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TMI Blog2006 (8) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... RBI'). Further, withdrawal of sums not exceeding Rs. 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. 3. 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. 4. 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. 5. 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 licence 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 Karna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted 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. 10. 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ala fides and were not established. Accordingly, the writ petitions were dismissed. 12. The stands taken before the High Court were reiterated by learned counsel appearing for the appellant and the respondents. 13. 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 per cent against required 25 per cent 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 17. The fact that Federal Bank's 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. 18. 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. 19. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 21. 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. 22. 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 24-1-2006, 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 losse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 26. 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 5-1-2006 which included Rs. 1.13 crores 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 per cent to 9 per cent and, as far as loss of Rs. 5.97 crores is concerned, it is because of the change in the provisioning norms. 27. High Court noted that the Bank had paid-up capital of Rs. 1.82 crores only, high gross NPAs at 18.04 per cent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1998 led RBI to issue guidelines to revise the minimum paid-up capital for the private sector banks. 28. The actual scenario shows that when the paid-up capital of the Bank is so low, namely Rs. 1.82 crores, its gross NPAs are at higher level (8.04 per cent), 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. 29. 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-clauses (a) and (d) thereof, section 45(4) provides for the necessary action in the interest of the deposito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mala fides also. This challenge along with the challenge to amalgamation also on the basis of mala fides needs to be considered. 32. 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. 33. That brings into focus the question as to whether the decision of RBI to recommend a scheme for amalgamation on 9-1-2006 and the decision of the Government to sanction the amalgamation on 24-1-2006 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 36. 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 9-1-2006 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. 37. 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral Bank was best under the circumstances and, therefore, the same appears to have been accepted. 42. 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. 43. Learned counsel for the appellants has highlighted that Saraswat 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 RB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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. v. Renusagar Power Co. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nable 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 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. 50. The principles of judicial review of administrative action were further summarized in 1985 by Lord Diplock in Council of Civil Service Unions case (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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