9911796707
TMI Blog2009 (9) TMI 1037X X X X Extracts X X X X X X X X Extracts X X X X ..... n its entirety, the relevant committee of the bank may still be found to have acted without jurisdiction since the master circular applies to lender-borrower transactions between a bank and another; and, the nature of the agreement which is the subject matter of the proceedings did not involve a lender-borrower relationship between the bank and the petitioner company. The petitioners also allege violation of the principles of natural justice in the bank committing procedural impropriety and maintain that the decision is tainted by institutional and personal bias. 2. The prayers are resisted primarily by the Kotak Mahindra Bank and by the Reserve Bank of India. These respondents say that since the principal act complained of is of a private bank, a petition under Article 226 of the Constitution is inappropriate. They claim that there is an efficacious alternative remedy available by way of arbitration which should deter the Court from entering into the factual disputes and onerous matters involving commercial and banking expertise. The private bank claims that the Reserve Bank has been impleaded and the legality of the master circular questioned to present a fagade of maintainabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transaction between the company and Kotak Mahindra Bank was not in derivatives and otherwise invalid. The company contended that the transaction was a capital account transaction under a set of regulations brought in by the Foreign Exchange Management Act. 5. The prelude to the challenge launched in these proceedings is covered in the first 16 paragraphs of the petition. The real grievance appears in the 50-odd pages thereafter. Kotak Mahindra Bank issued a notice on October 22, 2008 asking the petitioner company to show cause as to "why it should not be declared as a willful defaulter ... (and) the Bank ... (not) make appropriate disclosures with the Reserve Bank of India, the Securities and Exchange Board of India, the Credit Information Bureau (India) Limited" under the master circular of July 1, 2008 issued by the Reserve Bank. The petitioner company furnished an initial reply on November 4, 2008 asserting that since the bank's claim had not crystallised it had falsely invoked the guidelines which applied "solely in case of a lender and borrower relationship" and followed it up with another letter of November 21, 2008 emphasising that, in the context of the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of our letter dated November 4, 2008 to him. Thereafter, vide our letter dated February 10, 2009 our client had requested for the representation hearing to be fixed in Kolkata. By a letter dated February 20, 2009 Kotak Mahindra Bank Ltd. communicated its inability to accede to our request to convene meeting in Kolkata. A copy each of the said letters dated November 21, 2008, February 10, 2009 and February 20, 2009 is annexed hereto and collectively marked Attachment VIII. 11. In the circumstances, we are filing herewith our client's written representation with your good selves so that you may consider our client's submissions as aforesaid and drop the entire proceedings on alleged willful default. However, if despite this written representation, if you are still not satisfied with our client's submissions in the matter, you may indicate the reasons thereof to us and/or to our client and afford our client an opportunity to represent its case further in person through us, for which necessary date, time and place may also be communicated to us/our client sufficiently in advance. 7. Simultaneously with the company questioning the basis of the bank invoking the guide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n also be raised before the Committee which is to decide the issue. This Court does not consider this case to be a fit and proper one for exercise of writ powers. The writ petition stands dismissed. However, no opinion is expressed on merits of the petitioner's claim and all points are left open for being agitated by it before the Committee. 11. Despite its reservations, the petitioner company had per force to present itself before the bank's committee. Shortly after the hearing in Mumbai, the salient points of its submission before the committee were recorded on behalf of the company by a letter of by a letter of March 30, 2009. The company recorded that advocates were in attendance on behalf of the bank in course of the hearing who had given "direction to the thinking faculty of the committee." The letter recounted that it had been urged on the company's behalf that the master circular on willful default applied only to a lender-borrower relationship whereupon the chairman of the committee had remarked that a derivative transaction was a non-funded facility and became a funded facility upon the amounts becoming due under the contract. The letter complained of lack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as a willful defaulter on April 7, 2009. A copy of such letter was forwarded to the company. The decision of April 7, 2009 reached the company thereafter. Over four pages and a bit, the committee recorded the basis for declaring the company a willful defaulter under the master circular. The principal reasons furnished in discarding the company's contention that the transaction relevant transaction was beyond the pale of the master circular, appear from the following: 8. Further, the Committee observed that derivative transactions are expressly permitted under the Reserve Bank of India Act, 1934 and are valid so long as one of the parties thereto is a bank or authorized dealer regulated by the Reserve Bank of India. Having regard to the provisions of the RBI Act and considering that there is no ruling or decision by any court whatsoever holding that derivative transactions are speculative and/or are wagering contracts and are therefore illegal, the Committee opined that the Company's allegations in this regard are baseless. 9. On review of the Company's representations, and on the basis of the relevant records, the Committee has found that the Bank and the Company en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a defaulter irrespective of whether it fails to repay the money borrowed under any fund-based facility or fails to pay the monies that may have become due under a non-fund based facility. This is further evidenced by the strict prudential norms issued by the RBI in relation to recognition of non-performing assets which include dues to banks arising out of loan transactions as well as derivative transactions. In light of the above, and also that the Bank had sanctioned and you had availed of a derivative facility limit, which is a non fund-based credit facility, and entered into inter alia the Transaction, the Committee opined that your contention that a derivative facility does not constitute a 'borrowal' account was untenable and was therefore disregarded." 20. The Bank shall be reporting the said declaration to RBI, CIBIL or such other agency/institution as directed by RBI. All the other processes and procedures as are required to be followed in terms of the Master Circular of Reserve Bank of India issued vide DBOD No. DL.BC.1/20.16.003/2008-09 dated July 01, 2008 shall be carried out following your declaration as a willful defaulter. 