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Shiv Kumar Tulsian and Another Vs. Union of India and Others - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberWrit Petition No. 2109 of 1986
Judge
Reported in[1990]68CompCas720(Bom)
ActsBanking Regulation Act, 1949 - Sections 45(1), 45(2), 45(3) and 45(4); Constitution of India - Articles 14, 19 and 31A
AppellantShiv Kumar Tulsian and Another
RespondentUnion of India and Others
Excerpt:
company - constitutional validity - sections 45 (1), 45 (2), 45 (3) and 45 (4) of banking regulation act, 1949 and articles 14, 19 and 31a of constitution of india - petition challenging constitutional validity of section 45 - whether provisions of act violative of articles 14 and 19 - section 45 related to preparation of scheme for reconstruction and amalgamation during moratorium - order of moratorium was condition precedent for preparation and sanctioning of scheme of reconstruction and amalgamation - section 45 does not confer arbitrary, uncontrolled discretion upon authorities to make order of moratorium - restrictions by reason of imposition of moratorium are reasonable and needed to safeguard public interest of depositors and creditors - section 45 does not place restriction on.....1. the first petitioner is a shareholder of the third respondent, hindustan commercial bank ltd. (hereinbefore called 'the hcb'). the second petitioners are a company incorporated under the companies act, 1956, and are also shareholders of hcb. the first petitioner is also a director is also a director and shareholder of the second petitioners. the first and respondents are respectively the union of india and the reserve bank of india. the third respondent, hcb, is a banking company on which a moratorium has been imposed by the central government and is sought to be amalgamated with the fourth respondent, the punjab national bank.2. the petition was mainly argued by both the sides on points of law, particularly as regards the ambit and scope of section 45(1), (2) and (3) of the banking.....
Judgment:

1. The first petitioner is a shareholder of the third respondent, Hindustan Commercial Bank Ltd. (hereinbefore called 'the HCB'). The second petitioners are a company incorporated under the Companies Act, 1956, and are also shareholders of HCB. The first petitioner is also a director is also a director and shareholder of the second petitioners. The first and respondents are respectively the Union of India and the Reserve Bank of India. The third respondent, HCB, is a banking company on which a moratorium has been imposed by the Central Government and is sought to be amalgamated with the fourth respondent, the Punjab National Bank.

2. The petition was mainly argued by both the sides on points of law, particularly as regards the ambit and scope of section 45(1), (2) and (3) of the Banking Regulation Act, 1949 (hereinafter referred to as 'the said Act'), and the constitutional validity of the said provisions. In the light of the submissions, it would be necessary to state a few relevant facts. HCB was established in the year 1943 and is an unlicensed scheduled commercial bank having an authorised capital of Rs. 5 crores (50,00,000 equity shares of Rs. 100 each) and paid-up capital of Rs. 1.24 crores (2,50,000 shares of Rs. 100 each on which only Rs. 50 per share have been called and paid). HCB has not declared any dividend since the year 1946. Since about the year 1956, it has been working under the directions of the Reserve Bank of India. It is the case of the Reserve Bank that in view of the highly unsatisfactory financial condition and methods of operation of the HCB which did not show any improvement inspite of the directions repeatedly issued by the Reserve Bank, its affairs were brought under the surveillance of the Reserve Bank through the appointment of an officer of the Reserve Bank as an additional director on its board under section 36(a)(b) of the said Act since the year 1972. Export for a brief duration from February, 1982, when two more additional non-official directors were appointed by the Reserve Bank there has been only one director appointed by the Reserve Bank on the board of HCB as against six directors either elected by shareholders or co-opted by the directors of the HCB. The petitioners and some other shareholders who have filed affidavits in support of the petition have purchased the shares of HCB by about the end of the year 1985 or the beginning of the year 1986. The shares of HCB are quoted around Rs. 30 per share in the market and it appears from the material on record that the petitioners have purchased the shares at a price lower than the prevailing rate. The petitioners claim to have an interest in the HCB as shareholders and in their capacity as shareholders have a right to challenge the order of moratorium and the draft scheme prepared and notified by the Reserve Bank under section 45 of the Act. The Reserve Bank has been carrying out statutory inspection of the affairs of the bank from time to time. Prior to its application for moratorium, it had also carried out the statutory scrutiny of the affairs of the bank. The Reserve Bank made an application dated April 24, 1986, to the Central Government for an order of moratorium in respect of the HCB under section 45(1) of the said Act. This application vividly describes the fast deteriorating financial condition prevailing in the HCB. The application disclosed the following :

(a) A review of the working of the private sector banks with unsatisfactory financial position was recently undertaken. One of them is HCB;

(b) Time and again the bank was advised to bring about qualitative improvement in its loan portfolio and methods of operation;

(c) As a part of the efforts by the Reserve Bank to improve the working of the bank, additional directors to strengthen the bank were appointed. The above measures proved to be ineffective;

(d) The bank has lost its basic resilience to regain the required strength to function as an independent viable banking unit;

(e) The extent of erosion in its deposits has been progressively increasing and reached a level of Rs. 462.59 lakhs as on December 31, 1984, as compared to Rs. 9.80 lakhs as on September 24, 1982;

(f) The bank had suffered heavy erosion in its deposits, capital and reserves. The provisions, reserves and paid-up capital had been totally eroded as far back as on December 31, 1984;

(g) The bank has not declared any dividends since 1946;

(h) The declared profits have been manipulated;

(i) Interest on non-performing and sticky accounts has been taken into account which has inflated the figure of income;

(j) Failure of the HCB to make adequate provisions in the last few years with a view to presenting the annual accounts without showing loss;

(k) As per the inspection under section 35 of the said Act as on September 27, 1985, it is noticed that a nominal loss of Rs. 4.29 lakhs is likely to be declared for 1985, but actually there would be a loss of Rs. 39.76 lakhs;

(l) The possibility of a run on the bank could not be ruled out;

(m) Since the bank has lost its public image, it has vitally affected the rate of deposits;

(n) Sticky advanced of the bank amounted to Rs. 33.73 crores as on September 27, 1985, and constituted as much as 40.2% of its total advances, as against 29.7% as on December 31, 1984, and 22.1% as on September 24, 1982;

(o) The deterioration in the bank's working which has come about mainly due to -

(i) the unsatisfactory handling of advances portfolio;

(ii) inefficient funds management which has resulted in the bank's failure to comply with cash reserve ratio and statutory liquidity ratio requirements on several occasions;

(iii) poor house-keeping as can be seen from the fact that one-third of the total number of branches had not balanced their books of accounts for the last two years;

(iv) 27 cases of fraud involving an aggregate sum of Rs. 35.63 lakhs have surfaced during march 30, 1984, to September 27, 1985.

he critical financial condition is highlighted by the following tabularised statement incorporated in an application :

----------------------------------------------------------------------Rupees in lakhsAs on---------------------------------------------the date of the date of the date ofprevious last lastinspection inspection scrutiny(24-9-1982) (30-3-1984) (31-12-1984)----------------------------------------------------------------------(1) (2) (3)-----------------------------------------------------------------------1. Real or exchangeablevalue of paid-upcapital and reserves. (-) 9.08 (-) 307.17 (-) 462.522. Extent of erosion in(i) Provision entire entire entire(143.95) (189.31) (164.79)(ii) Reserves entire entire entire(49.0) (93.0) (95.25)(iii) Paid-up capital entire entire entire(125.0) (125.0) (125.0)(iv) Deposits 9.80 307.17 462.52(11,056.38) (12,848.85) (15,117.82)% of erosion indeposits. Negligible 2.4 3.13. Sticky advances 1,416.57 2.025.42 2,469.40% of total advances 22.1 24.8 29.74. Net profit 1982 1983 1984------- ------- -------22.47 17.90 2.32% of net profit toworking capital 0.2 0.9 0.05----------------------------------------------------------------------NOTE : (1) Figures in brackets indicate book value.

