M. Aravindakshan Nair v. State of Kerala and Others

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** **PRESENT :** **THE HONOURABLE MR. JUSTICE A.M.SHAFFIQUE** **TUESDAY, THE 12TH DAY OF MARCH 2013 /21ST PHALGUNA 1034** ## **WP(C).No. 28629 of 2009(W)** **-------------------------------------** ## **PETITIONER(S):** - **------------------------** **1. M. ARAVINDAKSHAN NAIR, S/O. V. GOPALAN NAIR, BUILDING NO. VI/249 (NEW NO VI/275) NEAR C.T.O, AANAVATHI, KOCHI 682 002.** **2. B.S. RAMESH, X/194 NEW NO.X/201),** - **J.D. NORTH STREET, FORT KOCHI- 01** **3. URSULA LENIN, KALIYATH HOUSE BUILDING NO. XVII/204, MUNDAMVELI, KOCHI 682 007.** **4. A.P. KALYANASUNDARAM, VI/1158 ( NEW NO. VI/1209) KOTTUKULAM ROAD, KOCHI -02.** **BY ADVS. MR.N.HARIDAS MR.P.N.SASIDHARAN MR.N.HARIDAS MR.GEORGE POONTHOTTAM** ## **RESPONDENT(S):** ## **------------------------** **1. STATE OF KERALA, REP. BY THE SECRETARY, DEPARTMENT OF CO-OPERATION GOVERNMENT SECRETARIAT, THIRUVANANTHAPURAM.** **2. REGISTRAR OF CO-OPERATIVE SOCIETIES, GOVERNMENT OF KERALA, THIRUVANANTHAPURAM.** **3. JOINT REGISTRAR OF CO-OPERATIVE SOCITIES (G) ERNAKULAM.** **tss** ## **W.P.(C) NO.28629/2009** **4. DEPUTY GENERAL MANAGER,RESERVE BANK OF INDIA, URBAN BANKS DEPARTMENT,THIRUVANANTHAPURAM -33.** **5. MATTANCHERY MAHAJANIK CO-OPERATIVE URBAN BANK LTD., NO. 665, P.O. BOX NO. 304, PALLIARAKKAVU ROAD, KOCHI -02, REPRESENTED BY ITS GENERAL MANAGER.** **6. ADMINISTRATOR, (ASSISTANT REGISTRAR OF CO-OPERATIVE SOCIETIES (GENERAL) KOCHI), MATTANCHERY MAHAJANIK CO-OPERATIVE URBAN BANK LTD., NO. 665, P.O. BOX, NO. 304, PALLIARAKKAVU ROAD, KOCHI-02.** **7. K.N.GOPALAKRISHNAN, VI/334, THOPPINAKAM, ANAVATHIL, KOCHI,** **8. T.BALAN, JYOTHIS, KOOVAPADAM, KOCHI-2** **9. K.P.GEORGE, IV/541 KARIPALAM, KOCHAD HOUSE, KOCHI -2.** **ADDL.R7 TO R9 ARE IMPLEADE AS PER ORDER DTD. 1.8.2011 IN IA. 10079/2011 IN WP(C) NO.28629/2009.** **R1 TO R3 & R6 BY GOVT. PLEADER SRI.P.PADMALAYAN BY ADV. SRI.GEORGE POONTHATTAM BY ADV. SRI.VIVEK VARGHESE BY ADV. SRI.O.D.SIVADAS** **THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 17/11/2012, THE COURT ON 12/03/2013 DELIVERED THE FOLLOWING:** **tss** ## **W.P.(C) NO.28629/2009** ## **APPENDIX** ## **PETITIONER'S EXHIBITS** ## **P1:- COPY OF THE PROCEEDINGS NO.C.B.(4) 9585/2004 DTD. 15.6.04 ISSUED BY THE 2ND RESPONDENT.** **P2:- COPY OF THE JUDGMENT DTD. 3.11.04 IN WPC. 18244/04 OF THIS HONOURABLE COURT.** **P3:- COPY OF THE JUDGMENT 23.8.06 IN CONT. CASE NO.524/06(S) OF THIS HONOURABLE COURT.** ## **P4:- COPY OF THE PROCEEDINGS NO.C.R.B./86/04 DTD. 12.6.07 ISSUED BY THE 3RD RESPONDENT TO THE IST PETITIONER.** **P5:- COPY OF THE JUDGMENT DTD. 13.7.07 IN WPC. 20750/07 OF THIS HONOURABLE COURT..** ## **P6:- COPY OF THE EXPLANATION DTD. 20.8.07 SUBMITTED BY PETITIONERS 1,2 & 4 BEFORE THE 3RD RESPONDENT.** ## **P7:- COPY OF THE AWARD DTD. 19.9.08 IN SRC. 116/07 OF THE CO-OPERATIVE ARBITRATION COURT, THIRUVANANTHAPURAM.** ## **P8:- COPY OF THE ORDER NO.C.R.B. 860/04/K.DIS. DTD. 4.3.08 ISSUED BY THE 3RD RESPONDENT TO THE IST PETITIONER.** **P9:- COPY OF THE LETTER DTD. 2.5.08SUBMITTED BY THE IST PETITIONER BEFORE THE 5TH RESPONDENT BANK.** **P10:- COPY OF THE NOTICE DTD. 6.5.08 ISSUED BY THE 3RD RESPONDENT TO THE IST PETITIONER.** ## **P11:- COPY OF THE APPEAL NO.7107/C2/08/CO.OP DTD. 20.5.08 SUBMITTED BY THE PETITIONERS BEFORE THE IST RESPONDENT.** **P12:- COPY OF THE PETITION DTD. 21.5.08 SUBMITTED BY THE PETITIONERS BEFORE THE 3RD RESPONDENT.** **P13:- COPY OF THE JUDGMENT DTD. 27.5.08 IN WPC. 15540/08 OF THIS HONOURABLE COURT.** ## **P14:- COPY OF THE STAY PETITION DTD. 24.5.08 IN EXT.P11 APPEAL, FILED BY THE PETITIONERS BEFORE THE IST RESPONDENT.** **P15:- COPY OF THE MEMO DTD. 12.6.08 FILED BY THE PETITIONERS' COUNSEL, MR.P.N.SASIDHARAN BEFORE THE IST RESPONDENT** ## **tss** ## **W.P.