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CASE NO.:

Appeal (civil) 3698 of 2006

PETITIONER:

Ganesh Bank, Kurundwad Ltd. and Ors.

RESPONDENT:

The Union of India and Ors.

DATE OF JUDGMENT: 28/08/2006

BENCH:

ARIJIT PASAYAT & C.K. THAKKER

JUDGMENT:

J U D G M E N T

(Arising out of SLP (C) No. 7188 of 2006)

ARIJIT PASAYAT, J.

Leave granted.

The present appeal is directed against the judgment and

order dated 5.4.2006 passed by a Division Bench of the

Bombay High Court in Writ Petition No.337/2006 questioning

Notification dated 7th January, 2006 issued by the

Government of India, Ministry of Finance imposing a

moratorium in respect of the appellant-Ganesh Bank of

Kurundwad Ltd. (hereinafter referred to as "Bank") for a period

of three months from the date of order upto and inclusive of

6th April, 2006. Amongst others, the said Bank was directed

not to grant any loan or advances or incur liability without the

permission in writing of the Reserve Bank of India (in short the

'RBI''). Further, withdrawal of sums not exceeding 5,000/- by

a Savings Bank or Current Account holder was permitted with

a further relaxation of amount not exceeding Rs.10,000/- or

the actual balance whichever is less in the event of certain

difficulties such as medical treatment, higher education and

obligatory expenses like marriage etc. Challenge was also

made to the appointment of two Directors on the Board of

Directors of the Bank.

Further Challenge was made to the Notification dated

9.1.2006 proposing a scheme of amalgamation of the Bank

with Federal Bank, another private sector commercial bank

and to the order dated 24.1.2006 sanctioning amalgamation of

Bank with Federal Bank.

It is to be noted that along with the said writ petition filed

by the Bank, another writ petition (WP(C) No. 160/2006) was

filed by one Mr. Sunil Mahadev Chavan.

The background facts in which the writ petitions were

filed are essentially as follows:

Appellant Bank was founded sometimes in the year 1920

and is having a banking license given by the RBI. It has some

32 branches situated principally in districts of Kolhapur and

Sangli of Maharashtra and the adjoining Belgaum District of

Karnataka. It has around 1,75,000 depositors in the rural

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areas of these three districts.

It was carrying on its activities smoothly, and it incurred

losses only once and that was in the financial year 2004-05.

That was also for the reasons which were beyond its control,

viz (i) the value of the government securities, wherein it had

made deposits, went down, and (ii) the provisioning norms set

up by the RBI were made more stringent by it. It was on this

background that it was shocked to receive the order of

moratorium in the morning of 8th January, 2006. It led to

unnecessary long queue at its Dadar branch, Mumbai, though

there was no run on the bank any time in the past or even on

that day as such. Thereafter, the issuance of the moratorium

and the decision of the RBI to take further steps was duly

advertised. The RBI appointed two directors of its own on the

Board of Directors of the appellant-Bank on 7th January,

2006. The RBI then notified the proposed scheme of

amalgamating the appellant-Bank with the Federal Bank on

9th January, 2006. The appellant-Bank objected to it by filing

its objections on 23rd January, 2006, yet a decision was taken

by the RBI and the Central Government on 24th January, 2006

sanctioning amalgamation of the appellant-Bank with the

Federal Bank.

An interim order was passed by the High Court in

W.P.337/2006 by which operation of the order dated

24.6.2006 was stayed and status quo was directed to be

maintained. The order was challenged by the RBI and Federal

Bank before this Court.

By Order dated 30.1.2006 this Court directed that the

petitions were to be heard and decided early by the High

Court. However, the interim order was left undisturbed.

Before the High Court the principal submissions of the

writ petitioners were two-fold, namely that the order dated 7th

January, 2006 imposing moratorium and then the order dated

7th January, 2006 appointing two Directors are both mala fide

to suit the convenience of Federal Bank, ultra vires the power

of the RBI and the Central Government and, therefore, bad in

law, illegal and void. Similarly, the other submission of the

writ petitioners was that the subsequent framing of scheme of

amalgamation on 9th January, 2006 and the decision to

sanction the amalgamation taken on 24th January, 2006 are

motivated and pre-planned decisions for the benefit of the

Federal Bank, mala fide and ultra vires the powers of the

Central Government and the RBI. It was further submitted

that both these decisions are not justified on facts and have

been arrived at without taking into consideration the relevant

materials. As far as the first decision imposing the moratorium

is concerned, it was submitted that there were no good

reasons to impose the same and, as far as the decision to

amalgamate is concerned, it was submitted that the said

decision was arrived at without considering the proposals of

four other banks which were better placed and had made

better offers.

As against these submissions of the writ petitioners, the

stand of the RBI and the Central Government was that the

Bank was in serious financial difficulties and therefore, the

moratorium had to be imposed. The moratorium was fully

justified on the facts of the case. The decision to amalgamate

the appellant Bank with the Federal Bank was arrived at in

full compliance with the statutory requirements and after

considering relevant materials on record as well as the

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suggestions and objections from the appellant-Bank and all

concerned, and after examining the proposals from the four

other banks. It was, therefore, submitted that there is no

reason to interfere with the decisions arrived at by the RBI and

the Central Government which essentially were for benefit of

the depositors. It was submitted that the interest of the

employees was taken care of and the interest of the

shareholders obviously came last.

