, another writ petition (WP(C) No. 160\/2006) was
\nfiled by one Mr. Sunil Mahadev Chavan.\n<\/p>\n
\tThe background facts in which the writ petitions were
\nfiled are essentially as follows:\n<\/p>\n
\tAppellant Bank was founded sometimes in the year 1920
\nand is having a banking license given by the RBI. It has some
\n32 branches situated principally in districts of Kolhapur and
\nSangli of Maharashtra and the adjoining Belgaum District of
\nKarnataka. It has around 1,75,000 depositors in the rural
\nareas of these three districts.\n<\/p>\n
\tIt was carrying on its activities smoothly, and it incurred
\nlosses only once and that was in the financial year 2004-05.
\nThat was also for the reasons which were beyond its control,
\nviz (i)  the value of the government securities, wherein it had
\nmade deposits, went down, and (ii) the provisioning norms set
\nup by the RBI were made more stringent by it. It was on this
\nbackground that it was shocked to receive the order of
\nmoratorium in the morning of 8th January, 2006. It led to
\nunnecessary long queue at its Dadar branch, Mumbai, though
\nthere was no run on the bank any time in the past or even on
\nthat day as such. Thereafter, the issuance of the moratorium
\nand the decision of the RBI to take further steps was duly
\nadvertised. The RBI appointed two directors of its own on the
\nBoard of Directors of the appellant-Bank on 7th January,
\n2006. The RBI then notified the proposed scheme of
\namalgamating the appellant-Bank with the Federal Bank on
\n9th January, 2006. The appellant-Bank objected to it by filing
\nits objections on 23rd January, 2006, yet a decision was taken
\nby the RBI and the Central Government on 24th January, 2006
\nsanctioning amalgamation of the appellant-Bank with the
\nFederal Bank.\n<\/p>\n
\tAn interim order was passed by the High Court in
\nW.P.337\/2006 by which operation of the order dated
\n24.6.2006 was stayed and status quo was directed to be
\nmaintained. The order was challenged by the RBI and Federal
\nBank before this Court.\n<\/p>\n
\tBy Order dated 30.1.2006 this Court directed that the
\npetitions were to be heard and decided early by the High
\nCourt.  However, the interim order was left undisturbed.\n<\/p>\n
Before the High Court the principal submissions of the
\nwrit petitioners were two-fold, namely that the order dated 7th
\nJanuary, 2006 imposing moratorium and then the order dated
\n7th January, 2006 appointing two Directors are both mala fide
\nto suit the convenience of Federal Bank, ultra vires the power
\nof the RBI and the Central Government and, therefore, bad in
\nlaw, illegal and void. Similarly, the other submission of the
\nwrit petitioners was that the subsequent framing of scheme of
\namalgamation on 9th January, 2006 and the decision to
\nsanction the amalgamation taken on 24th January, 2006 are
\nmotivated and pre-planned decisions for the benefit of the
\nFederal Bank, mala fide and ultra vires the powers of the
\nCentral Government and the RBI. It was further submitted
\nthat both these decisions are not justified on facts and have
\nbeen arrived at without taking into consideration the relevant
\nmaterials. As far as the first decision imposing the moratorium
\nis concerned, it was submitted that there were no good
\nreasons to impose the same and, as far as the decision to
\namalgamate is concerned, it was submitted that the said
\ndecision was arrived at without considering the proposals of
\nfour other banks which were better placed and had made
\nbetter offers.\n<\/p>\n
As against these submissions of the writ petitioners, the
\nstand of the RBI and the Central Government was that the
\nBank was in serious financial difficulties and therefore, the
\nmoratorium had to be imposed. The moratorium was fully
\njustified on the facts of the case. The decision to amalgamate
\nthe appellant Bank with the Federal Bank was arrived at in
\nfull compliance with the statutory requirements and after
\nconsidering relevant materials on record as well as the
\nsuggestions and objections from the appellant-Bank and all
\nconcerned, and after examining the proposals from the four
\nother banks. It was, therefore, submitted that there is no
\nreason to interfere with the decisions arrived at by the RBI and
\nthe Central Government which essentially were for benefit of
\nthe depositors. It was submitted that the interest of the
\nemployees was taken care of and the interest of the
\nshareholders obviously came last.\n<\/p>\n
According to the High Court the following two questions
\nwere to be adjudicated:\n<\/p>\n
“(A)\tWhether the decision dated 7th January,
\n2006 of the Central Government imposing
\nmoratorium and to appoint two directors was
\nmala fide, ultra vires the powers of the Central
\nGovernment and the RBI, bad in law and void
\nand unjustified on facts?\n<\/p>\n
(B)\tWhether the notification dated 9th
\nJanuary, 2006 containing the proposed
\nscheme of amalgamation and the decision to
\nsanction the amalgamation dated 24th
\nJanuary, 2006 were mala fide, ultra vires the
\npowers of the Central Government and the RBI
\nand unjustified on facts?”\n<\/p>\n
Taking note of the factual background the High Court
\nheld that the inference drawn by RBI was a positive inference
\nand cannot be termed to be perverse. The High Court felt that
\nit is the discretion of the decision maker where two views are
\npossible and if the regulatory body arrived at a conclusion on
\nthe basis of facts and figures before it and points out that it
\nhas been warning the Bank for last over three years it will not
\nbe proper for the High Court to substitute its judgment for
\nthat of the RBI. Therefore, it was held that the decision of the
\nRBI to impose the moratorium was neither unjustified nor
