The Thiruvalla East Co-Operative Bank Ltd v Reserve Bank of India and Others

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE MR.JUSTICE V.G.ARUN** **FRIDAY, THE 9[TH] DAY OF DECEMBER 2022 / 18TH AGRAHAYANA, 1944** **WP(C) NO. 24257 OF 2022** ## **PETITIONER:** THE THIRUVALLA EAST CO-OPERATIVE BANK LTD NO.3260, HEAD OFFICE, ERAVIPEROOR P.O, THIRUVALLA, PATHANAMTHITTA - 689 512, REPRESENTED BY ITS CHAIRMAN, PROF. DR. JACOB GEORGE. BY ADVS. K.I.MAYANKUTTY MATHER T.K.SREEKALA KALLIYANI KRISHNA B. VINEETH KOMALACHANDRAN ## **RESPONDENTS:** 1 THE RESERVE BANK OF INDIA 1ST FLOOR, CENTRAL OFFICE BUILDING, SHAHID BHAGAT SINGH ROAD, TOWN HALL P.O, MUMBAI - 400001, REPRESENTED BY ITS PRINCIPAL CHIEF GENERAL MANAGER. 2 GENERAL MANAGER RESERVE BANK OF INDIA, DEPARTMENT OF SUPERVISION, BAKERY JUNCTION, VIKAS BHAVAN P.O., THIRUVANANTHAPURAM - 695 033. 3 ASSISTANT MANAGER RESERVE BANK OF INDIA, DEPARTMENT OF SUPERVISION, BAKERY JUNCTION, VIKAS BHAVAN P.O., THIRUVANANTHAPURAM - 695 033. 4 UNION OF INDIA REPRESENTED BY THE JOINT SECRETARY, DEPARTMENT OF FINANCIAL SERVICES, MINISTRY OF FINANCE,(ECONOMIC AFFAIRS), 3RD FLOOR, JEEVAN DEEP BUILDING, PARLIAMENT STREET, SANSAD MARG P.O., NEW DELHI-110 001. W.P.(C).24257/2022 2 5 STATE OF KERALA REPRESENTED BY ITS SECRETARY, CO-OPERATIVE BANK LTD., GOVERNMENT SECRETARIAT G.P.O, THIRUVANANTHAPURAM, PIN - 695014 6 REGISTRAR OF CO-OPERATIVE SOCIETIES JAWAHAR SAHAKARANA BHAVAN, DPI JUNCTION, THAICAUD P.O, THIRVANANTHAPURAM PIN - 695014 7 JOINT REGISTRAR OF CO-OPERATIVE SOCIETIES CIVIL STATION, 4TH FLOOR, PATHANAMTHITTA P.O, PATHANAMTHITTA PIN - 689645 BY ADVS. M.GOPIKRISHNAN NAMBIAR (SR.) E.K.NANDAKUMAR (SR.) GOVERNMENT PLEADER K.JOHN MATHAI JOSON MANAVALAN KURYAN THOMAS PAULOSE C. ABRAHAM RAJA KANNAN ## **OTHER PRESENT:** DSGI S.MANU; SPL.GP P.P.THAJUDHEEN THIS WRIT PETITION (CIVIL) HAVING COME UP FOR ADMISSION ON 16.09.2022, THE COURT ON 09.12.2022 DELIVERED THE FOLLOWING: W.P.(C).24257/2022 3 ## **JUDGMENT** Dated this the 9[th] day of December, 2022 The petitioner is an Urban Co-operative Bank ('the Bank') with its head office at Eraviperoor, Thiruvalla. The Bank has 18 branches spread across 12 Grama Panchayaths in Pathanamthitta District. The present Board of Directors of the Bank assumed charge on 29.11.2021. The petitioner being an Urban Co-opearative Bank, the Reserve Bank of India/1[st] respondent has supervisory and regulatory control over its functioning, as conferred by Part V of the Banking Regulation Act, 1949. ('the Act' for short). As per Ext. P1 Circular dated 29.11.2021, the 1[st] respondent, after perusal of the offsite returns submitted by the Bank for the quarter ended 30.09.2021, observed that the Bank's Net NPA had worsened to 12.83% and intimated that the RBI had decided to impose revised Supervisory Action Framework on the Bank for breach of trigger points under Net NPA indicator (Net NPA being W.P.(C).24257/2022 4 greater than 12%). Thus, certain restrictions were imposed on the activities of the Bank by Ext.P1 Circular. Thereafter, the 1[st] respondent caused an inspection to be conducted from 20.04.2022 to 22.04.2022 and also on 02.07.2022. Thereafter, alleging serious governance issues and persistent violation of RBI directives/instructions/circulars were observed during the inspection, the 1[st] respondent issued Ext. P2 notice requiring the Bank to stop sanction/disbursal of fresh loans and advances (including off-balance sheet exposure) till further orders. Along with Ext.P2, the report of inspection and Ext.P3 order, issued in exercise of the power under Section 36AB(1) of the Act, appointing an Assistant General Manager of the RBI as an Additional Director on the Board of the Bank for a period of two years, were also communicated. On receipt of Exts. P2 and P3 the petitioner submitted Ext.P4 explanation, answering the defects noted in the inspection report. As the explanation failed to evoke any positive response, this writ petition is filed seeking the following reliefs: a. Call for the records of the case leading to the issuance of Ext.P2 proceedings issued by the 2[nd] respondent and quash the same by means of a writ of certiorari or W.P.