KANJIRAPPALLY SERVICE CO-OPERATIVE BANK LTD. v. STATE OF KERALA & ORS.

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT:** ## **THE HONOURABLE MR. JUSTICE DEVAN RAMACHANDRAN** **FRIDAY, THE 4TH DAY OF AUGUST 2017/13TH SRAVANA, 1939** ## **WP(C).No. 25405 of 2013 (A)** **----------------------------------------** ## **PETITIONER(S) : -------------------------** **1. THE KANJIRAPPALLY SERVICE CO-OPERATIVE BANK LTD., NO. 2061, KANJIRAPPILLY P.O., KOTTAYAM DISTRICT, REPRESENTED BY ITS SECRETARY.** **2. THE SECRETARY, THE KANJIRAPPALLY SERVICE CO-OPERATIVE BANK LTD., NO.2061, KANJIRAPPILLY P.O., KOTTAYAM DISTRICT.** **3. THE BOARD OF DIRECTORS,** - **THE KANJIRAPPALLY SERVICE CO-OPERATIVE BANK LTD., NO.2061, KANJIRAPPILLY P.O., KOTTAYAM DISTRICT, REPRESENTED BY ITS PRESIDENT.** **4. THE PRESIDENT, THE KANJIRAPPALLY SERVICE CO-OPERATIVE BANK LTD., NO.2061, KANJIRAPPILLY P.O., KOTTAYAM DISTRICT.** - **BY SRI.K.K.CHANDRAN PILLAI (SENIOR ADVOCATE) ADVS. SMT.S.AMBILY** **SRI.ARUN ANTONY SMT.K.V.SHENU SRI.THOMAS JAMES MUNDACKAL** **RESPONDENT(S) :** - **-----------------------------** **1. STATE OF KERALA, REPRESENTED BY THE SPECIAL SECRETARY, CO-OPERATION DEPARTMENT, GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM - 695 001.** **2. THE REGISTRAR OF CO-OPERATIVE SOCIETIES, OFFICE OF THE REGISTRAR OF CO-OPERATIVE SOCIETIES, THIRUVANANTHAPURAM - 695 001.** **3. THE JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES (GENERAL), OFFICE OF THE JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES, KOTTAYAM 686 001.** **..2/-** **..2..** ## **WP(C).No. 25405 of 2013 (A)** ## **----------------------------------------** ## **4. THE ASSISTANT REGISTRAR OF CO-OPERATIVE SOCIETIES, OFFICE OF THE ASSISTANT REGISTRAR OF CO-OPERATIVE SOCIETIES, KANJIRAPPALLY, KOTTAYAM DISTRICT 680 721.** ## *** ADDITIONAL R5 IMPLEADED** ## **5. KURUVILLA MATHEW, S/O.MATHEW, AGED 65 YEARS, MADUKAKUZHY, ANAKKAL P.O., KANJIRAPILLY, KOTTAYAM DISTRICT- 686 508.** - **ADDITIONAL R5 IS IMPLEADED AS PER ORDER DATED 19.07.2016** **IN I.A.NO. 11333 OF 2016.** **R1 TO R4 BY SR. GOVERNMENT PLEADER SRI.MOHAMMED HASHIM ADDL.R5 BY ADV. SRI.JOHNSON MANAYANI** **THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 04-08-2017, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:** **Msd.** ## **WP(C).No. 25405 of 2013 (A)** **------------------------------------------** ## **APPENDIX** ## **PETITIONER(S)' EXHIBITS :** - **EXT.P-1: COPY OF CIRCULAR NO.24/2010 DATED 05.05.2010 ISSUED BY THE 2ND RESPONDENT.** - **EXT.P-2: COPY OF THE LETTER DATED 29.09.2011 ISSUED BY THE 3RD RESPONDENT TO THE 1ST PETITIONER.** - **EXT.P-3: TRUE COPY OF RESOLUTION TAKEN BY THE DIRECTOR BOARD DATED 20.06.2012.** - **EXT.P-4: TRUE COPY OF REPLY GIVEN TO 3RD RESPONDENT DATED 06.07.2012.** - **EXT.P-5: TRUE COPY OF COVERING LETTER TO EXT.P4 DATED 10.07.2012.** - **EXT.P-6: COPY OF REQUEST GIVEN TO 1ST RESPONDENT BY THE 4TH PETITIONER TO THE 1ST RESPONDENT.** - **EXT.P-7: COPY OF COMMUNICATION FROM 3RD RESPONDENT TO 2ND RESPONDENT DATED 25.03.2013.** - **EXT.P-8: COPY OF COMMUNICATION ISSUED BY THE 3RD RESPONDENT TO THE 4TH RESPONDENT DATED 23.08.2013.** - **EXT.P-9: COPY OF REPRESENTATION SUBMITTED BY THE 3RD PETITIONER BEFORE THE MINISTER FOR CO-OPERATION DEPARTMENT DATED 23.08.2013.** ## **RESPONDENT(S)' EXHIBITS & ANNEXURES :** - **ANNEXURE A1: TRUE COPY OF THE PETITION FILED BY THE PETITIONER BEFORE THE RESPONDENTS 6 TO 8.** **EXHIBIT R5(A): TRUE COPY OF THE PETITION FILED BY THIS RESPONDENT BEFORE THE RESPONDENTS 1 TO 4.** **EXHIBIT R5(B): THE TRUE COPY OF THE AUDIT REPORT FOR THE YEAR 2009-2010 DATED 30.04.2011 SUBMITTED BY THE AUDITOR.** - **EXHIBIT R5(C): THE TRUE COPY OF THE AUDIT CERTIFICATE FOR THE YEAR 2010-2011 DATED 10.02.2012 SUBMITTED BY THE AUDITOR.** - **EXHIBIT R5(D): THE TRUE COPY OF THE AUDIT CERTIFICATE ISSUED BY THE AUDITOR FOR THE YEAR 2005-2006.** **//TRUE COPY//** **P.A.TO JUDGE.** **Msd.** _**C.R.**_ ## **DEVAN RAMACHANDRAN, J. --------------------------------------WP(C) No.25405 of 2013 --------------------------------------Dated this the 4[th] day of August, 2017** ## **JUDGMENT** The manner and mode of investment of the funds of a Cooperative Society, incorporated and registered under the provisions of the Kerala Co-operative Societies Rules, 1969 ('the KCS Rules' for brevity), is scrupulously prescribed in Chapter VI thereof. This Chapter begins with Rule 53 and ends at Rule 63. The _leit motif_ of these provisions is that the funds of a Society will have to be, as far as possible, maintained as fluid resource in such form and according to the standards fixed by the Government from time to time. Liquid resource means assets which may be converted into ready cash and includes balance with the banks, post office savings bank and unencumbered investments representing the statutory reserve fund. The mode of investment of reserve fund is also provided under Rule 60 of the Rules and it postulates investment in the Central Cooperative Bank or the Apex Bank as the case may be and in trust **2** _WP(C) No.25405 of 2013_ securities. This being the essential manner in which funds are to be deployed. 