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TMI Blog1962 (3) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of time involved in it would not have been an adequate measure, and amalgamation and reconstruction were out of question at the stage which had been reached. We are thus satisfied that ss. 38(1) and (3)(b)(iii) of the Banking Companies Act are neither discriminatory nor unreasonable, and cannot be declared void under Arts. 14 and 19 of the Constitution. Since the provisions are manifestly in the public interest, they cannot also be declared ultra vires under Art. 301, because they are protected by Art. 302 of the Constitution. The appeal and the petition thus fail, and are dismissed X X X X Extracts X X X X X X X X Extracts X X X X ..... hibiting further advances to Directors, their relations and individuals, firms or companies, in which the Dircetors were interested, advising the Palai Bank to reduce clean advances and to regularise others, warning the Bank that the Reserve, Bank considered that the business of the Bank was being conducted in the manner detrimental to the interests of its depositors, and that if the directions were not carried out, action under the first proviso to sub-s. (2) of s. 22 of the Banking Companies Act would be taken by issuing a notice that a licence could not be granted to the Bank. From the correspondence which has been filed in this case, it does appear that the Reserve Bank was not satisfied at each following inspection that the position had improved; rather it apprehended that it had worsened, and that the directions had not been carried out. This was denied on behalf of the Bank, but nothing depends upon who is right and who is wrong, because no charge of mala fide conduct is now made against the Reserve Bank. As a result of the inspection in February March, 1956, the Reserve Bank avers, it was found that on December 31, 1955, the advances stood at Rs. 355.02 lakhs, of which Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars there were losses, but were hidden. In June 1960, there was a run on several branches of the Palai Bank. Whether this was due to the publication of the balance sheet showing a loss, or whether it was due to the appointment of Mr. Sivaraman, it is hardly possible now to say. Between June 24, 1960 (deposits, Rs. 9.82 crores) and July 22, 1960 (deposits, Rs. 9.32 crores) there was a withdrawal of Rs. 50 lakhs. By August 3, 1960 (deposits, 8.50 crores) there was a withdrawal of Rs. 82 lakhs in 12 days. To meet this run, the Bank had to borrow against Government securities with the result that all its Government securities except those worth Rs. 25 lakhs were pledged. The deposits (Rs. 8.50 crores) consisted of Rs. 4 crores in fixed deposits, Rs. 2.25 crores in current accounts and Rs. 2.25 crores in savings deposits. Against these, the Reserve Bank found that the Palai Bank had cash to the extent of Rs. 50 lakhs and a capacity to borrow Rs.1 crore against its securities. The appellant, however, urged before us that in the report of the General Manager dated November 8, 1960, the cash in hand was shown to be Rs. 42.18 lakhs and at Banks, Rs. 83.68 lakhs, the marketable securities, R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under Art. 32 of the Constitution. That petition was heard along with this appeal. This judgment will dispose of the appeal as well as the writ petition. In the High Court, the application of the Reserve Bank was opposed on two grounds. The first was that the action of the Reserve Bank in making the application for the winding up of the Palai Bank was malafide. This ground appears to have been given up in the High Court itself, and has not been raised before us. The second ground was that s. 38(3)(b)(iii) of the Banking Companies Act, 1949, was void, inasmuch as it offends against Arts. 14 and 19 of the Constitution. In the hearing before us Art. 301 was also invoked. The decision of the High Court was against the Bank and other answering respondents, a-rid this ground alone has been urged before us. Though the facts cease to play an important part in the decision of the question of law which survives, those narrated above were referred to by the learned Attorney- General as showing the background of the action taken by the Reserve Bank. The appellant, in his reply, referred to some other facts in explanation to avoid a possible prejudice to his case, if the facts as presente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but took a hasty action before even the 30 days had expired. The action of the Reserve Bank was undoubtedly taken during the period of grace; but after July 21, the situation had altered so radically that delay might have defeated the very purpose of the law, under which action was taken. Finally, it was contended that the Palai Bank began by being a rural Bank, which was making advances on the security of land, and such security, though "sticky" was capable of being realised. Reference was made to the Report of the Travancore Cochin Banking Enquiry Commission, which was, appointed in 1956, where, in making a survey of banking in Travancore-Cochin State, it was pointed out that the Banks were "spread out into the rural interior of the State", and the main business of these banks was "to finance the rural people engaged in a small business-crop raising, produce processing, transporting, vending, etc." It was argued that to a rural Bank of this kind the standards of a commercial bank could not be applied and that the Reserve Bank should have made allowances in respect of the realisability of the advances, the worse of which belonged to a period prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "38(1), Notwithstanding anything contained in section 391, section 392, section 433 and section 583 of the Companies Act., 1956, but without prejudice to its powers under sub-section(1) of section 37 of this Act,, the High Court