# GANESH BANK. KURUNDWAD LTD. AND ORS v. THE UNION OF INDIA AND ORS

- **Citation:** [2006] Supp. 5 S.C.R. 437
- **Court:** Supreme Court of India
- **Decided:** 2006-01-07
- **Case number:** Civil Appeal No. 3698 of2006
- **Bench:** Arijit Pasa Yat, C.K. Thakker
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ganesh-bank-kurundwad-ltd-and-ors-v-the-union-of-india-and-ors-21671
- **Pages:** 25

## Headnote

B
Banking Regulation Act, 1950-Sections 45 (/) and 36 (AB)-Bank
incurring huge losses-Imposition of moratorium in respect of Bank by RBI
and order of amalgamation of bank with private sector commercial bank,
within one month of order of moratorium-Correctness of-Held Moratorium C
imposed justified and in terms with public interest under sec/ion 45(/)-
Action of RBI based on negative net worth, risk weighted assets ratio, high
level non-performing assets of the bank and its inability to infi1se fresh
capital-Federal Bank being a strong bank, amalgamation of the bank with
it in interest of depositors and no malafide involved-A/so RBI has necessaiy D
powers to appoint Directors on the Board of the Bank-Thus, order of High
Court not inte1fering with the decision of RBI correct and calls for no
interference-Administrative law.
Administrative law-Judicial inte1ference in administrative mallersScope of-Held: There should be judicial restraint-Where irrelevant aspects E
have been eschewed from consideration, no relevant aspects have been
ignored and administrative decisions have nexus with the facts on record,
there is no scope for inte1ference-ln case of illegality, irrationality, and
procedural impropriety administrative action is subject to control by judicial
review-Test is whether there is any infirmity in the decision making process
and not in the decision itself
F
Appellant bank incurred huge losses for the first time in the year 20042005. On 7.01.2006, RBI imposed moratorium in respect of appellant-bank
for three months and duly advertised its decision to take further steps. It
appointed two directors of its own on the Board of Directors of the appellant
bank. RBI then notified the proposed scheme of amalgamating appellant bank G
with Federal Bank, another private sector commercial bank on 9.01.2006 and
the appellant bank filed objections, however, on 24.1.2006, RBI and the Central
Government sanctioned amalgamation of appellant Bank with the Federal
Bank. Appellant Bank filed writ petitions on the ground that the order
437
H
438
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A imposing moratorium and appointing two Directors was ma/a.fide, ultra vires
the power of RBI and Central Government and as such bad in law, illegal and
void; and also the framing of scheme of amalgamation and the decision to
sanction the amalgamation was motivated and pre-planned for the benefit of
the Federal Bank; and that there were no good reasons to impose moratorium
B and the decision to amalgamate was arrived at without considering the
proposals of other banks which were bet!er placed and had made better offers.
High Court dismissed the writ petitions holding that the inference drawn by
RBI was positive and cannot be termed to be perverse; that RBI was warning
the bank for last three years as such it was not possible for High Court to
substitute its judgment for that of RBI, therefore, the decision of the RBI to
C impose the moratorium was neither unjustified nor against the provisions of
section 45(1) of the Banking Regulation Act, 1949. However, it held that the
allegation of malafides was not substantiated. Hence the present appeal.
Dismissing the appeal, the Court
D
HELD: I.I. The phrase "good reasons" in sub-section (1) of section 45
E
of the Banking Regulation Act, 1950 is a term of wide amplitude and it will
not be correct to restrict it only to the actions mentioned under sub-section
(2) of section 45 of the Act. The provision is concerned with preparing a
scheme of reconstruction or amalgamation which would become necessary
where the RBI is satisfied about the existence of any of the four grounds
mentioned in section 45(4)-public interest; interest of the banking system;
necessary action in the interest of the depositors or with a view to secure
proper management of the bank. Precursor to the framing of the scheme is
the imposition of the moratorium which is provided in sub-sections (1) and
(2) of section 45. Existence of court proceedings

## Text

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GANESH BANK. KURUNDWAD LTD. AND ORS.
A
v.
THE UNION OF INDIA AND ORS.
AUGUST 28. 2006
(ARIJIT PASA YAT AND C.K. THAKKER, JJ.]
B
Banking Regulation Act, 1950-Sections 45 (/) and 36 (AB)-Bank
incurring huge losses-Imposition of moratorium in respect of Bank by RBI
and order of amalgamation of bank with private sector commercial bank,
within one month of order of moratorium-Correctness of-Held Moratorium C
imposed justified and in terms with public interest under sec/ion 45(/)-
Action of RBI based on negative net worth, risk weighted assets ratio, high
level non-performing assets of the bank and its inability to infi1se fresh
capital-Federal Bank being a strong bank, amalgamation of the bank with
it in interest of depositors and no malafide involved-A/so RBI has necessaiy D
powers to appoint Directors on the Board of the Bank-Thus, order of High
Court not inte1fering with the decision of RBI correct and calls for no
interference-Administrative law.