(C).24257/2022 5 other appropriate writ or order; b. Issue a writ of mandamus or other appropriate writ or order forbearing the respondents 1 to 3 from implementing Ext.P2 and all further adverse proceedings against the petitioner – Bank in pursuance thereof. ba. Call for the records of the case from the 2[nd] respondent leading to the issuance of Ext.P11 – notice and quash the same by means of an appropriate writ or order in the nature of certiorari. bb. Issue a writ of mandamus or other appropriate writ or order forbearing the 2[nd] respondent, his subordinates and other designated persons from pursuing any further steps for Audit in pursuance of Ext.P11. 2. Adv. K.I. Mayankutty Mather appearing for the petitioner Bank assailed Ext.P2 on the following grounds; Ext.P2 proceedings, in so far as it prohibits the petitioner Bank from disbursing loans and advances to its customers is vitiated by irregular and excessive exercise of powers vested under the Banking Regulation Act. Section 35 of the Act provides for inspection by the RBI, either on direction from the Central Government or on its own. In either case, the RBI is bound to supply a copy of the inspection report to the Banking Company. In so far as the report of inspection was not W.P.(C).24257/2022 6 provided to the petitioner Bank prior to issuance of Ext.P2 and no explanation sought regarding the defects noted in the report, Ext.P2 is liable to be set aside for violation of the mandate of Section 35(1). A reading of Section 35(1A) pertaining to scrutiny by the RBI indicates that a copy of the report should be furnished to the Banking Company before taking adverse action. Ext.P2 is illegal also for the reason that the prohibition against receiving fresh deposits can be only effected by the Central Government, that too, after forming an opinion that the affairs of the Banking Company are being conducted to the detriment of its depositors. Such opinion should be formed based on the report of enquiry furnished by the RBI and after hearing the Banking Company. In so far as Ext.P2 is issued by the RBI itself, that too without affording an opportunity of hearing, the action taken under Ext.P2 is _ex facie_ illegal. 3. Even if it is conceded that the RBI is conferred with the power under Section 35A to issue necessary directions to any Banking Company, such power can be exercised only if one or more of the circumstances mentioned in Section 35A(1) W.P.(C).24257/2022 7 is found to exist. Ext.P2 does not reflect the existence of any such circumstance. 4. Section 36(1)(a) empowers the RBI to prohibit banking companies against entering into any particular transaction or class of transactions. Therefore, the RBI cannot issue an omnibus direction prohibiting disbursal of all fresh loans and advances. 5. The averments in the counter affidavit of the RBI is opposed by contending that order should be read and understood on the basis of what is stated therein and not based on the explanations offered subsequently. To buttress this contention, reliance is placed on the decisions in **Mohindar Singh Gill and Another v. The Chief Election Commissioner, New Dekhi and Others** (AIR 1978 SC 851) and **Senkumar T.P. IPS (Dr.) v. Union of India** (AIR 2017 SC 2628). 6. On merits it is contended that the functioning of a cooperative Bank, which is catering to the financial needs of thousands of its members belonging to the economically weaker section, will come to a halt if Ext.P2 order is given W.P.(C).24257/2022 8 effect. It is submitted that the Bank has no objection in an officer of the RBI being appointed as Additional Director to monitor its affairs. At the same time, the RBI's proposal to conduct special audit under Sec. 30(1B) of the Act, as proposed in Ext.P11, is highly objectionable since that would amount to transgression into the autonomy of the Bank. The RBI ought to have taken into consideration that, unlike other banking companies, the accounts of the petitioner is being periodically inspected and audited by the audit wing of the Co-operative Department of the State Government. 