3. The application showed that in view of the above state of affairs, the Reserve Bank was of the opinion that :

(a) the financial position and methods of the operation of the bank have reached a stage beyond redemption and the bank is not able to comply with the provisions of sections 11 (minimum capital) and 22 (licensing conditions) of the said Act and section 42(6)(a)(i) and (ii) of the Reserve Bank of India Act, 1934 (inclusion in the Second Schedule);

(b) the future of the bank has to be considered with a view to preventing further determination in its financial position and working and safeguarding the interests of depositors and creditors and the Reserve Bank suggested that the bank may be compulsorily amalgamated with a public sector bank. It is also suggested in the application that the bank may be amalgamated with the Punjab National Bank. In the last paragraph of the application, it has been pointed out that as there is a distinct possibility of the bank finalising its accounts for 2985 very shortly, the Government should take an early decision. They also enclosed a draft notification ordering moratorium in case the Government agreed to the proposed action.

4. The Central Government has, on a consideration of the pros and cons of the application, decided to accept the proposal for moratorium and accordingly issued a notification of moratorium dated May 24, 1986, in exercise of the powers conferred on it by section 45(2) of the said Act for a period effective from May 24, 1986, and ending with September 25, 1986, and directed stay of the commencement or continuance of all actions and proceedings against the HCB during the period of moratorium, subject to certain conditions. During this period of moratorium, the Reserve Bank acting under section 45(4) of the said Act prepared a draft scheme for the amalgamation of HCB with the Punjab National Bank. The said draft scheme was duly received by the HCB on or July 21, 1986. This draft scheme was also published in the Official Gazette as well as in the newspapers inviting suggestions and objections to the draft scheme as required by section 45(5) of the said Act.

5. By this petition under article 226 of the Constitution, the petitioners have challenged -

(i) The constitutional validity of section 45 of the Banking Regulation Act, 1949;

(ii) The order dated May 24, 1986, passed by the Central Government (the first respondent herein) under section 45(2) of the said Act whereby a moratorium was declared in respect of the HCB for the period from May 24, 1986, up to and inclusive of September 25, 1986, i.e., for a period of four months :

(iii) The action taken by the Reserve Bank of India (the second respondent herein) under section 45(4) of the said Act for the amalgamation of the HCB with the Punjab National Bank (respondent No. 4 herein);

(iv) The draft scheme prepared and proposed by the Reserve Bank under the provisions of section 45(5) for the amalgamation of HCB with the Punjab National Bank.

6. Though in the petition, the draft scheme is also sought to be challenged Mr. Cooper, learned counsel for the petitioners, however, restricted his challenge only to the order of moratorium and he constitutional validity of section 45(1), (2) and (3) of the said Act, since the petitioners and others have lodged their objections to the draft scheme and the same are under consideration. The Central Government has not yet approved or finalised the scheme. The learned single judge while admitting the writ petition extended the period of moratorium by two months expiring on November 25, 1986.

7. Before we embark upon the rival contentions urged by Mr. Cooper on behalf of the petitioners and Mr. Setalwad on behalf of respondents Nos. 1 and 2, it would be proper to set out the relevant provisions contained in section 45 of the said Act.

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

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

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

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

(a) in the public interest; or

(b) in the interests of the depositors; or

(c) in order to secure the proper management of the banking company as a whole, -

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

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

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

8. As a matter of fact, sub-section (4) of section 45 deals with the powers of the Reserve Bank to prepare a scheme during the period of moratorium. The only relevant provision regarding moratorium, therefore, is contained in the first three sub-sections of section 45 quoted above. The marginal note to section 45 shows that section 45 deals with the powers of Reserve Bank when applying to the Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution or amalgamation. Sub-section (1) vests power in the Reserve Bank to make an application to the Central Government for an order of moratorium in respect of a banking company, but this power can be exercised only if the Reserve Bank is satisfied that there is good reason for doing so. Under sub-section (2), the power to order moratorium vests in the Central Government and can be exercised by it obviously if an application is made for that purpose by the Reserve Bank and not otherwise. Sub-section (2) further shows that the Central Government can order moratorium only for a limited duration not exceeding six months, which shows that the order is of a temporary nature. Sub-section (3) is a consequential provision baring the banking company from making any payment to any depositors or discharge any liabilities or obligation to any other creditors during moratorium. A reference to some of the remaining provisions contained in section 45 of the said Act will be made by us at a later stage while appreciating the scheme and object of section 45.

9. While considering the exercise of powers by the authorities concerned under section 45, it must be noticed that the Act gives the Reserve Bank very wide controlling and supervisory powers including issuance of directions to the banking company in connection with its business. There are various other provisions in the said Act which confer wide jurisdiction on the Reserve Bank to deal with the situations effectively in connection with the business of the bank in public interest. We need not refer to all the provisions, but some of them may be mentioned. For example, section 35 confers powers on the Reserve Bank to cause inspection of any banking company and of its books and accounts. A copy of its report has to be supplied by the Reserve Bank to the banking company. Similarly, powers are also conferred on the Reserve Bank under sub-section (1A) of section 35 to cause a scrutiny of the affairs of any banking company and its books and accounts to be made by its officers. A copy of the scrutiny report has to be furnished to the banking company on a request in that behalf made by the banking company or even without such a request, if any adverse action is contemplated against the banking company on the basis of the scrutiny. There are several other provisions conferring a variety of powers of control and supervision over the management of the banking company. It can made an application to the High Court shall order the winding up of the banking company.

10. The word 'moratorium' has not been defined in the Act. In Words and Phrases, permanent edition, volume 27-A, page 210, the word 'moratorium' has been defined as a term designating suspension of all or of certain legal remedies against debtors, sometimes authorised by law during financial distress. It further explains the word 'moratorium' as a period of permissible or obligatory delay; specifically a period during which an obliger has a legal right to delay meeting an obligation. In Jowitt's Dictionary of English Law, second edition, page 1201, 'moratorium' is defined as an authorised postponement of payment of debts.

11. It is, therefore, clear that 'moratorium' implies postponement of obligations of the debtor to pay his creditor. In the context of a bank, 'moratorium', therefore, means postponement of payment or postponement of a legal proceeding for recovery of amounts by the depositors or creditors. Obviously, moratorium is a very harsh and stringent action which can be resorted to only in exceptional cases and if the emergency so demands. Such an emergency may arise in different ways depending on the facts of each case. A clear case for moratorium would arise when there is an actual or likely run on the bank by the depositors or the creditors of the bank. A near or imminent possibility of a run on the bank can arise where a bank is on the brink of insolvency meaning thereby that the assets at any given point of time fall short of the liability. This situation may arise as a result of utter mismanagement of the affairs of the bank and indiscriminate advances made which either are not immediately recoverable or irrecoverable. Such loans are styled as sticky loans. Some of them may be irrecoverable and some are recoverable, but not immediately. In the case of banks, 'moratorium' is undisputedly a measure which has to be adopted in rare cases and as a temporary measure to prevent the depositors and creditors of the bank from seeking realisation of their dues. When such a situation arises, there is always a possibility of some friends or relations being favoured by the management and some others may not even be in a position to realise their dues from the bank. Now, in such situations calling for a moratorium, it would be necessary to bear in mind the role of the Reserve Bank of India under the said Act. The predominant object that permeates through the various provisions giving various powers to the Reserve Bank under the said Act is the protection of the depositors and creditors. The role and function of this apex body, viz., Reserve Bank, as far as the banking system is concerned has been considered by the Supreme Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India : AIR1962SC1371 , popularly cited as Palai Banks;s case. In that case, the provisions of section 38(1) and (3)(b)(iii) of the said Act were challenged as violative of articles 14, 19, 19(1)(f) and (g) and 301 of the Constitution of India. The Reserve Bank had applied under section 38(1) to the High Court for the winding up of the Palai Bank. Under section 38(1), it is provided that on an application made by the Reserve Bank for winding up, the court shall pass an order of winding up. Mere filing of an application by the Reserve Bank is enough and nothing further is required to be proved in the court in support of its application. The aforesaid provisions make the Reserve Bank the sole judge to decide whether the affairs of the 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 of winding up the banking company, when the application is made by the Reserve Bank. It was argued that these provisions were void, firstly, because they permitted 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 created an unreasonable restriction upon the right to carry on banking and, lastly, because the whole procedure was nothing but a denial of the principles of natural justice, chiefly by denying access to courts. In support of the first limb of the argument, article 14 was invoked and in support of the second and third limbs, article 19(1)(f) and (g). The majority judgment was delivered by Hidayatullah J., as he then was. In paragraph 16 of the judgment, the Supreme Court traces the history of the establishment of the Reserve Bank and in paragraph 17 pointed out the functions of the Reserve Bank and accepted and justified the wide powers of the Reserve Bank, in the matter of regulating the banking affairs generally. The court observed (at p. 526 of 32 Comp Cas) :

'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 of the reserves with a 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 of not less than 5 per cent. of their demand liabilities and 2 per cent. of their time liabilities. The 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 an ordinary bank.'