\nagainst the provisions of Section 45(1) of the Banking
\nRegulation Act, 1949 (in short the ‘Act’). It was noted that the
\nRBI is an expert body to regulate the banking activities and its
\njudgment based on the factual scenario cannot be substituted
\nby the High Court, may be because another view of the matter
\nwas possible. The High Court held that the allegation of mala
\nfides was not substantiated. It was also of the view that while
\ndealing with the question of mala fides, the following questions
\nwere also to be dealt with:\n<\/p>\n
“(i)\tThe first one is non-consideration of any
\nscheme for reconstruction before going for
\namalgamation.\n<\/p>\n
(ii)\tThe second is with respect to proposing
\namalgamation with Federal Bank on 9th
\nJanuary, 2006 itself.\n<\/p>\n
(iii)\tThe third facet is not considering the
\nproposal of other banks.\n<\/p>\n
(iv)\tThe fourth is in respect to an adequate
\nopportunity under Section 45(6) and (7) of the
\nAct.”\n<\/p>\n
After considering the rival submissions, the High Court
\nheld that the allegations were mala fides and were not
\nestablished. Accordingly, the writ petitions were dismissed.\n<\/p>\n
The stands taken before the High Court were re-iterated
\nby learned counsel appearing for the appellant and the
\nrespondents.\n<\/p>\n
Learned counsel for the appellants submitted that the
\nundue and unseemly haste with which the order of
\nmoratorium dated 7.1.2006 was passed is a clear indication of
\nmala fides. Moreover, full and correct facts were not placed by
\nthe RBI before the Central Government, in particular, facts
\nregarding bank balances with the RBI and other banks and
\ncash at hand amounting to Rs.36.62 crores were not placed
\nbefore the Central Government. Actual figure of those liquid
\nassets were Rs.119 crores as against total deposits of
\nRs.217.43 crores which is 55% against required 25% as per
\nRBI norms. This was indicative of the bank’s strong liquidity
\nposition. Total assets of the bank as on 31.3.2005 were
\nRs.235.44 crores as against total liabilities of Rs.220.45
\ncrores. Therefore, the assets were exceeding the liabilities by
\nRs.14.99 crores. Even as on 31.12.2005, the assets were
\nexceeding the liabilities by Rs.17.70 crores. The net loss in the
\nyear 2004-05 on which great stress was laid by the RBI and
\nthe Central Government was on account of notional\/book
\nentry loss with respect to additional provision for Non
\nPerforming Assets (in short the ‘NPAs’)  and depreciation in the
\nvalue of Government securities. In respect of Urban
\nCooperative Banks, the RBI has relaxed provisional norms up
\nto 5 years in respect of depreciation in the value of
\nGovernment securities. However, the same was denied to the
\nBank. Majority advances of the banks were given to the
\npriority sector namely Agricultural advances to which
\nSecuritisation Act is not applicable.  Therefore, relaxation was
\nnecessary to be given. The RBI had granted permission to the
\nBank to open three new Branches after being satisfied that the
\nBank was in a sound financial position. Several awards were
\ngiven to the Bank for exercising banking services. There was
\nno complaint from any depositor, customer or shareholder and
\nthe Bank has not defaulted in payment of taxes or other
\ngovernment dues.\n<\/p>\n
When objections were called for by the RBI regarding
\namalgamation within a span of 15 days in January, 2006, out
\nof the total objections received by RBI, 97.49% of the
\ncustomers\/depositors objected to moratorium and\/or
\namalgamation of the Bank and have opted for independent
\nentity of the Bank.\n<\/p>\n
The factual scenario indicates that the proposal for
\namalgamation with the Federal Bank was circulated and in a
\npre-determined manner the proposal was ultimately approved
\non 24.1.2006.  The draft scheme of amalgamation was sent to
\nthe Central Government to be operative w.e.f. 27.1.2006.
\nWhen the appellant-Bank approached the High Court on
\n24.1.2006 and the copy of the writ petition was served on the
\nRBI and the Central Government, the Notification of
\namalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself
\nso that it could be argued before the High Court that the
\nappellant Bank was no longer in existence on 25.1.2006. The
\nexercise of power under Section 45 of the Act was done solely
\nfor the purpose of favoring the Federal Bank.  Though Section
\n36(AB) of the Act empowers the RBI to appoint Additional
\nDirectors there is no provision which empowers RBI to direct
\nthat no decision of the Board of Directors would be valid
\nunless it is approved by the Directors appointed by the RBI.\n<\/p>\n
The entire exercise was pre-conceived under the garb of
\nexercise of statutory authority. There was a systematic plan to
\namalgamate the appellant-Bank with the Federal Bank. The
\nentire proceedings are thus vitiated by malice in law. The
\nrejection of the proposal of Saraswat Bank is vitiated on
\naccount of misunderstanding of Section 56(zb) of the Act and
\non account of a failure to consider the interest of shareholders
\nwhose interest would continue to be of paramount importance.
\nOn account of heavy floods there was temporary disruption of
\nbanking activities and this aspect has not been considered.\n<\/p>\n
The fact that Federal Banks’ Board Meeting was
\npreponed from 11.1.2006 to 8.1.2006 is a pointer to the fact
\nthat they were very much in know of things to gain under
\nadvantage.\n<\/p>\n
The data given by the RBI relating to some other
\namalgamation i.e. in cases of Global Trust Bank and Nedgundi
\nBank have no relevance as in those cases there were large
\nscale complaints of fraud.\n<\/p>\n
In response, learned counsel for the respondent No.4 i.e.