(C) NO.28629/2009** ## **P16:- COPY OF THE LETTER DTD. 19.6.08 ISSUED FROM THE OFFICE OF THE IST RESPONDENT TO THE IST PETITIONER.** **P17:- COPY OF THE JUDGMENT DTD. 30.6.08 IN WPC. 19197/08 OF THIS HONOURABLE COURT.** **P18:- COPY OF THE ORDER G.O.(RT) NO.251/09/CO/OP. DTD. 14.5.09 ISSUED BY THE IST RESPONDENT TO THE IST PETITIONER.** **P19:- COPY OF THE JUDGMENT DTD. 5.6.09 IN WPC. 14971/09 OF THIS HONOURABLE COURT.** **P20:- COPY OF THE NOTICE DTD. 19.6.09 ISSUED BY THE IST RESPONDENT TO THE IST PETITIONER.** ## **P21:- COPY OF THE NOTICE DTD. 16.7.09 ISSUED BY THE IST RESPONDENT TO THE IST PETITIONER.** **P22:- COPY OF THE NOTICE DTD. 25.8.09 ISSUED BY THE UNDER SECRETARY ON BEHALF OF THE ADDL. CHIEF SECRETARY TO THE IST PETITIONER.** ## **P23:- COPY OF THE ORDER DTD. 24.9.09 ISSUED BY THE ADDL. SECRETARY, COOPERATION(C) DEPARTMENT DISMISSING EXT.P11 APPEAL.** ## **P24:- COPY OF THE ORDER DTD. 1.10.09 ISSUED BY THE 3RD RESPONDENT DISQUALIFYING THE PETITIONERS UNDER SECTION 44(1) OF THE K.C.S. RULES.** **P25:- COPY OF THE ORDER DTD. 1.10.09 ISSUED BY THE 3RD RESPONDENT APPOINTING THE 6TH RESPONDENT AS PART TIME ADMINISTRATOR OF THE 5TH RESPONDENT BANK.** **P26:- COPY OF THE LETTER UBD((T)NO.8/10.00 14/2008 -09 DTD. 1.7.09 ISSUED BY THE 4TH RESPONDENT TO THE 5TH RESPONDENT BANK.** ## **P27:- COPY OF THE ENVELOPE CONTAINING EXT.P23 ORDER SENT TO THE IST PETITIONER BY THE IST RESPONDENT.** **P28:- COPY OF THE JUDGMENT DTD. 13.7.07 IN WPC. 20750/2007(T) OF THIS HONOURABLE COURT.** **P29:- COPY OF THE JUDGMENT DTD. 18.9.07 IN WPC. 4765/06 (P) OF THIS HONOURABLE COURT.** **tss** ## **W.P.(C) NO.28629/2009** ## **RESPONDENT'S EXHIBITS** **R3(1):- COPY OF THE LETTER DTD. 03/04/2003 OF THE 4TH RESPONDENT.** **R3(2):- COPY OF THE ORDER UNDER SECTION 66 DTD. 7.4.2004.** **R3(3):- COPIES OF THE LETTERS ISSUED BY THE 4TH RESPONDENT DET. 20.10.2003 & 01.11.2003 & THE PETITIONERS DTD. 27.10.2003.** **R3(4):- COPIES OF THE RELEVANT PAGES OF AUDIT REPORT.** **R3(5):- COPIES OF THE LETTERS BY THE GENERAL MANAGER & THE SURCHARGED PERSONS.** **R3(6):- COPY OF THE ORDER UNDER SECTION 68 (1).** **R3(7):- COPY OF THE OFFICE ORDER DTD. 17.5.08.** **R3(8):- COPY OF THE FILE NOTE DTD. 21.5.08.** **R3(9):- COPY OF THE REPORT DTD. 5.10.09 SUBMITTED BY THE 6TH RESPONDENT.** **R3(10:- COPY OF THE LETTER DTD. 25.6.04 OF THE SIXTH RESPONDENT.** **R6(a):- COPY OF THE LETTER DTD. 3/10/2009.** **R6(b):- COPY OF THE LETTER DTD. 3.10.2009.** ## **TRUE COPY** **P.S. TO JUDGE** **tss** ## **A.M.SHAFFIQUE, J * * * * * * * * * * * * *** W.P.C.No.28629 of 2009 ---------------------------------------Dated this the 12[th] day of March 2013 ## **J U D G M E N T** Exts.P8, P23, P24 and P25 are under challenge in this writ petition. 2. Ext.P8 is an order passed by the Joint Registrar, Co-operative Societies, the 3[rd] respondent imposing surcharge on the petitioners in terms of Section 68(2) of the Kerala Co-operative Societies Act (hereinafter referred as the Act). Though the petitioners filed an appeal under Section 83 of the Act, the same came to be rejected by Ext.P23. Pursuant to Ext.P8 order, the 3[rd] respondent issued Ext.P10 notice for disqualification of the petitioners by invoking Rule 44 of the Co-operative Societies Rules (hereinafter referred as the Rules) and Ext.P24 is the order passed disqualifying the petitioners under the said Rule. W.P.C.No.28629/2009 2 Ext.P25 is the order issued by the 3[rd] respondent appointing an Administrator to the 5[th] respondent society exercising the power under Section 33 of the Act. 3. The factual circumstances involved in the case would disclose that on an inspection conducted by the department under Section 66 of the Act, it was found that the members who are in management of the society were wilfuly negligent in conducting