According to the High Court the following two questions

were to be adjudicated:

"(A) Whether the decision dated 7th January,

2006 of the Central Government imposing

moratorium and to appoint two directors was

mala fide, ultra vires the powers of the Central

Government and the RBI, bad in law and void

and unjustified on facts?

(B) Whether the notification dated 9th

January, 2006 containing the proposed

scheme of amalgamation and the decision to

sanction the amalgamation dated 24th

January, 2006 were mala fide, ultra vires the

powers of the Central Government and the RBI

and unjustified on facts?"

Taking note of the factual background the High Court

held that the inference drawn by RBI was a positive inference

and cannot be termed to be perverse. The High Court felt that

it is the discretion of the decision maker where two views are

possible and if the regulatory body arrived at a conclusion on

the basis of facts and figures before it and points out that it

has been warning the Bank for last over three years it will not

be proper for the High Court to substitute its judgment for

that of the RBI. Therefore, it was held that the decision of the

RBI to impose the moratorium was neither unjustified nor

against the provisions of Section 45(1) of the Banking

Regulation Act, 1949 (in short the 'Act'). It was noted that the

RBI is an expert body to regulate the banking activities and its

judgment based on the factual scenario cannot be substituted

by the High Court, may be because another view of the matter

was possible. The High Court held that the allegation of mala

fides was not substantiated. It was also of the view that while

dealing with the question of mala fides, the following questions

were also to be dealt with:

"(i) The first one is non-consideration of any

scheme for reconstruction before going for

amalgamation.

(ii) The second is with respect to proposing

amalgamation with Federal Bank on 9th

January, 2006 itself.

(iii) The third facet is not considering the

proposal of other banks.

(iv) The fourth is in respect to an adequate

opportunity under Section 45(6) and (7) of the

Act."

After considering the rival submissions, the High Court

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held that the allegations were mala fides and were not

established. Accordingly, the writ petitions were dismissed.

The stands taken before the High Court were re-iterated

by learned counsel appearing for the appellant and the

respondents.

Learned counsel for the appellants submitted that the

undue and unseemly haste with which the order of

moratorium dated 7.1.2006 was passed is a clear indication of

mala fides. Moreover, full and correct facts were not placed by

the RBI before the Central Government, in particular, facts

regarding bank balances with the RBI and other banks and

cash at hand amounting to Rs.36.62 crores were not placed

before the Central Government. Actual figure of those liquid

assets were Rs.119 crores as against total deposits of

Rs.217.43 crores which is 55% against required 25% as per

RBI norms. This was indicative of the bank's strong liquidity

position. Total assets of the bank as on 31.3.2005 were

Rs.235.44 crores as against total liabilities of Rs.220.45

crores. Therefore, the assets were exceeding the liabilities by

Rs.14.99 crores. Even as on 31.12.2005, the assets were

exceeding the liabilities by Rs.17.70 crores. The net loss in the

year 2004-05 on which great stress was laid by the RBI and

the Central Government was on account of notional/book

entry loss with respect to additional provision for Non

Performing Assets (in short the 'NPAs') and depreciation in the

value of Government securities. In respect of Urban

Cooperative Banks, the RBI has relaxed provisional norms up

to 5 years in respect of depreciation in the value of

Government securities. However, the same was denied to the

Bank. Majority advances of the banks were given to the

priority sector namely Agricultural advances to which

Securitisation Act is not applicable. Therefore, relaxation was

necessary to be given. The RBI had granted permission to the

Bank to open three new Branches after being satisfied that the

Bank was in a sound financial position. Several awards were

given to the Bank for exercising banking services. There was

no complaint from any depositor, customer or shareholder and

the Bank has not defaulted in payment of taxes or other

government dues.

When objections were called for by the RBI regarding

amalgamation within a span of 15 days in January, 2006, out

of the total objections received by RBI, 97.49% of the

customers/depositors objected to moratorium and/or

amalgamation of the Bank and have opted for independent

entity of the Bank.

The factual scenario indicates that the proposal for

amalgamation with the Federal Bank was circulated and in a

pre-determined manner the proposal was ultimately approved

on 24.1.2006. The draft scheme of amalgamation was sent to

the Central Government to be operative w.e.f. 27.1.2006.

When the appellant-Bank approached the High Court on

24.1.2006 and the copy of the writ petition was served on the

RBI and the Central Government, the Notification of

amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself

so that it could be argued before the High Court that the

appellant Bank was no longer in existence on 25.1.2006. The

exercise of power under Section 45 of the Act was done solely

for the purpose of favoring the Federal Bank. Though Section

36(AB) of the Act empowers the RBI to appoint Additional

Directors there is no provision which empowers RBI to direct

that no decision of the Board of Directors would be valid

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unless it is approved by the Directors appointed by the RBI.