\nFederal Bank submitted as follows:\n<\/p>\n
The procedure, process and yardsticks envisaged under
\nSection 45 of the Act for the amalgamation of a financially
\nunviable bank with a stronger bank, cannot be the same as
\nare applicable to a tender process. It is submitted that when
\nacting under Section 45 of the Act, the primary consideration
\nmust be of public interest. Under the said provision, the RBI
\nhas the statutory duty and responsibility to act swiftly and
\ndecisively to protect interests of depositors and public
\nconfidence in the banking system. In contrast, when awarding
\na tender, it is primarily commercial considerations that must
\nbe the selection process. It is, therefore, submitted that it is in
\npublic interest not to interfere on commercial consideration
\nwith a decision made under Section 45 so long as it
\nsafeguards depositors’ interests and public confidence in the
\nbanking system in an emergent situation.\n<\/p>\n
The respondent No.4-Federal Bank is a financially strong
\nbank with high net worth, large capital funds and huge
\namount  of deposits with more than adequate capital to Risk
\nWeighted Assets Ratio (in short the ‘CRAR’). Its net worth is
\nabout Rs.897 crores and its capital is about Rs.85 crores It
\nhas deposits to the tune of Rs.16,448 crores and its CRAR at
\n11.34%, exceeds the Reserve Bank of India requirement of 9%.
\nIt has a very low percentage of NPA with its Gross NPAs being
\n5.17% and Net NPA being 1.41%. As of 31st December, 2005
\nFederal Bank has recorded a profit of Rs.174.48 crores. The
\ncontrast on each of these parameters with the appellant-Bank
\nis striking. On each parameter, the performance of the
\nappellant-Bank is abysmal in comparison to Federal Bank.\n<\/p>\n
It is also pertinent to note that Section 45 of the Act does
\nnot contemplate or require the consent of either the transferor
\nor the transferee bank, although both are given an opportunity
\nto lodge their objections\/suggestions to the draft scheme,
\nbefore a final decision is taken.\n<\/p>\n
It was submitted that Federal Bank was not privy to any
\ninformation from RBI regarding the status of the appellant-
\nBank or any proposal to impose a moratorium at any time
\nprior to 7.1.2006 when for the first time the order of
\nmoratorium and the RBI’s press release was placed on RBI’s
\nwebsite.\n<\/p>\n
It was also submitted that allegations of complicity based
\non the advancement of the date of Federal Bank’s Board
\nMeeting from 11.1.2006 to 8.1.2006 are completely
\nunfounded. It was submitted that Federal Bank had indeed
\nvide its Notice dated 29.12.2005 originally scheduled the said
\nBoard Meeting for 11.1.2006 at Kochi, but this date was found
\nto be inconvenient to several directors. Instead, 8.1.2006 was
\nfound to be a more convenient date for the meeting, since
\nfirstly many of the directors were congregating at Kochi for the
\nwedding of the son of one of Directors on that date, and
\nsecondly, one other director, an NRI was scheduled to attend a
\nmeeting at the PMO on 7.1.2006. The said director would also
\nhave found it convenient to attend the Board Meeting, if it
\nwere to be held on 8.1.2006. In view thereof, for bona fide
\nreasons and in good faith, the said Board meeting was
\nrescheduled for 8.1.2006 vide notice dated 4.1.2006.\n<\/p>\n
Certain aspects which have been noted by the High Court
\nto dismiss the appellant’s writ petition need  to be noted to
\ntest how for the conclusions are correct.\n<\/p>\n
The first is whether there were “good reasons” for the RBI
\nto apply to the Central Government for the moratorium which
\nled to the impugned order dated 24th January, 2006, the
\nconcept of “good reasons” contemplated under Section and as
\nto how the RBI justifies its decision on the basis of the
\nyardstick applied by it. As far as the appellant bank is
\nconcerned, its case is that it is a small commercial bank and
\nthe only year in which it had made losses was for the financial
\nyear 2004-05. That was because of the value of the
\nGovernment securities going down and the provisioning norms
\nbeing made more stringent by the RBI. According to the RBI’s
\napplication to the Central Government, the net worth of the
\npetitioner bank had become negative and so also CRAR had
\nbecome negative and was at 5.83.\n<\/p>\n
As against this stand of the RBI, it was pointed out on
\nbehalf of the appellant-Bank that Annexure-I to RBI’s
\napplication under Section 45(1) dated 4th January, 2006
\ncontained the key financial positions of the Bank. Clause 8
\nthereof dealt with the NPAs.  It was pointed that the net NPAs
\nhad gone down from 10.59% to 8.32%. It was also pointed out
\nthat the Bank had done good resource mobilization in the
\nmeantime and its paid up capital had gone up from Rs.1.52
\ncrore to Rs.1.82 crore.\n<\/p>\n
In para 5 of the letter, the RBI wrote to the Additional
\nSecretary, Ministry of Finance that infusing fresh capital did
\nnot appear to be feasible. There was reluctance on the part of
\nthe shareholders and directors to merge with the stronger
\nBank. It was therefore imperative to make immediate
\narrangement to protect the interest of the depositors to merge
\nwith another bank. It is for this purpose that the moratorium
\nwas proposed under Section 45(1)<\/p>\n
In the counter affidavit filed before the High Court, it was
\nstated on behalf of RBI that in June 1998, the Chairman of
\nthe appellant Bank was advised that old private sector banks
\nhaving present net worth of Rs.5 lakhs should attain the level
\nof Rs.50 crores within a period of 3 years On 12th January,
\n1999, the appellant -Bank sent the plan to augment resources
\nup  to Rs.20.08 crores over the period of 5 years. At on 31st
\nMarch, 2002 its net worth stood at only Rs.6.62 crores and its
\npaid up capital as on 31st March, 2005 was Rs.1.82 crore. It
\nwas further stated that as per the Bank’s Balance Sheet as on
\n31st March, 2005, it had reported the net loss of Rs.5.97
\ncrores.  In view of the deteriorating financial position, further