Administrative law-Judicial inte1ference in administrative mallersScope of-Held: There should be judicial restraint-Where irrelevant aspects E
have been eschewed from consideration, no relevant aspects have been
ignored and administrative decisions have nexus with the facts on record,
there is no scope for inte1ference-ln case of illegality, irrationality, and
procedural impropriety administrative action is subject to control by judicial
review-Test is whether there is any infirmity in the decision making process
and not in the decision itself
F
Appellant bank incurred huge losses for the first time in the year 20042005. On 7.01.2006, RBI imposed moratorium in respect of appellant-bank
for three months and duly advertised its decision to take further steps. It
appointed two directors of its own on the Board of Directors of the appellant
bank. RBI then notified the proposed scheme of amalgamating appellant bank G
with Federal Bank, another private sector commercial bank on 9.01.2006 and
the appellant bank filed objections, however, on 24.1.2006, RBI and the Central
Government sanctioned amalgamation of appellant Bank with the Federal
Bank. Appellant Bank filed writ petitions on the ground that the order
437
H
438
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A imposing moratorium and appointing two Directors was ma/a.fide, ultra vires
the power of RBI and Central Government and as such bad in law, illegal and
void; and also the framing of scheme of amalgamation and the decision to
sanction the amalgamation was motivated and pre-planned for the benefit of
the Federal Bank; and that there were no good reasons to impose moratorium
B and the decision to amalgamate was arrived at without considering the
proposals of other banks which were bet!er placed and had made better offers.
High Court dismissed the writ petitions holding that the inference drawn by
RBI was positive and cannot be termed to be perverse; that RBI was warning
the bank for last three years as such it was not possible for High Court to
substitute its judgment for that of RBI, therefore, the decision of the RBI to
C impose the moratorium was neither unjustified nor against the provisions of
section 45(1) of the Banking Regulation Act, 1949. However, it held that the
allegation of malafides was not substantiated. Hence the present appeal.
Dismissing the appeal, the Court
D
HELD: I.I. The phrase "good reasons" in sub-section (1) of section 45
E
of the Banking Regulation Act, 1950 is a term of wide amplitude and it will
not be correct to restrict it only to the actions mentioned under sub-section
(2) of section 45 of the Act. The provision is concerned with preparing a
scheme of reconstruction or amalgamation which would become necessary
where the RBI is satisfied about the existence of any of the four grounds
mentioned in section 45(4)-public interest; interest of the banking system;
necessary action in the interest of the depositors or with a view to secure
proper management of the bank. Precursor to the framing of the scheme is
the imposition of the moratorium which is provided in sub-sections (1) and
(2) of section 45. Existence of court proceedings, mentiqned in section 45(2),
F would certainly be one of the good reasons to impose moratorium, but that
certainly cannot be the only one. Considering that object of the Act is
protection of the interest of the depositors, such an interpretation of the
concept of "good reasons" will have to be adopted, and not a narrow one.
(451-G-HJ
G
t.2. RBI is an expert body to regulate the banking activities. Its action
is a pre-emptive action which it took considering the then financial position
of the appellant Bank and to prevent further difficulties which were likely to
arise. It is not that when there is a run on the bank then only RBI must
intervene or that it must intervene, only when there are good number of court
H proceedings against the concerned bank. The RBI has to take into account
GANESH BANK, KURUNDWAD LTD."· THE UNION OF INDIA
439
~
the totality of the circumstances and has to form its opinion accordingly.
A
[452-E-Fl
1.3. Even if two views are possible since the regulating body has arrived
at a conclusion on the basis of the facts and figures before it, and it has pointed
out that it had been warning the appellant Bank for last th,ree years, it will
not be proper for the Courts to substitute their judgment for that of RBI. Thus, B
it cannot be said that the decision of RBI to impose the moratorium was
unjustified or against the provisions of section 45(1) of the Act or was perverse
and calls for interference. (452-G-H; 453-Al
~
1.4. Regarding the appointment of two directors on the Board of
Directors of the appellant Bank, RBI has the necessary power under section c
36(AB) of the Act and, as s~ch it cannot be faulted for appointing the two
directors. (453-A-BI
2.1. The action of the RBI was based on the finding about the negative
net worth and Risk Weighted Assets Ratio (CRAR) of the appellant-Bank,
its inability to infuse fresh capital and the continued existence of a high level D
of non-performing assests of the bank. [454-G-H[
2.2. Under section 45 of the Act, the primary consideration is public
interest. There is an underlying object of acting swiftly and decisively to
•
protect interests of depositors and ensure public confidence in the banking
system. Once such confidence is lost it becomes difficult to revive the E
confidence and the credibility. Thus, the emergent situation which warrants
action with expedition cannot be lost sight of while deciding the legality of
the action. Once it was decided to anialgamate by reason of section 45 of the
Act, the RBI had to move with utmost expedition to identify another bank
prepared to take over the appellant-Bank and keeping in view the principles F
governing merger and amalgamation. The factual scenario does not show that
there was any undue haste or malajides involved. [455-D-E; 455-C-DJ
...
Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and Ors., (1962[
Supp. 3 SCR 632 and Reserve Bank of India and Ors. v. TimP.x Finance and
Investment Co. Ltd and Ors., [1992[ 2 SCC 344, referred to.
G
2.3. When a moratorium was imposed, RBI was duty bound to prepare a
scheme either of reconstruction or of amalgamation under section 45(4) with
any other banking institution. Thus, RBI had to give a scheme. The scheme
was described as a "cut and paste scheme" and of RBl's action as a regulator
in the interest of the depositors was highlighted. Federal Bank had responded H
440
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A immediately and unconditionally. The fact that the appellant-Bank was put
under moratorium was advertised on web site on 7th January 2006 itself. It
is at that stage that Federal Bank promptly gave its proposal on 8th January
2006. It was ready to honour full liabilities of the depositors and did not ask
for any concessions. Therefore, on the basis of a standard scheme, the opinion
B
of the appellant-Bank was sought on 9th January 2006 with respect to merger
with Federal Bank. The objection filed by the appellant-Bank was duly
considered. In fact, certain objections were raised and comments of the RBI
on them were forwarded to the Central Government along with the final
recommendations. (454-A-B; 454-F-G; 455-G-H(
c
Bari Doab Bank Ltd v. Union of India and Ors .. ( 19971 6 SCC 417,
referred to.
2.4. The Federal Banks' strength lay on the fact that it is a strong bank
with huge net worth, large capital funds and huge amount of deposits with
more than adequate CRAR. The offer of Federal Bank was an unconditional
D offer, whereby it proposed to take over the responsibility of any regulatory
forbearance. The reasons given by the Federal Bank to take over the
appellant's Bank were considered cogent reasons and, therefore, RBl's
decision that the proposal received from the Federal Bank was best under the
circumstances and cannot be faulted. The offers received from the other banks
E
were neither comprehensive nor unconditional. They were not concluded offers,
since they were both dependent upon a request for due diligence and in certain
instances regulatory forbearances. Also one Bank's offer was not accepted
as it was itself an ailing bank. ( 455-E-Fl
3.1. There should be judicial restraint while making judicial review in
F administrative matters. Where irrelevant aspects have been eschewed from
consideration and no relevant aspect has been ignored and the administrative
decisions have nexus with the facts on record, there is no scope for
interference. The duty of the court is to confine itself to the question of
legality; to decide whether the decision making authority exceeded its powers;
committed an error of law; committed breach of the rules of natural ju~tice;
G and reached a decision which no reasonable tribunal would have reached or
abused its powers. (456-H; 457-A-B(
H
3.2. The grounds on which administrative action is subject to control
by judicial review is illegality which means the decision-maker must
understand correctly the law that regulates his decision-making power and
must give effect to it; irrationality, namely, Wednesbury unreasonableness;
<
c
•
..
-
-
•
GANESH BANK, KURUNDWAD LTD. v. THE UNION OF INDIA
44 J
and procedural impropriety. The court will be slow to interfere in such matters A
relating to administrative functions unless decision is tainted by any
vulnerability enumerated above. Whether action falls within any of the
categories has to be established. Mere assertion in that regard would not be
sufficient. [459-C-D]
3.3. To arrive at a decision on "reasonableness" the Court has to find B
out if the administrator has left out relevant factors or taken into account
irrelevant factors. The decision of the administrator must have been within
the four corners of the law, and not one which no sensible person could have
reasonably arrived at, having regard to the principles, and must have been a
bona fide one. The decision could be one of many choices open to the authority C
but it was for that authority to decide upon the choice and not for the Court to
substitute its view. [460-C-Df
3.4. To characterize a decision of the administrator as "irrational" the
Court has to hold, on material, that it is a decision "so outrageous" as to be
in total defiance of logic or moral standards. Adoption of "proportionality" D
into administrative law was left for the future. [461-B-Cf
Union of India and Anr. v. C. Ganayutham, (1997] 7 SCC 463, relied
on .