15. The petitioners are presented t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advised that they should examine all cases of wilful defaults of ₹ 1.00 crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report wilful defaults to other participating/financing banks also. Cases of wilful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country." 2. Guidelines issued on wilful defaulters Further, considering the concerns expressed over the persistence of wilful default in the financial system in the 8th Report of the Parliament's Standing Committee on Finance on Financial Institutions, the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001 a Working Group on Wilful Defaulters (WGWD) under the Chairmanship of Shri S.S. Kohli, the then Chairman of the Indian Banks' Association, for examining some of the recommendations of the Committee. The Group submitted its report in November 2001. The recommendations of the WGWD were further examined by an In House Working Group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other credit information company which has obtained/would obtain certificate of registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and of which it is a member. Banks/FIs should, however, submit the quarterly list of wilful defaulters where suits have not been filed only to RBI in the format given in Annex 1." "3. Grievances Redressal Mechanism Banks/FIs should take the following measures in identifying and reporting instances of wilful default: (i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI. (ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter vis-'-vis RBI guidelines. (iii) The borrower should thereafter be suitably advised about the proposal to classify him as wilful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to, demonstrate the extraordinary, sweeping and omnibus authority of the Reserve Bank; such that every bank would be a state or authority within the meaning of Article 12 of the Constitution. The petitioners place Section 22 of the Act that mandates a previous licence to be obtained before any banking business can be commenced; the extent of control exercised by the Reserve Bank under Section 23; the wholesome directions that can be issued by the Reserve Bank under Section 35A; the incisive powers available to the Reserve Bank under Section 36; the authority of the Reserve Bank to remove managerial and other officers under Section 36AA; and, the power vested in the Reserve Bank to appoint directors in banking companies under Section 36AB. 18. The petitioners cite a judgment reported at (2002) DLT 234 (Delhi Stock Exchange v. K.C. Sharma) and rely on paragraphs 31, 32, 40 and 61 thereof to suggest that if a stock exchange run by its independent board or committee can be found to be amenable to the writ jurisdiction by virtue of the control exercised over it by statutory authorities, the same test should hold good for any bank. The Delhi High Court's view that the stock excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions that of completely controlling and regulating the transactions in securities in the country. 19. A similar view taken by the Bombay High Court which found the Bombay Stock Exchange to be amenable to the writ jurisdiction, reported at AIR 1991 Bom 30 (Sejal Rikeen Dalal v. The Stock Exchange, Bombay), has been placed by the petitioners. 20. An unreported Division Bench judgment of the Calcutta High Court in MAT No. 533 of 2002 and FMA No. 254 of 2002 (C. Mackertich Ltd. v. Custodian) delivered on July 19, 2002 is cited in the same context where the question as to whether the Calcutta Stock Exchange was amenable to the writ jurisdiction was left open. Another judgment reported at AIR 1997 Cal 18 (Overland Investment Ltd. v. State of Bengal) is placed by the petitioners to show that if an investment company could be found to be amenable to the writ jurisdiction because of the public element in the affairs of such company, any bank functioning under the Reserve Bank's ultimate control should also be seen in the same light. Paragraph 48 of the report is relevant: 48. In the instant case it is not in dispute that these companies are dealing with public and the public mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y carrying on banking business as a scheduled bank, cannot be termed as an institution or a company carrying on any statutory or public duty. A private body or a person may be amenable to writ jurisdiction only where it may become necessary to compel such body or association to enforce any statutory obligations or such obligations of public nature casting positive obligation upon it. We don't find such conditions are fulfilled in respect of a private company carrying on a commercial activity of banking. Merely regulatory provisions to ensure such activity carried on by private bodies work within a discipline, do not confer any such status upon the company nor put any such obligation upon it which may be enforced through issue of a writ under Article 226 of the Constitution. Present is a case of disciplinary action being taken against its employee by the appellant Bank. The respondent's service with the Bank stands terminated. The action of the Bank was challenged by the respondent by filing a writ petition under Article 226 of the Constitution of India. The respondent is not trying to enforce any statutory duty on the part of the Bank. That being the position, the appeal de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company which governs the relationship between such parties; such contract is not statutory. There was no obligation on the part of the bank to enter into such contract. The bank claims that in its declaring the company to be a willful defaulter it discharged no statutory or public duty. 26. The bank refers to a decision rendered by a Single Judge of the Kerala High Court reported at (1988) 64 Comp Cas 399 (K.M. Sethumadhavan v. Dhanalakshmi Bank Ltd.) where it was held that a banking company having a private capital structure, and whose profits go to the private pockets of its shareholders and not to the public exchequer, would not be a state or authority within the meaning of Article 12 of the Constitution. 27. The bank says that for a petition under Article 226 of the Constitution to be maintained against a private body, it must be only for the purpose of securing the performance of a public duty. The bank argues that if the source of the power exercised in the impugned conduct is contractual then it has to be assessed as to whether any duty was cast on it by a statute or by public law since the remedy in this jurisdiction is only in public law. 28. A judgment reported at (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d come within the sweep of Article 12 of the Constitution. At the same time, there are private bodies also which may be discharging public functions. It is difficult to draw a line between public functions and private functions when they are being discharged by a purely private authority. A body is performing a "public function" when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. In a book on Judicial Review of Administrative Action (5th Edn.) by de Smith, Woolf & Jowell in Chapter 3, para 0.24, it is stated thus: A body is performing a 'public function' when it seeks to achieve some collective benefit for the public or a section of the public and is accepted by the public or that section of the public as having authority to do so. Bodies therefore exercise public functions when they intervene or participate in social or economic affairs in the public interest. This may happen in a wide variety of ways. For instance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be either statutory or otherwise and the source of such power is immaterial, but, nevertheless, there must be the public law element in such action. Sometimes, it is difficult to distinguish between public law and private law remedies. According to Halsbury's Laws of England, 3rd Edn., Vol. 30, p. 682, 1317. A public authority is a body, not necessarily a county council, municipal corporation or other local authority, which has public or statutory duties to perform and which perform those duties and carries out its transactions for the benefit of the public and not for private profit. There cannot be any general definition of public authority or public action. The facts of each case decide the point. 