The entire exercise was pre-conceived under the garb of

exercise of statutory authority. There was a systematic plan to

amalgamate the appellant-Bank with the Federal Bank. The

entire proceedings are thus vitiated by malice in law. The

rejection of the proposal of Saraswat Bank is vitiated on

account of misunderstanding of Section 56(zb) of the Act and

on account of a failure to consider the interest of shareholders

whose interest would continue to be of paramount importance.

On account of heavy floods there was temporary disruption of

banking activities and this aspect has not been considered.

The fact that Federal Banks' Board Meeting was

preponed from 11.1.2006 to 8.1.2006 is a pointer to the fact

that they were very much in know of things to gain under

advantage.

The data given by the RBI relating to some other

amalgamation i.e. in cases of Global Trust Bank and Nedgundi

Bank have no relevance as in those cases there were large

scale complaints of fraud.

In response, learned counsel for the respondent No.4 i.e.

Federal Bank submitted as follows:

The procedure, process and yardsticks envisaged under

Section 45 of the Act for the amalgamation of a financially

unviable bank with a stronger bank, cannot be the same as

are applicable to a tender process. It is submitted that when

acting under Section 45 of the Act, the primary consideration

must be of public interest. Under the said provision, the RBI

has the statutory duty and responsibility to act swiftly and

decisively to protect interests of depositors and public

confidence in the banking system. In contrast, when awarding

a tender, it is primarily commercial considerations that must

be the selection process. It is, therefore, submitted that it is in

public interest not to interfere on commercial consideration

with a decision made under Section 45 so long as it

safeguards depositors' interests and public confidence in the

banking system in an emergent situation.

The respondent No.4-Federal Bank is a financially strong

bank with high net worth, large capital funds and huge

amount of deposits with more than adequate capital to Risk

Weighted Assets Ratio (in short the 'CRAR'). Its net worth is

about Rs.897 crores and its capital is about Rs.85 crores It

has deposits to the tune of Rs.16,448 crores and its CRAR at

11.34%, exceeds the Reserve Bank of India requirement of 9%.

It has a very low percentage of NPA with its Gross NPAs being

5.17% and Net NPA being 1.41%. As of 31st December, 2005

Federal Bank has recorded a profit of Rs.174.48 crores. The

contrast on each of these parameters with the appellant-Bank

is striking. On each parameter, the performance of the

appellant-Bank is abysmal in comparison to Federal Bank.

It is also pertinent to note that Section 45 of the Act does

not contemplate or require the consent of either the transferor

or the transferee bank, although both are given an opportunity

to lodge their objections/suggestions to the draft scheme,

before a final decision is taken.

It was submitted that Federal Bank was not privy to any

information from RBI regarding the status of the appellant-

Bank or any proposal to impose a moratorium at any time

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prior to 7.1.2006 when for the first time the order of

moratorium and the RBI's press release was placed on RBI's

website.

It was also submitted that allegations of complicity based

on the advancement of the date of Federal Bank's Board

Meeting from 11.1.2006 to 8.1.2006 are completely

unfounded. It was submitted that Federal Bank had indeed

vide its Notice dated 29.12.2005 originally scheduled the said

Board Meeting for 11.1.2006 at Kochi, but this date was found

to be inconvenient to several directors. Instead, 8.1.2006 was

found to be a more convenient date for the meeting, since

firstly many of the directors were congregating at Kochi for the

wedding of the son of one of Directors on that date, and

secondly, one other director, an NRI was scheduled to attend a

meeting at the PMO on 7.1.2006. The said director would also

have found it convenient to attend the Board Meeting, if it

were to be held on 8.1.2006. In view thereof, for bona fide

reasons and in good faith, the said Board meeting was

rescheduled for 8.1.2006 vide notice dated 4.1.2006.

Certain aspects which have been noted by the High Court

to dismiss the appellant's writ petition need to be noted to

test how for the conclusions are correct.

The first is whether there were "good reasons" for the RBI

to apply to the Central Government for the moratorium which

led to the impugned order dated 24th January, 2006, the

concept of "good reasons" contemplated under Section and as

to how the RBI justifies its decision on the basis of the

yardstick applied by it. As far as the appellant bank is

concerned, its case is that it is a small commercial bank and

the only year in which it had made losses was for the financial

year 2004-05. That was because of the value of the

Government securities going down and the provisioning norms

being made more stringent by the RBI. According to the RBI's

application to the Central Government, the net worth of the

petitioner bank had become negative and so also CRAR had

become negative and was at 5.83.

As against this stand of the RBI, it was pointed out on

behalf of the appellant-Bank that Annexure-I to RBI's

application under Section 45(1) dated 4th January, 2006

contained the key financial positions of the Bank. Clause 8

thereof dealt with the NPAs. It was pointed that the net NPAs

had gone down from 10.59% to 8.32%. It was also pointed out

that the Bank had done good resource mobilization in the

meantime and its paid up capital had gone up from Rs.1.52

crore to Rs.1.82 crore.