shall order the winding up of a banking company-- (a)if the banking company is unable to pay its debts ; or (b)if an application for its winding up has been made by the Reserve Bank under section 37 or this section. (2)The Reserve Bank shall make an application under this section for the winding up of a banking company if it is directed so to do by an order under clause (b) of sub-section (4) of section 35. (3)The Reserve Bank may make an application under this section for the Winding up of a banking company- (b)if in the opinion of the Reserve Bank (iii)the continuance of the banking company is prejudicial to the interests of its depositors. It is said that the word "shall" in the first sub-sec- tion is mandatory, and compels the High Court to pass an order winding up a banking company when ever the Reserve Bank chooses to make an application. It is further pointed out that these powers exclude the operation of s. 433 of the Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, every principle of natural justice is set at nought, and the very fundamental conception of it, namely, resort to Court is completely absent. Such a law, it is said, is so patently, unreasonable as to be a gross violation of all fundamental rights. Lastly, it is contended that in giving the Reserve Bank the power to elect to proceed under the Companies Act or under the Banking Companies Act, there is further room for discrimination. It is thus contended that s. 38(1) of the Banking Companies Act cannot be upheld as a valid law on any principle. The learned Attorney-General appearing for the answering respondents contends that the action of the Reserve Bank was fully supported and justified by the facts. According to him, the, Palai Bank was inspected frequently for ten years and the reports of the inspecting officers were made availa- ble to the Palai Bank not only for information but also for explanation and compliance. The action, says he, drastic though it may seem, was taken after numerous opportunities to the Palai Bank to mend matters, that even as late as 1960 the Reserve Bank gave a year's time for improvement, but immediate action had to be taken in view of the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by saying: "We accordingly consider it to be a matter of supreme importance from the point of view of the development of banking facili- ties in India, and of her economic advancement generally, that a Central or Reserve Bank should be created at the earliest possible date. The establishment of such a bank would by mobilization of the banking and currency reserves of India in one hand tend to increase the volume of credit available for trade, industry and agriculture and to mitigate the evils of fluctuating and high charges for the use of such credit caused by seasonal stringency." (Vol. I, Part I. Chap. XXII, para, 605) The White Paper on Indian Constitutional Reforms also recommended the establishment of a Reserve Bank 'free from political influence'. As a result of these findings when a fresh Bill was introduced by Sir George Schuster on September 8, 1933, it was accepted and received the assent of the Governor General on March 6, 1934. The functions of the Reserve Bank were generally indicated in the preamble as the regulation of the issue of the Bank notes and the keeping the reserves with t view to securing monetary stability in India and generally to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not being conducted in a manner detrimental to the interests of its depositors. The Reserve Bank has further the power to prohibit any scheduled bank from receiving, after a week, any fresh deposits. The above analysis of some of the provisions of the Reserve Bank of India Act show that the Reserve Bank of India has been created as a central bank with powers of supervision, advice and inspection, over banks, particularly those desiring that they be included in the Second Schedule or those scheduled already. The Reserve Bank thus safeguards the economy and the financial stability of the country. No doubt, the Board is composed of nominated members ; but from the nature of things, it could not be otherwise. Neither election nor competitive examinations can effectively take the place of nominations, if the Board is to be composed of men of proved worth and standing, and there is no other method which can even be contemplated. No doubt, the members of the Board are subject to removal, but neither integrity nor efficiency is secured only by such guarantee, and we have no reason to think that the Reserve Bank acted in this case, or acts in other cases under pressure or from oblique mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the interests of the depositors." It must not be forgotten that the Indian Companies Act, 1913, was concerned primarily with safeguarding the interests of the stockholders, whereas in a banking company, the interests of the depositors are invariably many times those of the stockholders, if those interests can be said to be represented by the monies invested respectively. In 1946, an Ordinance was promulgated consisting of only six sections of which the operative sections were the last four. Section 3 enabled the Central Government to direct the Reserve Bank to cause an inspection to be made of any banking company and its books and accounts and to make a report to the Central Government. Section 4 provided the machinery and the procedure to implement s. 3. Section 5 empowered Government to prohibit a bank from receiving fresh deposits or to direct the Reserve Bank not to include a particular bank in the Second Schedule, or to exclude it., if already included. Sub-section (2) provided for certain penalties, and s. 6 authorised the Central Government to publish, after reasonable notice to the banking company concerned, any report or parts thereof This was an attempt to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act, on the