2021 (3) TMI 543 - HC - Indian Laws

Cancellation of licence of the CKP Co-operative Bank Limited to carry on the banking business in India - whether in the facts and circumstances of the case, the Reserve Bank of India was justified in exercising powers under section 22 read with section 56 of the Banking Regulation Act to cancel the banking licence of the CKP Bank and was further justified in directing the Registrar of Co-operative Societies to take steps to wind up the said CKP Bank or not? HELD THAT - There is no substance in the submission made by the learned counsel for the petitioner that the Reserve Bank of India could not have passed an order of cancellation of banking licence of the said CKP Bank and ought to have given a fresh show cause notice. The Reserve Bank of India had given liberty to the members of the said CKP Bank for its revival and also asked the said CKP Bank to submit an option for merger. The said CKP Bank did not take any steps to improve the financial condition and on the contrary made the financial condition of the said CKP Bank in miserable state of affairs. In these circumstances, the Reserve Bank of India was not required to wait indefinitely having waited for about ten years for revival of the CKP Bank. There was no further requirement of issuance of any fresh show cause notice after issuance of second show cause notice on 23rd August, 2017 and before passing the impugned order dated 28th April, 2020. The Reserve Bank of India had postponed the action in view of the request made by the CKP Bank as and by way of last indulgence. The Reserve Bank of India was not required to give any hearing to the depositors before passing the order of suspension of the banking licence of the said CKP Bank. It is not the case of the said CKP Bank that principles of natural justice were violated by the Reserve Bank of India at any sage from 2009 onwards - there is no merit in the submission of the learned counsel for the petitioner that since no action was taken by the Reserve Bank of India pursuant to the show cause notices dated 11th June, 2015 and 23rd August, 2017 for substantial period, the alleged deficiencies on the part of the said CKP Bank in not complying with the requisition directed in those two show cause notices were deemed to have been waived. The financial condition of the said CKP Bank became worst day to day and thus the Reserve Bank of India complied with its duty to cancel the banking licence and in simultaneously directing the Registrar, Co-operative Societies to wind up its affairs so as to obviate further deterioration and erosion of all the deposits and the assets of the said CKP Bank. The Reserve Bank of India for various reasons recorded in the impugned orders which are in public interest has passed the said order of cancellation of the banking licence of the said CKP Bank and was right in not exercising such powers under section 45 of the Banking Regulation Act. The Registrar of Co-operative Societies while passing an order of winding up of the said CKP Bank rightly did not exercise the powers under Section 102 of the MCS Act but had complied with the mandatory directions issued by the Reserve Bank of India under Section 102 of the MCS Act. The Registrar of Co-operative Societies has no discretion to either issue a show cause notice or to give any hearing to the said CKP Bank or to any of the depositors - the order passed by the Registrar, Co-operative Societies thereby winding up the affairs of the CKP Bank is not a quasi-judicial order but is executive order, passing of which order neither contemplate any show-cause notice nor any personal hearing. It is duty of the Reserve Bank of India to act as the strongest watchdog into the affairs of a bank having granted banking licence and to continuously supervise mandatorily whether the conditions for granting such banking licence have been complied with from time to time by such banks or not. It is duty of the Reserve Bank of India to safeguard the public interest and more particularly the interest of depositors and members of such bank and to cancel the banking licence, if in spite of granting opportunity to take the necessary steps for complying with or fulfilling the conditions of Banking Regulation Act, such bank does not comply with the conditions and there would be no possibility of its revival - the Reserve Bank of India had granted sufficient indulgence to the said CKP Bank to revive the said CKP Bank and its financial position by permitting to take steps to merge the said CKP Bank with any other co-operative bank and to take various steps for its revival. The said CKP Bank however did not take any steps to comply with those directions issued by the Reserve Bank of India giving ample opportunity under Section 22(3) of the Banking Regulation Act. The statement of objects and reasons of the Amendment Act 52 of 1953 of the Banking Regulation Act clearly indicates that the Banking Companies Act was passed to ensure proper administration of the Banking Companies in India. The Reserve Bank of India has rightly exercised its powers and had complied with its duty under Section 22(4) of the Banking Regulation Act by cancelling the banking licence of the said CKP bank in the facts and circumstances of this case - the power to grant banking licence by the Reserve Bank of India to the banks on the conditions set out in Section 22(3) of the Banking Regulation Act is coupled with duty to cancel such banking licence in case of any breach or violation of such terms and conditions after giving opportunity to such bank to revive and to comply with those conditions and directions as may be issued by the Reserve Bank of India. The Reserve Bank of India once having exercised such powers and duty in compliance with Section 22(4) of the Banking Regulation Act and if such order is in public interest and in the interest of bank and its depositors, Court cannot interfere with such decision making process of the Reserve Bank of India. The Reserve Bank of India has complied with its duties and obligations in public interest. No case is thus made out by any of the petitioners to interfere with the impugned orders passed by the Reserve Bank of India or the Department of Co-operation Marketing and Textile - Petition dismissed.