12. In paragraph 18, it is pointed out that the most important function of the Reserve Bank is to regulate the banking system generally, and, therefore, the Reserve Bank is described as a banker's bank. The Reserve Bank has been given certain advisory and regulatory functions and by its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises the Government and other banks on financial and baking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other banks, and inspects the books and accounts of scheduled banks and advises the 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 and 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 section 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.

13. In paragraph 19, the court observed that the above analysis of some of the provisions of the Reserve Bank of India Act shows that the Reserve Bank has been created as a Central Bank with powers of supervision, advice and inspection over banks. In the same paragraph, the Supreme Court justified the wide powers conferred on the Reserve Bank notwithstanding the fact that the Board is composed of nominated members pointing out that neither election nor competitive examinations can effectively take the place of nominations, if the Board is to be composed of nominated members pointing out the 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 ever be contemplated. Similarly, the role of the Reserve Bank as a protector of the interests of the bank depositors in particular has been emphasised. In paragraph 26, it is observed that various provisions indicate 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. The Supreme Court said that it is in this context and setting that the provisions of section 38(1) and (3)(b)(iii) of the Banking Companies Act must be viewed, pointing out further that it cannot be overlooked that the legislature, in view of the sad experiences in the past, was anxious to devise a machinery for the supervision, inspection and effective functioning of banking companies in the country. After reposing confidence in the Reserve Bank, the Supreme Court held that the objection that the Reserve Bank gives no hearing, records no reasons in writing and does not communicate them (i.e., banks) is met by admitted facts and does not vitiate the actions. It was urged before the Supreme Court that the powers conferred on the Reserve Bank under sections 38(1) and (3)(b)(iii) are uncontrolled and despotic and to crown all, access to courts is not possible because the court must pass an order without probing into as to whether the affairs of the banking company are being conducted in a manner detrimental to the interests of the depositors, a fact capable of being proved like any other fact. This argument was rejected by observing that 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. It was held that this power is neither unreasonable nor violative nor offends the principles of natural justice. Action taken by the Reserve Bank is based on concrete facts which are normally checked and rechecked before the final decision is taken. What is important is that the Supreme Court emphasised that the Reserve Bank in its dealings with banking companies does not act on suspicion but in proved facts. These facts are collected, checked and rechecked under the statutory provisions by the Reserve Bank. The Reserve Bank also inspects the banking companies. It licenses such banking companies to conduct their affairs in the interests of the depositors and can withdraw the licence, if they do not company with the directions issued by the Reserve Bank from time to time. 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.

14. After quoting the observation in Virendra v. State of Punjab : [1958]1SCR308 ; AIR 1975 SC 896, the Supreme Court observed 32 Comp Cas 542 :

'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 circumstances that the law will be upheld.'

15. Proceeding father, in paragraph 45, we have the following observations (at page 542 of 32 of Comp Cas) :

'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 cconclusion 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.'

16. To sum up, from the ratio laid down by the Supreme Court, the following propositions emerge, firstly, a banking company could not be compared with an ordinary company because in the case of a banking company, the interests of the depositors are paramount; secondly, Parliament intended the Reserve Bank to have a decisive voice in respect of certain matters pertaining to banking companies, thirdly, where inspections have been carried out and directions given, the bank had sufficient opportunity to be heard; fourthly, the action to wind up is not a punitive action but an action to preserve the rights of depositors; fifthly, as the Reserve Bank has statutory access to facts and acts on proved facts, the power conferred is not unguided; sixthly, a law may be upheld if the legislature leaves an issue to an expert body like the Reserve Bank and, lastly, the impugned provision is not unreasonable because it excludes judicial scrutiny as the court would act as guided by the Reserve Bank nor is it unreasonable because no appeal or review is provided for.

17. The said unique position of the Reserve Bank has been reemphasised in later decisions of the Supreme Court in Corporation of Calcutta v. Calcutta Tramways Co. Ltd. : 1964CriLJ354 and Life Insurance Corporation of India v. Escorts Ltd. : 1986(8)ECC189 . In the light of the authoritative pronouncements of the Supreme Court referred to above, we have to consider the provisions of sub-sections (1),(2) and (3) of section 45 of the said Act and see whether the impugned action can be said to violate the principles of natural justice and whether these provisions are ultra vires articles 14 and 19(1)(f) and (g) of the Constitution.

18. From the provisions of sub-section (1) of section 45, it would be clear that the Reserve Bank has been given the power to apply to the Central Government for an order of moratorium in respect of a banking company, if in its opinion there is good reason so to do. The power to order moratorium is conferred on the Central Government under sub-section (2), which it can exercise on considering the application made by the Reserve Bank under sub-section (1). The order of moratorium implies staying the commencement or continuance of all actions and proceedings against the company for a fixed period of time, on such terms and conditions as the Central Government may think fit and proper. The optimum period of moratorium can in no case exceed six months. Under sub-section (3), the banking company is prohibited from making any payment to any depositors or discharge any liability or obligations any other creditors except as provided by any direction given by the Central Government in the order of moratorium.

19. We have already indicated the circumstances and the reasons which impelled the Reserve Bank to make an application to the Central Government for the impugned stringent action of moratorium. Though it has been contended by Mr. Setalwad, learned counsel appearing for the Reserve Bank and the Central Government, that the petitioners have no locus to challenge the impugned action of moratorium, we would rather proceed at this stage to consider the arguments of Mr. Cooper that before making an application to the Central Government, the Reserve Bank should have given an opportunity of hearing to all those who are likely to be affected by the proposed action. The persons likely to be affected, according to him are, firstly, the banking company itself, secondly, the shareholders of the company whose business would be vitally affected and also the depositors and creditors who will face the postponement of realisation of their dues from the bank. It is submitted that the denial of a pre-decisional hearing on the part of the Reserve Bank violates the audi alteram partem principle. As far as the Central Government is concerned, it was urged, it too ought to have given a pre-decisional hearing before passing an order of moratorium and at any rate if that was impossible, at least a post-decisional opportunity ought to have been given to the affected parties mentioned above. Admittedly, pre or post-decisional opportunity has not been given in the present case. It was submitted, therefore, that the impugned order of moratorium is rendered void and non est.

20. It is not, and cannot be, disputed that even as regards administrative or executive orders, the audi alteram partem principle does apply, even if a provision which confers powers on any public authority is silent and does not expressly provide for an opportunity of hearing to the affected party and it must be implied unless either by implication or by express provision excluded. As far as the provisions of sub-sections (1) and (2) of section 45 are concerned, the statute does not specifically exclude the hearing or opportunity before or after passing of the order. Ordinarily, therefor, it would be presumed that the said provisions impliedly include the obligation to observe the said principle and the making of an order before or after such hearing would violate the said principle. Still the question arises whether this principle is universal and must apply in all such cases and in all contingencies irrespective of the possibility of serious consequences detrimental to the interests of depositors and creditors. What is to be noticed so far as the powers conferred under sub-sections (i) and (2) are concerned is that the order operates only for a period extending not more than six months and is, therefore, intended as a temporary measure. Looking to the scheme and the drastic consequences, the power must be exercised only in exceptional cases and situations of emergency. If pre-decisional hearing as a minimal requirement of the observance of the principle of natural justice is to be followed in whatever manner possible, normally, the consequence of a run on the bank cannot be ruled out which would vitally affect the interests of the depositors and the creditors. It also cannot be ruled out that only a few favoured depositors and creditors may get the advantage to the detriment of the interest of other similarly situated persons. If there is an actual run on the bank, obviously, the order of moratorium cannot be challenged. In fact, Mr. Cooper fairly conceded that in such a situation, the Reserve Bank or the Central Government would be justified in straightway ordering moratorium. However, it was his contention that the application of the Reserve Bank does not disclose any such emergent situation having arisen. Even accepting the facts as stated in the application, he submitted that the Reserve Bank has taken into consideration the old financial situation, to be precise, the financial condition in the years 1982, 1983 and 1984 whereas the application is made long thereafter in April, 1986, and the impugned order of moratorium is passed one month later. He also submitted that the mere erosion of deposits is no ground for ordering moratorium nor does it imply an emergent situation having arisen. The very fact that the events of December, 1984, were taken into consideration and the Central Government passed the order one month after the application would negative the claim of any urgency or any grave situation or that there was any real apprehension of a run on a bank as suggested in the application.