Associated Provincial Picture Houses Ltd. v. Wednesbury Corpn., KB E
229: All ER 682 and Council of Civil Service Unions v. Minister for the Civil
Service, [1984] 3 All.ER.935, referred to.
3.5. Administrative action is stated to be referable to broad area of
Governmental activities in which the repositories of power may exercise every
class of statutory function of executive, quasi-legislative and quasi-judicial F
nature.
State of UP. and Ors. v. Renusagar Power Co. and Ors., AIR (1988) SC
1737, relied on.
"Judicial Review of Administrative Action" by Professor De Smith 4th G
Edition pp. 285-287, referred to.
3.6. The present trend of judicial opinion is to restrict the doctrine of
immunity from judicial review to those classes of cases which relate to
deployment of troupes, entering into international treaties, etc. The distinctive •H
442
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A features of some of these recent cases signify the willingness of the Courts
to assert their power to scrutinize the factual basis upon which discretionary
powers have been exercised. If the power has been exercised on a nonconsideration or non-application of mind to relevant factors, the exercise of
power will be regarded as manifestly erroneous. If a power (whether legislative
B or administrative) is exercised on the basis of facts which do not exist and
which are patently erroneous, such exercise of power will stand vitiated.
Commissioner of Income-tax v. Mahindra and Mahindra Ltd, AIR (1984)
SC 1182, relied on.
Council a/Civil Service Unions v. Minister for the Civil Service, 11984)
C 3 All.ER.935 and Padjieldv. Minister of Agriculture, Fisheries and Food LR,
(1968) AC 997, referred to.
D
"Applications for Judicial Review, law and Practice" by Grahame
Aldous and John Alder, referred to.
3. 7. In essence, the test is to see whether there is any infirmity in the
decision making process and not in the decision itself. Thus, the judgment of
the High Court does not suffer from any infirmity to warrant interference.
(461-C-D]
E
Indian Railways Construction Co. ltd v. Ajay Kumar, 120031 4 SCC
579, relied on.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3698 of2006.
From the Judgment and Order dated 5.4.2006 of the High Court of
F Bombay in Writ Petition No. 337/2006.
Raju Ramachandran, Himanshu Gupta and Shivaji M. Jadhav for the
Appellants.
Jaideep Gupta, Dr. A.M. Singhvi, Kuldeep S. Parihar, H.S. Parihar, Kirat
Singh Nagra, Indramili, Deshmukh and Mark D' Souza (for Mis. Suresh A.
G Shroff & Co.) for the Respondents.
The Judgment of the Court was delivered by
ARIJ IT PASAYA T, J. Leave granted.
H
The present appeal is directed against the judgment and order dated
GANESHBANK,KURUNDWADLTD.v. THEUN!ONOflNDIA[PASAYAT,J.]
443
5.4.2006 passed by a Division Bench of the Bombay High Court in Writ A
Petition No.337/2006 questioning Notification dated 7th January, 2006 issued
by the Government of India, Ministry of Finance imposing a moratorium in
respect of the appellant-Ganesh Bank ofKurundwad Ltd. (hereinafter referred
to as "Bank") for a period of three months from the date of order upto and
inclusive of 6th April, 2006. Amongst others, the said Bank was directed not B
to grant any loan or advances or incur liability without the permission in
writing of the Reserve Bank of India (in short the 'RBI"). Further, withdrawal
of sums not exceeding Rs. 5,000/- by a Savings Bank or Current Account
holder was permitted with ? further relaxation of amount not exceeding
Rs. I 0,000/- or the actual balance whichever is less in the event of certain
difficulties such as medical treatment, higher education and obligatory expenses C
like marriage etc. Challenge was also made to the appointment of two Directors
on the Board of Directors of the Bank.
Further Challenge was made to the Notification dated 9 .1.2006 proposing
a scheme of amalgamation of the Bank with Federal Bank, another private
sector commercial bank and to the order dated 24.1.2006 sanctioning D
amalgamation of Bank with Federal Bank.
It is to be noted that along with the said writ petition filed by the Bank,
another writ petition (WP (C) No. 160/2006) was filed by one Mr. Sunil
Mahadev Chavan.
The background facts in which the writ petitions were filed are
essentially as follows:
E
Appellant Bank was founded sometimes in the year 1920 and is having
a banking license given by the RBI. It has some 32 branches situated principally
in districts ofKolhapur and Sangli of Maharashtra and the adjoining Belgaum F
District of Karnataka. It has around 1,75,000 depositors in the rural areas of
these three districts.