one hand and the Companies Act, on the other, which have been characterised as discriminatory, are thus explainable on the basis of the object to be achieved. We shall soon illustrate this by a reference to the sections themselves. For the present we only wish to emphasise that banking companies cannot be compared with other companies. The ordinary companies deal with the money of the stockholders, who own a share in the assets, who appoint their own Directors, for better or for worse, and whose liability is also limited. The banking companies are in an entirely different class, as they deal with the money of the depositors who have no security except the solvency of the banking company and its sound dealings with their money. Ex facie, the banking companies must be regulated somewhat differently, and the interests of the depositors must be paramount and the winding up of such companies depends upon other considerations, chief among which is the desire to pay off the creditors as far as possible in full or at least equitably. The action is thus dictated not from any abstract consideration of a long-range view of the future ability of a bank to pay its creditors but i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not made final vis-a-vis a banking company except rarely where an appeal to the Central Government can lie. No useful purpose will be served in referring to these sections in detail. Nor do the powers of the Reserve Bank end there. The Reserve Bank not only has powers over banking companies while they are functioning, but it has also powers when the banking companies wish or are forced to cease to function. If a banking company wants to suspend its business and applies to the High Court for a moratorium, the application is not maintainable, unless it is accompanied by a report of the Reserve Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay its debts. When the High Court grants the relief without such report, it has to call for a report from the Reserve Bank. The High Court is also required to have regard to the interests of the depositors, and even during the period of moratorium granted by the High Court, the Reserve Bank can apply for the winding up of the banking company. Sections 39 and 41-A give special powers to the Reserve Bank in winding up proceedings. Even in voluntary winding up of a banking company, the Reserve Bank has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of natural justice, chiefly by denying an access to Courts. Though the arguments in this appeal have for their immediate object the declaration that ss. 38(1) and (3)(b) (iii) of the Banking Companies Act are void, they have ranged over a very wide field. In support of the first limb of the argument, Art. 14 is invoked, and in support of the second and third, Arts. 19(1)(f) and (g); and the argument proceeds along lines so well-known now as to need hardly any further amplification. There being no direct ruling either of this Court or of any High court, assistance is sought to be derived from observations in previous decisions of this Court relating to other laws. In reply, the learned Attorney-General has relied upon the provisions of certain banking laws in America and Japan and decisions of the American Courts, where such American laws were tested under the due process' clause. We shall refer to those laws and briefly rulings in the sequel, As regards the first point, viz., discrimination between banking companies and non-banking companies, we have already sufficiently indicated the wide difference that exists between these two types and the need for special laws dealing wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter hearing whether to take action or not, while withdrawals were being made at the rate of Rs. 7 lakhs per day. The emergency of the situations which may arise, is itself the justification for the procedure open under the Act and taken in this case. In our opinion, these grounds cannot be entertained. It is difficult to imagine that the Reserve Bank would act differently in another case. The main ground of attack is the way ss. 38(1) and (3)(b)(iii) make it mandatory for the High Court to pass an order winding up a banking company whenever the Reserve Bank under its powers or under an order of the Central Government makes an application for the winding up of a banking company. It is argued that such a power to the Reserve Bank is an uncontrolled and despotic power and to crown all, access to Courts is not possible because the Court itself must pass an order without deciding whether the affairs of the banking company are being conducted in a manner detrimental to the interests of the depositors--a fact capable of being proved like any other fact. It is argued as a matter of principle that any law which bars a decision by the Court is itself unreasonable without more. Mr. Pathak, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nations, that a person should be condemned, unheard, we cannot say that in this case the Palai Bank was not heard, and this case is really typical of those cases in which such a power would be invoked. The learned Attorney General was justified in saying that there was plenty of hearing before the application was filed. The gist of the objection must thus be taken to be that the Palai Bank was not heard in the High Court before the making of the impugned order. If a valid law could be made leaving to the determination of the Reserve Bank whether a banking company should be wound up and the Court to implement that decision, then this petition must fail ; but if it cannot be made, then it must succeed. We have thus to see whether there is any inviolable rule that every determination must always be made by the Court and by no other authority. In dealing with the rulings of this Court cited to us, of which we have already mentioned one, we shall enquire whether such a wide proposition can be said to have