\nmeetings were held on 12th August, 2005, 26th August, 2005
\nand 12th September, 2005 to point out the major concerns of
\nRBI vis. low paid up capital of Rs.182 crore, high level of gross
\nNPAs (18.04%) and net loss of Rs.5.97 crores. On 14th October,
\n2005 the bank was asked to submit a detailed plan for capital
\naugmentation. It is on the background that the moratorium
\nwas imposed on 7th January, 2006.\n<\/p>\n
Appellants’ stand was that since deposits with the Bank
\nwere Rs.92 crores, it was irrational to insist that it should
\nhave capital funds of Rs.50 crores. It was however pointed out
\nthat the Bank was consistently increased its capital and it
\nstood at Rs.2.95 crores by 5th January, 2006 which included
\nRs.1.13 crore in the form of share application money. It was
\nnothing but a part of share capital. Again, as far as NPAs are
\nconcerned, they had gone down from 14.10% to 9% and, as far
\nas loss of Rs.5.97 crores is concerned, it is because of the
\nchange in the provisioning norms.\n<\/p>\n
High Court noted that the Bank had paid up capital of
\nRs.1.82 crores only, high gross NPAs at 18.04% and net loss of
\nRs.3.97 crores. It was in these circumstances that the RBI had
\nto decide as to whether the depositors of the Bank required
\nany protection. RBI had been monitoring the financial position
\nof the Bank since June 1998 and since December 2003 the
\nBank had been placed under monthly monitoring as provided
\nunder Section 27 of the Act. According to High Court,
\nexpression “good reasons” under Section 45(1), primarily
\nrelates to   interest of the depositors and the interest of the
\nBank. This is because the primary objective of the Act is
\nprotection of the interest of depositors as against the primary
\nobjective of the Company Law which is to safeguard the
\ninterest of shareholders. This is what is specifically stated in
\nthe Objects and Reasons of the Act. On these facts, the RBI
\nwas of the view that an appropriate action was necessary. It
\ncould not be said that the decision was lacking in the absence
\nof good reasons. It is difficult to say that it was taken for the
\nbenefit of the Federal Bank since these reasons go back to
\nDecember 2003 when Federal Bank was not in picture.\n<\/p>\n
It has been submitted that a small bank like the
\nappellant cannot be expected to have the Capital Adequacy of
\nRs.50 crores as advised in June 1998 and which was later on
\nrevised to Rs.300 crores by circular dated 20th February
\n2004. Reference is made to Section 11(3)(i) of the Act which
\nprovides that if a banking company has places of its business
\nin more than one State, it is required to have the aggregate
\nvalue of its paid-up capital and reserves at not less than Rs.5
\nlakhs. If that is the expectation, the RBI cannot insist on the
\nrequirement of Rs.50 crores and then go on increasing it
\nfurther. Reliance is placed on the decision of this Court in
\nAssam Co. Ltd. v. State of Assam<\/a> (2001 (4) SCC 202), which
\nlays down that a delegate cannot over-ride the Act either by
\nexceeding the authority or by making provision which is
\ninconsistent with the Act. On the other hand, stand of RBI is
\nthat the language of Section 11(3)(i) is that in the case of such
\na banking company, the aggregate value of paid-up capital and
\nreserves shall not be less than Rs.5 lakhs. Therefore,
\ninsistence of Rs.50 crores or a higher amount cannot be said
\nto be erroneous. With globalisation, finance and banking in
\nrural areas also have to improve and it is from that point of
\nview that the RBI had expected the above referred
\nenhancement. That was expected from all similarly situated
\nbanks and not merely from the appellant-Bank alone.
\nReference is made to the expectations under the Basle
\nCommittee on Banking Supervision, 1988 and the first
\nNarasimham Committee Report on Financial System, 1991
\nwhich recommended on the basis of the Basle Committee that
\nIndia also must conform to the international standards of
\ncapital adequacy in a phased manner. Second Narsimham
\nCommittee Report on Banking Sector Reforms of 1998 led RBI
\nto issue guidelines to revise the minimum paid-up capital for
\nthe private sector banks.\n<\/p>\n
The actual scenario shows that when the paid-up capital
\nof the Bank is so low, namely Rs.1.82 crore, its gross NPAs are
\nat higher level (8.04%), its net worth had turned negative and
\nthe net loss is Rs.5.97 crores. There was nothing wrong on the
\npart of the RBI to expect an appropriate plan of capital
\naugmentation. The Bank has not been able to do that and it
\nwas quite likely that it would land into difficulties.
\nThe phrase “good reasons” in sub-section (1) of Section
\n45 is a term of wide amplitude and it will not be correct to
\nrestrict it only to the actions mentioned under sub-section (2)
\nof Section 45 of the Act as is contended by the appellant.  The
\nprovision is concerned with preparing a scheme of
\nreconstruction or amalgamation which would become
\nnecessary where the RBI is satisfied about the existence of
\nany of the four grounds mentioned in Section 45(4). Apart
\nfrom public interest and the interest of the banking system,
\nwhich are provided in sub-clause (a) and (d) thereof, Section
\n45(4) provides for the necessary action in the interest of the
\ndepositors or with a view to secure proper management of the
\nbank which are grounds (b) and (c) in that sub-section.
\nPrecursor to the framing of the scheme is the imposition of the
\nmoratorium which is provided in sub-sections (1) and (2) of
\nSection 45. Existence of court proceedings, mentioned in
\nsection 45(2), would certainly be one of the good reasons to
\nimpose moratorium, but that certainly cannot be the only one.
\nConsidering that object of the Act is protection of the interest
\nof the depositors, such an interpretation of the concept of
\n“good reasons” will have to be adopted, and not a narrow one.
\n It has been contended that there was a negative impact
\nwhen moratorium was imposed, and there were long queues at
\nfour branches of the appellant Bank on 8th January 2006.
