Partly allowed

Mr. Ashok Balwant Jadhav and Ors. v. the Reserve Bank of India, through General Manager and Ors.

Bombay HC10 Nov 2014WP/495/2014

Case brief

AI extract

What is this about?

This judgment dismisses writ petitions challenging the Reserve Bank of India's order superseding the board of the Nashik Merchants Co-operative Bank. The court held that Article 243ZL does not apply due to specific savings for banking regulations. The court also held that Section 36AA”b of the Banking Regulation Act, 1949 is not discriminatory under Article 14 as multi-State banks differ from Stat

What did the court decide?

The writ petitions were rejected. The Civil Applications do not survive and were disposed of. The order of supersession by the Reserve Bank of India was upheld.

Mr. Ashok Balwant Jadhav and Ors. Vs the Reserve Bank… — Cooperative Societies | Bombay HC (2014)

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wp-85,495 496.14, caw-1840.14

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pmw

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY CIVIL APPELLATE JURISDICTION

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WRIT PETITION NO.85 OF 2014

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Shri Vasant Nivrutti Gite and Ors. … Petitioners Vs. The Reserve Bank of India and Ors. … Respondents

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WITH WRIT PETITION NO.495 OF 2014

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Mr. Ashok Balwant Jadhav and Ors. … Petitioners Vs.

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The Reserve Bank of India and Ors. … Respondents

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WITH WRIT PETITION NO.496 OF 2014 WITH CIVIL APPLICATION NO.1840 OF 2014 IN WRIT PETITION NO.496 OF 2014

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Shri Prakash Motilal Diyama and Anr. … Petitioners Vs.

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The Reserve Bank of India and Ors. … Respondents

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Mr. Pramod Narayan Joshi, for the Petitioners in WP No.85 of 2014.

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Mr. Sham V. Walve, for Petitioners in WP No.495 of 2014.

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Mr. Nikhil Pujari a/w Pratik Rahade i/by Mr. Sachin P. Gorwadkar, for the Petitioners / Applicant in WP No.496 of 2014 and CAW No.1840 of 2014.

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Mr. Venkatesh Dhond, Senior Advocate a/w Mr. Parag Sharma i/by M/s. Udwadia & Udeshi, for Respondent Nos.1 and 2 in all Petitions.

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CORAM : A.S. OKA & A.S. GADKARI, JJ.

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DATE : 10^th NOVEMBER, 2014

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P.C.

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. These Petitions were heard in the last week. These Petitions concern the Nashik Merchants Co-operative Bank Limited at Nashik. It is admittedly registered under the Multi-State Co-operative Societies Act, 2002 (for short “the said Act of 2002”). The Reserve Bank of India passed an order dated 3^rd January, 2014 in purported exercise of powers under the provisions of the Banking Regulation Act, 1949. The Reserve Bank of India invoked Section 36AAA of the said Act of 1949 by directing that the Board of Directors of the State Co-operative Bank shall stand superseded. The Reserve Bank of India proceeded to appoint an Administrator for a period of one year. In Writ Petition No.85 of 2014 and in Writ Petition No.495 of 2014, the challenge is mainly to the said order of the Reserve Bank of India. In Writ Petition No.496 of 2014, the substantive prayer is for challenging the validity of Section 36AAA of the said Act of 1949 by contending that the same is violative of Article 14 of the Constitution of India.

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We have heard the learned counsel appearing for the Petitioners in these Petitions. The learned counsel appearing for the Petitioners relies upon the provisions of part IXB of the Constitution of India introduced by the Constitution (Ninety-Seventh Amendment), Act

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2011 and in particular Article 243ZL. His submission is that in view of clause (i) of Article 243ZL, a board of a co-operative society cannot be suspended or kept under suspension for a period exceeding six months. He pointed out that unless there is a government shareholding in the Society or there is a loan or financial assistance or any guarantee issued by the Government, the power of superseding the Board cannot be exercised. He, therefore, submitted that the impugned order is in breach of Article 243ZL which came into force with effect from 12^th January, 2012.