In para 5 of the letter, the RBI wrote to the Additional

Secretary, Ministry of Finance that infusing fresh capital did

not appear to be feasible. There was reluctance on the part of

the shareholders and directors to merge with the stronger

Bank. It was therefore imperative to make immediate

arrangement to protect the interest of the depositors to merge

with another bank. It is for this purpose that the moratorium

was proposed under Section 45(1)

In the counter affidavit filed before the High Court, it was

stated on behalf of RBI that in June 1998, the Chairman of

the appellant Bank was advised that old private sector banks

having present net worth of Rs.5 lakhs should attain the level

of Rs.50 crores within a period of 3 years On 12th January,

1999, the appellant -Bank sent the plan to augment resources

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up to Rs.20.08 crores over the period of 5 years. At on 31st

March, 2002 its net worth stood at only Rs.6.62 crores and its

paid up capital as on 31st March, 2005 was Rs.1.82 crore. It

was further stated that as per the Bank's Balance Sheet as on

31st March, 2005, it had reported the net loss of Rs.5.97

crores. In view of the deteriorating financial position, further

meetings were held on 12th August, 2005, 26th August, 2005

and 12th September, 2005 to point out the major concerns of

RBI vis. low paid up capital of Rs.182 crore, high level of gross

NPAs (18.04%) and net loss of Rs.5.97 crores. On 14th October,

2005 the bank was asked to submit a detailed plan for capital

augmentation. It is on the background that the moratorium

was imposed on 7th January, 2006.

Appellants' stand was that since deposits with the Bank

were Rs.92 crores, it was irrational to insist that it should

have capital funds of Rs.50 crores. It was however pointed out

that the Bank was consistently increased its capital and it

stood at Rs.2.95 crores by 5th January, 2006 which included

Rs.1.13 crore in the form of share application money. It was

nothing but a part of share capital. Again, as far as NPAs are

concerned, they had gone down from 14.10% to 9% and, as far

as loss of Rs.5.97 crores is concerned, it is because of the

change in the provisioning norms.

High Court noted that the Bank had paid up capital of

Rs.1.82 crores only, high gross NPAs at 18.04% and net loss of

Rs.3.97 crores. It was in these circumstances that the RBI had

to decide as to whether the depositors of the Bank required

any protection. RBI had been monitoring the financial position

of the Bank since June 1998 and since December 2003 the

Bank had been placed under monthly monitoring as provided

under Section 27 of the Act. According to High Court,

expression "good reasons" under Section 45(1), primarily

relates to interest of the depositors and the interest of the

Bank. This is because the primary objective of the Act is

protection of the interest of depositors as against the primary

objective of the Company Law which is to safeguard the

interest of shareholders. This is what is specifically stated in

the Objects and Reasons of the Act. On these facts, the RBI

was of the view that an appropriate action was necessary. It

could not be said that the decision was lacking in the absence

of good reasons. It is difficult to say that it was taken for the

benefit of the Federal Bank since these reasons go back to

December 2003 when Federal Bank was not in picture.

It has been submitted that a small bank like the

appellant cannot be expected to have the Capital Adequacy of

Rs.50 crores as advised in June 1998 and which was later on

revised to Rs.300 crores by circular dated 20th February

2004. Reference is made to Section 11(3)(i) of the Act which

provides that if a banking company has places of its business

in more than one State, it is required to have the aggregate

value of its paid-up capital and reserves at not less than Rs.5

lakhs. If that is the expectation, the RBI cannot insist on the

requirement of Rs.50 crores and then go on increasing it

further. Reliance is placed on the decision of this Court in

Assam Co. Ltd. v. State of Assam (2001 (4) SCC 202), which

lays down that a delegate cannot over-ride the Act either by

exceeding the authority or by making provision which is

inconsistent with the Act. On the other hand, stand of RBI is

that the language of Section 11(3)(i) is that in the case of such

a banking company, the aggregate value of paid-up capital and

reserves shall not be less than Rs.5 lakhs. Therefore,

insistence of Rs.50 crores or a higher amount cannot be said

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to be erroneous. With globalisation, finance and banking in

rural areas also have to improve and it is from that point of

view that the RBI had expected the above referred

enhancement. That was expected from all similarly situated

banks and not merely from the appellant-Bank alone.

Reference is made to the expectations under the Basle

Committee on Banking Supervision, 1988 and the first

Narasimham Committee Report on Financial System, 1991

which recommended on the basis of the Basle Committee that

India also must conform to the international standards of

capital adequacy in a phased manner. Second Narsimham

Committee Report on Banking Sector Reforms of 1998 led RBI

to issue guidelines to revise the minimum paid-up capital for

the private sector banks.

The actual scenario shows that when the paid-up capital

of the Bank is so low, namely Rs.1.82 crore, its gross NPAs are

at higher level (8.04%), its net worth had turned negative and

the net loss is Rs.5.97 crores. There was nothing wrong on the

part of the RBI to expect an appropriate plan of capital

augmentation. The Bank has not been able to do that and it

was quite likely that it would land into difficulties.