7. Sr. Adv. E.K.Nandakumar appearing for the RBI as instructed by Adv. Poulose Abraham, refuted the petitioner's contentions and put forth the following arguments; The RBI constituted under Sec. 3 of the RBI Act 1934 acts as the Central Bank of the country and exercises supervisory and regulatory powers over other banks and banking institutions as empowered by the Banking Regulation Act. Sec. 35 read with Sec. 56 of the Act provides RBI with the power to inspect and conduct special scrutiny of Co-operative Banks. Under Sec. 35(1), the RBI is invested W.P.(C).24257/2022 9 with the power to conduct inspection at any time at its discretion. The RBI can also conduct inspection as directed by the Central Government. Only when the RBI is directed by the Central Government to inspect, it is bound to report to the Central Government and in such event, it is for the Central Government to take necessary action. As the inspection in the case at hand was conducted by the RBI on its own, it is not required to forward the report of inspection to the Central Government and it is not for the Central Government to take action under Section 35 (4), after considering the report and after hearing the petitioner Bank. Even without resorting to the procedure under Section 35, the RBI can, in exercise of the power under Sec.35A, issue such directions as it deems fit to prevent the affairs of any co-operative bank from being conducted in a manner detrimental to the interest of the depositors or prejudicial to the interest of the bank. The Act also confers the RBI with power under Section 36(1A) to prohibit any banking company from entering into any particular transaction or class of transactions. Although the inspection was conducted as per Sec. 35(1), the direction in W.P.(C).24257/2022 10 Ext.P2 is issued in exercise of the power under Section 35A and Section 36. Neither Section 35A or Section 36 envisages an opportunity of hearing to the petitioner Bank. Hence, the challenge on that ground, premised on the procedure prescribed in Section 35 cannot be countenanced. Relying on **Small Industries Development Bank of India v. SIBCO Investment Private Limited** [(2022) 3 SCC 56], it is argued that it is not necessary for the RBI to mention any specific provision for issuing directions. The nature and scope of powers conferred on the RBI is highlighted with the aid of the decision in **Internet and Mobile Association of India v.** **Reserve Bank of India** [(2020) 10 SCC 274]. It is contended that the impugned order issued strictly within the four corners of the statutory power and in public interest, warrants no interference. 6. Before proceeding to decide the dispute involved, it may be relevant to note that, the provisions of the Act will not apply to a primary agricultural credit society, a cooperative land mortgage bank and any other co-operative bank, except in the manner and to the extent specified in part V. The W.P.(C).24257/2022 11 provisions of the Act are made applicable to Co-operative Societies by virtue of Section 56 in Chapter V. The petitioner being an Urban Co-operative Bank is thus amenable to the supervisory and regulatory control of the RBI. Having found the RBI to be having supervisory and regulatory powers, it is also necessary to consider the autonomous character of cooperative societies. For this, one need only refer to the preamble of the Kerala Co-operative Socialites Act, 1969 extracted hereunder; “ **Preamble** .- WHEREAS with a view to provide for the orderly development of the Co-operative sector in the State, it is essential to organize the Co-operative Societies in accordance with Co-operative principles as self governing democratic institutions, to achieve the objects of equity, social justice and economic development, as envisaged in the directive principles of State Policy of the Constitution of India, and to promote scientific and technological development, health care, market intervention and management excellence in the Co-operative Sector it is expedient to consolidate, amend and unify the law relating to Co-operative societies in the State." 