the affairs of the society. It is found that the society suffered a loss of Rs.6,23,165/-. The loss suffered was on account of two specific counts. One relates to payment of penalty of Rs. 5,39,995/- to the Reserve Bank of India(RBI), for the period from 24.1.2003 to 9.5.2003, for ignoring the instructions of RBI in relation to the maintenance of the credit deposit ratio and giving loans without any restrictions. If proper steps were taken the Cash Reserve ratio (CRR) and Statutory Liquidated ratio (SLR) would not have been drastically reduced. Another reason was regarding appointment of 5 last grade servants in the W.P.C.No.28629/2009 3 5[th] respondent bank without permission from the Joint Registrar and overlooking the instructions from RBI. They were informed about the violation of operational instructions and without caring to comply with such directions the appointments were made, which was cancelled by the Joint Registrar. A sum of Rs.83,170/- was the loss suffered by the Bank in that count. 4. According to the petitioners, all these alleged irregularities were properly explained and therefore there was no reason for the authorities to have imposed surcharge on them and further they were not responsible for any wilful negligence or misappropriation of the funds and such a harsh step should not have been taken against them for disqualifying them in contesting the next elections. It is contended that the intention was to prevent them from participating in the next election as there is disqualification attached to the imposition of surcharge. W.P.C.No.28629/2009 4 5. Counter affidavit is filed by the department inter alia supporting the orders passed. According to them, the members of the Managing Committee failed to conduct the affairs of the society properly and the Joint Registrar had conducted a proper enquiry into the matter and have arrived at a conclusion which cannot be assailed. According to them, the factual aspects mentioned in Ext.P8 and the findings thereon will clearly indicate the lack of proper care and the manner in which the affairs of the society were being conducted. Substantial loss had been caused to the society on account of mismanagement. It is wilful on account of the fact that no corrective steps were taken by the Managing Committee during the relevant time despite directions and instructions from RBI. Under these circumstances, the respondents supported the impugned orders. 6. RBI had filed counter affidavit. According to them they were not necessary parties to the lis. An W.P.C.No.28629/2009 5 inspection was conducted by RBI under section 35 of the Banking Regulation Act which revealed serious irregularities and violation of various instructions issued by the RBI from time to time. The Bank has failed to comply with the statutory requirement of maintaining the CRR and the SLR. Hence the Registrar was requested to conduct a detailed inspection. They supported the stand taken by the Department. 7. Heard the learned counsel for Petitioner, learned Senior counsel appearing for RBI and the learned Government Pleader. 8. The learned counsel for the petitioner submitted that surcharge proceedings can be taken only if there is wilful negligence on the part of the members in carrying out the affairs of the Bank. Reliance is placed on the following judgments in support of his contentions: i) **Pollachi Coop. Marketing Society v. K.N. Valuswami, (1994 Supp (3) SCC 134),** wherein the W.P.C.No.28629/2009 6 ## Supreme Court held as under: **“2.