The phrase "good reasons" in sub-section (1) of Section

45 is a term of wide amplitude and it will not be correct to

restrict it only to the actions mentioned under sub-section (2)

of Section 45 of the Act as is contended by the appellant. The

provision is concerned with preparing a scheme of

reconstruction or amalgamation which would become

necessary where the RBI is satisfied about the existence of

any of the four grounds mentioned in Section 45(4). Apart

from public interest and the interest of the banking system,

which are provided in sub-clause (a) and (d) thereof, Section

45(4) provides for the necessary action in the interest of the

depositors or with a view to secure proper management of the

bank which are grounds (b) and (c) in that sub-section.

Precursor to the framing of the scheme is the imposition of the

moratorium which is provided in sub-sections (1) and (2) of

Section 45. Existence of court proceedings, mentioned in

section 45(2), would certainly be one of the good reasons to

impose moratorium, but that certainly cannot be the only one.

Considering that object of the Act is protection of the interest

of the depositors, such an interpretation of the concept of

"good reasons" will have to be adopted, and not a narrow one.

It has been contended that there was a negative impact

when moratorium was imposed, and there were long queues at

four branches of the appellant Bank on 8th January 2006.

The RBI arranged to send an amount of Rs.2 crores to the

Bank from its Current Account to meet the depositors'

demands. The manager of the Appellant Bank's branch at

Dadar has made an affidavit to state that he had not asked for

an amount of Rs.2 crores and yet it was sent by RBI. The

branch manager has further stated that depositors were

unhappy with the decision of RBI. These are all disputed

questions as rightly noted by the High Court. As far as the

views of the depositors are concerned, they are bound to vary

from person to person and no definite conclusion can be

drawn merely on the bank manager's affidavit that people were

angry against RBI. Besides, no depositor has questioned

legality of the action. It can be said that the action of the RBI

is a pre-emptive action which it took considering the then

financial position of the appellant Bank and to prevent further

difficulties which were likely. It is not that when there is a run

on the bank then only RBI must intervene or that it must

intervene only when there are good number of court

proceedings against the concerned bank. The RBI has to take

into account the totality of the circumstances and has to form

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its opinion accordingly.

The ultimate question is whether the inference drawn by

the RBI is a possible inference or is something which can be

said to be a perverse one. Even if two views are possible since

the regulating body has arrived at a conclusion on the basis of

the facts and figures before it, and it has pointed out that it

has been warning the appellant Bank for last over 3 years, it

will not be proper for the Courts to substitute their judgment

for that of RBI. In the circumstances, it cannot hold that the

decision of RBI to impose the moratorium was unjustified or

against the provisions of section 45(1) or such that one can

call it a perverse one and interfere with it. The RBI is an expert

body to regulate the banking activities. The moratorium has

been challenged on the ground of malafides also. This

challenge along with the challenge to amalgamation also on

the basis of malafides needs to be considered.

As far as the challenge to the appointment of two

directors on the Board of Directors of the appellant Bank is

concerned, the RBI has the necessary power under Section

36AB of the Act. In the circumstances, it cannot be faulted for

appointing the two directors.

That brings into focus the question as to whether the

decision of RBI to recommend a scheme for amalgamation on

9th January 2006 and the decision of the Government to

sanction the amalgamation on 24th January 2006 could be

said to be mala fide or bad in law. As far as this question is

concerned, it contains many sub-questions which are as

follows:-

(i) The first one is non-consideration of any

scheme for reconstruction before going for

amalgamation.

(ii) The second is with respect to proposing

amalgamation with Federal Bank on 9th

January 2006 itself.

(iii) The third facet is not considering the

proposal of four other banks.

(iv) The fourth is with respect to an adequate

opportunity under Section 45(6) and (7) of the

Act.

Now, as far as the first two questions of non-

consideration of reconstruction and proposing merger with

Federal Bank, the RBI has noted that the Bank was in

difficulties from 1990 and particularly from December 2003

when it was placed under monthly monitoring. RBI in its

application for moratorium to the Central Government dated

4th January 2006 had clearly stated that during the

discussion with the appellant-Bank, major shareholders and

directors had shown total reluctance to merge into the

stronger bank. In view thereof, it was imperative that

immediate arrangement to protect the interest of the

depositors was to be made through its merger with a bank

under Section 45 of the Act. RBI had, therefore, made an effort

and called upon the appellant-Bank, that if possible, to

explore the possibility of merger with another stronger bank. It

had also made an effort to impress that there should be

infusion of fresh capital. That was not coming. There could be

a reconstruction by bringing in more money or by narrowing

the size of the appellant-Bank which did not appear to be

feasible. The only option left was that of amalgamation.