29. The bank says that the source of the power exercised by its grievance redressal committee is the contract between the parties and the banker-customer relationship that such contract brought in. It claims that the Federal Bank judgment would demonstrate that a private bank was per se not be amenable to the writ jurisdiction. 30. The next decision cited is reported at (2006) 4 MLJ 385 (Nadar Mahajana Sangam v. Reserve Bank of India). A society instituted a writ petition co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit petition can only be filed by someone who is personally aggrieved. The powers under Article 226 of the Constitution of India should be sparingly used and only in those clear cases where the rights of a person have been seriously infringed and he has no other adequate and specific remedy available to him. The relief under Article 226 of the Constitution of India is based on the existence of a right in favour of a person invoking the writ jurisdiction. The exception to the general rule is only in cases where the writ applied for is writ of habeas corpus or quo warranto or filed in public interest. Even assuming the members of the appellant's Association is affected by an act of the second respondent, but for the purpose of enforcing the rights of the members, writ petition at the instance of the Association is not maintainable. Ordinarily, the personal or individual right of the petitioner himself be enforced under Article 226 of the Constitution of India. Merely because the first respondent/Reserve Bank of India has been arrayed as a party, the Court does not get jurisdiction to hear the writ petition since the main writ petition is against the second respondent, which is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctions and the obligations does not make his functions a public duty or public functions and subject him to the power of judicial review of the High Court under Article 226. He is purely a private person carrying on business activities for personal gain, without any public duty, though there may be public element in his/its functions or activities." 65. We may also notice herein that the above observations do not mean that in no circumstance this Court can exercise the power of judicial review against the Bank. A distinction has to be drawn between failure to observe the statutory duty and an obligation (s) towards its employees and individuals which are non-statutory in nature." 68. For our conclusions hereinabove we answer the reference by holding: (a) The Jammu and Kashmir Bank Ltd is neither the State nor an authority or instrumentality of the State within the meaning of Article 12 of the Constitution of India; (b) The Bank does not perform any public duty or public functions while dealing with its employees or carrying out its normal commercial and business activities as a Banking Company so as to make it amenable to writ jurisdiction under Article 226 of the Constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d such determination carried to the Court of Appeal, where the order of the Divisional Court was affirmed. The following passage reveals the relevant considerations: I have little hesitation in accepting the applicant's contention that the Jockey Club effectively regulates a significant national activity, exercising powers which affect the public and are exercised in the interest of the public. I am willing to accept that if the Jockey Club did not regulate this activity the government would probably be driven to create a public body to do so. But the Jockey Club is not in its origin, its history, its constitution or (least of all) its membership a public body. While the grant of a Royal Charter was no doubt a mark of official approval, this did not in any way alter its essential nature, functions or standing. Statute provides for its representation on the Horserace Betting Levy Board, no doubt as a body with an obvious interest in racing, but it has otherwise escaped mention in the statute book. It has not been woven into any system of governmental control of horseracing, perhaps because it has itself controlled horseracing so successfully that there has been no need for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, perish the thought, that it were to use its powers in a way in which was manifestly unfair. What then? Counsel for the panel submits that the panel would lose the support of public opinion in the financial markets and would be unable to continue to operate. Further or alternatively, Parliament could and would intervene. Maybe, but how long would that take and who in the meantime could or would come to the assistance of those who were being oppressed by such conduct?" (Page 568) In fact, given its novelty, the panel fits surprisingly well into the format which this Court had in mind in R v. Criminal Injuries Compensation Board. It is without doubt performing a public duty and an important one. This is clear from the expressed willingness of the Secretary of State for Trade and Industry to limit legislation in the field of take-overs and mergers and to use the panel as the centrepiece of his regulation of that market. The rights of citizens are indirectly affected by its decisions, some, but by no means all of whom, may in a technical sense be said to have assented to this situation, eg the members of the Stock Exchange. At least in its determination of whether there has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it has several hues to it; it is used in cases where the action may not be received at all without any application of mind or may initially be received and dismissed at the preliminary stage. It is also used, and probably erroneously, in the context of alternative remedy, but that is a separate discussion altogether. In every case, however, where the issue of maintainability of a writ petition is raised, the key is ultimately found in the nature of the grievance and the legal right canvassed. 