been established before. In A. K. Gopalan's case(1), s.14 of the Preventive Detention Act was held void as contravening Art. 22(5) of the Constitution in so far as it prohibited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a law requiring anticipatory action particularly on grounds of suspicion, and a law which authority action based on the factualexistence of certain grounds. A. K. Gopalan's case ([1950] S.C.R. 88.) and Dr. N. B.Khare v. The State of Delhi ([1950] S.C.R. 519) were distinguished on this narrow ground which appears to have been conceded then by the learned Attorney-General. The factual existence of grounds- amenable to an objective determination by the Court in the present case, namely prejudice to the interests of the depositors was said to place this case within the rule in V. G. Row's case ([1952] S.C.R. 597). But cases of detention and associations declared unlawful are not in the same class as a banking company on which there is a run by the depositors and whose affairs, on inspection, are found to be mismanaged and conducted in such a way that it is unable to pay all lawful demands upon it. The factual background will not be one of suspicion, and action will be based on concrete facts, which will normally be checked and rechecked before the final decision, and, in our opinion, it is impossible to equate such a case with either A. K. Gopalan's case ([1950] S.C.R. 88.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause under it a religious institution could be notified and taken over and vested in an executive officer merely by stating that the Board "was satisfied that in the interests of proper administration of the Math and its endowments, the settlement of a scheme was necessary." In the latter case, it was observed as follows "'Sections 38 and 39 relate to the framing of a scheme. A scheme can certainly be settled to ensure due administration of the endowed property but the objection seems to be that the Act provides for the framing of a scheme not by a civil court or under its supervision but by a Commissioner who is a mere administrative or executive officer. There is also no provision for appeal againsts his order to the court." After commenting upon the amendment of sub-s. (4) of s. 39, which took away the right of suit and made the order of the Commissioner final and conclusive, this Court concluded "We think that the settling of a scheme in regard to a religious institution by an executive officer without the intervention of any judicial tribunal amounts to an un- reasonable restriction upon the right of pro- perty of the superior of the religious ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue of section 4 thereof, to be a member of the Judicial Service (of the State) not being below, the rank of a Subordinate Judge, while under section 7 of Act IV of 1939, Commissioner of Endowments could be a person of either the judicial or the executive service and that even where a member of the judicial service is appointed he may be a person below the rank of a Subordinate Judge. Another important difference has also to be noticed, viz., that while under section 38 of the previous Act the enquiry has to be conducted in such manner as may be prescribed' which means as prescribed by the Provincial Government by rules made under the Act and hence changeable by the Government, under the present Act, Section 42(1)(b) specifically enjoins that the 'Commissioner shall bold an enquiry in the manner prescribed and so far as may be in accordance with the provisions of the Code of Civil Procedure relating to the trial of suits". This Court, therefore, held that the scheme framed was not unreasonable. At p. 59 of the Report, a summary of the four steps which made. for reasonableness was given as follows "(1) The scheme is to be framed by a Commissioner, who is, by appoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the section, this Court said : "...... section 7 imposes the penalty of removal not only upon a conviction under ,section 5 but goes further and brings about the same result even where there is a reason- able suspicion entertained by the Central Government that such an offence has been committed. The question whether an offence has been committed is left entirely to the subjective determination of Government." This Court pointed out that there was no opportunity to the offender to clear his conduct, and held that this was "nothing short of a travesty of the right of citizenship". The case is explainable on the ground that an Indian citizen has a fundamental right to stay in India and if he is to be removed for committing an offence or under suspicion that he has committed an offence, the removal is a penalty which cannot be inflicted without an opportunity to the offender to clear his conduct. As pointed out by us already, while dealing with Thakur Raghubir Singh's Case ([1953] S.C.R. 1049. 671), there is no question of a punishment here, and there is, in fact, a hearing, though not before a Court. There is nothing in the Influx from Pakistan (Control) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that in judging the reasonableness of any particular law "the surrounding circumstances in which the impugned law came to be enacted, the underlying purpose of the enactment and the extent and urgency of the evil sought to be remedied" must also be considered. That case concerned the freedom of speech and its alleged curtailment by the Punjab Special Powers (Press) Act, 1956. In judging the reasonableness of the law from the angle of the exclusion of Courts, this Court observed: "Legislature had to ask itself the question : who will be the appropriate authority to determine at any given point of time as to whether the prevailing circumstances require some restriction to be placed on the right to freedom of speech and expression and the right to carry on any occupation, trade or business and to what extent ? The answer was obvious, namely, that as the State Government was charged with the preservation of law an order in the State, as it alone was in possession of all material facts it would be the beat authority to investigate the circumstances and assess the urgency of the situation that might arise and to make up its mind whether any and, if so, what anticipato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has had access to their books and accounts. If the Court were called upon to take immediate action, it would almost always be guided by the opinion of the Reserve Bank. It would be impossible for the Court to reach a conclusion unguided by the Reserve Bank if immediate action was demanded. But the law which gives the same position to the opinion of the Reserve Bank is challenged as unreasonable. In our opinion, such a challenge has no force. The situation that arose in this case is typical of the occasions on which this extraordinary power would normally be exercised, and, as we have said already, if the power is abused by the Reserve Bank, what will be struck down would be the action of the Reserve Bank but not the law. An appeal against the Reserve Bank's action or a provision for an ex post facto finding by the Court is hardly necessary. An appeal to the Central Government will be only an appeal from Caesar to Caesar, because the Reserve Bank would hardly act without the concurrence of the Central Government and the finding by the Court would mean, to borrow the macabre phrase of Raman Nayar, J., a postmortem examination of the corpse of the banking company. It is a matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave generally upheld the, validity of statutes providing for the liquidation of state' banks, including the control and administration of the assets by state officials or by receivers or liquidators appointed by them, the determination of the, bank's solvency, claims against the bank...... The power is thus conferred on the Comptroller of Currency by the National Bank Act and by the State law upon the superintendents of Banks Under some statutes of the States, banking officials have no power to liquidate insolvent Banks independently of the judiciary. But in others, this power is specifically conferred. These propositions were cited to us from American Jurisprudence Vol. 7, Vols. IX, XIII and XVIA of Corpus Juris Secundum and from the Law Reports, particularly Title Guaranty and Surety Co. v. Idaho Ex Rd. Allen, Bushnell v. Leland , Ex parte Chetwood and some others. Mr. Nambiar, however, joined issue on the use of the American precedents on the grounds that banking in America is by grace of legislature, and is either a franchise or a privilege, which has no place in our Constitution. He added that the carrying on of business is not one of the provisions of the American Bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution as being unreasonable restriction which infringe the petitioners right under Art. 14 and Art. 19 (1)(f) and (g) of the Constitution. Under s. 38(3)(b)(iii) of the Banking Companies Act the winding up petition was filed by the Reserve Bank of India against the Palai Bank Ltd., in the Kerala High Court on August 8,1960. On the same day an application for the appointment of a Provisional Liquidator was also made and a Provisional Liquidator was appointed. On behalf of the Directors an objection was taken in the High Court that s. 38(3) (b) (iii) was invalid and unconstitutional because it contravenes Arts. 14 and 19 of the Constitution and that the petition was mala fide. After the appointment of the liquidator four scheme of arrangement under s. 44B of the Banking Companies Act were presented to the Court. On October 6, 1960, the Court ordered the Reserve Bank to examine the work ability and efficacy of the schemes. The Reserve Bank of India filed its report on October 22, 1960, to the effect that prima facie the schemes were not workable. The order of winding up was then passed on December 5, 1960. The plea of mala fides was not pressed and the High Court hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (Act X of 1949) was passed. On December 31, 1952, the Banks' Liquidation Proceedings committee of 1952 made its report. According to that report the number of bank which suspended payments during the year 1926 to 1952 was 851. The total liabilities of these banks were Rs. 96.86 lakhs. Of these banks 123 were in Travancore-Cochin which were the most numerous. Then it was stated how many banks failed during different periods and it was pointed out that the slow progress of liquidation proceedings was due to the facts that the advances were mostly unsecured and recovery involved litigation, so much so that there were not enough funds to take legal proceedings ; many claims were barred by limitation : contributories could not be traced and the unpaid capital could not be recovered. In cases of small banks advances were small and legal expenses for realisation were out of proportion to the amounts involved and the claims had therefore to be given up and the Directors invariably delayed the submission of their statements under s. 177A of the Companies Act and this hampered the progress of the liquidation proceedings. The Banking Companies Act was then amended from time to time and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot;. Section II in that Part deals with requirement as to minimum paid up Capital and reserve of banking companies. Section 22 empowers the Reserve Bank to give licences to banking companies and prohibits the carrying on of banking business without a licence issued by the Reserve Bank which may be issued subject to such conditions as the Reserve Bank thinks fit. Every banking company in existence at the commencement of this Act had to apply for such a licence within six months of the commencement of the Act and every other company had to apply before commencing banking