7. No doubt, despite the autonomous nature of Cooperative Societies, Chapter V of the Act provides sufficient power to the RBI to intervene and correct the mistakes and W.P.(C).24257/2022 12 defects of co-operative societies/banks. But while exercising such power, the RBI should tread with caution and circumspection, keeping in mind that Co-operative Societies are democratic self governing institutions. 8. On the contention based on the power under Section 35 of the Act, it is evident from a reading of Sub-section (1) of Section 35 that a copy of the report of inspection has to be supplied to the banking company, irrespective of whether the inspection was conducted at the instance of the Central Government or by the RBI on its own. But that does not take away the powers of the RBI to act on its own. Although Sections 35A and 36 of the Act confers the RBI with the power to act on its own, the question is whether such power can be exercised without affording an opportunity of hearing to the banking company. As the provisions do not specifically spell out such opportunity, the principle of _audi alteram partem_ will have to be read into the statute, the same being an integral and unavoidable limb of the rules of natural justice. Dilating on this point, the Apex Court in **Maneka Gandhi v. Union of India** 1978(1) SCC 248 observed as under: W.P.(C).24257/2022 13 “Now, as already pointed out, **the doctrine of natural justice consists principally of two rules, namely, nemo debet esse judex in propria causa : no one shall be a judge in his own cause, and audi alteram partem : no decision shall be given against a party without affording him a reasonable hearing…** … **The audi alteram partem rule is intended to inject justice into the law and it cannot be applied to defeat the ends of justice, or to make the law “lifeless, absurd, stultifying, self-defeating or plainly contrary to the common sense of the situation”. Since the life of the law is not logic but experience and every legal proposition must, in the ultimate analysis, be tested on the touchstone of pragmatic realism, the audi alteram partem rule would, by the experiential test, be excluded, if importing the right to be heard has the effect of paralysing the administrative process or the need for promptitude or the urgency of the situation so demands. But at the same time it must be remembered that this is a rule of vital importance in the field of administrative law and it must not be jettisoned save in very exceptional circumstances where compulsive necessity so demands.** It is a wholesome rule designed to secure the rule of law and the court should not be too ready to eschew it in its application to a given case. True it is that in questions of this kind a fanatical or doctrinaire approach should be avoided, but that does not mean that merely because the traditional methodology of a formalised hearing may have the effect of stultifying the exercise of the statutory power, the _audi alteram partem_ should be wholly excluded. **The court must make every effort to salvage this cardinal rule to the maximum extent permissible in a given case. It must not be forgotten that “natural justice** W.P.(C).24257/2022 14 **is pragmatically flexible and is amenable to capsulation under the compulsive pressure of circumstances”** . The _audi alteram partem_ rule is not cast in a rigid mould and judicial decisions establish that it may suffer situational modifications. The core of it must, however, remain, namely, that the person affected must have a reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise. That is why Tucker, L.J., emphasised **in Russel v. Duke of Norfolk [(1949) 1 All ER 109] that “whatever standard of natural justice is adopted, one essential is that the person concerned should have a reasonable opportunity of presenting his case”. What opportunity may be regarded as reasonable would necessarily depend on the practical necessities of the situation.** It may be a sophisticated full-fledged 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. **The audi alteram partem rule is sufficiently flexible to permit modifications and variations to suit the exigencies of myriad kinds of situations which may arise.”