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He invited our attention to Section 36AAA of the said Act of 1949 as well as amendments made to the said Act of 1949 by the Banking Laws (Amendment) Act, 2012 (for short the Amendment Act of 2012). He invited our attention to Part IIAB of the said Act of 1949 which was brought on the statute book on 12^th January 2012. His submission is that Section 36 ACA of Part II AB clearly provides that the power vesting with the Reserve Bank of India of superseding the Board of Directors of a Banking Company can be exercised initially for a period not exceeding six months. The order of supersession can be extended from time to time provided the total period shall not exceed 12 months. He submitted that the said provision of Section 36 ACA was on the statute book when the impugned order was passed by the

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Reserve Bank of India. He invited our attention to the other amendments carried out to Section 56 of the said Act of 1949 by the Amendment Act of 2012. He invited our attention to the Schedule to the Amendment Act of 2012 which clearly shows that a Banking Company will include a Multi-State Co-operative Bank. Inviting our attention to the provisions of Section 36 ACA, he submitted that in case of all the banking companies and banks including co-operative banks constituted under the State Laws, the order of supersession of the board can be operative for a maximum period of 12 months. On the other hand, Section 36AAA provides that supersession of the board of directors of a multi-State co-operative bank can be extended from time to time for a total period not exceeding five years. He urged that there is no difference between a co-operative bank which is a co-operative society registered under the State Law and a multi-state co-operative bank registered under the said Act of 2002. He urged that no distinction can be made between a co-operative bank under the State Law and a co-operative bank under the said Act of 2002 as both are banking companies and banks within the meaning of the said Act of 1949. He urged that in case of a co-operative bank under the State Law, there is an outer limit of one year for operation of an order superseding the board and, therefore, Section 36AAA which provides for outer limit of five years in case of a multi-State co-operative bank is discriminatory

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and is hit by Article 14 of the Constitution of India. He urged that by no stretch of imagination, a multi-State co-operative bank can be treated differently from a co-operative bank under a State Law. He urged that two equals are being treated as unequals by the said Act of 1949. He would urge that even if the first submission of the Petitioners based on Article 243ZL is not accepted, the prayer made for declaring the Section 36AAA of the said Act of 1949 as unconstitutional will have to be acceded to. He would, therefore, urge that in any event, the impugned order is vitiated and the same deserves to be set aside.

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. The learned Senior Counsel appearing for the Reserve Bank of India invited our attention to Article 243ZL and pointed out that the second proviso specifically saves the provisions of the said Act of 1949 and, therefore, notwithstanding Article 243ZL, the Reserve Bank of India is empowered to exercise powers under Section 36AAA. He submitted that the Constitution of India itself recognises that a cooperative bank registered under the State law is different from a cooperative bank registered under the said Act of 2002. He urged that both the classes of Banks are completely different. A multi-State cooperative bank operates not only in one State but in more than one States. Inviting our attention to the findings recorded in the impugned order, he urged that considering the cases of grave illegalities and

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irregularities affecting interest of the investors, no interference is called for in the impugned order. The learned counsel appearing for the Petitioner submitted that even the merits of the said order needs to be looked into. He urged that without giving a proper opportunity to the Petitioners of being heard, the impugned order has been passed.

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We have given careful consideration to the submissions. It will be necessary to make a reference to the provisions of the said Act of 1949. Clause (c) of Section 5 of the said Act of 1949 defines a banking company to mean any company which transacts the business of banking in India. It will be necessary to make a reference to Part V of the said Act of 1949 and in particular Section 56 thereof. It is provided that the provisions of the said Act of 1949 shall apply to, or in relation to, Cooperative Societies as they apply to, or in relation to banking companies subject to modifications made by the Section. The Section as it originally stood before coming into force of the Amendment Act of 2012, contained definition of a State co-operative bank. It provided that a State co-operative bank means a State co-operative bank, a central co-operative bank and a primary co-operative bank. Amendment made by the Amendment Act of 2012 to the said definition is that the word “State” was deleted and the definition was maintained as it is. We must note here that clause (cciiia) of Section 56 defines “multi-State co-

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operative Bank” to mean a multi-State co-operative society which is a primary co-operative bank. A multi-State co-operative society is defined to mean a multi-State co-operative society registered as such under any Central Act for the time being in force relating to the multi-State cooperative societies. Thus, the said Act itself makes a distinction between a co-operative bank registered under a State Law and a multiState co-operative bank. Sub-sections (1) and (2) of Section 36AAA read thus :-

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“(1) Where the Reserve Bank is satisfied in the public interest/or for preventing the affairs of a multi-State co-operative bank being conducted in a manner detrimental to the interest of the depositors or of the multi-State co-operative bank or for securing the proper management of the multi-State cooperative bank, it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, supersede the Board of directors of such multi-State cooperative bank for a period not exceeding five years as may be specified in the order, which may be extended from time to time, so, however, that total period shall not exceed five years.