business but companies which were in existence could continue their banking business until the licence was granted or it was refused. But it could not be refused before the expiry of three years referred to in sub-s. (1) of s. 11 Sub-section (3) of that section entities the Reserve Bank to inspect books of the Banking company to satisfy itself in regard to matters contained in that sub-section. Under sub-s. (4) the Reserve Bank can cancel a licence granted to a banking company provided that before cancelling the licence it gives an opportunity to the Banking Company to show cause why its licence should not be cance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o time issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions. (2)The Reserve Bank may on representation made to it or on its own motion, modify or cancel any direction issued under subsection (1) and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect." Section 36 defines further powers and functions of the Reserve Bank. It has power to caution or to prohibit a banking company from entering into any particular transaction or class of transactions, to assist any proposal for amalgamation of companies, to give loans to banking companies, to require banking companies to call a meeting of the directors for the purpose of considering any matter relating to or arising out of the affairs of the banking company to depute one or more of its officers, to watch proceedings at any meeting of the board of directors, to appoint one or more of its officers to observe the manner in which the affairs of the banking company are conducted or to require the banking company to make such change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to comply with the requirements specified in section 11 ; or (ii)has by reason of the provisions of section 22 become disentitled to carry on banking business in India ; or (iii)has been prohibited from receiving fresh deposits by an order Under clause. (1) of sub- section (4) of section 35 or under clause (b) of sub-section 3(A) of section 42 of the Reserve Bank of India Act, 1934 or; (iv)having failed to comply with any requirement of this Act other than the requirements laid down in section 11, has continued such failure, or having contravened any provision of this Act has continued such contravention beyond such period or periods as I may be specified in that behalf by the Reserve Bank from time to time after notice in writing of such failure or contravention has been conveyed to the banking company ; or (b)if in the opinion of the Reserve Bank- (i) a compromise or arrangement sanctioned by a Court in respect of the banking company cannot be worked satisfactorily with or without modifications or (ii)the returns, statements or information furnished to it under or in Pursuance of the provisions of this Act disclose that the banking company is unable to pay its debts or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t gives to the Reserve Bank the power to license existing banking companies or the banking companies, which want to commence business, and for that purpose it can inspect the books of the banking company in order to determine whether it is or will be able to pay its depositors. It can cancel a licence in certain circumstances but after giving to the banking company, an opportunity to be heard. A banking companies is required to keep a portion of its assets in a liquid form the Reserve Bank can order inspection of any banking company at any time it thinks proper and Central Government can order the Reserve Bank to make an inspection of any banking company and on that report drastic steps against the company may follow. The Reserve Bank can give directions as to how the business of a banking company shall be conducted. It can appoint observers and give directions to the directors of a banking company as to what they should do or should not do. Moratorium can be imposed by the High Court at the instance of a banking company but the Reserve Bank may have that order varied and set aside if the order is not in the interest of the depositors and if the Reserve Bank thinks that the continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y days were over winding up application was made on August 8.1960, which the Reserve Bank submits was for very good reasons, the protection of the interest of the depositors. The test of reasonableness has to be applied to each individual statute and no abstract standard or general pattern can be laid down which will be applicable to all cases : Patanjali Sastri, C.J., in State of Madras v. V. O. Row ([1952] S. C. R. 597, 607,608) observed : "The formula of subjective satisfaction of the Government or of its officers, which an advisory Board thrown in to review the materials on which the Government seeks to over- ride a basic freedom guaranteed to the citizen, may be viewed as reasonable only in very exceptional circumstances and within the narrowest limits, and cannot receive judicial approval as a general pattern of reasonable restrictions on fundamental rights." See also Abdul Hakim v. State of Bihar ([1961] 2 S.C.R. 610.) Although the legislature is the best judge of what is good for the community ; State of Bihar v. Kameshwar Singh([19S2] S.C.R. 889.) the ultimate responsibility for determining the validity of the law must, rest with the Court and the Court must n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(6). Das, C.J., there observed that the legislature had to ask itself the question as to who would be the proper authority to determine at any given time as to whether the prevailing circumstances required some restrictions on the right to freedom of speech and expression and the answer was obvious that the State Government was charged with the preservation of law and order ; it alone had in possession all the material facts and it would be the best authority' to investigate the circumstances and