It was carrying on its activities smoothly, and it incurred losses only
once and that was in the financial year 2004-05. That was also for the reasons G
which were beyond its control, viz. (i) the value of the government securities,
wherein it had.made deposits, went down, and (ii) the provisioning norms set
up by the RBI were made more stringent by it It was on this background that
it was shocked to receive the order of moratorium in the morning of 8th
January, 2006. It led to unnecessary long queue at its Dadar branch, Mumbai,
though there was no run on the bank any time in the past or even on that H
444
SUPREME COURT REPORTS (2006] SUPP. 5 S.C.R.
A day as such. Thereafter, the issuance of the moratorium and the decision of
the RBI to take further steps was duly advertised. The RBI appointed two
directors of its own on the Board of Directors of the appellant-Bank on 7th
January, 2006. The RBI then notified the proposed scheme of amalgamating
the appellant-Bank with the Federal Bank on 9th January, 2006. The appellantB Bank objected to it by filing its objections on 23rd January, 2006, yet a
decision was taken by the RBI and the Central Government on 24th January,
2006 sanctioning amalgamation of the appellant-Bank with the Federal Bank.
An interim order was passed by the High Court in W.P.337/2006 by
which operation of the order dated 24. I .2006 was stayed and status quo was
C directed to be maintained. The order was challenged by the RBI and Federal
Bank before this Court.
D
By Order dated 30. I .2006 this Court directed that the petitions were to
be heard and decided early by the High Court. However, the interim order was
left undisturbed.
Before the High Court the principal submissions of the writ petitioners
were two-fold, namely that the order dated 7th January, 2006 imposing
moratorium and then the order dated 7th January, 2006 appointing two Directors
are both ma/a fide to suit the convenience of Federal Bank, ultra vires the
power of the RBI and the Central Government and, therefore, bad in law, illegal
E and void. Similarly, the other submission of the writ petitioners was that the
subsequent framing of scheme of amalgamation on 9th January, 2006 and the
decision to sanction the amalgamation taken on 24th January, 2006 are
motivated and pre-planned decisions for the benefit of the Federal Bank, ma/a
fide and ultra vires the powers of the Central Government and the RBI. It was
F further submitted that both these decisions are not justified on facts and have
been arrived at without taking into consideration the relevant materials. As
far as the first decision imposing the moratorium is concerned, it was submitted
that there were no good reasons to impose the same and, as far as the
decision to amalgamate is concerned, it was submitted that the said decision
was arrived at without considering the proposals of four other banks which
G were better placed and had made better offers.
As against these submissions of the writ petitioners, the stand of the
RBI and the Central Government was that the Bank was in serious financial
difficulties and therefore, the moratorium had to be imposed. The moratorium
was fully justified on the facts of the case. The decision to amalgamate the
H appellant Bank with the Federal Bank was arrived at in full compliance with
GANESHBANK,KURUNDWADLTD.v. THEUNIONOFINDIA[PASAYAT,J.]
445
the statutory requirements and after considering relevant materials on record A
as well as the suggestions and objections from the appellant-Bank and all
concerned, and after examining the proposals from the four other banks. It
was, therefore, submitted that there is no reason to interfere with the decisions
arrived at by the RBI and the Central Government which essentially were for
benefit of the depositors. It was submitted that the interest of the employees B
was taken care of and the interest of the shareholders obviously came last.
According to the High Court the following two questions were to be
adjudicated:
"(A) Whether the decision dated 7th January, 2006 of the Central
Government imposing moratorium and to appoint two directors was C
ma/a fide, ultra vires the powers of the Central Government and the
RBI, bad in law and void and unjustified on facts?
(B) Whether the notification dated 9th January, 2006 containing the
proposed scheme of amalgamation and the decision to sanction the
amalgamation dated 24th January, 2006 were malajide, ultra vires the D
powers of the Central Government and the RBI and unjustified on
facts?"
Taking note of the factual background the High Court held that the
inference drawn by RBI was a positive inference and cannot be termed to be E
perverse. The High Court felt that it is the discretion of the decision maker
where two views are possible and if the regulatory body arrived at a conclusion
on the basis of facts and figures before it and points out that it has been
warning the Bank for last over three years it will not be proper for the High
Court to substitute its judgment for that of the RBI. Therefore, it was held
that the decision of the RBI to impose the moratorium was neither unjustified F
nor against the provisions of Section 45(1) of the Banking Regulation Act,
1949 (in short the 'Act'). It was noted that the RBI is an expert body to
regulate the banking activities and its judgment based on the factual scenario
cannot be substituted by the High Court, may be because another view of
the matter was possible. The High Court held that the allegation of malafides G
was not substantiated. It was also of the view that while dealing with the
question of ma/a fides, the following questions were also to be dealt with:
"(i) The first one is non-consideration of any scheme for reconstruction
before going for amalgamation.