21. As far as the factual aspect is concerned, the contents of the application by the Reserve Bank to the Central Government are fully supported by Mr. Venkateswaran, Deputy Chief Officer in the Department of Banking Operations and Development of the Reserve Bank in his affidavit, dated October 14, 1986. It is not necessary nor permissible for us to examine the correctness of the figures and the facts detailed in the application. This court will not sit in appeal over the judgment of the Reserve Bank which had the necessary expertise opinion and advice, necessary information and access to the records of the bank. Furthermore, the Reserve Bank had carried out the inspection and scrutiny which revealed the facts mentioned in the application. The question as to whether the facts found by the Reserve Bank were sufficient to cause a possible run on the bank in the immediate future would be a matter the judgment of an expert body like the Reserve Bank. This apart, the record shows that the inspection reports as on September 24, 1982, and as on March 30, 1984, were furnished to the bank. Similarly, as far as the scrutiny which is carried out by the Reserve Bank as on December 31, 1984, is concerned, the salient points were brought to the notice of the bank by the Reserve Bank, though an actual copy of the report may not have been furnished. The grievance of non-furnishing of the scrutiny report to the HCB loses its significance in view of the fact that the HCB has even submitted its comments to the Reserve Bank in that behalf (see the notice of the chairman to the board of directors of the HCB dated August 7, 1985 (exhibit B-1)). As far as the inspection as on September 27, 1985, is concerned, it has been explained that the inspection report was not ready by the time the Reserve Bank had taken the decision to apply to the Central Government under section 45(1) for a moratorium. It is significant that the bank itself has not raised a voice by making a representation to the Central Government even after the order of moratorium was passed. What is more significant is that though the bank is made a party to this writ petition, it has not chosen to controvert the facts brought on record by the Reserve Bank. It has not challenged the order of moratorium at all in any manner. The board of directors of the bank as a representative of the shareholders was the proper body to raise its voice if it felt that the order was in any manner factually or otherwise unjustified. The bank was obviously in possession of all the facts and the relevant material including the past inspection reports, the gist of the scrutiny was brought to its notice as well as the directions issued by the Reserve Bank from time to make up the deficiencies and improve its performance. We cannot accept the argument of Mr. Cooper that after all the board has several nominees appointed, who were under the thumb of the Reserve Bank. Apart from the chairman and the four nominees, admittedly there were six other elected/co-opted directors who by virtue of their majority could have done the needful or passed a resolution as they deemed fit for taking appropriate action. The inaction on their part explains their acquiescence in the order of moratorium. If the chairman did not move in the matter, these directors who were in the majority could have requisitioned a meeting. If the shareholders felt aggrieved, they also could have taken appropriate steps a permissible in law. In view of the facts disclosed in the application and the affidavit of Mr. Venkateswaran, it could hardly be said that there was no justification for ordering the moratorium. This decision was based on fact found by an expert body (the Reserve Bank). It would not, in our opinion, by permissible for the court to substitute its opinion sitting in judgment over it.

22. Mr. Cooper, however, contended that even in a case of this nature, the least that the Central Government should have done was to give some opportunity, however minimal it may be, to the bank and/or to the affected parties in order to ascertain the correctness of the facts stated in the application. It is in this context, he says, that there is a violation of the principles of natural justice. In other words, he submitted that if a pre-decisional hearing cannot be given on the ground of secrecy or a possible run on the bank, there is no reason why the Central Government should deny at least a post-decisional opportunity, however minimal it be, as it deemed fit to the affected parties to ascertain the correctness of the facts stated in the application.

23. Mr. Cooper drew our attention to the various decisions of the Supreme Court on the question dealing with the scope and applicability of the principles of natural justice. It is undisputed that a moratorium does entail civil consequences affecting the bank, shareholders as well as the depositors and creditors and the normal rule is that a person who is affected by any decision or order should be afforded an opportunity. It is by now well-settled and beyond controversy that this principle applies equally to orders or decisions which are judicial, quasi-judicial or executive. (see S. L. Kapoor v. Jagmohan : [1981]1SCR746 ). It is equally well-settled and undisputed that normally a person or party who is affected by an order must be heard and that such a hearing must be a real opportunity which should include the issuance of a notice of the facts alleged and of the action proposed to be taken and opportunity of explaining and rebutting the factual allegations and/or showing cause against the proposed action (see S. L. Kapoor v. Jagmohan : [1981]1SCR746 , Swadeshi Cotton Mills v. Union of India : [1981]2SCR533 and Maneka Gandhi v. Union of India : [1978]2SCR621 ). In Maneka Gandhi's case, the Supreme Court reaffirmed the principle that the soul of natural justice is fair play in action and accordingly the principle and procedures which are to be applied are those that 'fair play in action' demands. Further, the Supreme Court also held in the said case that what opportunity may be given or may be regarded as reasonable must necessarily depend on the facts and circumstances of each case. It may be a sophisticated and fullfledged hearing or it may be a hearing which is very brief and minimal. It may be a hearing prior to the decision or it may even be a post-decisional remedial hearing.

24. There are several factors which are relevant for the consideration of the question as to whether a pre-decisional hearing is excluded by necessary implication where a statute does not specifically provide for the same. As far as section 45(1) and (2) is concerned, the relevant factors, in our opinion, for the exclusion of the audi alteram partem rule is the urgency or emergency of the action proposed to be taken and whether the pre-decisional hearing would defeat the very object and purpose of the order of moratorium. It is undoubtedly true that the court must try to salvage as much as possible the principle of natural of natural justice in its application to a given set of facts. The short question is whether it is possible to salvage and apply the principle of natural justice even to a minimal extent to the action under section 45(1) and (2). In our view, it is not. The simple reason is that not only is the action to be taken an emergent one, but has to be kept secret to avoid a possible run on the bank in order to protect the interests of the depositors and the creditors. This is exactly why is our opinion the Legislature thought it fit to restrict the period of moratorium to a short duration and to emphasise this aspect it is made clear that the total period cannot exceed six moths.

25. We are not unmindful of the argument of Mr. Cooper that in a given case an unjustified order of moratorium would damage the reputation and business of the bank and might cause a run on the bank. This hypothetical question need not detain us for the simple reason that in the present case the Reserve Bank had objectively taken into account the working of the HCB for the past three years and also its current financial position and was satisfied that without any delay the order of moratorium must be issued. As pointed out by us above, a pre-decisional hearing for an action under section 45(1) and (2) would have the effect of frustrating the very object of the action Section 45(1) and (2) requires secrecy to be maintained which must necessarily exclude any pre-decisional hearing.

26. Coming to the second limb of Mr. Cooper's submission that in any vent, in section 45(2), a post-decisional opportunity must be implied, and if such opportunity is denied, the order is rendered void. We do not want to suggest for a moment that the affected party should go unheard without opportunity at any stage nor does the section expressly exclude the same natural justice is fair play in action and fair play would demand a fair and procedure. However, bearing in mind the short life of the moratorium under full-fledged opportunity of calling for objections from the affected parties who are innumerable would be impracticable though theoretically not impossible. Therefore, issuing notices to each of the affected parties including the banking company calling upon them to submit their objections would be a procedure which cannot be adopted within the short period. However, it would be open to the banking company and other affected parties to make a representation to the authority which the authority must consider. In reality, it would be the banking company, i.e., board of directors who would be in the best position to make an effective representation since they are in possession of all the relevant material. Other affected persons such as the shareholders or depositors or creditors may make a representation which must be considered by the authority. But individual or personal hearing to such persons would be impracticable. It cannot be overlooked that the board of directors represent the share-holders who can always express their view points to the board directors. Ultimately, what sort of post decisional opportunity need be given would have to be tailored by the authority according to the circumstances and having regard to the nature of the objections raised.