assess the urgency of the situation and make up its minde as to what anticipatory action must be taken for prevention of the threatened or anticipated breach of peace : "The court is wholly unsuited to gauge the seriousness of the situation, for it cannot be in possession of material which are available only to the executive Government. Therefore the determination of the time when and the extent to which restrictions should be imposed on the Press must of necessity be left to the judgment and discretion of the State Government and that is exactly what the Legislature did by passing the statute." This passage from the judgment of Das, C.J., and the passage from the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not have filed an application but that the court could not order liquidation till after it had heard the Palai Bank in its defence and had afforded it an opportunity of meeting the allegations in the winding up petition. In other words a law which authorises a banking company to be condemned unheard merely on the subjective satisfaction of one of the suitors even though it was the Reserve Bank is unconstitutional. It was next contended that the provision of s.38 of the Banking Companies Act were not so unusual and that in other countries in similar circumstances much wider powers had been given in regard to the winding up of banking companies. Reference was made to the National Bank Act in the United States Code, s.191 of which deals, with general grounds for appointment of receivers. It provides inter alia that whenever the Comptroller shall be satisfied of the insolvency of a national banking association he may, after due examination of its affairs appoint a receiver who shall proceed to close up such association and enforce the personal liability of the shareholder. It also empowers the Comptroller to appoint receivers for insolvent national banks and to make rateable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itutes a judicial function without the scope of legislative control. It was then submitted that in America closing the doors of a bank without awaiting court's orders is not, a violation of due process of law. See Title 'Guaranty & Surety Company of Scranton v. State of Idaho ((1916] 240 U.S. 136. 60 L. Ed. 566.) where it was held that the State's power to put upon a Bank Commissioner the duty of closing the doors of State Bank if, on examination, it is found to be insolvent without awaiting judicial proceedings is not a violation of the due process of law, but it appears that the proposition that such a power was a violation of the 14th Amendment had not been argued in the State Court. The following observations of Mr. Chief Justice White at p.569 are significant. "We say this because, in its opinion, the court observed that if that was the conten- tion, it was irrelevant, as the statute did not authorise liquidation except as a result of judicial proceedings although they did impose upon the bank commissioner the duty, after he found a bank to be insolvent, to close its doors and prevent the further transaction of business until, in the orderly course of proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and societies which are not wound under the Companies Act but under a different procedure-by the orders of the Central Government---e.g. the Life Insurance Corporation, the State Finance Corporation, the State Bank of India and some others. They are all owned by the Central Government and are therefore not comparable with the respondent company. Besides merely because some other corporations or societies of a different kind can be wound up in a different manner or under a special procedure is hardly a ground for holding in favour of the constitutionality of the impugned provision. To further support the reasonableness of the impugned provision it was argued that because of the special knowledge of financial matters possessed by the Reserve Bank and to protect financial structure of the country special powers have been conferred on the Reserve Bank and the learned Attorney- General relied on the observations of Rajagopala Ayyangar, J., All India Bank Employees' Association v. National Industrial Tribunal ([1962] 3 S.C.R. 269, 298.) : "From what we have stated earlier as the genesis of the legislation now impugned it would be apparent that Government bad to effect a rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Reserve Bank is of the opinion that a banking company should be wound up is constitutional. In other words can a statute which takes away the power of the Court to proceed in a normal judicial manner to determine a question submitted to it for its decision on the materials proved before it and requires it to decide it merely in accordance with the subjective satisfaction of one party to the dispute 'and without giving the other party the right to be heard at any stage of the proceeding and prove its defence be called a reasonable restriction under Art. 19(1)(f) and (g)of the Constitution. Will the law which excludes the application of the judicial process, and compels the Court to merely carry out the behests of one of the parties by giving effect to that party's subjective satisfaction and thus to abdicate its judgment to the opinion of a suitor be valid. Dealing with emergence of judicial power Griffith, C.J., in Waterside Workers' Federation of Australia v. J. W. Alexander Ltd. ((1918) 25 C.L.R. 434, 442.) said that as soon as man emerged from the savage state and formed settled communities it became necessary to have rules to regulate conduct for the enforcement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty. In Mahant Sri, Jagannath Ramanuj Das v. The State of Orissa ([1954] S.C.R. 1046, 1052.), objection was taken to certain provisions in the Orissa Hindu Religious Endowments Act which related to the framing of a scheme. Under those provisions a scheme could be settled to ensure due administration of the endowed properties but the objection was that the Act provided for the framing of a scheme not by the Civil Courts nor under provisions of the Civil Procedure Code but by a 'Commissioner who was merely an administrative officer. There was no provision for appeal against his order. Mukherjea, J. (as he then was), said at p. 1052 as follows "We think that the settling of a scheme in regard to a religious institution by an executive officer without intervention of any judicial tribunal amounts to an unreasonable restriction upon the right of property of the superior of the religious institution which is blended with his office. Sections 38 and 39 of Act must, therefore, be held to be invalid." See also The Commissioner of Hindu Religious Endowments v. Sri Lakshmindra ([1954] S.C.R. 1005, 1037.). In Sri Sadasib Prakash Brahmachari v. The State of Orissa ([1956] S.