** ## The position was reiterated in a series of decisions, including ## **Rajesh Kumar v. CIT [(** 2007) 2 SCC 181] “Effect of civil consequences arising out of determination of lis under a statute is stated in _State of Orissa_ v. _Dr. Binapani Dei_ [(1967) 2 SCR 625 : AIR 1967 SC 1269] . It is an authority for the proposition when by reason of an action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice are required to be followed. In such an event, W.P.(C).24257/2022 15 although no express provision is laid down in this behalf, compliance with principles of natural justice would be implicit. In case of denial of principles of natural justice in a statute, the same may also be held ultra vires Article 14 of the Constitution.” 9. Therefore, even accepting that the direction in Ext. P2 is issued in exercise of the power under Sec,. 35 A and 36, the order cannot be sustained since it was passed without hearing the affected party. 10. Moreover, a careful scrutiny of Ext.P2 reveals that none of the circumstances enumerated in Section 35A are mentioned in the order. Without even referring to those circumstances, the RBI could not have arrived at the satisfaction required for passing an order having far reaching consequences. Now, coming to Section 36, even if the power to prohibit banking company from entering into any particular transaction or class of transactions is conceded, it is fundamental that the order passed in exercise of such power should reflect the basis for prohibiting a transaction or class of transactions. Surprisingly, Ext. P2 or the accompanying report does not contain any such material. Moreover, an omnibus direction prohibiting disbursal of all loans and advances cannot be termed as an order prohibiting any particular transaction or W.P.(C).24257/2022 16 class of transactions. The above discussion leads to the only conclusion that, Ext. P2, to the extent it directs stoppage of further sanction/disbursal of fresh loans and advances is patently illegal and hence unsustainable. 11. The challenge against Ext. P11 on the premise that the accounts of the bank is being subjected to statutory audit by the audit wing of the Co-operative department cannot be countenanced in the light of Sec. 30 r/w Sec. 56 of the Act. In the result, the writ petition is ordered as follows; Ext. P2 to the extent it prohibits sanction/disbursal of fresh loans and advances, is quashed. This order does not prevent the RBI from continuing the proceedings based on the report appended to Ext. P2, after affording an opportunity of hearing to the petitioner bank. The challenge against Ext. P11 being unsustainable, is rejected. Sd/- ## **V.G.ARUN JUDGE** sb W.P.(C).24257/2022 17 ## **APENDIX OF WP(C) 24257/2022** PETITIONER EXHIBITS Exhibit P1 TRUE COPY OF THE NOTICE CIRCULAR SO ISSUED BY THE 2ND RESPONDENT DATED 29.11.2021 Exhibit P2 TRUE COPY OF THE PROCEEDINGS OF THE 2ND RESPONDENT DATED 22.07.2022 ALONG WITH THE FINDING OF THE SELECT SCOPE INSPECTION Exhibit P3 TRUE COPY OF THE COMMUNICATION DATED 22.07.2022 Exhibit P4 TRUE COPY OF THE RESOLUTION DATED 10.5.2022 Exhibit P5 TRUE COPY OF THE AMENDMENT OF THE RULES GOVERNING WOMEN EMPOWERMENT LOANS SCHEME DATED NIL Exhibit P6 TRUE COPY OF THE CIRCULAR (CIRCULAR NO.32/2021) DATED 13.08.2021 Exhibit P7 TRUE COPY OF THE EMAIL COMMUNICATION DATED 09.02.2022 GIVEN BY THE PETITIONER - BANK TO THE RESERVE BANK OF INDIA Exhibit P8 TRUE COPY OF THE CIRCULAR OF THE RESERVE BANK OF INDIA DATED 27.11.2014 Exhibit P9 TRUE COPY OF THE BALANCE SHEET FOR THE YEAR 2022 DATED 31.03.2022 AND THE PROFIT AND LOSS ACCOUNT. Exhibit P10 TRUE COPY OF THE STATEMENT DISCLOSING THE LEVEL OF NON-PERFORMING LOANS AND ADVANCES DATED 31.03.2022. RESPONDENT EXHIBITS Exhibit R1(A) TRUE COPY OF THE RBI CIRCULAR DCBR.BPD (PCB) CIR NO.3/12.905.001/2014-15 DATED NOVEMBER 27, 2014 Exhibit R1(B) TRUE COPY OF THE LETTER DCBS (T) NO. 010/01/13/2015-16 DATED OCTOBER 30, 2015 18 ## W.P.(C).24257/2022 ISSUED BY RBI TO THE PETITIONER Exhibit R1(C) TRUE COPY OF THE RBI CIRCULAR NO. DOR (PCB) BPD. CIR NO. 9/12.05.001/2019-20 DATED JANUARY 6, 2020