27. Mr. Setalwad contended that wherever the Legislature wanted to provide for pre or post-decisional hearing, it has specifically so provided in the provisions of the Act. He particularly emphasised that in section 45 itself there is a provision for opportunity at the stage of framing of the scheme as provided in section 45(5) of the Act. He contended that on a plain reading of section 45(1) and (2), it would appear that the Legislature intended to exclude any such opportunity. Mr. Setalwad tried to justify this construction of exclusion of opportunity on the ground that the order is of a temporary nature and lasts only for a short period. We are unable to accept the argument of Mr. Setalwad on the well-settled rule of construction that if a statute is silent, opportunity must be implied as it is consistent with the principles of natural justice, unless such an opportunity is expressly excluded. In our view, section 45(2) does not exclude post-decisional opportunity, if demanded.

28. Coming to the facts of this case, we have already indicated above that the bank has not raised any objections nor made any representation nor even at this stage has shown any interest in challenging the impugned order. They have not remained present in court or put forth their contentions.

29. Mr. Cooper contended that the board of directors had failed in their duty to raise objections to the order of moratorium. Not only that but even the request of Mr. Choudhary went unheeded. Under such circumstances, inaction on the part of the board of directors should not deprive the petitioners as shareholders of a post-decisional opportunity. In this connection, Mr. Cooper drew our attention to the correspondence and other documents on record. Mr. Choudhary, by his letter dated July 24, 1986, requested the chairman of the bank to call a board meeting to discuss the action of moratorium and the likely action of amalgamation. Therefore, on August 2, 1986, the board meeting was held and the extracts of the minutes of the meeting are on record. The resolution as quoted in the extracts runs thus :

'Resolved that Sri A. D. (page 102, volume II) director of the bank of Shri M. V. Doshi, director be and is hereby authorised and empowered to represent the board before Reserve Bank of India or Central Government and/or any other competent authority in connection with the draft scheme of amalgamation circulated by Reserve Bank and the notice appearing in newspapers for suggestions and objections by way of representing personally or through written memorandum within the time provided in the scheme.

Further resolved that Shri Choudhary or Shri Doshi will forward a copy of memorandum or any representation to the chairman of the bank who will circulate it onwards to the other directors and place it before the board in the next meeting.'

30. This resolution would prima facie indicate that the board of directors did not think it fit to challenge the moratorium but wanted to make a representation only in connection with the draft scheme of amalgamation. This would further show that Mr. Choudhary and Mr. Doshi both of whom are directors and who are now complaining against the moratorium have accepted the responsibility of making a representation with regard to the draft scheme of amalgamation only.

31. Immediately thereafter, pursuant to there solution passed by the board of directors, a representation dated August 4, 1986, was sent by the bank to the Reserve Bank. This representation is signed by Mr. Doshi and it is significant that objections relate only to the draft scheme and there is no whisper about any challenge to the moratorium obviously because a decision to challenge the draft scheme only was taken by the board of directors. However, thereafter Mr. Choudhary sends a telegram dated August 7, 1986, to the chairman requesting him to convene a board meeting for considering the moratorium an the draft scheme of amalgamation. It has been further stated in the telegram ends by again requesting the chairman to convene a meeting of the board of directors for considering further action. On the very next day, the chairman sent his reply saying that there was no need to convene a board meeting for the purpose mentioned in the telegram. Mr. Cooper submitted that this reply of the chairman would show that he was acting just at the behest of the Reserve Bank and has not taken into account the interest of the bank. It does not appear to us to be so, having regard to the resolution of the board and the subsequent action of the bank in actually forwarding the objections to the draft scheme in accordance with the resolution passed by the board. It is to be noted that if Mr. Choudhary was not satisfied with the attitude of the chairman, he could have taken steps to requisition a board meeting by following the necessary procedure in that behalf, reference, however, needs to be made to other representations. Petitioner No. 2, M. R. Holdings Ltd., wrote a letter dated July 24, 1986, to the Reserve Banking requesting them to furnish certain information and documents. Thereafter, they addressed a letter dated August 2, 1986, to the Reserve Bank in which there is a reference to their opposition to the order of moratorium and the scheme of amalgamation on various grounds. This representation was sent to the Reserve Bank and not to the Central Government and we fail to see how the Reserve Bank would be concerned with the order of moratorium which had been issued by the Central Government and the Reserve Bank had no power to review or reconsider. The representation could only be made to the Central Government which had passed the order of moratorium. Under the circumstances, this representation would survive only as an objection to the draft scheme of amalgamation.

32. Then there is the letter from Gannon Finances and Investments of which Mr. Choudhary is a director, dated August 18, 1986, to the Finance Minister. Although some grievance is made in the letter about the order of moratorium for a period of two months to enable the directors and shareholders of the bank to make a representation to the Reserve Bank and Central Government. However, we do not find that either this company or the bank or the petitioners made any representation to the Central Government thereafter.

33. We would like to make it clear that we do not want to suggest that a post-decisional opportunity is wholly excluded after the Central government-passes the order of moratorium under sub-section (2) of section 45, but such an opportunity, in our opinion, has to be demanded by the affected person. It is impracticable for the authorities, i.e., the Central Government to issue in such cases individual to the banking company, shareholders, depositors and the other affected persons of which the number would run into thousands and as in the present case which is about four lakhs. In such an eventuality, the only proper and reasonable course that can be visualised is that the affected party should be given an opportunity if demanded and the same should not be denied, except for some compelling reasons. Here again, the modalities of the post-decisional opportunity would have to be tailored as circumstances demand and no hard and fast rule can be laid down in that behalf. In this connection, we may usefully refer to the decision of the Supreme Court in Liberty Oil Mills v. Union of India : [1984]3SCR676 . In that case, the Supreme Court was dealing with the provisions of clause 8 of the Imports (Control) Order, 1955, issued under the Imports and Exports (Control) Order, 1955, issued under the Imports and Exports (Control) Act, 1947 18 of 1947). Clause 8B contemplates an action of interim nature pending investigation into the allegations under clause 8 and while considering the question of observance of the principles of natural justice in paragraph 21, the court observe (at p. 1287) :

'We have seen that action under clause 8B is to be taken if the authority is satisfied in the public interest that such action may be taken without ascertaining further details in regard to the allegations. It clearly implies that when further facts are ascertained by the authority or brought to the notice of the authority, such action may be reviewed. As we have earlier pointed out, while ex parte interim orders may always be made without a pre-decisional opportunity or without the order itself providing for a post-decisional opportunity, the principles of natural justice which are never excluded will be satisfied if a post-decisional opportunity is given, if demanded.'

34. It was contended by Mr. Cooper that under section 35, the Reserve Bank is bound to forward a copy of the scrutiny report, if any adverse order based on such a scrutiny is contemplated. However, the report relating to scrutiny as on December 21, 1984, was not forwarded to the HCB. He also submitted that though the Reserve Bank is bound to forward the inspection report under section 35, such report as on September 27, 1985, was not forwarded. He submitted that failure to observed the provisions of section 35, vitiates the order of moratorium passed by the Central Government on the basis of the application of the Reserve Bank which has used the said material in the application. As far as the scrutiny report is concerned, the affidavit of Mr. Venkateswaran dated November 12, 1986, shows that there has been a substantial compliance as the findings were fully disclosed to the HCB. As regards the inspection report pertaining to the inspection as on September 27, 1985, it has been explained that it could not be furnished because the decision to make the application was already taken by the Reserve Bank. In our view, the objections raised by Mr. Cooper are too technical and do not merit any further investigation. What we find in this case is that there has been substantial compliance with the provisions of section 35 which require to be complied with before an action adverse to the banking company is sought to be taken.