H
446
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A
(ii) The second :s with respect to proposing amalgamation with Federal
Bank on 9th January, 2006 itself.
(iii) The third facet is not considering the proposal of other banks.
(iv) The fourth is in respect to an adequate opportunity under Section
B
45(6) and (7) of the Act."
After considering the rival submissions, the High Court held that the
allegations were ma/a fides and were not established. Accordingly, the writ
petitions were dismissed.
C
The stands taken before the High Court were re-iterated by learned
counsel appearing for the appellant and the respondents.
Learned counsel for the appellants submitted that the undue and
unseemly haste with which the order of moratorium dated 7 .1.2006 was passed
is a clear indication of ma/a fides. Moreover, full and correct facts were not
D placed by the RBI before the Central Government, in particular, facts regarding
bank balances with the RBI and other banks and cash at hand amounting to
Rs.36.62 crores were not placed before the Central Government. Actual figure
of those liquid assets were Rs.119 crores as against total deposits of
Rs. 217.43 crores which is 55% against required 25% as per RBI norms. This
was indicative of the bank's strong liquidity position. Total assets of the bank
E as on 3 I .3.2005 were Rs.235.44 crores as against total liabilities of Rs.220.45
crores. Therefore, the assets were exceeding the liabilities by Rs.14.99 crores.
Even as on 31.12.2005, the assets were exceeding the liabilities by Rs.17.70
crores. The net loss in the year 2004-05 on which great stress was laid by the
RBI and the Central Government was on account of notional/book entry loss
p with respect to additional provision for Non Performing Assets (in short the
'NPAs') and depreciation in the value of Government securities. In respect of
Urban Cooperative Banks, the RBI has relaxed provisional norms up to 5
years in respect of depreciation in the value of Government securities. However,
the same was denied to the Bank. Majority advances of the banks were given
to !'be priority sector namely Agricultural advances to which Securitisation
G Act is not applicable. Therefore, relaxation was necessary to be given. The
RB I had granted permission to the Bank to open three new Branches after
being satisfied that the Bank was in a sound financial position. Several
awards were given to the Bank for exercising banking services. There was no
complaint from any depositor, customer or shareholder and the Bank has not
H defaulted in payment of taxes or other government dues.
GANESHBANK,KURUNDWADLTD.v. THEUNIONOFINDIA[PASAYAT,J.]
447
When objections were called for by the RBI regarding amalgamation A
within a span of 15 days in January, 2006, out of the total objections received
by RBI, 97.49% of the customers/depositors objected to moratorium and/or
amalgamation of the Bank and have opted for independent entity of the Bank.
The factual scenario indicates that the proposal for amalgamation with
the Federal Bank was circulated and in a pre-determined manner the proposal B
was ultimately approved on 24.1.2006. The draft scheme of amalgamation was
sent to the Central Government to be operative w.e.f. 27.1.2006. When the
appellant-Bank approached the High Court on 24.1.2006 and the copy of the
writ petition was served on the RBI and the Central Government, the Notification
of amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself so that it could C
be argued before the High Court that the appellant Bank was no longer in
existence on 25.1.2006. The exercise of power under Section 45 of the Act was
done solely for the purpose of favoring the Federal Bank. Though Section
36(AB) of the Act empowers the RBI to appoint Additional Directors there
is no provision which empowers RBI to direct that no decision of the Board
of Directors would be valid unless it is approved by the Directors appointed D
by the RBI.
The entire exercise was pre-conceived under the garb of exercise of
statutory authority. There was a systematic plan to amalgamate the appellantBank with the Federal Bank. The entire proceedings are thus vitiated by
malice in law. The rejection of the proposal of Saraswat Bank is vitiated on E
account of misunderstanding of Section 56(zb) of the Act and on account of
a failure to consider the interest of shareholders whose interest would continue
to be of paramount importance. On account of heavy floods there was temporary
disruption of banking activities and this aspect has not· been considered.
The fact that Federal Banks' Board Meeting was preponed from I I .1.2006
to 8.1.2006 is a pointer to the fact that they were very much in know of things
to gain under advantage.
F
The data given by the RBI relating to some other amalgamation i.e. in
cases of Global Trust Bank and Nedgundi Bank have no relevance as in those G
cases there were large scale complaints of fraud.