2. The genesis of the controversy in this case is that the first respondent Society invested a large portion of its funds in certain mutual funds without obtaining the permission of the Registrar of Co-operative Societies. The allegation against the first respondent Society is that these modes of investments, which are alleged to be high risk ones, are not provided for in the bye-laws of the Society and, therefore, that it ought to have been done only with the previous express sanction of the Registrar of Co-operative Societies, thus being in violation of the provisions contained in Rule 180 of the Rules. 3. The Society in question is a Primary Agricultural Credit Society as defined under Section 2(oaa) of the Act with its principal object being to provide loans and advances for agricultural purposes. Their investment in the mutual funds, therefore, invited objections because such investments were seen to be high risk ones and not fluid thereby being in violation of the principal object for which the funds could have been utilised. It is **3** _WP(C) No.25405 of 2013_ asserted by the respondent that even if the Society wanted to make such investments, it could have done so only after obtaining the express sanction from the Registrar of Co-operative Societies and that their action in not obtaining such sanction before making such investments amounts to gross illegality and misfeasance on the part of the members of the Managing Committee of the Society. 4. The controversy in this case has been exacerbated because the Society has allegedly made investments in certain mutual funds which is commonly perceived to be high risk investments. The inevitable prejudice against such investments is obviously on account of the continued perceptional bias against it because it carries with it certain degree of fear on account of volatility. The oscillating tendencies of the stock markets adds to this and the daily news from it can overwhelmingly create an impression of on such volatility. Since the provisions of the Act, as indicated above, provide that investments of Societies be fluid as far as possible, the respondents maintain that mutual fund returns, being not guaranteed and subject to great uncertainty, it **4** _WP(C) No.25405 of 2013_ was impermissible for the Society to have made such investments. 5. The apprehension voiced by the respondents may perhaps appear justified because the volatility facet of such investments would give mutual funds a certain degree of uncertainty and it is axiomatically possible, the returns being not guaranteed, that such investments may even loose money. It is in this background of the perceptional bias against investments in mutual funds, especially because our country has been essentially a pure fixed income for the past several decades, that this Court will have to approach the issues raised in this writ petition. 6. The 1[st] respondent as recorded above, is a Primary Agricultural Credit Society incorporated under the provisions of the Kerala Co-operative Societies Act [hereinafter referred to as the KCS Act for brevity]. The 2[nd] petitioner claims to be the Secretary and the 4[th] respondent to be the President of the said Bank. The 3[rd] petitioner is shown to be the Board of Directors in Management of the affairs of the Bank. They have filed this writ petition impugning Ext.P8, which is a notice dated 23.08.2013, **5** _WP(C) No.25405 of 2013_ issued by the Joint Registrar of Co-operative Societies, Kottayam, the 3[rd] respondent herein, directing the 4[th] respondent-the Assistant Registrar of Co-operative Societies, Kottayam to conduct an enquiry under Section 68(1) of the KCS Act on the allegation that the petitioners have caused loss to the finances of the Bank by making certain high risk investment in mutual funds and such other instruments without the prior permission of the Registrar of Co-operative Societies, as is required under Rule 180 of the KCS Rules. The petitioners say that such investments were made by them only because the Bank had surplus funds, which could not be deployed for any other purpose on account of the loan-deposit ratio and asserts that as a consequent of these investments the Bank has not been prejudiced in any manner whatsoever. 