35. In addition to the plea of substantial compliance with the formalities before taking an action under section 45(1) and (2), it was urged by Mr. Setalwad that there was total acquiescence in the order of moratorium on the part of the HCB as they have never complained about the said order nor filed any representation. He submitted that even the petitioner have not approached the court expeditiously, but there has been a gross delay of about three months in filing this petition, particularly in the context of the moratorium order lasting only for four months which is fatal and the petitioners are not entitled to any relief in the petition. If the petitioners had any real grievance, they ought to have come to the court soon after the order of moratorium and in any event, should have at least made a representation to the competent authority, viz., the Central Government complaining about the order of moratorium and seeking a post-decisional opportunity. Relying on the ratio laid down in Palai Bank's case, : AIR1962SC1371 , Mr. Setalwad submitted that there has been substantial compliance with the principles of natural justice and no grievance can be made that there has been a breach of the audi alteram partem rule at either the pre-decisional or post-decisional hearing. It is also significant that the board of directors of the HCB in their resolution passed on August 2, 1986, decided to file objections to the draft scheme and did not record any decision to challenge the order of moratorium and, accordingly, the objections to the draft scheme were prepared and submitted to the Reserve Bank of India. If the board of directors had any grievance about the order of moratorium, they would have passed a resolution to make a representation challenging the order of moratorium as well. It is to be noted that under the resolution of the board of directors dated August 2, 1986, the task of preparation of a representation was entrusted to Mr. Choudhary and Mr. Doshi both of whom are directors of the HCB. Mr. Choudhary is also a director of the second petitioner-company. Since the board of directors had taken the decision to challenge the draft scheme and nothing more, Mr. Choudhary could have himself sent the representation on behalf of the second petitioners or in his individual capacity to the Central Government. Instead of that, he acted in a round about way by sending a telegram to the chairman of the HCB to convene a meeting again, which suggestion did not find favour with the chairman because he thought that no useful purpose would be served by calling such a meeting. This view of the chairman is understandable since the matter was already discussed and decision taken in the meeting on August 2, 1986. In any event, having come to know that the chairman was not willing to proceed with the matter as desired by him, it was open to Mr. Choudhary to make a representation to the Central Government. However, he did not do so, but later on, on August 6, 1986, filed this petition. After filing this petition, by letter dated dated September 20, 1986, Mr. Choudhary again wrote to the chairman of the HCB to call a meeting to consider the question as to what action should be taken in the matter. This letter was replied to by the chairman by his letter dated September 25, 1986, expressing his inability to convene the meeting. But then Mr. Choudhary himself could have taken steps to requisition a meeting by following the requisite procedure. Nothing of that sort has been done. The correspondence on record shows that they never challenged the order of moratorium before the appropriate authority, viz., the Central Government. It appears that a request was made to the Reserve Bank by Mr. Choudhary to furnish copies of some documents. As a matter of fact, the copies could have been obtained by him from the bank itself, particularly in view of the fact that Mr. Choudhary was himself a director of the bank. In any event, as rightly pointed out by Mr. Setalwad, these documents are not germane on the question of filling the representation against the order of moratorium.

36. In our opinion, section 45(1) by its very mature excludes pre or post-decisional opportunity. We have already indicated in the preceding paragraphs our conclusions so far as the pre or post-decisional hearing qua section 4(2) is concerned.

37. It was urged by Mr. Cooper that the Central Government mechanically acted on the application of the Reserve Bank without probing and/or calling for record from the Reserve Bank in order to verify and satisfy itself about the correctness of the contents of the application before passing the order of moratorium. In this connection, we may refer to the affidavit of Mr. M. S. Sitharaman, Under Secretary in the Ministry of Finance, Department of Economic Affairs, Banking Division of the Central Government, dated October 15, 1986. In his affidavit, he has stated that the Union of India on receipt of the application of the Reserve bank examined all aspects of the matter and came to the conclusion that the public interest and the interest of the depositors and other constituents of the HCB and the interest of the banking system could not be protected except by declaration of moratorium in respect of the HCB. He has stated that it was, therefore, decided by the Union of India to declare a moratorium on the HCB under the provision of section 45(2). We are unable to agree that the Central Government would act so casually as submitted by Mr. Cooper in the matter of such a serious nature having adverse effects on the HCB. This argument will not assume any importance in view of the observations of the Supreme Court in Palai Bank's case : AIR1962SC1371 which confirm the desirability of reposing full confidence in the actions of the Reserve Bank under the Act. The Reserve Bank acts on statutorily proved facts after checking and rechecking. Moreover, the opinion expressed in the application is not that of any individual, but that of an expert body and there was nothing wrong if the Central government has acted on it.

38. It was then urged by Mr. Cooper that a reading of the application made by the Reserve Bank itself discloses that the application was made with a pre-determined motive of amalgamating the HCB with the Punjab National Bank and to achieve this result the Reserve Bank resorted to the provisions of section 45(1) and asked for a moratorium. This argument is based on the recitals in the application, viz. :

'..... We are of the view that the bank may be compulsorily amalgamated with one public sector bank. We suggest that the bank may be amalgamated with the Punjab National Bank. If Government agree to the proposed merger of the bank, the enclosed (draft) notification ordering moratorium in respect of the bank may please be issued.'

39. Mr. Cooper, therefore, criticised the action of the Reserve Bank in making the application itself as a colourable exercise of the power and not a bona fide action. We are unable to subscribe to this contention. It is true that the question of amalgamation or reconstruction of the bank has to be considered by the Reserve Bank during the period of moratorium as provided in sub-section (4) of section 45. However, that by itself cannot justify the interference that the exercise of power is colourable for the simple reason that even at the stage of the application for moratorium, the Reserve Bank has to apply its mind to all the facts and circumstances of the case and if on the facts of this case, the Reserve bank has tentatively taken the view that amalgamation would be the proper course, that does not mean that the Reserve Bank made the application mala fide or with a predetermined motive. Ultimately, the power vests in the Central Government whether to accept the application or not. Moreover, during the period of moratorium, the Reserve Bank has to apply its mind whether to frame a scheme or not and whether such a scheme should be for reconstruction or amalgamation. As far as the Reserve Bank is concerned, even the finality to the draft scheme can be reached only after calling for and considering the suggestions and objections as provided in sub-section (5) of section 45. Merely because there is a suggestion for amalgamation in the application, it cannot render the action of the Reserve Bank colourable.

40. Mr. Setalwad also pointed out in this connection that there is a constant dialogue between the Reserve Bank and the banking company on the various issues including suggestions and implementation to improve the working of the bank. This is supplemented by inspection reports and scrutiny reports and directions issued by the Reserve Bank from time to time. He submitted that under the circumstances, it cannot be said that the Reserve Bank acted in haste and that the action is colourable.

41. Another facet of Mr. Cooper's argument was that the impugned action of the Reserve Bank suffers from the vice of improper and mala fide exercise of power. The Central Government too is guilty of the same charge inasmuch as the said authority, viz,. the Central Government could have resorted to section 36AE of the Act which would have served the same purpose. It is true that under section 36AE, the Central Government acts on the report from the Reserve Bank if it satisfied that the banking company has failed to comply with the directions given by the Reserve Bank or is being mismanaged or is being managed in a manner detrimental to the interests of its depositors and that, (i) in the interests of the depositors; or (ii) in the interest of banking policy; or (iii) for the better provision of credit generally or of credit to any particular section of the community or in any particular area, it is necessary to acquire the undertaking of such banking company. Counsel further contended that the Reserve Bank could have applied under section 38 for winding up to achieve the same purpose. We do not see that this contention deserves any merit. What action is most suitable in the facts and circumstances of a given case is for the Reserve Bank to decide and no inference of want of bona fides or colourable exercise of power could be drawn merely because the Reserve Bank resorted to section 45(1) and not to other remedial measures under the Act. We have already indicated the various circumstances which impelled the Reserve Bank to make an application under section 45(1) and no fault can be found in their action.