** The appellant is a cooperative society registered under the provisions of the Tamil Nadu Cooperative Societies Act, 1961. Respondents 1-14 were for the year 1974-75 members of its Board of Management. An enquiry under Section 65 of the said Act into the affairs of the appellant-society was ordered by the Deputy Registrar of Cooperative Societies on 26-9-1976 in relation to sales and purchases of Cholam and Ragi. The inquiry report revealed that there had been a loss in the business of Cholam and Ragi during the said year in the sum of Rs 1,31,990.33; that the amount of Rs 6661 had been paid in excess of the prevailing market rate of Ragi; and that a loss in the sum of Rs 8638.35 had occurred due to reduction in retail prices. Accordingly, surcharge proceedings were initiated by the Registrar of Cooperative Societies against Respondents 1-14 under the provisions of Article 71 of the said Act, which makes members in management of a Cooperative Society liable in the event of wilful negligence. In these proceedings the Registrar found Respondents 1-14 liable to pay the sum of Rs 1,23,350.98, with interest thereon at the rate of twelve-and-a-half per cent per annum from the date of his order till the date of realisation, to the appellant society. Respondents 1-14 preferred appeals to the Special Tribunal for Cooperative Cases, which dismissed the appeals. W.P.C.No.28629/2009 7 **3.** Respondents 1-14 thereupon preferred writ petitions under Article 227 to the High Court. The High Court noted that the decree of negligence which was contemplated under Section 71 of the said Act was wilful negligence. The word ‘wilfulness’, it held, imported premeditation or knowledge and consciousness that an injury or loss was likely to result from the act done or from the omission to act. It imported a constructive intention as to the consequence. Quoting an earlier judgment, delivered by Pandian, J. (as he then was) in _Sathyamangalam Cooperative Urban Bank Ltd._ v. _Dy. Registrar of Cooperative Society_ , it held that to constitute wilful negligence, the act done or omitted to be done must involve such reckless disregard of duty as to imply bad faith. The High Court observed that the very approach of the Special Tribunal for Cooperative Cases was wrong as it had posed for answer the following question: “The main point for consideration would be whether the purchases were effected as per the regulation and whether the subsequent series were done in good faith and in the interest of the society.” The High Court came to the conclusion that the evidence before the Tribunal and the findings arrived at by it on the basis of such evidence did not justify the legal inference that Respondents 1-14 had been guilty of wilful negligence. **4.** The High Court was, in our view, right in emphasising that the degree of negligence that had to be established under Section 71 W.P.C.No.28629/2009 8 was not mere negligence but wilful negligence and that this imported a consciousness that injury or loss was likely to arise from an act of commission or omission. The basis upon which the Tribunal considered the matter was, therefore, erroneous. Once we come to the conclusion that the test applied by the High Court was the right test, we must concur with the High Court in its finding that the evidence did not disclose the legal inference that Respondents 1-14 had been guilty of wilful negligence. ii) **In A.K.Francis vs Joint Registrar [1990(2) KLT** **470]** a learned Judge of this court had occasion to consider the nature and scope of section 68 of the Act and it is held at paragraph 12 and 16 as under: “12. The further requirement of S.68 is that the payment or deficiency in the assets of the society was made, or caused by breach of trust of wilful negligence or misappropriation or fraudulent retention of money. It is not the mere wrongful payment or causing of deficiency in the assets that attracts S.68, but the further fact that such payment or deficiency was made or caused by the breach of trust, wilful negligence, misappropriation or fraud of the person