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(2) The Reserve Bank may, on supersession of the Board of directors of the multi-State co-operative bank under subsection (1) appoint an Administrator for such period as it may determine.”

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The power conferred of supersession of the Board under

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Section 36AAA is confined to the multi-State co-operative banks. The power can be exercised in the following contingencies :-

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A] The affairs of a multi-state co-operative bank being conducted in a manner detrimental to the interest of the depositors;

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B] The affairs of a multi-state co-operative bank being conducted in a manner detrimental to the said bank or;

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An order can be passed superseding the board upto the period of five years by recording reasons.

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There is no dispute that in the present case, the power has

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been exercised under Section 36AAA. Now, we turn to the Amendment to the Constitution of India by incorporating Part IXB. Clause (c) of Article 243ZH makes a distinction between a co-operative society and a multi-State co-operative society. “Co-operative society” means a society registered or deemed to be registered under any law relating to cooperative societies for the time being in force in any State whereas “multi-state co-operative society” is defined to mean a society with objects not confined to one State and registered or deemed to be registered under any law for the time being in force relating to the multi-State co-operative societies. Thus, multi-State co-operative Societies are the one registered under the said Act of 2002 and the cooperative societies are the one registered under the laws in force in any State. Now, we turn to the Article 243ZG which reads thus :-

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“243ZL.- (1) Notwithstanding anything contained in any law for the time being in force, no board shall be superseded or kept under suspension for a period exceeding six months:

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Provided that the board may be superseded or kept under suspension in case -

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(i) of its persistent default; or

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(ii) of negligence in the performance of its duties; or

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(iii) the board has committed any act prejudicial to the interests of the co-operative society or its members; or

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(iv) there is stalemate in the constitution or functions of the board; or

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(v) the authority or body as provided by the Legislature of a State, by law, under clause (2) of article 243ZK, has failed to conduct elections in accordance with the provisions of the State Act;

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Provided further that the board of any such cooperative society shall not be superseded or kept under suspension where there is no Government shareholding or loan or financial assistance or any guarantee by the Government:

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Provided also that in case of a co-operative society carrying on the business of banking, the provisions of the Banking Regulation Act, 1949 shall also apply:

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Provided also that in case of a co-operative society, other than a multi-State co-operative society, carrying on the business of banking, the provisions of this clause shall have the effect as if for the words “six months”, the words “one year” had been substituted.

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(2) In case of supersession of a board, the administrator appointed to manage the affairs of such co-operative society shall arrange for conduct of elections within the period specified in clause (1) and handover the management to the elected board.

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(3) The Legislature of a State may, by law, make provisions for the conditions of service of the administrator.”

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It is true that clause (1) of Article 243ZL provides that a Board of a co-operative society shall not be superseded for a period exceeding six months. However, the second proviso makes it very clear that in case of a co-operative society carrying on the business of banking, the provisions of the said Act of 1949 shall also apply. Thus, under the second proviso, the applicability of the said Act of 1949 in relation to the co-operative societies carrying on the business of banking has been specifically saved Therefore, notwithstanding Article 243ZL, the Reserve Bank of India can continue to exercise its powers in relation to co-operative banks under the said Act of 1949 and, therefore, in relation to exercise of such powers by the Reserve Bank of India, embargo of six months provided under Article 243ZL will not apply.

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Now, we come to the submissions made based on violation of Article 14 on the basis of which validity of Section 36AAA has been challenged.