38. A writ petition has per force to be allowed to be filed if one of the respondents thereto is obviously a state or authority within the meaning of Article 12 of the Constitution. Yet, such petition may not progress at all if the nature of the right sought to be asserted takes it beyond the pale of judicial review. For a writ petition to be entertained there has to be an element of public law involved. This could be by virtue of the status of the respondent complained against or the nature of the conduct impugned. The test of whether a body performs a public function may not always depend on the source of its general operations or whether it is a public body or a private body. Judicial re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a statutory authority over the body which is sought to be subjected to judicial review. A partnership firm has to conform to the Partnership Act, a society has to act in accordance with the applicable statute, a company has to comply with the provisions of the Companies Act and, similarly, any bank has to abide by the Banking Regulation Act and the supervision of the central bank under the Reserve Bank of India Act. If, however, the extent of regulatory control by a statutory body over a private body is coupled with a public duty in its general functioning or the private body is a specialised body dealing with the public, as a stock exchange, the consideration would be different. 40. The remedy under Article 226 is essentially a public law remedy and is not ordinarily available against private wrongs. The jurisdiction may be invoked when there is wrongful exercise of power or a refusal to perform duties in the public law domain. Article 226 of the Constitution confers on every High Court, subject to territorial considerations, the "power ... to issue to any person or authority, including in appropriate cases, any Government ... directions, orders or writs, including writs in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation there under is only as to whether the default in payment thereof is willful within the definition of the relevant expression in the circular. The adjudication and, more importantly, the outcome of the adjudication under the master circular are intended to achieve a larger benefit than the immediate, private interest of the body which invokes it. 42. The petition thus qualifies to progress for further consideration, not upon Kotak Mahindra Bank being found to be a state or other authority generally answering to that description in Article 12 of the Constitution, or on it being assessed to be inherently engaged in discharging public functions, but on the public character of the duty that is intrinsic in its invocation of the master circular. The exercise of such public duty brings in the attendant safeguards under Part III of the Constitution and its conduct in discharge of such duty has to be tested against the elevated, more exacting standards than would otherwise be applicable to this private bank. 43. There are two other, but less fundamental, preliminary hurdles that the petitioners have been presented by the respondents. Both respondent banks state that there is a statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture that the petitioner company has brought to court. The bank suggests that since the subject involves an element of expertise, the court should treat the objection with a bit more circumspection than the everyday protest on the ground of alternative remedy. The bank says that at the end of the day an objection on the ground of an efficacious alternative remedy is an appeal to the court to exercise its discretion to not receive the petition. The bank is cautious in putting the point across; it says that its prayer to refer the matter to an expert forum under the statutory clause is not to imply the court's inability to address the issues involved but only to emphasise the inconvenience that may be occasioned in ascertaining the banking practice and then assessing the matters in issue. 45. The Reserve Bank is more vehement on this aspect. It commends the alternative remedy of statutory arbitration vociferously by underlining the virtues of the self-imposed restraint in this jurisdiction to not take up a matter if an effective option is available to the petitioner before a designated forum. The Reserve Bank asserts that since credit information is defined in the 2005 Act to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, therefore, of Clause 13 therein. We are therefore, unable to accede to the submission that we should exercise our discretion to withhold the matter from arbitration and deal with it ourselves. 47. The Reserve Bank also cites in such context a judgment reported at (2007) 14 SCC 680 (Empire Jute Company Limited v. Jute Corporation of India Ltd.) where the Bisra Stone Lime case was noticed and the Supreme Court exhorted that the existence of an arbitration should deter the writ court from proceeding with the matter. But it would be evident from paragraph 18 of the report that the impugned order of a Division Bench of this Court had referred a part of the subject-matter of the writ petition to arbitration and retained the other part in court: 18. The power of judicial review vested in the superior courts undoubtedly has wide amplitude but the same should not be exercised when there exists an arbitration clause. The Division Bench of the High Court took recourse to the arbitration agreement in regard to one part of the dispute but proceeded to determine the other part itself. It could have refused to exercise its jurisdiction leaving the parties to avail their own remedies under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, be weighed more heavily against the petitioner if a statutory arbitration or an arbitration before an expert body (not of arbitrators but of specialists in the area of activity involved in the engagement between the main parties) is cited to persuade the exercise of the self-imposed restraint to not receive the petition. But such distinction - between a run of the mill arbitration agreement and a statutory arbitration or an arbitration before an expert body - is no different from the court exercising greater restraint (where there is no arbitration agreement covering the subject-matter) in receiving a writ petition when there is a designated forum under, say, a special statute or an appellate forum available than when there is no appellate or other special forum nominated. 51. In this case a statutory arbitration is alluded to. The question is whether such alternative remedy would be efficacious if it is at all available. Despite the Reserve Bank's enthusiasm in the reference, there is a conundrum that it has missed. The primary ground urged is that the expression, "credit information", under the 2005 Act would embrace the act of the bank here adjudging the petitioner co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - were to be included in its fold, it would be arbitrary and rendered ultra vires the Constitution. There is an arguable case made out, though it may still fail in the final reckoning. But since the respondents argue that the challenge to the validity of the master circular should not be entertained on the ground of constructive res judicata, the prima facie satisfaction of the quality of the challenge cannot yet be the conclusive basis for repelling the argument on alternative remedy. 