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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 ..... h Court does not suffer from any infirmity to warrant interference. X X X X Extracts X X X X X X X X Extracts X X X X ..... rected to be maintained. The order was challenged by the RBI and Federal Bank before this Court. 8. 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. 9. Before the High Court the principal submissions of the writ petitioners were two-fold, namely that the order dated 7-1-2006 imposing moratorium and then the order dated 7-1-2006 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 9-1-2006 and the decision to sanction the amalgamation taken on 24-1-2006 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 9-1-2006 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 held that the allegations were mala 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 favouring 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 unless it is approved by the Directors appointed by the RBI. 16. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformance 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 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 12-1-1999, the appellant -Bank sent the plan to augment resources up to Rs. 20.08 crores over the period of 5 years. At on 31-3-2002 its net worth stood at only Rs. 6.62 crores and its paid-up capital as on 31-3-2005 was Rs. 1.82 crores. It was further stated that as per the Bank's Balance Sheet as on 31-3-2005, it had reported the net loss of Rs. 5.97 crores. In view of the deteriorating financial position, further meetings were held on 12-8-2005, 26-8-2005 and 12-9-2005 to point out the major concerns of RBI vis. low paid-up capital of Rs. 1.82 crores, high level of gross NPAs (18.04 per cent) and net loss of Rs. 5.97 crores. On 14-10-2005 the bank was asked to submit a detailed plan for capital augmentation. It is on the background that the moratorium was imposed on 7-1-2006. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority 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 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. 28. The actual scenario shows that when the paid-up capital of the Bank is so low, namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 its opinion accordingly. 31. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamation. 35. 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-Bank was put under moratorium was advertised on website on 7-1-2006 itself. It is at that stage that Federal Bank promptly gave its proposal on 8-1-2006. 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 Karnataka. 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 most 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 unconditiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rength 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 per cent) exceeds the RBI requirement (9 per cent) and percentage of NPAs (Gross and Net) is (5.17 per cent and 1.41 per cent respectively). For the accounting period ending 31-12-2005 its profit is Rs. 174 crores. 41. As observed by this Court in Bari Doab Bank Ltd. v. Union of India [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. 42. At this juncture it is to be noted that offer of Federal Bank was an unconditional offer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 CIT v. Mahindra & 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prehensive 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) "...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." [Em ..... X X X X Extracts X X X X X X X X Extracts X X X X
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