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As pointed out earlier, even Part IXB of the Constitution of India treats the co-operative societies registered under the State Act differently from the multi-State co-operative societies registered under the said Act of 2002. Even the third proviso to Article 243ZL makes a

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clear distinction between a co-operative society and a multi-State cooperative society carrying on the business of banking. In view of the second proviso to Article 243ZL, the outer limit provided under clause (1) of Article 243ZL will not apply when the power of supersession is exercised under the said Act of 1949 in relation to banking multi-state societies under the said Act of 2002. As noted earlier, the relevant provisions of the Constitution of India (i.e the third proviso) to which the Petitioners are relying upon clearly show that even the Constitution of India treats a multi-State co-operative society differently from a cooperative society under a State Act. Therefore, the argument that both the categories of co-operative banks are equals cannot be accepted.

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We have also made a reference to the provisions of Section 56 of the said Act of 1949. Even Section 56 makes a clear distinction between a co-operative bank and a multi-state co-operative bank and perhaps that is the reason why there is a separate provision in the form of 36AAA incorporated under the said Act of 1949 which deals with power of supersession vested in Reserve Bank of India in relation to multi-State co-operative banks. That is the reason why under Section 36 ACA outer limit of 12 months for supersession is provided and only in case of multi-state co-operative banks that the outer limit of five years has been provided. The area of operation of a co-operative society

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registered under a State Law running banking business is much smaller that the area of operation of a multi-state cooperative society under the said Act of 2002 running a banking business. Therefore, the argument of discrimination based on Article 14 of the Constitution of India for assailing the validity of 36AAA cannot be accepted and the same will have to be rejected.

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As far as the merits of the order is concerned, we must note that a very detailed order running into several pages has been passed by the Reserve Bank of India. The said order takes into consideration a report of statutory inspection under Section 35 of the said Act of 1949. The details of the irregularities have been set out in the impugned order. After setting out the details of the irregularities, in paragraphs 6 and of the impugned order, it is observed thus :-

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“6. In view of the serious irregularities and violations such as directors holding position in other societies/financial entities in conflict of interest, setting up of public trust in violation of 6(i) (j) of BR Act (AACS), making donations to trusts where directors are interested, interested party transactions with other trusts connected with directors, violation of KYC/AML guidelines, collapse of good Governance along with other managerial lapses, Central Task Force for Urban Co-

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operative Banks (Central TAFCUB) in its meeting held on October 23, 2013 recommended to supersede the Board of directors of the bank and appoint an administrator under section 36(AAA) of the BR Act 1949 (AACS) by the RBI.

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7 Therefore, it is evident from the above description that the present Board of Directors has been jointly and severally liable for such gross

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malpractices/irregularities in the functioning of the bank. As such the bank clearly failed in discharging its responsibilities and was conducting the bank's business in a matter detrimental to the interests of the bank's present and future depositors. In the circumstances,I, S.Karuppasamy, Executive Director of the Reserve Bank of India, in exercise of the powers conferred under subsection 36AAA of the BR Act, 1949 (AACS) read with section 56(zaa) of the Banking Regulation Act,1949, do hereby order the supersession of the Board of Directors of the Nasik Merchant's Co-operative Bank Ltd.Nashik, Maharashtra with effect from January 6,2014 and appoint Shri J.B.Bhoria as Administrator of the said bank fromt hat date for a period of one year.”

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After having perused the said order, we find that all relevant factors have been considered by the Reserve Bank of India. Very large irregularities and illegalities were found. It cannot be disputed that Reserve Bank of India is a body of experts in the banking.

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The Reserve Bank of India possesses expert knowledge pertaining to the matters of banking. As far as the operation of banking is concerned, the matter should be best left to the decision of those who are qualified to address the issues. Nothing arbitrary, irrational or illegal is pointed in the impugned order. Considering the fact that the impugned order has been passed by the expert body like Reserve Bank of India after considering all the factors, as held by the Apex Court in the case of 1 Federation of Railway Officers Association and others vs. Union of India , no interference can be made on merits of the impugned order. We, accordingly, find that there is no merit in various challenges invoked by the Petitioners. The Petitions are accordingly rejected. Civil Applications do not survive and the same are disposed of.

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(A.S. GADKARI, J ) (A.S.OKA, J )

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1 2003(4) SCC 259

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Mr. Ashok Balwant Jadhav and Ors. v. the Reserve Bank of India, through General Manager and Ors.

Case brief

What is this about?

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Mr. Ashok Balwant Jadhav and Ors. v. the Reserve Bank of India, through General Manager and Ors.

Case brief

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What did the court decide?

What the court decided

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