In response, learned collnsel for the respondent No.4 i.e. Federal Bank
submitted as follows:
The procedure, process and yardsticks envisaged under Section 45 of H
448
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A the Act for the amalgamation of a financially unviable bank with a stronger
bank, cannot be the same as are applicable to a tender process. It is submitted
that when acting under Section 45 of the Act, the primary consideration must
be of public interest. Under the said provision, the RBI has the statutory duty
and responsibility to act swiftly and decisively to protect interests of depositors
and public confidence in the banking system. In contrast, when awarding a
B tender, it is primarily commercial considerations that must be the selection
process. It is, therefore, submitted that it is in public interest not to interfere
on commercial consideration with a decision made under Section 45 so long
as it safeguards depositors' interests and public confidence in the banking
system in an emergent situation.
c
The respondent No.4-Federal Bank is a financially strong bank with
high net worth, large capital funds and huge amount of deposits with more
than adequate capital to Risk Weighted Assets Ratio (in short the 'CRAR').
Its net worth is about Rs.897 crores and its capital is about Rs.85 crores It
has deposits to the tune of Rs. I 6,448 crores and its CRAR at I I .34%, exceeds
D the Reserve Bank of India requirement of 9%. It has a very low percentage
of NPA with its Gross NP As being 5. I 7% and Net NPA being 1.41 %. As of
3 I st December, 2005 Federal Bank has ~ecorded a profit of Rs. I 74.48 crores.
The contrast on each of these parameters with the appellant-Bank is striking.
On each parameter, the performance of the appellant-Bank is abysmal in
E comparison to Federal Bank.
F
It is also pertinent to note that Section 45 of the Act does not contemplate
or require the consent of either the transferor or the transferee bank, although
both are given an opportunity to lodge their objections/suggestions to the
draft scheme, before a final decision is taken.
It was submitted that Federal Bank was not privy to any information
from RBI regarding the status of the appellant-Bank or any proposal to
impose a moratorium at any time prior to 7. I .2006 when for the first time the
order of moratorium and the RBI's press release was placed on RBI's website.
G
It was also submitted that allegations of complicity based on the
advancement of the date of Federal Bank's Board Meeting from I I I .2006 to
8.1.2006 are completely u:ifounded. It was submitted that Federal Bank had
indeed vide its Notice dated 29. 12.2005 originally scheduled the said Board
Meeting for I 1.1.2006 at Kochi, but this date was found to be inconvenient
to several directors. Instead, 8.1.2006 was fouqd to be a more convenient date
H for the meeting, since firstly many of the directors were congregating at Kochi
GANESH BANK, KURUNDWAD LTD. v. THE UNION OF INDIA [PASA YAT,J]
449
for the wedding of the son of one of Directors on that date, and secondly, A
one other director, an NRI was scheduled to attend a meeting at the PMO on
7. 12006. The said director would also have found it convenient to attend the
Board Meeting, if it were to be held on 8. 12006. In view thereof, for bonajide
reasons and in good faith, the said Board meeting was rescheduled for
8. 12006 vide notice dated 4. 1.2006.
Certain aspects which have been noted by the High Com1 to dismiss
the appellant's writ petition need to be noted to test how far the conclusions
are correct.
B
The first is whether there were "good reasons" for the RBI to apply to C
the Central Government for the moratorium which led to the impugned order
dated 24th January, 2006, the concept of "good reasons" contemplated under
Section and as to how the RBI justifies its decision on the basis of the
yardstick applied by it. As far as the appellant bank is concerned, its case
is that it is a small commercial bank and the only year in which it had made
losses was for the financial year 2004-05. That was because of the value of D
the Government securities going down and the provisioning norn1s being
made more stringent by the RBI. According to the RBl's application to the
Central Government, the net worth of the petitioner bank had become negative
and so also CRAR had become negative and was at 5.83.
As against this stand of the RBI, it was pointed out on behalf of the E
appellant-Bank that Annexure-1 to RBI's application under Section 45(1) dated
4th January, 2006 contained the key financial positions of the Bank. Clause
8 thereof dealt with the NPAs. It was pointed that the net NPAs had gone
down from 10.59% to 8.32%. It was also pointed out that the Bank had done
good resource mobilization in the meantime and its paid up capital had gone F
up from Rs.1.52 crore to Rs.1.82 crore.
In para 5 of the letter, the RBI wrote to the Additional Secretary,
Ministry of Finance that infusing fresh capital did not appear to be feasible.
There was reluctance on the part of the shareholders and directors to merge
with the stronger Bank. It was therefore imperative to make immediate G
arrangement to protect the interest of the depositors to merge with another
bank. It is for this purpose that the moratorium was proposed under Section
45(1).