\nThe RBI arranged to send an amount of Rs.2 crores to the
\nBank from its Current Account to meet the depositors’
\ndemands. The manager of the Appellant Bank’s branch at
\nDadar has made an affidavit to state that he had not asked for
\nan amount of Rs.2 crores and yet it was sent by RBI. The
\nbranch manager has further stated that depositors were
\nunhappy with the decision of RBI. These are all disputed
\nquestions as rightly noted by the High Court.  As far as the
\nviews of the depositors are concerned, they are bound to vary
\nfrom person to person and no definite conclusion can be
\ndrawn merely on the bank manager’s affidavit that people were
\nangry against RBI. Besides, no depositor has questioned
\nlegality of the action. It can be said that the action of the RBI
\nis a pre-emptive action which it took considering the then
\nfinancial position of the appellant Bank and to prevent further
\ndifficulties which were likely. It is not that when there is a run
\non the bank then only RBI must intervene or that it must
\nintervene only when there are good number of court
\nproceedings against the concerned bank. The RBI has to take
\ninto account the totality of the circumstances and has to form
\nits opinion accordingly.\n<\/p>\n
 The ultimate question is whether the inference drawn by
\nthe RBI is a possible inference or is something which can be
\nsaid to be a perverse one. Even if  two views are possible since
\nthe regulating body has arrived at a conclusion on the basis of
\nthe facts and figures before it, and it has pointed out that it
\nhas been warning the appellant Bank for last over 3 years, it
\nwill not be proper for the Courts to substitute their judgment
\nfor that of RBI. In the circumstances, it cannot hold that the
\ndecision of RBI to impose the moratorium was unjustified or
\nagainst the provisions of section 45(1) or such that one can
\ncall it a perverse one and interfere with it. The RBI is an expert
\nbody to regulate the banking activities. The moratorium has
\nbeen challenged on the ground of malafides also. This
\nchallenge along with the challenge to amalgamation also on
\nthe basis of malafides needs to be considered.
\nAs far as the challenge to the appointment of two
\ndirectors on the Board of Directors of the appellant Bank is
\nconcerned, the RBI has the necessary power under Section
\n36AB of the Act. In the circumstances, it cannot be faulted for
\nappointing the two directors.\n<\/p>\n
That brings into focus the question as to whether the
\ndecision of RBI to recommend a scheme for amalgamation on
\n9th January 2006 and the decision of the Government to
\nsanction the amalgamation on 24th January 2006 could be
\nsaid to be mala fide or bad in law. As far as this question is
\nconcerned, it contains many sub-questions which are as
\nfollows:-\n<\/p>\n
(i) The first one is non-consideration of any
\nscheme for reconstruction before going for
\namalgamation.\n<\/p>\n
 (ii) The second is with respect to proposing
\namalgamation with Federal Bank on 9th
\nJanuary 2006 itself.\n<\/p>\n
 (iii) The third facet is not considering the
\nproposal of four other banks.\n<\/p>\n
 (iv) The fourth is with respect to an adequate
\nopportunity under Section 45(6) and (7) of the
\nAct.\n<\/p>\n
Now, as far as the first two questions of non-
\nconsideration of reconstruction and proposing merger with
\nFederal Bank, the RBI has noted that the Bank was in
\ndifficulties from 1990 and particularly from December 2003
\nwhen it was placed under monthly monitoring. RBI in its
\napplication for moratorium to the Central Government dated
\n4th January 2006 had clearly stated that during the
\ndiscussion with the appellant-Bank, major shareholders and
\ndirectors had shown total reluctance to merge into the
\nstronger bank. In view thereof, it was imperative that
\nimmediate arrangement to protect the interest of the
\ndepositors was to be made through its merger with a bank
\nunder Section 45 of the Act. RBI had, therefore, made an effort
\nand called upon the appellant-Bank, that if possible, to
\nexplore the possibility of merger with another stronger bank. It
\nhad also made an effort to impress that there should be
\ninfusion of fresh capital. That was not coming. There could be
\na reconstruction by bringing in more money or by narrowing
\nthe size of the appellant-Bank which did not appear to be
\nfeasible. The only option left was that of amalgamation.
\nWhen a moratorium is imposed, RBI was duty bound to
\nprepare a scheme either of reconstruction or of amalgamation
\nunder Section 45(4) with any other banking institution. Thus,
\nRBI had to give a scheme. Federal Bank had responded
\nimmediately and unconditionally. The fact that the appellant-
\nBank was put under moratorium was advertised on web site
\non 7th January 2006 itself. It is at that stage that Federal
\nBank promptly gave its proposal on 8th January 2006. The
\nFederal Bank gave three reasons in its letter to RBI which were
\nas follows:-\n<\/p>\n
(i)  Ganesh Bank of Kurundwad Ltd. has 32
\nbranches situated in Western Maharashtra
\nand Belgaum area of Karanataka. Our
\npresence in this area is very minimal and
\nadding up of the branches of Ganesh Bank of
\nKurundwad Ltd. will enable us to have
\nsignificant presence in the area.\n<\/p>\n
(ii) Ganesh Bank of Kurundwad Ltd. has mot
\nof the branches in the agricultural heartland
\nwhich would enable us to augment our credit
\ndisbursal to agricultural sector.\n<\/p>\n
(iii). Small size of Ganesh Bank of Kurundwad
\nLtd. ensures that there will not be any
\ndifficulty in the merger process between our
\nbank and them.\n<\/p>\n
Thereafter it stated as follows:-\n<\/p>\n
We also inform our unconditional acceptance
\nto make full payment to depositors and that we
\nwill not demand any regulatory forbearance.”\n<\/p>\n
Thus, the Federal Bank was ready to honour full
\nliabilities of the depositors and did not ask for any
\nconcessions. Therefore, on the basis of a standard scheme, the
\nopinion of the appellant-Bank was sought on 9th January
\n2006 with respect to merger in Federal Bank. The scheme was