42. Mr. Setalwad challenged the locus standi of the petitioners who are merely shareholders to challenge the order of moratorium. In this connection, reliance was placed by the counsel on Daman Singh v. State of Punjab : [1985]3SCR580 . In that case, the Supreme Court was called upon to consider the constitutional validity of the provisions 1, 13(8) and 30 of the Punjab Co-operative Societies Act. The Supreme Court held that the provisions of section 13(8), (9), (10) and (11) cannot be said to be violative of the principles of natural justice on the ground that it did not make an express provision for issue of notice to members of the concerned co-operative societies. In this connection, the Supreme Court observed that once a person becomes a member of a co-operative society, he loses his individuality qua the society and he has no independent rights except given to him by the statue and the bye-laws. He must act and speak through the society or rather, the society alone can act and speak for him qua rights or duties of the society as a body. The Supreme Court further held that if the statute which authorises compulsory amalgamation of co-operative societies provides for notice to the societies concerned, the requirement of natural justice is fully satisfied and the notice to the society will be deemed as notice to all its members. That is why section 13(9)(a) provides for the issue of notice to the societies and not to individual members. Mr. Setalwad submitted that the same principle would apply to a banking company and the shareholder must act and speak through the board of directors and that the banking company alone can act and speak for him qua his rights and the notice to the banking company would be deemed to be a notice to its shareholders . Mr. Cooper tried to distinguish this authority by saying that the provisions are different and moreover, section 13(9)(b) provides an opportunity to the members to be heard if they so desire. It is not necessary to go into these aspects since we have already held that as regards the order of moratorium even a shareholder has to be given a post-decisional opportunity if demanded.

43. In fairness, we must also mention that Mr. Cooper drew our attention to the decision of the Supreme Court in Bennett Coleman and Co. Ltd. v. Union of India : [1973]2SCR757 , the court observed that a shareholder is entitled to the protection under article 19. That individual right is not lost by reason of the fact that he is a shareholder of the company. When his fundamental rights as a shareholder are impaired by State action, his rights as a shareholder are protected. The reason is that the shareholder's rights are equally and necessarily affected if the rights of the company are affected.

44. English as well as Indian decisions were cited by both the parties on the question as to whether an order made without hearing a party affected, i.e., in violation of the principles of natural justice is void per se or is voidable. In the view which we have taken on the interpretation of section 45(1) and (2), this does not survive. However, we would like to observe that even if an order is void, the High Court while exercising its power under article 226 of the Constitution of India is entitled to exercise its discretion taking into account the factors such as the serious consequences, delay in approaching the court or that the order is found to be otherwise just and does not call for interference. In this connection, we may rely upon the operative orders passed by the Supreme Court in Smt. Maneka Gandhi v. Union of India : [1978]2SCR621 ; S. L. Kapoor v. Jagmohan : [1981]1SCR746 and Swadeshi Cotton Mills v. Union of India : [1981]2SCR533 . Having held that the respective orders under challenge were void for non-observance of the audi alteram partner rule, yet the Supreme Court did not strike down these orders, but passed final orders suitable to the particular situation.

45. Mr. Setalwad submitted that if the order of moratorium was otherwise justified, the mere suggestion/proposal of a scheme for amalgamation in the application cannot lead to the interference of mala fides or a colourable exercise of power on the part of the Reserve Bank in making the application under section 45(1). Counsel relied on a decision of a Division bench of the Punjab and Haryana High Court in Amrit Bank Ltd. v. Union of India [1968] 38 Comp Cas 356, where also the order of moratorium issued by the Union of India under Section 45(2) was challenged on grounds similar to those urged before us. The question of constitutional validity of the provisions, however, does not seem to have been considered in that case. The principal grounds urged on behalf of the Amrit Bank before the High Court were : (1) The Reserve Bank of India and the Central Government had not considered the relevant facts constituting the limits or restraints of their powers under section 45 of the Act, (2) the impugned order was made for ulterior motive not contemplated by the statue, viz., to merge the petitioner-bank with the State Bank of Patiala and not for any reason connected with the financial stability of the petitioner-bank, and (3) since the impugned order was passed without any notice to the petitioners and without giving an opportunity to make any representation, the rules of natural justice were not observed. All these contentions were rejected by the High Court. Relying on the ratio laid down by the Supreme Court in Palai Bank's case : AIR1962SC1371 , the High Court held that the Reserve Bank has been given very wide powers of superintendence over banking companies with a view to safeguard not only the interests of the depositors but also the public interest and under section 45(4) of the said Act, it can also act in the interests of the banking system of the country as a whole. It cannot, therefore, be contended that the provisions of section 45 of the Act can be resorted to only on the ground on which the High Court would moved under section 37 of the Act, namely, that a banking company being temporarily unable to meet its liabilities. It was argued before the court that since sub-section (4) occurs after sub-section (1), while considering whether an application should be made to the Central Government under sub-section (1) of section 45, the Reserve Bank could not lawfully keep in view any of the consideration mentioned in sub-section (4) and that this could be done only during the period of moatorium. While rejecting this argument, the High Court observed (at page 366) :

'He did not go in so far as to urge that it was only something which happened during the period of moratorium which could persuade the Reserve Bank to prepare a scheme under sub-section (4). But the learned counsel loses sight of the fact that before a scheme can be prepared can be prepared, a moratorium must necessary be declared, because if an order of moratorium is not made and the creditors and the creditors and depositors of the bank come to know that the banking company is likely to be reconstructed or amalgamated with another company or banking institution, there will be a sudden run on the bank which will almost inevitably lead to its liquidation. If for any of the reasons given in sub-section (4) and, in particular, for proper management of a banking company, as in its case, the Reserve Bank consideration of the scheme necessary, the precedent step is to obtain from the Central Government an order of moratorium. The position taken up by Mr. Awasthy in this connection is untenable.'

46. The High Court further held that (headnote) :

'The Reserve Bank can exercise its powers under section 45 for obtaining moratorium and framing subsequently a scheme of amalgamation in the case of a banking company even when there is no such financial difficulty, if grave defects in the management of the banking company are revealed on inspection and there are serious differences between persons in management of the company and it cannot be contended the because the Reserve Bank had ample powers under other provisions of the Act to correct the defects noticed by it in the management of the company the fact that it chose to seek for a moratorium and subsequently, framed scheme of amalgamation was sufficient indication of the mala fide intention behind the action of the Reserve Bank.'

47. The court further held that (headnote) :

'Having regard to the circumstances in which the law came to be enacted, the underlying purpose of the enactment and the extent and urgency of the evil sought to be remedied by the Banking Regulation Act 1949, not only is it not incumbent on the Reserve Bank to issue a notice before action is initiated to obtain moratorium in the case of a banking company, but such a notice would defeat the very object of the statute. The direct consequence would be the possibility that some depositors of the banking company may attempt and succeed in obtaining preferential payments to themselves to the prejudice of the other depositors.'

48. It would be equally true that if the Central Government were to give a prior intimation in order to give an opportunity of hearing to the banking company, it is almost certain that prior intimation or opportunity of hearing to the banking company would cause a run on the bank with the further possibility that some depositors of the banking company may attempt and succeed in obtaining preferential payments to themselves to the prejudice of the other depositors.

49. The question as to whether after order of moratorium is passed, the Central Government should give a post-decisional opportunity, if demanded, does not seem to have been considered in that case. However, as far as we are concerned, we have already expressed our views on the point it is not necessary to reiterate them again.

50. Coming to the constitutional challenges to the impugned provisions of section 45(1), (2) and (3), Mr. Cooper submitted that these provisions violate the fundamental rights guaranteed under articles 14 and 19(1)(g) of the Constitution. He submitted that the impugned provisions confer an arbitrary, uncontrolled and untrammelled discretion upon the authorities to make an order of moratorium and are, therefore, void under article 14 of the Constitution. He also submitted that the impugned provisions place an unreasonable restriction on the fundamental rights of the petitioners to carry on business through the banking company by becoming its shareholders which right has been guaranteed under article 19(1)(g) of the Constitution.

51. On the other hand, it was submitted by Mr. Setalwad that the challenge to the impugned provisions as violative of articles 14 and 19(1)(g) is barred under article 31A(1)(c) of the Constitution which, inter alia, provides that no law providing for the amalgamation of two or more corporations can be challenged as violating articles 14 and 19. He also submitted that it would be incorrect to say that the impugned provisions confer unguided, arbitrary or unfettered powers on the Reserve Bank and/or Central Government.