53. There is a further reason for discarding the respondents' protest on the ground of alternative remedy, which is generally an inappropriate consideration at a final hearing but is a live issue in this case as the respondents' right to urge the same had been preserved by the order receiving the petition. The petitioners have contended that the grievance redressal committee of the bank inherently lacked jurisdiction to take upon the burden of assessing whether the company was a willful defaulter under the master circular. It is now settled that if an arguable case is brought where the challenge goes to the root of the matter then it is better suited to subject it to judicial review than pus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be raised but the Supreme Court did not allow them to be made on the ground that they ought to have been urged at an earlier stage. When a similar order was passed against the said company for a subsequent year, the said additional points were included by it in its petition before the High Court. The High Court held that it was not open to the Company to raise such points on the ground of constructive res judicata. The company took such order to the Supreme Court in appeal by special leave. The Supreme Court held that the High Court was in error in holding that the principle of constructive res judicata precluded the Company from raising the additional points. Accordingly, the merits of the said points were considered and the challenge to the impugned assessment order was upheld. In dealing with the question of constructive res judicata, the earlier Constitution Bench in Amalgamated Coalfields Ltd. observed that constructive res judicata was an artificial form of res judicata enacted by Section 11 of the Code of Civil Procedure and it should not be generally applied to writ petitions filed under Article 32 or Article 226. In the later decision of Devilal Modi it was observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng one writ petition after another. 58. The bank relies on another judgment reported at (2005) 1 SCC 444 (U.P. State Road Transport Corporation v. State of U.P.) for the proposition that the applicability of the doctrine of constructive res judicata had been extended to statutory violations challenged by way of proceedings under Article 226 of the Constitution. The complex facts in that case need to be seen for the law laid down therein to be best appreciated. 59. By an order made in Shri Chand v. Govt. of U.P. (1985) 4 SCC 169 the Supreme Court quashed a scheme that the Uttar Pradesh State Road Transport Corporation had published in 1959 under Section 68C of the Motor Vehicles Act, 1939. It was, however, left open to the state transport undertaking to publish a fresh draft scheme, if necessary. The state transport corporation published a fresh scheme in 1986 under the same provision. Objections were filed to the scheme but before they could be decided, the Motor Vehicles Act, 1988 came into force in 1989 repealing the Motor Vehicles Act, 1939. The competent authority thereafter held that the proposed scheme had lapsed by virtue of Section 100(4) of the 1988 Act. The state transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t decision in Ram Krishna Verma. It held that in the judgments of both Ram Krishna Verma and Nisar Ahmad the Supreme Court had opined that the 1986 scheme had not lapsed notwithstanding Section 100(4) of the 1988 Act. It observed that, in any event, the order in Gajraj Singh directed the 1993 notification, which approved the 1986 scheme, to be modified upon taking into account the objections thereto that remained pending. The Supreme Court referred to previous judicial pronouncements on the legal issue and held at paragraph 11, 11. The principle of res judicata is based on the need of giving a finality to judicial decisions. The principle which prevents the same case being twice litigated is of general application and is not limited by the specific words of Section 11 of the Code of Civil Procedure in this respect. Res judicata applies also as between two stages in the same litigation to this extent that a court, whether the trial court or a higher court having at an earlier stage decided a matter in one way will not allow the parties to reagitate the matter again at a subsequent stage of the same proceedings. 61. What must first be seen in the present case is as to what was deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns open. 62. So much for the prelude to the real dispute. Some matters already noticed will again fall for consideration but the basis for assessment thereof will have to be in the context that they next come up. 63. The petitioners have fashioned their attack on the bank's invocation of the master circular and its grievance redressal committee's decision of April 7, 2009 on six major counts. The validity of the master circular is questioned primarily on the principle embodied in the maxim, nemo debet esse judex in propria sua causa (nobody shall be judge of his own cause). The petitioners are aggrieved at the Reserve Bank failing to rein in the private bank. They suggest that the bank has sought to pre-judge a matter that it has referred to arbitration and has sought to irretrievably condemn the petitioner even during the pendency of the reference. They say that the bank has failed to comply with the due process contemplated by the master circular. They allege that the general bias of the bank and its grievance redressal committee is accentuated by the presence on the committee of a gentleman who has been conducting all litigation against the petitioner company on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 85) 3 SCC 267 (Ram and Shyam Company v. State of Haryana) where, in the a discussion on the efficacy of the alternative remedy cited, the Supreme Court observed since the impugned decision was effectively taken by the Chief Minister of the State, the alternative remedy was illusive and produced those famous words that an "appeal from Caesar to Caesar's wife can only be bettered by appeal from one's own order to oneself." In support of their contention that such a scenario would expose a borrower to a real likelihood of bias, the petitioners rely on another celebrated judgment reported at (1978) 1 SCC 405 (Mohinder Singh Gill v. The Chief Election Commissioner, New Delhi) for the quotation therein from an English judgment to the effect that justice must be rooted in confidence and confidence is destroyed when right-minded persons go away thinking that the judge was biased. 66. The petitioners argue that if Clause 3 of the master circular intrinsically exudes the genuine likelihood of bias it would make the provision unfair and ultra vires the Constitution. They rely on another oft-noticed judgment reported at (1969) 1 QB 577 (Metropolitan Properties Co. (F.G.C.) Ltd. v. Lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d confidence is destroyed when right- minded people go away thinking: "The judge was biased." 