\ndescribed as a “cut and paste scheme” and of RBI’s action as a
\nregulator in the interest of the depositors was highlighted.\n<\/p>\n
It appears that the action of the RBI was based on the
\nfinding about the negative net worth and CRAR of the
\nAppellant-Bank, its inability to infuse fresh capital and the
\ncontinued existence of a high level of NPAs. It has been rightly
\npointed out that once it was decided to amalgamate by reason
\nof Section 45 of the Act, the RBI had to move with utmost
\nexpedition. This is of paramount importance to prevent erosion
\nof the confidence of the depositors. Once such confidence is
\nlost it becomes difficult to revive the confidence and the
\ncredibility.\n<\/p>\n
This Court had occasion to deal with need for expedition
\nin Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and
\nOrs.<\/a> (1962 (Supp.) 3 SCR 632) and Reserve Bank of India and
\nOrs. v. Timex Finance and Investment Co. Ltd. and Ors.<\/a> (1992
\n(2) SCC 344). It is not in dispute that there were long queues
\nand on 8.1.2006 the one branch of the appellant-Bank
\nactually faced cash shortage and had to draw its funds with
\nthe RBI protecting the interest of the depositors because
\nduring such period there are severe restrictions on the ability
\nof the depositors to operate their bank accounts. Therefore,
\nwith a view to protect the interest of the depositors, the RBI
\nhas to act expeditiously to identify another bank prepared to
\ntake over the appellant-Bank and keeping in view the
\nbackground principles governing merger and amalgamation
\nRBI had to act with expedition. The factual scenario does not
\nshow that there was any undue haste or mala fides involved.\n<\/p>\n
Under Section 45 of the Act, the primary consideration is
\npublic interest.  There is an underlying object of acting swiftly
\nand decisively to protest interests of depositors and ensure
\npublic confidence in the banking system. The emergent
\nsituation which warrants action with expedition cannot be lost
\nsight of while deciding the legality of the action.\n<\/p>\n
It is brought on record that Federal Banks’ strength lay
\non the fact that it is a strong bank with huge net worth, large
\ncapital funds and huge amount of deposits with more than
\nadequate CRAR.  Its net worth is about Rs.897 crores, capital
\nis around Rs.85 crores, and deposits to the tune of Rs.16,448
\ncrores.  Its CRAR (11.34%) exceeds the RBI requirement (9%)
\nand percentage of NPAs (Gross and Net) is (5.17% and 1.41%
\nrespectively). For the accounting period ending 31st December,
\n2005 its profit is Rs.174 Crores.\n<\/p>\n
As observed by this Court in Bari Doab Bank Ltd. v.
\nUnion of India and Ors.<\/a> (1997 (6) SCC 417) the provisions of
\nSection 45 of the Act provide adequate opportunity of a
\nrepresentation and no additional opportunity is required to be
\ngiven. The objection filed by the appellant-Bank was duly
\nconsidered. In fact, certain objections were raised and
\ncomments of the RBI on them were forwarded to the Central
\nGovernment along with the final recommendations. The RBI
\nwas of the view that the proposal received from the Federal
\nBank was best under the circumstances and, therefore, the
\nsame appears to have been accepted.\n<\/p>\n
At this juncture it is to be noted that offer of Federal
\nBank was an unconditional offer, whereby it proposed to take
\nover the responsibility of any regulatory forbearance.  Three
\nreasons given by the Federal Bank to take over the appellant’s
\nBank were considered cogent reasons and, therefore, RBI’s
\ndecision cannot be faulted. As rightly contended the offers
\nreceived from the City Bank, Standard Chartered Bank were
\nneither comprehensive nor unconditional. In fact, they were
\nnot concluded offers, since they were both dependent upon a
\nrequest for due diligence and in certain instances regulatory
\nforbearances. Ratnakar Bank’s offer was not accepted as it
\nwas itself an ailing bank.\n<\/p>\n
Learned counsel for the appellants has highlighted that
\nSarastwat Bank’s offer was an equally good offer if not better
\nand should  have been accepted. It has been pointed out by
\nlearned counsel for the  respondents that Saraswat Bank is a
\nMulti State Co-operative Bank and its functioning is governed
\nby Multi State Cooperative Societies Act, 2002 (in  short ‘2002
\nAct’). The legal opinion available to the RBI was that it was not
\nfeasible or permissible to amalgamate a commercial bank with
\na cooperative Bank by reason of the provisions of the Act as
\nwell as 2002 Act. The RBI was of the view that such
\namalgamation is not possible under Sections 17 and 18 of the
\n2002 Act as also Section 56 (zb) of the Act.  It was pointed out
\nthat Saraswat Bank cannot be considered to be a banking
\ncompany for the purpose of Section 45(4) to 45(15) of the Act.
\nIn order to be a banking company within the meaning of the
\nAct, the entity in question must be a company. Section 56(zb)
\nof the Act excludes the applicability of Section 45(4) to 45(15)
\nso far as cooperative banks are concerned. It was pointed out
\nthat even if it is conceded for the sake of argument that legally
\namalgamation is permissible it could have taken a very long
\ntime to get requisite clearance from several other agencies
\nunder the 2002 Act and could not have gone through
\nexpeditiously. It is also pointed out that an amalgamation of
\nMulti State Cooperative Bank is subject to far less regulatory
\ncontrol of the RBI especially in relation to non banking
\nmatters. There is no dispute that the application made by
\nSaraswat Bank was duly considered by the RBI.\n<\/p>\n
The scope of Judicial review in administrative matters
\nhas been the subject matter of consideration before this Court
\nin several cases.\n<\/p>\n
 There should be judicial restraint while making judicial
\nreview in administrative matters. Where irrelevant aspects
\nhave been eschewed from consideration and no relevant aspect
\nhas been ignored and the administrative decisions have nexus
\nwith the facts on record, there is no scope for interference.