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power is to remove a vital constitutional safeguard". A great deal of emphasis was laid by the learned Attorney- General on the fact that the Reserve Bank is a body of expert bankers which could more appropriately determine as to when the continuance of a banking company is prejudicial to the interests the depositors than a judicial tribunal. This argument is in our opinion fallacious because the liquidation of banking companies in this country as of any other company is a judicial function and therefore within the jurisdiction of Courts and it has never been seriously suggested that the Courts have found or will in future find any difficulty in adjudicating on any technical matter dealing with the peculiar nature of banking companies. It cannot with any justification be argued that in dealing with such matters the exercise of jurisdiction by Courts is less desirable than any other matters which are litigated before them. Indeed it would be a negation of the rule of law if the citizen were to be denied to have his rights adjudicated by an independent tribunal like a Court of law and it will not subserve the interests of the Rule of Law in a free democratic society, if adjudic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is one of the main features of the rule of law. To quote from Stephen's Commentaries on the Laws of England, Vol. III, p. 565 : "The importance of the judicial element in our Constitution can hardly be exaggerated, for it rests with the Courts to ensure the conformity of Government with law.................. The ,Rule of Law' which Dicey held to be a leading principle of our Constitution, does not involve the decision of every dispute by Courts of law. But it does imply that all authorities in the State act under the eye of the Courts, and are liable to have the legality of their conduct inquired into." What then is the position in the present case. It is claimed on behalf of the Reserve Bank that the position of the Palai Bank was very precarious and that its assets were not sufficient for the purpose of the payment to its depositors in full or to meet its liabilities. It was also alleged that on several occasions directions had been given to the Palai Bank to conduct its affairs in the manner required by the Reserve Bank and that many opportunities had been given to it to give its explanation as to the defects and irregularities in its working and to carry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erests of the depositors is up- held the interests of the public cannot be safeguarded ? In considering this question it may be legitimate to enquire whether the High Court which normally exercises jurisdiction in the matter of ordering winding up of companies is incompetent or its procedure inadequate to, examine the charges against a banking company. The credit of a banking institution is undoubtedly very sensitive. It thrives upon the confidence of the public in the honesty of its management, and its reputation of solvency. There is however nothing peculiar in the business of a banking company that it must be ordered to be wound up on the subjective satisfaction of the Reserve Bank. The Reserve Bank is undoubtedly an expert body with vast facilities for making enquiries into the affairs of banking companies in India. But on that account it cannot be presumed that the view of the Reserve Bank that any banking institution should be liquidated must always be correct. It cannot be said that the Reserve Bank can never act mistakenly or even negligently. The Reserve Bank may even be directed by the Central Government for reasons of its own to apply for liquidation of a Bank. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in truth exercise of purely executive authority. It is a matter of no moment that the executive authority invested with the power to call upon the court to lend its aid, is an expert body which performs an important function directly or indirectly in the governance of the State. However august the body so set up may be, a provision of law providing for imposition of restrictions on a citizen's fundamental right pursuant to its subjective satisfaction as to the existence of a state of affairs, and thereby permanently depriving the citizen of his right or property is in our judgment wholly unreasonable. The plea of constitutionality of a statute infringing a fundamental right cannot be negatived on the assumption that the autocratic power of imposing penalty or punishment is entrusted to the executive authority which will exercise it only in proper cases and there will be no abuse of power. In the larger interest, our Constitution makers have been averse to conferral of auto cratic power and have tried to protect the citizen against the exercise of such power by guaranteeing him the fundamental freedoms and have also provided protection against infringement or those freedoms by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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