52. We are satisfied that the impugned provisions of section 45(1), (2) and (3) do not confer any arbitrary, unguided or untrammelled discretion upon the authorities. In our view, sufficient guidelines are to be found in the object and purposes of the Act. It can be granted from the other operative provisions of the Act. In this connection Mr. Setalwad rightly placed reliance on Jyoti Pershad v. Union Territory of Delhi : [1962]2SCR125 . Guidelines can also be found from the factors set out in section 45(4). It is true that sub-section (4) of section 45 of section 45 relates to the preparation of a scheme for reconstruction or amalgamation during the moratorium. It is also true that sub-section (4) and other sub-sections of section 45 which follow deal with the preparation and sanctioning of the scheme of reconstruction or amalgamation. It is equally true as urged by Mr. Cooper that the provisions of sub-section (4) onwards can be brought into operation only on the basis of a legal valid order of moratorium. In other words, he submitted that an order of moratorium is a condition precedent and a jurisdictional fact which must exist taking any action under section 45(4) onwards. In our view, it is not possible to bifurcate the impugned provisions from the rest of the provisions of section 45. The first three sub-sections of section 45 cannot be said to be unconnected with the rest of the provisions of section 45. Section 45 is a composite provision which provides an inseparable scheme with regard to moratorium, scheme of reconstruction or scheme of amalgamation. The mere fact that in a given case, the moratorium may come to an end without any further action, viz., a scheme of reconstruction or amalgamation will not necessarily show that the two sets of the provisions are independent of each other or have no nexus with each other and must be read as such. The very fact that a valid order of moratorium is needed for the exercise of powers under section 45(4) would indicate that the factors mentioned in section 15(4) afford the guidelines for making an application by the Reserve Bank under section 45(1) and the Central Government for passing an order for moratorium on such application. The expression 'that there is good reason to do' in section 45(1) has to be read in the context of the contingencies incorporated in section 45(4) and the object and purpose of the Act as can be gathered from the other operative provisions of the Act. Our conclusion also finds support in the marginal note of section 45, which ends thus :

'Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare a scheme of reconstitution or amalgamation.'

53. It is needless to emphasise that similar arguments are negatived by the Supreme Court in Palai Central Bank's case [1962] 32 Comp Cas 514. The court held that the power (in that case under section 38) is not unfettered as the Reserve Bank acts on proved facts which it has access to under statutory provisions. Further, it is to be noted that the exercise of the power under section 45(2) is not unfettered as it requires application of mind by two independent agencies/authorities, viz., the Reserve Bank of India and the Central Government. In Palai Central Bank's case [1962] 32 Comp Cas 594, the Supreme Court also held that even assuming that the power is unguided, the provision is not unreasonable as the power is conferred on an expert body which in the true sense is best able to decide whether it should or should not be exercised. The desirability of conferring such powers on the Reserve Bank has been emphasise by the Supreme Court in Palai Central Bank's case [1962] 32 Comp Cas 514 for several reasons such as (a) the powers are conferred in the public interest; (b) the powers are not unguided or unfettered; (c) there is nothing unreasonable in the fact that such extensive powers are conferred on an expert body such as the Reserve Bank which is uniquely competent to take decisions on all matters appertaining to banking business; and (d) the fact that no appeal or review is provided for does not make the provision unreasonable. We, therefore, find no substance in the contention that the impugned provisions offend article 14 in any manner. As regards the challenge based on article 19(1)(g), it is clear that the restrictions by reason of imposition of moratorium are not only reasonable and are needed to safeguard the public interest, but also to safeguard the interest of the depositors and creditors.

54. In this behalf, we may usefully refer to the statement of law set out by Mr. Seervai in the Constitutional Law of India, second edition, volume 1, at page 276 and 277. The position of law has been summarised thus :

'The result of the authorities appears to be that the vesting of discretionary power in the State or public authorities of a very high standing is treated as a guarantee that the power will be used fairly and with a sense of responsibility. The conferment of wide discretionary power on minor or subordinate officials weakens, if it does not destroy that guarantee and might lead the court to hold that the conferment of such power was unreasonable.'

55. As far as section 45 is concerned, as pointed out by us above, the powers are conferred on high authorities like the Reserve Bank which is aptly described as the 'bankers ' bank' and the Central Government. The conferment of power on these two authorities by itself is a guarantee that the power will be used fairly and with a sense of responsibility are not arbitrarily. We are, therefore, not inclined to uphold any of the contentions of MR. Cooper on the question of constitutional validity of section 45(1), (2) and (3).

56. Since we have upheld the constitutional validity of section 45(1), (2) and (3) sens article 31A(1)(c) of the Constitution, it is not really necessary for us to consider Mr. Setalwad's contention that these provisions are protected from challenges based on articles 14 and 19(1)(g) by virtue of article 31A(1)(c). However, we may briefly indicate the line of argument of both the learned counsel on this question. Mr. Cooper submitted that article 31A(1)(c) can be invoked only in respect of the provisions relating to amalgamation. He pointed out that an order of moratorium need not necessarily result in a scheme of amalgamation, rather, it can come to an end after the expiry of the period without any further consequential steps of reconstruction or amalgamation. The Reserve Bank may frame a scheme for reconstruction of the banking company instead of a scheme for amalgamation. None of these possibilities can be taken for granted but would depend on the facts of each case and, therefore, according to learned counsel, it is only a provision for amalgamation which can be saved and not such a provision which is mixture of different provisions resulting in a variety of consequences though one of them may be of amalgamation. In any case, he submitted that an order of moratorium under section 45(2) is a jurisdictional fact on the basis of which further action can be taken and such a provision cannot be said to be ancillary to the provisions of section 45(4) which, inter alia, deal with amalgamation. Secondly, he pointed out that even the provisions contained in section 45(4) onwards are not provisions merely of amalgamation, but they also relate to the reconstruction of the banking company which is not saved by article 31A(1)(c). However, according to Mr. Setalwad, the provisions contained in section 45(1), (2) and (3) are enabling/ancillary provisions and since sub-section (4) of section 45 onwards deals with amalgamation, the entire section must be treated as the provision pertaining to amalgamation. As far as the applicability of article 31A(1)(c) is concerned, according to learned counsel, the mere fact that different consequences in different situations may follow would not make any difference. He also submitted that the provisions of section 45(1), (2) and (3) must be treated as provisions ancillary to the remaining provisions of section 45 which do provide for amalgamation and, consequently, the entire section gets protection under article 31A(1)(c). But, according to Mr. Cooper, the impugned provisions cannot be said to be ancillary provisions. In the view that we have taken on the constitutional validity of the impugned provisions, without the aid of article 31A(i)(c), we do not think it necessary to decide this interesting but vexed question.

57. We must make it clear that so far as the validity or otherwise of the draft scheme of amalgamation propose by the Reserve Bank is concerned, the Reserve Bank has already invited suggestions and objections and in fact such suggestions and objections have been received by the Reserve Bank. Mr. Cooper submitted that section 45(6) contemplates suggestions and objections to the scheme. He submitted that these suggestions and objections can only relate to the modification of the draft scheme and there is no provision for the cancellation of the scheme. This argument is based on the wording of section 45 (6) and (7). However, it is not necessary to deal with this aspect in view of the stand taken by the Central Government and the Reserve Bank. According to Mr. Setalwad, the particulars enumerated in section 45(6) are not only to make suggestions which would imply change in the scheme, but also objections and, according to him, objections can also be objections to the very making of the scheme itself and he conceded that if the Reserve Bank or the Central Government is satisfied as a result of the objections that the scheme may not be framed at all, they would not proceed further in the matter. He submitted that though section 45(6) and (7) does not specifically provide for such a contingency, section 21 of the General Clauses Act will come into play, and the Reserve Bank will have the power to cancel the draft scheme. We make it clear that we have not considered the merits or demerits of the scheme and it is open to the parties to take up such contentions as they deed fit and permissible in law.

58. Before parting with the judgment, we must record our deep appreciation of the valuable assistance ably rendered by the senior counsel for the parties which has considerably helped us in deciding the rival contentions.

59. In the result, the petition fails. Rule is discharged. However, in the circumstances of the case, there shall be no order as to costs.

60. Petition dismissed.


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