67. It is submitted that there is no gainsaying that only if a bank or financial institution had internally decided that a borrower would be branded as a willful defaulter would the notice be issued to the borrower for such purpose and the remedy of a representation to the domestic grievance redressal committee would be a facetious exercise in futility. The petitioners exhort that such manifestly unjust procedure would fall foul of Article 14 of the Constitution and rely on the judgment reported at (1978) 1 SCC 248 (Maneka Gandhi v. Union of India) to emphasise the content and reach of the equalising principle enunciated in Article 14 which was held to be the founding faith of the Constitution. In the leading opinion rendered on behalf of three of the seven judges on the Bench, the pronouncement of the law by a Constitution Bench of Five Judges in E.P. Royappa v. State of Tamil Nadu (1974) 4 SCC 3 was quoted with approval in its assertion that, "equality is antithetic to arbitrariness" and "equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic, while t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entially and inseparably connected in substance. If, when the unconstitutional portion is stricken out, that which remains is complete in itself, and capable of being executed wholly independent of that which was rejected, it must be sustained. The difficulty is in determining whether the good and bad parts of the statute are capable of being separated within the meaning of this rule. If a statute attempts to accomplish two or more objects, and is void as to one, it may still be in every respect complete and valid as to the other. But if its purpose is to accomplish a single object only, and some of its provisions are void, the whole must fail unless sufficient remains to effect the object without the aid of the invalid portion. And if they are so mutually connected with and dependent on each other, as conditions, considerations, or compensations for each other, as to warrant the belief that the legislature intended them as a whole, and if all could not be carried into effect, the legislature would not pass the residue independently, then if some parts are unconstitutional, all the provisions which are thus dependent, conditional, or connected must fall with them. 70. Though the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usually blacklisting is also done by the same department or organisation with whom the person sought to be blacklisted engages in business. It is the bank's case that if a government department can have the right to blacklist a contractor, subject to hearing him, a bank may also effectively blacklist one of its borrowers by holding him to be a willful defaulter under the master circular. The bank submits that the bank has an inherent right to brand one of its customers as a defaulter and that the consequence of such branding has been widened under the Reserve Bank's master circular should, in principle, not make any difference. 72. The Reserve Bank is more studied in its approach to the attack on its circular. It says that the law relating to bias has moved on in India and the traditional concept of likelihood of bias is no longer the accepted position, particularly in economic matters. It contends that courts in India are now loath to entertain a generic challenge founded on likelihood of institutional bias though individual, personal bias still remains a germane consideration if supported by adequate particulars. The Reserve Bank brings a judgment reported at (2004) 11 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is a matter of policy in a crucial area of the economic activity. The central bank claims that such policy decision is based on the bitter recovery experience of banks and financial institutions and has the technical backing of expert studies and reports. It refers to a judgment reported at (2003) 4 SCC 289 (Federation of Rly Officers' Assn v. Union of India) for the proposition that the scope of judicial review is extremely restricted in matters of policy evolved by the government. 75. The limited challenge to the validity of the master circular does not appeal. The only ground put forth by the petitioners is the apparent arbitrariness in permitting banks and financial institutions to be party, judge and jury all rolled into one and that such procedure is overwhelmingly loaded against the borrower who is, more often than not, disadvantaged in his bargaining capacity from the inception of the relationship. One need not go much beyond the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and its vires being upheld for an answer to the petitioner's challenge to the master circular. The said Act goes against the general gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used to rope in any person having other permitted business dealings with a bank but not being a person who had availed of credit facilities from the bank, the petitioners appear to have reserved the ammunition for use in their foremost contention that in the petitioner company not being a borrower of the bank, the master circular could not have been invoked against it. 79. The second count of challenge on merits - the first of three successive seemingly minor charges - is of the Reserve Bank not harnessing the private bank as it shot like a loose cannon down a mountain slope to denigrate the petitioner company and sully the company's self-proclaimed pristine credit record. There would be value in the point if the Reserve Bank was of the opinion that the master circular could not be applied to anyone placed as the petitioner company was or even harboured doubts as to its applicability. The Reserve Bank insists that the company answered to the description of a borrower under the master circular and was liable to have such circular used against it. The Reserve Bank's foundation for justifying the bank's invocation of the circular will call for a closer scrutiny in another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is liable to pay to the Claimant such further amounts that may become due under Transaction 1 and/or Transaction 2 on the various statement dates there under, as claimed by the Claimant in its Particulars of Claim, as amended from time to time? ) Whether the Respondent is liable to pay interest to the Claimant at the default rate of interest as applicable from time to time, on the unpaid/claimed amounts, from the respective due dates of payment until payment and/or realization thereof? If so, at what rate/rates? 82. The bank retorts that there is no virtue in denying a legitimate claim for denial's sake and taking advantage of the usual delay of the legal process. It says that if the law and practice permitted it to pursue its claim in an agreed forum and independently take action for the petitioner company's recalcitrance, the bank cannot be faulted for so doing. It claims that since there is no justification for the petitioner company to withhold what is rightfully and contractually due to the bank, the bank was well within its rights adopt the procedure designed by the Reserve Bank to document and disseminate information as to the petitioner company's intransig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o an allegation of violation of the principles of natural justice. Not every attribute of the rules of natural justice needs to be inflexibly complied with in every instance, nor will the writ court make such a rigorous demand. What is imperative is that there has to be substantial compliance with the rules of fairplay that any form of justice would demand. If it appears that the authority discharging a quasi-judicial function enters upon the matter with an element of predisposition, then the course of action that it charts out and the reasons that it ultimately gives call for a more stern examination. The writ court may be more searching in its exercise of assessing the decision-making process to discover whether the transgression in the procedure can be linked to the quasi-judicial authority's endeavour to rush through the formalities to arrive at the inevitable conclusion. 86. But there appears to be substantial compliance with the procedure set down by the master circular. The bank's notice of October 22, 2008 sufficiently directs the petitioner company to what it needed to address and adequately informed the company of the basis for the company's opinion. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his officers thoroughly, their weaknesses as well as their strength. His opinion as regards their suitability for selection to the All India Service is entitled to great weight. But then under the circumstances it was improper to have included Naqishbund as a member of the selection board. He was one of the persons to be considered for selection. It is against all canons of justice to make a man judge in his own cause. It is true that he did not participate in the deliberations of the committee when his name was considered. But then the very fact that he was a member of the selection board must have had its own impact on the decision of the selection board. Further admittedly he participated in the deliberations of the selection board when the claims of his rivals particularly that of Basu was considered. He was also party to the preparation of the list of selected candidates in order of preference. At every stage of his participation in the deliberations of the selection board there was a conflict between his interest and duty. Under those circumstances it is difficult to believe that he could have been impartial. The real question is not whether he was biased. It is difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical to the company or that his being on the committee was a matter of concern to the company. The bank argues that the petitioner company took a chance with eyes wide open and should not be permitted to question the gentleman's presence on the committee. The bank contends that despite the company's reservation on certain other scores, it wholeheartedly submitted to the grievance redressal committee's jurisdiction and is deemed to have waived any objection as to the composition thereof. The bank refers to a judgment reported at AIR 1957 SC 425 (Manak Lal v. Dr. Prem Chand Singhvi) and Anr. reported at (1997) 1 SCC 111 (U.D. Lama v. State of Sikkim). In Manak Lal the appellant did not object to the presence of a particular member on the tribunal and the Supreme Court concluded that in so acting, the appellant was precluded from raising such objection at a later stage before the court. That the timing of the objection in such regard is of crucial importance has also been recognised in the following passage at paragraph 15 of the report in U.D. Lama: 15. ... Moreover, this objection should have been made as soon as the Second Committee was constituted. It has to be borne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not now be permitted to resurrect it. 95. Further, if the petitioner company had aired its misgiving on such account at or prior to the hearing, or even immediately thereafter, it would have afforded the bank or its committee to take care of the perceived shortcoming. It would have been entirely different if the petitioner company had cited good grounds for Mr. Sathe's exclusion from the committee and the committee had still persisted with him thereon. But the petitioner company did not afford the grievance redressal committee an opportunity to right the wrong, if a wrong at all it was. 96. The final count of the petitioners' challenge is as to the bank's authority to invoke the master circular in respect of the company's transactions with the bank. 97. The range accrual transaction involved a daily payout of Euro 10,000 by the petitioner company to the bank if at any time between March 15, 2007 and March 13, 2008 the exchange rate between Euro and US dollar fixed above 1.41. The company's liability to pay would stop altogether if the exchange rate any time thereafter struck 1.3130. The company has narrated in its counter-statement in the arbitral reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int to the return of the fund made available by a bank or financial institution to its customer and payment would point to the interest to be earned on the credit facilities granted. 99. The petitioners refer to the penal measures detailed under Clause 2.5 of the master circular. The four measures suggested, according to the petitioners, contemplate a lender-borrower relationship in each case. The first penal action recommended is that no additional facilities should be granted by any bank or financial institution to the listed willful defaulter; the second suggests legal process against "borrower/guarantors and foreclosure of recovery of dues"; the third action proposes a proactive approach for a change of management in the defaulter company; and, the fourth refers to loan agreements and advises banks and financial institutions to introduce a clause in the loan agreements that the borrowing company should not induct any person on its board who is the promoter or a director of a company which has been identified as a willful defaulter. 100. The petitioners insist that for the master circular to apply there must be an agreement at the inception of the relationship with a bank or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rower to furnish proof of underlying exposure which is sought to be hedged, in a form acceptable to KMBL. Other conditions 8. Undertaking from the borrower to cash collateralise the negative MTM (over & above the limit of INR 200 Las) every 15 days 9. The cash collateralisation shall be in the form of Fixed Deposit under lien to KMBL. 103. The bank places the company's acknowledgement of such sanction letter and its unreserved acceptance of the terms and conditions contained therein. One such acknowledgement would appear from a writing executed by a joint managing director of the company on February 6, 2006: We hereby acknowledge receipt of your sanction letter No. CB/100106/1298 and annexures dated January 10, 2006 of which this a copy. We accept and agree to be bound by the terms and conditions contained therein. 104. The bank attempts to demonstrate that the sanction letter of January 10, 2006 was not a one-time, off-beat transaction and refers to the several other similar letters from the bunch of documents disclosed by the letter of July 21, 2009. Another sanction letter of January 31, 2007 and the telltale indications therein of a lender-borrower transaction is placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified has been reduced in a phased manner. The Reserve Bank says that even its circular of 2001 included, within the definition of NPA, any amount receivable by a bank or financial institution which remained overdue for a period of more than 180 days. The respondent banks suggest that if any "receivable" to a bank could be brought within the definition of NPA, such receivable could also be made the basis for invoking the master circular. The respondent banks have brought several other circulars of the Reserve Bank. A master circular on income recognition, asset classification, provisioning and other related matters issued on July 1, 2008 is placed for the contemporary classification of assets as NPA. The Reserve Bank relies on Clause 2.1.2 of such other master circular of July 1, 2008: 2.1.2 With a view to moving towards international best practices and to ensure greater transparency, '90 days' over due* norms for identification of NPAs have been made applicable from the year ended March 31, 2004. As such, save and except certain relaxations mentioned at para 2.1.3 and 2.1.4 below, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be: a transaction not carrying a lender-borrower flavour at the inception could later become a borrowal account by the conduct of the customer. This, the bank says, is what happened in the petitioner company's case and is the bank's fundamental basis for viewing the relationship from the lender-borrower standpoint and invoking the master circular. 