When a moratorium is imposed, RBI was duty bound to

prepare a scheme either of reconstruction or of amalgamation

under Section 45(4) with any other banking institution. Thus,

RBI had to give a scheme. Federal Bank had responded

immediately and unconditionally. The fact that the appellant-

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Bank was put under moratorium was advertised on web site

on 7th January 2006 itself. It is at that stage that Federal

Bank promptly gave its proposal on 8th January 2006. The

Federal Bank gave three reasons in its letter to RBI which were

as follows:-

(i) Ganesh Bank of Kurundwad Ltd. has 32

branches situated in Western Maharashtra

and Belgaum area of Karanataka. Our

presence in this area is very minimal and

adding up of the branches of Ganesh Bank of

Kurundwad Ltd. will enable us to have

significant presence in the area.

(ii) Ganesh Bank of Kurundwad Ltd. has mot

of the branches in the agricultural heartland

which would enable us to augment our credit

disbursal to agricultural sector.

(iii). Small size of Ganesh Bank of Kurundwad

Ltd. ensures that there will not be any

difficulty in the merger process between our

bank and them.

Thereafter it stated as follows:-

We also inform our unconditional acceptance

to make full payment to depositors and that we

will not demand any regulatory forbearance."

Thus, the Federal Bank was ready to honour full

liabilities of the depositors and did not ask for any

concessions. Therefore, on the basis of a standard scheme, the

opinion of the appellant-Bank was sought on 9th January

2006 with respect to merger in Federal Bank. The scheme was

described as a "cut and paste scheme" and of RBI's action as a

regulator in the interest of the depositors was highlighted.

It appears that the action of the RBI was based on the

finding about the negative net worth and CRAR of the

Appellant-Bank, its inability to infuse fresh capital and the

continued existence of a high level of NPAs. It has been rightly

pointed out that once it was decided to amalgamate by reason

of Section 45 of the Act, the RBI had to move with utmost

expedition. This is of paramount importance to prevent erosion

of the confidence of the depositors. Once such confidence is

lost it becomes difficult to revive the confidence and the

credibility.

This Court had occasion to deal with need for expedition

in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and

Ors. (1962 (Supp.) 3 SCR 632) and Reserve Bank of India and

Ors. v. Timex Finance and Investment Co. Ltd. and Ors. (1992

(2) SCC 344). It is not in dispute that there were long queues

and on 8.1.2006 the one branch of the appellant-Bank

actually faced cash shortage and had to draw its funds with

the RBI protecting the interest of the depositors because

during such period there are severe restrictions on the ability

of the depositors to operate their bank accounts. Therefore,

with a view to protect the interest of the depositors, the RBI

has to act expeditiously to identify another bank prepared to

take over the appellant-Bank and keeping in view the

background principles governing merger and amalgamation

RBI had to act with expedition. The factual scenario does not

show that there was any undue haste or mala fides involved.

Under Section 45 of the Act, the primary consideration is

public interest. There is an underlying object of acting swiftly

and decisively to protest interests of depositors and ensure

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public confidence in the banking system. The emergent

situation which warrants action with expedition cannot be lost

sight of while deciding the legality of the action.

It is brought on record that Federal Banks' strength lay

on the fact that it is a strong bank with huge net worth, large

capital funds and huge amount of deposits with more than

adequate CRAR. Its net worth is about Rs.897 crores, capital

is around Rs.85 crores, and deposits to the tune of Rs.16,448

crores. Its CRAR (11.34%) exceeds the RBI requirement (9%)

and percentage of NPAs (Gross and Net) is (5.17% and 1.41%

respectively). For the accounting period ending 31st December,

2005 its profit is Rs.174 Crores.

As observed by this Court in Bari Doab Bank Ltd. v.

Union of India and Ors. (1997 (6) SCC 417) the provisions of

Section 45 of the Act provide adequate opportunity of a

representation and no additional opportunity is required to be

given. The objection filed by the appellant-Bank was duly

considered. In fact, certain objections were raised and

comments of the RBI on them were forwarded to the Central

Government along with the final recommendations. The RBI

was of the view that the proposal received from the Federal

Bank was best under the circumstances and, therefore, the

same appears to have been accepted.

At this juncture it is to be noted that offer of Federal

Bank was an unconditional offer, whereby it proposed to take

over the responsibility of any regulatory forbearance. Three

reasons given by the Federal Bank to take over the appellant's

Bank were considered cogent reasons and, therefore, RBI's

decision cannot be faulted. As rightly contended the offers

received from the City Bank, Standard Chartered Bank were

neither comprehensive nor unconditional. In fact, they were

not concluded offers, since they were both dependent upon a

request for due diligence and in certain instances regulatory

forbearances. Ratnakar Bank's offer was not accepted as it

was itself an ailing bank.

Learned counsel for the appellants has highlighted that

Sarastwat Bank's offer was an equally good offer if not better

and should have been accepted. It has been pointed out by

learned counsel for the respondents that Saraswat Bank is a

Multi State Co-operative Bank and its functioning is governed

by Multi State Cooperative Societies Act, 2002 (in short '2002

Act'). The legal opinion available to the RBI was that it was not

feasible or permissible to amalgamate a commercial bank with

a cooperative Bank by reason of the provisions of the Act as

well as 2002 Act. The RBI was of the view that such

amalgamation is not possible under Sections 17 and 18 of the

2002 Act as also Section 56 (zb) of the Act. It was pointed out

that Saraswat Bank cannot be considered to be a banking

company for the purpose of Section 45(4) to 45(15) of the Act.