Summary

Issues Involved:
1. Cancellation of CKP Co-operative Bank's banking license by the Reserve Bank of India (RBI).
2. Appointment of a liquidator for CKP Co-operative Bank.
3. Alleged violation of principles of natural justice and due process.
4. RBI’s refusal to consider revival plans or merger options for CKP Bank.
5. Financial aid and reconstruction of CKP Bank.
6. Legal procedures and powers under the Banking Regulation Act and Maharashtra Co-operative Societies (MCS) Act.
7. Rights and remedies of depositors with deposits exceeding ?5 lakhs.

Detailed Analysis:

1. Cancellation of CKP Co-operative Bank's Banking License by RBI:
The RBI cancelled the banking license of CKP Co-operative Bank on 28th April 2020, citing the bank's continuous financial deterioration and non-compliance with statutory requirements under the Banking Regulation Act, 1949. The RBI's decision was based on multiple statutory inspections revealing severe deficiencies, including negative CRAR, high NPAs, and significant asset erosion. Despite several opportunities and directives to improve its financial condition, the bank failed to demonstrate any substantial progress.

2. Appointment of a Liquidator for CKP Co-operative Bank:
Following the cancellation of the banking license, the Commissioner for Co-operation and Registrar of Cooperative Societies appointed a liquidator on 4th May 2020. This decision was in compliance with Section 110A of the MCS Act, which mandates the Registrar to wind up the affairs of an insured co-operative bank upon RBI’s direction. The liquidator was tasked with conducting the liquidation proceedings and submitting quarterly progress reports.

3. Alleged Violation of Principles of Natural Justice and Due Process:
Petitioners argued that the RBI and Registrar's actions violated principles of natural justice due to the delay between show cause notices and the final order, and for not issuing a fresh show cause notice considering subsequent developments. However, the court found that the RBI had given ample opportunities to the bank to address the deficiencies and that the deteriorating financial condition justified the cancellation without further delay.

4. RBI’s Refusal to Consider Revival Plans or Merger Options for CKP Bank:
The court noted that CKP Bank had submitted multiple revival plans, which were either insufficient or not implemented effectively. The RBI had granted various permissions and relaxations to aid the bank's revival, but the bank failed to show significant progress. The RBI’s decision to cancel the license was deemed justified given the lack of credible commitment towards revival.

5. Financial Aid and Reconstruction of CKP Bank:
Petitioners sought directions for RBI to prepare a reconstruction or amalgamation scheme for CKP Bank, or alternatively, provide financial aid for its revival. The court held that the RBI had already explored these options and found no viable plan for the bank’s revival. The RBI’s decision was based on the bank’s unsustainable financial position and the public interest.

6. Legal Procedures and Powers under the Banking Regulation Act and MCS Act:
The court upheld the RBI’s authority under Section 22(4) of the Banking Regulation Act to cancel the banking license and the Registrar’s duty under Section 110A of the MCS Act to wind up the bank upon RBI’s direction. The court emphasized that the Registrar had no discretion in this matter and was bound to comply with RBI’s directives without issuing a separate show cause notice.

7. Rights and Remedies of Depositors with Deposits Exceeding ?5 Lakhs:
The court acknowledged the hardships faced by depositors with deposits exceeding ?5 lakhs, as the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures only up to ?5 lakhs per depositor. The liquidator had started disbursing insured amounts to eligible depositors. The court noted that any surplus after liquidation would be distributed among the depositors as per statutory provisions.

Conclusion:
The court dismissed the petitions, upholding the RBI’s decision to cancel CKP Bank’s license and the Registrar’s order to wind up the bank. The court found no violation of principles of natural justice or due process and emphasized the RBI’s duty to protect public interest and depositors’ funds. The court recognized the statutory framework governing the actions of RBI and the Registrar, affirming their compliance with legal requirements.