\nThe duty of the court is (a) to confine itself to the question of
\nlegality; (b) to decide whether the decision making authority
\nexceeded its powers (c) committed an error of law (d)
\ncommitted breach of the rules of natural justice and (e)
\nreached a decision which no reasonable Tribunal would have
\nreached or (f) abused its powers.  Administrative action is
\nsubject to control by judicial review in the following manner:\n<\/p>\n
(i)\tIllegality: This means the decision-\n<\/p>\n
maker must understand correctly the
\nlaw that regulates his decision-making
\npower and must give effect to it.\n<\/p>\n
(ii)\tIrrationality, namely, Wednesbury
\nunreasonableness.\n<\/p>\n
(iii)   Procedural impropriety.\n<\/p>\n
One of the points that falls for determination is the scope
\nfor judicial interference in matters of administrative decisions.
\nAdministrative action is stated to be referable to broad area of
\nGovernmental activities in which the repositories of power may
\nexercise every class of statutory function of executive, quasi-
\nlegislative and quasi-judicial nature. It is trite law that
\nexercise of power, whether legislative or administrative, will be
\nset aside if there is manifest error in the exercise of such
\npower or the exercise of the power is manifestly arbitrary (See
\nState of U.P. and Ors. v. Renusagar Power Co. and Ors. (AIR<\/a>
\n1988 SC 1737). At one time, the traditional view in England
\nwas that the executive was not answerable where its action
\nwas attributable to the exercise of prerogative power. Professor
\nDe Smith in his classical work “Judicial Review of
\nAdministrative Action” 4th Edition at pages 285-287 states the
\nlegal position in his own terse language that the relevant
\nprinciples formulated by the Courts may be broadly
\nsummarized as follows. The authority in which discretion is
\nvested can be compelled to exercise that discretion, but not to
\nexercise it in any particular manner. In general, discretion
\nmust be exercised only by the authority to which it is
\ncommitted. That authority must genuinely address itself to the
\nmatter before it; it must not act under the dictates of another
\nbody or disable itself from exercising discretion in each
\nindividual case. In the purported exercise of its discretion, it
\nmust not do what it has been forbidden to do, nor must it do
\nwhat it has not been authorized to do. It must act in good
\nfaith, must have regard to all relevant considerations and
\nmust not be influenced by irrelevant considerations, must not
\nseek to promote purposes alien to the letter or to the spirit of
\nthe legislation that gives it power to act, and must not act
\narbitrarily or capriciously. These several principles can
\nconveniently be grouped in two main categories: (i) failure to
\nexercise a discretion, and (ii) excess or abuse of discretionary
\npower. The two classes are not, however, mutually exclusive.
\nThus, discretion may be improperly fettered because irrelevant
\nconsiderations have been taken into account, and where an
\nauthority hands over its discretion to another body it acts
\nultra vires.\n<\/p>\n
The present trend of judicial opinion is to restrict the
\ndoctrine of immunity from judicial review to those classes of
\ncases which relate to deployment of troupes, entering into
\ninternational treaties, etc. The distinctive features of some of
\nthese recent cases signify the willingness of the Courts to
\nassert their power to scrutinize the factual basis upon which
\ndiscretionary powers have been exercised. One can
\nconveniently classify under three heads the grounds on which
\nadministrative action is subject to control by judicial review.
\nThe first ground is ‘illegality’ the second ‘irrationality’, and the
\nthird ‘procedural impropriety’. These principles were
\nhighlighted by Lord Diplock in Council of Civil Service Unions
\nv. Minister for the Civil Service (1984 (3) All.ER.935),
\n(commonly known as CCSU Case). If the power has been
\nexercised on a non-consideration or non-application of mind to
\nrelevant factors, the exercise of power will be regarded as
\nmanifestly erroneous. If a power (whether legislative or
\nadministrative) is exercised on the basis of facts which do not
\nexist and which are patently erroneous, such exercise of power
\nwill stand vitiated. (See commissioner of Income-tax v.
\nMahindra and Mahindra Ltd. (AIR<\/a> 1984 SC 1182) . The effect
\nof several decisions on the question of jurisdiction has been
\nsummed up by Grahame Aldous and John Alder in their book
\n“Applications for Judicial Review, Law and Practice” thus:\n<\/p>\n
“There is a general presumption against
\nousting the jurisdiction of the courts, so that
\nstatutory provisions which purport to exclude
\njudicial review are construed restrictively.
\nThere are, however, certain areas of
\ngovernmental activity, national security being
\nthe paradig, which the courts regard
\nthemselves as incompetent to investigate,
\nbeyond an initial decision as to whether the
\ngovernment’s claim is bona fide. In this kind of
\nnon-justiciable area judicial review is not
\nentirely excluded, but very limited. It has also
\nbeen said that powers conferred by the Royal
\nPrerogative are inherently unreviewable but
\nsince the speeches of the House of Lords in
\ncouncil of civil Service Unions v. Minister for
\nthe civil Service this is doubtful. Lords
\nDiplock, Scaman and. Roskili appeared to
\nagree that there is no general distinction
\nbetween powers, based upon whether their
\nsource is statutory or prerogative but that
\njudicial review can be limited by the subject
\nmatter of a particular power, in that case
\nnational security. May prerogative powers are
\nin fact concerned with sensitive, non-\n<\/p>\n
justiciable areas, for example, foreign affairs,
\nbut some are reviewable in principle, including
\nthe prerogatives relating to the civil service
\nwhere national security is not involved.\n<\/p>\n
Another nonjusticiable power is the Attorney
\nGeneral’s prerogative to decide whether to
\ninstitute legal proceedings on behalf of the
\npublic interest.”\n<\/p>\n
(Also see Padfield v. Minister of Agriculture, Fisheries and
\nFood (LR (1968) AC 997).\n<\/p>\n
The court will be slow to interfere in such matters
\nrelating to administrative functions unless decision is tainted
\nby any vulnerability enumerated above; like illegality,
\nirrationality and procedural impropriety. Whether action falls
\nwithin any of the categories has to be established. Mere
\nassertion in that regard would not be sufficient.\n<\/p>\n
The famous case commonly known as “The Wednesbury’s
\ncase” is treated as the landmark so far as laying down various
\nbasic principles relating to judicial review of administrative or
\nstatutory direction.\n<\/p>\n
Before summarizing the substance of the principles laid
\ndown therein we shall refer to the passage from the judgment
\nof Lord Greene in Associated Provincial Picture Houses Ltd. v.