108. The bank relies on a Reserve Bank letter of October 13, 2008 circulated to all commercial banks laying down prudential norms for off-balance sheet exposures of banks: Prudential Norms for Off-balance Sheet Exposures of Banks Please refer to our circular RBI/2008-09/125. DBOD. No. BP.BC.31/ 21.04.157/2008-09 dated August 8, 2008 on the captioned subject. 2. The issues regarding asset classification status of overdue payments in respect of derivative transactions and re-structuring of derivative contracts have been examined, and it is advised as under: 2.1 2.1 Asset Classification i) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In that case all other funded facilities granted to the clie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the overdues arising from forward contracts and plain vanilla swaps and options. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extent IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. 4. These relaxations will also be applicable to the foreign branches of Indian banks. All other instructions contained in the aforesaid Circular of October 13, 2008 remain unchanged. 110. The respondent banks say that the term "borrower" in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h derivatives, as had been specified by the Bank from time to time, shall be deemed always to have been valid, as if the provisions of Sub-section (1) were in force at all material times." Credit Information Companies (Regulation) Act, 2005 2. Definitions.-In this Act, unless the context otherwise requires,- (b) "borrower" means any person who has been granted loan or any other credit facility by a credit institution and includes a client of a credit institution; (c) "client" includes- (i) a guarantor or a person who proposes to give guarantee or security for a borrower of a credit institution; or (ii) a person- (A) who has obtained or seeks to obtain financial assistance from a credit institution, by way of loans, advances, hire purchase, leasing facility, letter of credit, guarantee facility, venture capital assistance or by way of credit cards or in any other form or manner; (B) who has raised or seeks to raise money by issue of security as defined in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or by issue of commercial paper, depository receipt or any other instrument; (C) whose financial standing has been assessed or is prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted." Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank." F. Foreign Currency and Derivative Transactions For the Bank: ... iv. Derivative transactions comprising of swaps and options are disclosed as off balance sheet exposures. The swaps are segregated into trading or hedge transactions. Trading swaps outstanding as at the Balance Sheet dates are marked to market the resulting profits or losses, are recorded in the Profit and Loss Account. Outstanding derivative transactions designated as "Hedges" are accounted on an accrual basis over the life of the transaction. Option premium paid is accounted for in the Profit and Loss Account on expiry of the option." "Equity Index/Equity Futures/Equity Index/Equity Options/ Embedded Derivatives: ... xiii. The marked to market on derivative contracts is determined on a portfolio basis with net unrealised losses being recognised in the profit and loss account. Unrealised gains are not recognised in profit and loss account on grounds of prudence as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f and it cannot draw any sustenance from the world of reasons that the order has left out. The petitioners rely on a decision reported at (2005) 12 SCC 508 (Bangalore Development Authority v. R. Hanumaiah) which quotes from Mohinder Singh Gill (supra) at paragraph 56 that held that orders had to stand or fall on the basis of the reasons contained therein and reasons could not be supplemented by later affidavits or further explanation. 118. The respondent banks say that the extent of assessment in judicial review is limited primarily to looking at the decision-making process and not reappraising the facts or sifting through evidence. They rely on the judgments reported at : (1992) Supp 2 SCC 312 (H.B. Gandhi, Excise and Taxation Officercum- Assessing Authority, Karnal v. Gopi Nath & Sons); (1997) 3 SCC 72 (Indian Oil Corporation Ltd. v. Ashok Kumar Arora); AIR 1959 SC 942 (Mahant Moti Das v. S.P. Sahi) and (2008) 9 SCC 1 (Shamshad Ahmad v. Tilak Raj Bajaj) in support of such argument. The most recent pronouncement at paragraph 38 of the report in Shamshad Ahmad may be seen: 38. Though powers of a High Court under Articles 226 and 227 are very wide and extensive over all courts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank's grievance redressal committee. But it would be naive to suggest that the fact that such other body of material now brought to sustain the decision be disregarded because it had not been specifically referred to at paragraph 10 or thereabouts of the decision. The committee opined that the terms "borrower" and "lender" in the relevant circular "are colloquial in usage and are a subclass of the wider debtor/creditor relationship." It also suggested that "financial facilities sanctioned by a bank and availed by a customer are conveniently referred to as a borrowing by the customer and the customer's account is therefore generally referred to and called a borrowal account." The only statutory provision that the committee relied on was Section 45A of the Reserve Bank of India Act, 1934. 122. Clause (b) of Section 45-A defines "borrower" to mean any person to whom a credit limit has been sanctioned by any banking company, whether availed of or not. Certain instances are indicated in the inclusive definition. The fundamental basis of the definition is that a credit limit has to be sanctioned by a banking company to a person for such person to be regarded as a borrower unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the circular of October 13, 2008 that derivative transactions were brought into the sweep of NPA accounts; and the other borrowal accounts of the same customer had to be linked such that the entire portfolio of accounts would be NPA. But the subsequent clarification of October 29, 2008 delinked the customer's borrowal accounts from the defaulting derivative transaction account in certain cases. 125. Under the subject transaction, the bank afforded the petitioner company a period of time - the length of which was pre-determined - to furnish security as cover for the extent of the company's indebtedness to the bank in excess of a limit sanctioned previously. It was possible, depending on foreign exchange rate fluctuations, that the extent of the company's indebtedness to the bank on a given day could stand drastically reduced over the next few days without the company having paid the bank a paisa during the period. The arrangement between the bank and the company allowed a form of deferred payment. But that may not be the same as giving a loan or an advance. 126. In a sense, the reference to the other circulars may result in a wild goose chase. In theory, Reserve ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