concerned. Unless the latter ingredient is found to exist, action under S.68 is ruled out.” “16. The uniform trend of decisions is therefore, that negligence simpliciter is not W.P.C.No.28629/2009 9 sufficient to visit the officer of a co-operative society with proceedings under S.68. His conduct should be wilful, implying culpability with an element of deliberateness or mens rea involved in the conduct or omission which resulted in the loss. Without such conduct or omission, resulting in loss to the society, the Registrar is not entitled to proceed under S.68 or to pass an order of surcharge.” In the light of the aforesaid judgments, the main contention urged by the learned counsel for the petitioner is that on perusal of Ext.P8 it can be seen that there is no wilful negligence or wilful act or omission on the part of the members of the Managing Committee to invoke surcharge proceedings. Therefore, all further actions pursuant to Ext.P8 are bad in law. 9. Though a contention was raised that there was no proper notice under Rule 66(5) of the Rules, the said issue is covered by the judgment of the Division Bench of this Court in the same case. Originally, by judgment dated 24/03/2010, this writ petition was allowed, setting aside the impugned orders on the ground that there was no proper notice to the W.P.C.No.28629/2009 10 petitioners under Rule 66(5) of the Rules. The State Government and the Registrar filed W.A.No.579 of 2010 and the Division Bench came to the conclusion that the requirement of Rule 66(5) is not mandated for proceedings under Section 68(2). Since the other contentions were not considered by the Division Bench, the matter is remitted back to this Court for hearing of the case on merits. Therefore, what has to be considered in this writ petition is only the validity of Ext.P8, as to whether such a proceedings could be initiated on the grounds specified therein and whether the appellate authority was justified in confirming the same. Further question may also arise as to whether the proceedings under Rule 44(1) of the Rules was mandated in the light of the finding in Ext.P8. 10. The Joint Registrar, after an enquiry, came to the conclusion that the bank was suffering a loss over a period of time. Reference is made to the statement of accounts of the bank from 1999-2000 to 2003-2004 to indicate that the W.P.C.No.28629/2009 11 accumulated loss was more than the share value. Reference is also made regarding the bad and doubtful debts and the interest on the outstanding amount. It is found that necessary care was not shown for granting loans. Sufficient security was not obtained and in cases were security was obtained it was not sufficient. Certain members have joined the bank only for the purpose of availing the loans. Normally loans were granted up to 70% of the total receipts, but the society had granted 85% of the total receipts as loan. It was also found that appropriate steps were not taken by the members of the Managing Committee on the basis of the reports given by the Registrar and the Reserve Bank of India. 11. Certain specific instances are also pointed out in order to indicate that in respect of certain persons though they have not repaid the bank loan, they were paid advances for the said amount which is outstanding. Further, reference is made to the fine imposed by the W.P.C.No.28629/2009 12 Reserve Bank of India for Rs.5,39,995/-. It is also stated that the bank had spent an amount of Rs.83,170/- as expenses for appointing last grade servants without permission from Joint Registrar. 12. It seems that after having taken into consideration the objections raised by the members of the Managing Committee, the Joint Registrar had come to a finding that there was wilful negligence on their part, by which loss had been caused to the society. Therefore surcharge had been imposed. 