In order to be a banking company within the meaning of the

Act, the entity in question must be a company. Section 56(zb)

of the Act excludes the applicability of Section 45(4) to 45(15)

so far as cooperative banks are concerned. It was pointed out

that even if it is conceded for the sake of argument that legally

amalgamation is permissible it could have taken a very long

time to get requisite clearance from several other agencies

under the 2002 Act and could not have gone through

expeditiously. It is also pointed out that an amalgamation of

Multi State Cooperative Bank is subject to far less regulatory

control of the RBI especially in relation to non banking

matters. There is no dispute that the application made by

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Saraswat Bank was duly considered by the RBI.

The scope of Judicial review in administrative matters

has been the subject matter of consideration before this Court

in several cases.

There should be judicial restraint while making judicial

review in administrative matters. Where irrelevant aspects

have been eschewed from consideration and no relevant aspect

has been ignored and the administrative decisions have nexus

with the facts on record, there is no scope for interference.

The duty of the court is (a) to confine itself to the question of

legality; (b) to decide whether the decision making authority

exceeded its powers (c) committed an error of law (d)

committed breach of the rules of natural justice and (e)

reached a decision which no reasonable Tribunal would have

reached or (f) abused its powers. Administrative action is

subject to control by judicial review in the following manner:

(i) Illegality: This means the decision-

maker must understand correctly the

law that regulates his decision-making

power and must give effect to it.

(ii) Irrationality, namely, Wednesbury

unreasonableness.

(iii) Procedural impropriety.

One of the points that falls for determination is the scope

for judicial interference in matters of administrative decisions.

Administrative action is stated to be referable to broad area of

Governmental activities in which the repositories of power may

exercise every class of statutory function of executive, quasi-

legislative and quasi-judicial nature. It is trite law that

exercise of power, whether legislative or administrative, will be

set aside if there is manifest error in the exercise of such

power or the exercise of the power is manifestly arbitrary (See

State of U.P. and Ors. v. Renusagar Power Co. and Ors. (AIR

1988 SC 1737). At one time, the traditional view in England

was that the executive was not answerable where its action

was attributable to the exercise of prerogative power. Professor

De Smith in his classical work "Judicial Review of

Administrative Action" 4th Edition at pages 285-287 states the

legal position in his own terse language that the relevant

principles formulated by the Courts may be broadly

summarized as follows. The authority in which discretion is

vested can be compelled to exercise that discretion, but not to

exercise it in any particular manner. In general, discretion

must be exercised only by the authority to which it is

committed. That authority must genuinely address itself to the

matter before it; it must not act under the dictates of another

body or disable itself from exercising discretion in each

individual case. In the purported exercise of its discretion, it

must not do what it has been forbidden to do, nor must it do

what it has not been authorized to do. It must act in good

faith, must have regard to all relevant considerations and

must not be influenced by irrelevant considerations, must not

seek to promote purposes alien to the letter or to the spirit of

the legislation that gives it power to act, and must not act

arbitrarily or capriciously. These several principles can

conveniently be grouped in two main categories: (i) failure to

exercise a discretion, and (ii) excess or abuse of discretionary

power. The two classes are not, however, mutually exclusive.

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Thus, discretion may be improperly fettered because irrelevant

considerations have been taken into account, and where an

authority hands over its discretion to another body it acts

ultra vires.

The present trend of judicial opinion is to restrict the

doctrine of immunity from judicial review to those classes of

cases which relate to deployment of troupes, entering into

international treaties, etc. The distinctive features of some of

these recent cases signify the willingness of the Courts to

assert their power to scrutinize the factual basis upon which

discretionary powers have been exercised. One can

conveniently classify under three heads the grounds on which

administrative action is subject to control by judicial review.

The first ground is 'illegality' the second 'irrationality', and the

third 'procedural impropriety'. These principles were

highlighted by Lord Diplock in Council of Civil Service Unions

v. Minister for the Civil Service (1984 (3) All.ER.935),

(commonly known as CCSU Case). If the power has been

exercised on a non-consideration or non-application of mind to

relevant factors, the exercise of power will be regarded as

manifestly erroneous. If a power (whether legislative or

administrative) is exercised on the basis of facts which do not

exist and which are patently erroneous, such exercise of power

will stand vitiated. (See commissioner of Income-tax v.

Mahindra and Mahindra Ltd. (AIR 1984 SC 1182) . The effect

of several decisions on the question of jurisdiction has been

summed up by Grahame Aldous and John Alder in their book

"Applications for Judicial Review, Law and Practice" thus:

"There is a general presumption against

ousting the jurisdiction of the courts, so that

statutory provisions which purport to exclude

judicial review are construed restrictively.