7. I have heard Sri.K.K. Chandran Pillai, learned Senior Counsel, assisted by Smt.S. Ambily, appearing for the petitioners, Sri.Johnson Manayani, appearing on behalf of the addl. 5[th] respondent and the learned Special Government Pleader appearing for respondents 1 to 4. **6** _WP(C) No.25405 of 2013_ 8. The pleadings on record and the submissions made by the learned Senior Counsel would indicate that the case of the petitioner is that they had not used the funds of the Bank in any manner so as to cause any loss or prejudice to it. According to the learned Senior Counsel, these funds were remaining unutilised and unused on account of the rigor of the deposit-loan ratio and, therefore, that any amount that is received by investment in a mutual fund or such other can only be a premium and not a loss to the Bank in any manner. His specific case is that the amounts, if had been left unutilised and idle, the Bank could have gained nothing at all, whereas by the investments made by the petitioners in the manner that they have done, the Bank has been actually enjoyed profits of more than Rupees One Crore. He further says that all these investments were made on the sanction of valid resolutions passed by the Board of Directors and that it was done with full responsibility and bonafides to ensure that the money did not remain inert and so that it could earn benefit by such an investment. 9. Sri.Johnson Manayani, the learned counsel appearing for **7** _WP(C) No.25405 of 2013_ the addl. 5[th] respondent, who is a member of the Bank, submits in vehement refutation of the petitioner's claims by saying that the conduct of the petitioners cannot be justified in any manner whatsoever, because the allegedly high risk investments were done by them without obtaining the permission and concurrence of the Registrar of Co-operative Societies, as is imperatively warranted under the provisions of Rule 180 of the Kerala Cooperative Societies Rules [hereinafter referred to as 'the KCS Rules' for brevity]. He says, therefore, that the action of the respondents in having initiated proceedings under Section 68(1) of the KCS Act cannot be faulted and will have to be found to be irreproachable. Sri.Manayani further submits that the question as to whether the Bank had suffered a loss or whether they had made profits are issues that cannot be now affirmatively considered by this Court and that it will have to be left to the competent Authorities to make an evaluation and assessment of the relevant factors under the provisions of Section 68(1) of the KCS Act. 10. In response to the aforesaid submission of Mr.Manayani **8** _WP(C) No.25405 of 2013_ that the Bank had not obtained the permission of the Registrar of Co-operative Societies before making the investments, Sri.Chandran Pillai, learned Senior Counsel submits that the petitioners had already moved Ext.P6 representation before the Registrar seeking permission under the mandate of Rule 180 of the KCS Rules and that the Joint Registrar of Co-operative Societies has, in fact, recommended such permission to be granted as per Ext.P7 order. 11. The learned Special Government Pleader submits, taking cue from the Counter Affidavit filed on behalf of the respondents, that the investment of the petitioners in the high risk instruments like mutual funds and such other has been done illegally and that such conduct of the petitioner is not one that can be viewed as being merely irregular. He asserts very firmly that what the petitioners have done being illegal, cannot be cured even by a post ratification to be obtained from the Authorities. He says that in any even of the matter, no such permission has been granted by the Registrar of Co-operative Societies and that no orders have been issued on Ext.P6 even as on day. He, therefore, **9** _WP(C) No.25405 of 2013_ prays that the writ petition be dismissed, permitting the respondents to continue with the proceedings initiated under Ext.P8 notice. 12. Sri.Johnson Manayani, the learned counsel appearing for the addl. 5[th] respondent, adds a submission saying that audit objections were raised by the concerned Authorities against the petitioners every year, which finally led to Ext.P8 notice. He says that even though Ext.P8 was issued as early as in the year 2013, no action had been taken by the Authorities on account of, what he terms, questionable considerations based on political affiliation and other irrelevant criterion. 13. Mr.Chandran Pillai, the learned Senior Counsel, in answer to the above submission of Mr.Manayani, again points to Ext.P6 and says that the petitioners had made their request for permission to make investments of the surplus funds in Mutual Funds, before the Registrar under Rule 180 of the KCS Rules as early as on 16.07.2012, which is in fact much before Ext.P8 notice had been issued to them. He, therefore, says that the submissions of Sri.Johnson Manayani, on this account, cannot be **10** _WP(C) No.25405 of 2013_ sustained. 