13. In regard to the factual aspects involved in the matter, I do not think that it will be proper for this Court to arrive at a different finding as to whether loss had been caused to the society. The question would be whether such loss had been incurred by the society on account of the wilful default or negligence on the part of the members of the Managing Committee. It is not in dispute that they were holding charge of the Co-operative Society during the W.P.C.No.28629/2009 13 relevant time. The petitioners have an explanation to offer in respect of each and every allegation of negligence by the Joint Registrar. But the explanations were not considered to be satisfactory by the Joint Registrar. Over and above that, in order to constitute wilful negligence, one has to see whether the acts of the members of the Managing Committee was in any way mala fide and whether it is in gross violation of the Rules prescribed by the Society or its bye-laws. While being in charge of a financial institution, the Managing Committee members are bound to conduct the same in the manner prescribed by RBI, as well as the Rules of the Society and the bye-laws framed thereunder. Minor deviation from the said Rules or bye-laws cannot be termed as wilful. But, if repeatedly, mistakes are committed knowing fully well that they are violating the provisions of the Act, Rules or bye-laws, it will amount to wilful and deliberate action, which can be termed as a wilful negligence. In **Pollachi Co-operative Marketing Society** W.P.C.No.28629/2009 14 (supra) the Supreme Court and in **A.K.Francis** (supra) this court had clearly laid down the law that negligence simpliciter is not sufficient. His conduct should be wilful, implying culpability with an element of deliberateness or mens rea involved in the conduct or omission which resulted in the loss. Without such conduct or omission, resulting in loss to the society, the Registrar is not entitled to proceed to pass an order of surcharge. Whether such a material is available in Ext.P8 order is what is to be considered in this writ petition. 14. There is no allegation of misappropriation. Expenditure of the amounts are not in dispute. The allegation is that instructions from RBI had not been complied. This allegation is supported by RBI as well. In fact a preliminary enquiry was conducted through Assistant Registrar on the basis of the allegations made by RBI. The enquiry under section 66 of Act commenced on the basis of such a report. The finding is that the mandatory W.P.C.No.28629/2009 15 requirements under sections 18 and 24 of the Banking Regulation Act were not complied during the November 2002 to February 2003, by not maintaining the CRR and SLR. Documents are relied upon to indicate that RBI instructions were not complied. Specific instances of mismanagement is pointed out in the report. When there is a finding by the department that specific instructions and directives of RBI were not complied by the members of the Managing Committee despite the same being brought to their notice by the Secretary, it amounts to wilful negligence as held in the aforementioned cases. In that view of the matter I do not think that Ext.P8 warrants any interference. The appellate authority has concurred with the view expressed by the Joint Registrar. Disqualification under Rule 44(1) of the Rules is a consequence of surcharge proceedings. Ext.P25 is an order passed under section 33(1) of the Act for want of quorum. This again is a consequence of disqualification of the members. Therefore the other W.P.C.No.28629/2009 16 impugned orders are also sustainable. In the result the writ petition is dismissed. (sd/-) **(A.M.SHAFFIQUE, JUDGE)** jsr ## W.P.C.No.28629/2009 17 W.P.C.No.28629/2009 18