There are, however, certain areas of

governmental activity, national security being

the paradig, which the courts regard

themselves as incompetent to investigate,

beyond an initial decision as to whether the

government's claim is bona fide. In this kind of

non-justiciable area judicial review is not

entirely excluded, but very limited. It has also

been said that powers conferred by the Royal

Prerogative are inherently unreviewable but

since the speeches of the House of Lords in

council of civil Service Unions v. Minister for

the civil Service this is doubtful. Lords

Diplock, Scaman and. Roskili appeared to

agree that there is no general distinction

between powers, based upon whether their

source is statutory or prerogative but that

judicial review can be limited by the subject

matter of a particular power, in that case

national security. May prerogative powers are

in fact concerned with sensitive, non-

justiciable areas, for example, foreign affairs,

but some are reviewable in principle, including

the prerogatives relating to the civil service

where national security is not involved.

Another non\027justiciable power is the Attorney

General's prerogative to decide whether to

institute legal proceedings on behalf of the

public interest."

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(Also see Padfield v. Minister of Agriculture, Fisheries and

Food (LR (1968) AC 997).

The court will be slow to interfere in such matters

relating to administrative functions unless decision is tainted

by any vulnerability enumerated above; like illegality,

irrationality and procedural impropriety. Whether action falls

within any of the categories has to be established. Mere

assertion in that regard would not be sufficient.

The famous case commonly known as "The Wednesbury's

case" is treated as the landmark so far as laying down various

basic principles relating to judicial review of administrative or

statutory direction.

Before summarizing the substance of the principles laid

down therein we shall refer to the passage from the judgment

of Lord Greene in Associated Provincial Picture Houses Ltd. v.

Wednesbury Corpn. (KB at p. 229: All ER p. 682). It reads as

follows:

"\005\005It is true that discretion must be

exercised reasonably. Now what does that

mean? Lawyers familiar with the phraseology

used in relation to exercise of statutory

discretions often use the word 'unreasonable'

in a rather comprehensive sense. It has

frequently been used and is frequently used as

a general description of the things that must

not be done. For instance, a person entrusted

with a discretion must, so to speak, direct

himself properly in law. He must call his own

attention to the matters which he is bound to

consider. He must exclude from his

consideration matters which are irrelevant to

what he has to consider. If he does not obey

those rules, he may truly be said, and often is

said, to be acting 'unreasonably' . Similarly,

there may be something so absurd that no

sensible person could even dream that it lay

within the powers the authority. . . . In

another, it is taking into consideration

extraneous matters. It is unreasonable that it

might almost be described as being done in

bad faith; and in fact, all these things run into

one another."

Lord Greene also observed (KB p.230: All ER p.683)

"\005..it must be proved to be unreasonable

in the sense that the court considers it to be a

decision that no reasonable body can come to.

It is not what the court considers

unreasonable The effect of the legislation is not

to set up the court as an arbiter of the

correctness of one view over another."

(emphasis supplied)

Therefore, to arrive at a decision on "reasonableness" the

Court has to find out if the administrator has left out relevant

factors or taken into account irrelevant factors. The decision of

the administrator must have been within the four corners of

the law, and not one which no sensible person could have

reasonably arrived at, having regard to the above principles,

and must have been a bona fide one. The decision could be

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one of many choices open to the authority but it was for that

authority to decide upon the choice and not for the Court to

substitute its view.

The principles of judicial review of administrative action

were further summarized in 1985 by Lord Diplock in CCSU

case as illegality, procedural impropriety and irrationality. He

said more grounds could in future become available, including

the doctrine of proportionality which was a principle followed

by certain other members of the European Economic

Community. Lord Diplock observed in that case as follows:

"\005\005.Judicial review has I think,

developed to a stage today when, without

reiterating any analysis of the steps by which

the development has come about, one can

conveniently classify under three heads the

grounds on which administrative action is

subject to control by judicial review. The first

ground I would call 'illegality', the second

'irrationality' and the third 'procedural

impropriety'. That is not to say that further

development on a case\027by\027case basis may

not in course of time add further grounds. I

have in mind particularly the possible

adoption in the future of the principle of

'proportionality' which is recognized in the

administrative law of several of our fellow

members of the European Economic

Community."

Lord Diplock explained "irrationality" as follows:

"By 'irrationality' I mean what can by now

be succinctly referred to as Wednesbury

unreasonableness'. It applies to a decision

which is to outrageous in its defiance of logic

or of accepted moral standards that no

sensible person who had applied his mind to

the question to be decided could have arrived

at it."

In other words, to characterize a decision of the

administrator as "irrational" the Court has to hold, on

material, that it is a decision "so outrageous" as to be in total

defiance of logic or moral standards. Adoption of

"proportionality" into administrative law was left for the future.

These principles have been noted in aforesaid terms in

Union of India and Anr. v. C. Ganayutham (1997 [7] SCC 463).

In essence, the test is to see whether there is any infirmity in

the decision making process and not in the decision itself. (See

Indian Railways Construction Co. Ltd. v. Ajay Kumar (2003 (4)

SCC 579).

Looked at from the aforesaid angle, the judgment of the

High Court does not suffer from any infirmity to warrant

interference. The appeal is dismissed.