14. I have considered the rival contentions of all the parties, as is recorded above. I must, however, immediately exercise caution in delving into any affirmative assessment as to whether the Bank has made a profit or otherwise in these proceedings under Article 226 of the Constitution of India, being cognizant of the well-settled constraints of the jurisdictional limits while dealing with disputed questions of facts. These issues are fully in the realm of facts, which are seriously disputed by the parties, and while dealing with such disputations, this Court will have to be circumspect that it will not foray into the authority of the competent officers vested with the jurisdiction under the relevant Acts, Statutes and Regulations. 15. In the case at hand, what is sought to be done by the Authorities is to invoke Section 68(1) of the KCS Act and to initiate an enquiry to verify whether the petitioners have committed any act of misfeasance or maladministration that would warrant an order of surcharge under its provision. It is now settled in law that any action under Section 68 will have to be **11** _WP(C) No.25405 of 2013_ preceded by an enquiry either under Sections 63, 65 or 66 of the KCS Act and that any such enquiry can be continued or concluded only after following the mandate of Rule 66 of the KCS Rules [see for support _**A.K. Francis v. Joint Registrar [1990 (2) KLT 470]**_ . The apprehension of the petitioners, therefore, that proper procedure will not be followed by the Authorities while concluding the proceedings initiated under Ext.P8 would, therefore, not hold water in view of the specific statutory safeguards inbuilt in such procedure. 16. Since the resolution of the disputes in this lis would be possible only after the assessment and evaluation of the facts involved specifically as to whether the investments made by the Bank had suffered loss or profit, it would be impossible for this Court to enter into a conclusion decisively one way or the other. I am, therefore, of the view that these issues are to be best left to the competence of the Authorities, who are vested with the jurisdiction, authority and expertise under the KCS Act and Rules. 17. I, therefore, for the above, order this writ petition directing that the respondents will be at liberty to continue with **12** _WP(C) No.25405 of 2013_ the proceedings initiated as per Ext.P8, under the provisions of Section 68(1) of the KCS Act and that such proceedings will be pursued and concluded only as per the strict procedural prescriptions under the KCS Act and Rules by first causing an enquiry or inspection under Sections 64 or 65 or 66 of the KCS Act, as they deem proper, following the imperative procedure prescribed under Rule 66 of the KCS Rules. If the Authorities follow the procedure statutorily prescribed without deviating from it, the apprehension of the petitioners would be fully or at least substantially allayed and they would obtain no cause for fear or prejudice at the hands of the respondents. 18. Since this writ petition was admitted in the year 2013 and since there was an order of interim stay granted by this Court against further proceedings pursuant to Ext.P8 on 18.10.2013, the time frames prescribed by the KCS Acts and Rules for initiation and completion of proceedings under Sections 64, 65, 66 and 68 of the KCS Act would be computed by the Authorities after excluding the period between 18.10.2013, when this writ petition was filed, until the date of receipt of the certified **13** _WP(C) No.25405 of 2013_ copy of this judgment. 19. At this point, the learned Senior Counsel submits that Ext.P6 representation made by the petitioners have not, admittedly, been considered by the Authorities even as on date. He says that if this is considered by them, the issues, to a large extent, will be taken care of. I am of the view that it will not be appropriate for this Court to issue any such order at this stage, especially after I have allowed the competent Authority to purse further action bare in Ext.P8. I, therefore, leave it to the Authorities to consider whether any orders will require to be issued on Ext.P6, pending enquiry as per Ext.P8, and it would be up to them to take a decision on it, if they deem it so required. This writ petition is thus ordered as above. In the facts and circumstances of this case, I make no order as to costs and I direct the parties to suffer their respective costs. ## Sd/- ## **DEVAN RAMACHANDRAN, JUDGE.** //True Copy// P.A. to Judge sp/10/08/17