\nWednesbury Corpn. (KB at p. 229: All ER p. 682). It reads as
\nfollows:\n<\/p>\n
“It is true that discretion must be
\nexercised reasonably. Now what does that
\nmean? Lawyers familiar with the phraseology
\nused in relation to exercise of statutory
\ndiscretions often use the word ‘unreasonable’
\nin a rather comprehensive sense. It has
\nfrequently been used and is frequently used as
\na general description of the things that must
\nnot be done. For instance, a person entrusted
\nwith a discretion must, so to speak, direct
\nhimself properly in law. He must call his own
\nattention to the matters which he is bound to
\nconsider. He must exclude from his
\nconsideration matters which are irrelevant to
\nwhat he has to consider. If he does not obey
\nthose rules, he may truly be said, and often is
\nsaid, to be acting ‘unreasonably’ . Similarly,
\nthere may be something so absurd that no
\nsensible person could even dream that it lay
\nwithin the powers the authority. . . . In
\nanother, it is taking into consideration
\nextraneous matters. It is unreasonable that it
\nmight almost be described as being done in
\nbad faith; and in fact, all these things run into
\none another.”\n<\/p>\n
Lord Greene also observed (KB p.230: All ER p.683)<\/p>\n
“..it must be proved to be unreasonable
\nin the sense that the court considers it to be a
\ndecision that no reasonable body can come to.
\nIt is not what the court considers
\nunreasonable The effect of the legislation is not
\nto set up the court as an arbiter of the
\ncorrectness of one view over another.”\n<\/p>\n
(emphasis supplied)<\/p>\n
Therefore, to arrive at a decision on “reasonableness” the
\nCourt has to find out if the administrator has left out relevant
\nfactors or taken into account irrelevant factors. The decision of
\nthe administrator must have been within the four corners of
\nthe law, and not one which no sensible person could have
\nreasonably arrived at, having regard to the above principles,
\nand must have been a bona fide one. The decision could be
\none of many choices open to the authority but it was for that
\nauthority to decide upon the choice and not for the Court to
\nsubstitute its view.\n<\/p>\n
The principles of judicial review of administrative action
\nwere further summarized in 1985 by Lord Diplock in CCSU
\ncase as illegality, procedural impropriety and irrationality. He
\nsaid more grounds could in future become available, including
\nthe doctrine of proportionality which was a principle followed
\nby certain other members of the European Economic
\nCommunity. Lord Diplock observed in that case as follows:\n<\/p>\n
“.Judicial review has I think,
\ndeveloped to a stage today when, without
\nreiterating any analysis of the steps by which
\nthe development has come about, one can
\nconveniently classify under three heads the
\ngrounds on which administrative action is
\nsubject to control by judicial review. The first
\nground I would call ‘illegality’, the second
\n‘irrationality’ and the third ‘procedural
\nimpropriety’. That is not to say that further
\ndevelopment on a casebycase basis may
\nnot in course of time add further grounds. I
\nhave in mind particularly the possible
\nadoption in the future of the principle of
\n‘proportionality’ which is recognized in the
\nadministrative law of several of our fellow
\nmembers of the European Economic
\nCommunity.”\n<\/p>\n
Lord Diplock explained “irrationality” as follows:\n<\/p>\n
“By ‘irrationality’ I mean what can by now
\nbe succinctly referred to as Wednesbury
\nunreasonableness’. It applies to a decision
\nwhich is to outrageous in its defiance of logic
\nor of accepted moral standards that no
\nsensible person who had applied his mind to
\nthe question to be decided could have arrived
\nat it.”\n<\/p>\n
In other words, to characterize a decision of the
\nadministrator as “irrational” the Court has to hold, on
\nmaterial, that it is a decision “so outrageous” as to be in total
\ndefiance of logic or moral standards. Adoption of
\n“proportionality” into administrative law was left for the future.\n<\/p>\n
These principles have been noted in aforesaid terms in
\nUnion of India and Anr. v. C. Ganayutham<\/a> (1997 [7] SCC 463).
\nIn essence, the test is to see whether there is any infirmity in
\nthe decision making process and not in the decision itself. (See
\nIndian Railways Construction Co. Ltd. v. Ajay Kumar<\/a> (2003 (4)
\nSCC 579).\n<\/p>\n
Looked at from the aforesaid angle, the judgment of the
\nHigh Court does not suffer from any infirmity to warrant
\ninterference. The appeal is dismissed.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Ganesh Bank, Kurundwad Ltd. And … vs The Union Of India And Ors on 28 August, 2006 Author: A Pasayat Bench: Arijit Pasayat, C.K. Thakker CASE NO.: Appeal (civil) 3698 of 2006 PETITIONER: Ganesh Bank, Kurundwad Ltd. and Ors. RESPONDENT: The Union of India and Ors. DATE OF JUDGMENT: 28\/08\/2006 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-115401","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nGanesh Bank, Kurundwad Ltd. 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