In the counter affidavit filed before the High Court, it was stated on
behalf of RBI that in June 1998, the Chairman of the appellant Bank was H
450
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A advised that old private sector banks having present net worth of Rs.5 lakhs
should attain the level of Rs.50 crores within a period of 3 years On 12th
January, 1999, the appellant -Bank sent the plan to augment resources up to
Rs.20.08 crores over the period of 5 years. As on 31st March, 2002 its net
worth stood at only Rs.6.62 crores and its paid up capital as on 31st March,
2005 was Rs.1.82 crore. It was further stated that as per the Bank's Balance
B Sheet as on 31st March, 2005. it had reported the net loss of Rs.5.97 crores.
In view of the deteriorating financial position. further meetings were held on
12th August, 2005, 26th August, 2005 and 12th September, 2005 to point out
the major concerns of RBI vi:::. low paid up capital of Rs.182 crore, high level
of gross NPAs (18.04%) and net loss ofRs.5.97 crores. On 14th October, 2005
C the bank was asked to submit 3 detailed plan for capital augmentation. It is
on the background that the moratorium was imposed on 7th January, 2006.
Appellants' stand was that since deposits with the Bank were Rs.92
crores, it was irrational to insist that it should have capital funds of Rs.50
crores. It was however pointed out that the Bank has consistently increased
D its capital and it stood at Rs.2.95 crores by 5th January, 2006 which included
Rs.1.13 crore in the fonn of share application money. It was nothing but a part
of share capital. Again, as far as NP As are concerned, they had gone down
from 14.10% to 9% and, as far as loss of Rs.5.97 crores is concerned, it is
because of the change in the provisioning norms.
E
High Court noted that the Bank had paid up capital of Rs.1.82 crores
only, high gross NPAs at 18.04% and net loss of Rs.3.97 crores. It was in
these circumstances that the RBI had to decide as to whether the depositors
of the Bank required any protection. RBI had been monitoring the financial
position of the Bank since June 1998 and since December 2003 the Bank had
F been placed under monthly monitoring as provided under Section 27 of the
Act. According to High Court, expression "good reasons" under Section
45(1 ), primarily relates to interest of the depositors and the interest of the
Bank. This is because the primary objective of the Act is protection of the
interest of depositors as against the primary objective of the Company Law
which is to safeguard the interest of shareholders. This is what is specifically
G stated in the Objects and Reasons of the Act. On these facts, the RBI was
of the view that an apprcpriate action was necessary. It could not be said that
the decision was lacking in the absence of good reasons. It is difficult to say
that it was taken for the benefit of the Federal Bank since these reasons go
back to December 2003 when Federal Bank was not in picture.
H
GANESHBANK,KURUNDWADLTD.1'. THEUNIONOFINDIA(PASAYAT,J.]
45]
It has been submitted that a small bank like the appellant cannot be A
expected to have the Capital Adequacy of Rs.50 crores as advised in June
1998 and which was later on revised to Rs.300 crores by circular dated 20th
February 2004. Reference is made to Section 11 (3)(i) of the Act which provides
that if a banking company has places of its business in more than one State,
it is required to have the aggregaty value of its paid-up capital and reserves B
at not less than Rs.5 lakhs. If that is the expectation, the RBI cannot insist
on the requirement of Rs.50 crores and then go on increasing it further.
Reliance is placed on the decision of this Court in Assam Co. ltd. v. State
of Assam, (200I] 4 SCC 202, which lays down that a delegate cannot over-ride
the Act either by exceeding the authority or by making provision which is
inconsistent with the Act. On the other hand, stand of RBI is that the C
language of Section l 1(3)(i) is that in the case of such a banking company,
the aggregate value of paid-up capital and reserves shall not be less than Rs.5
lakhs. Therefore, insistence of Rs.50 crores or a higher amount cannot be said
to be erroneous. With globalisation, finance and banking in rural areas .also
have to improve and it is from that point of view that the RBI had expected
the above referred enhancement. That was expected from all similarly situated D
banks and not merely from the appellant-Bank alone. Reference is made to the
expectations under the Basie Committee on Banking Supervision, 1988 and
the first I;Jarasimham Committee Report on Financial System, ! 991 which
recommended on the basis of the Basie Committee that India also must
conform to the internatioml standards of capital adequacy in a phased manner. E .
Second Narsimham Comrr:ittee. Report on Banking Sector Reforms of 1998 led
RBI to issue guidelines to revise the minimum paid-up capital for the private
sector banks.
The actual scenario shows that when the paid-up capital of the Bank
is so low, namely Rs.1.82 crore, its gross NPAs are at higher level (8.04%), F
its net worth had turned negative and the net _loss is Rs.5.97 crores. There
was nothing wrong on the part of the RBI to expect an appropriate plan of
capital augmentation. The Bank has .not been able to do that and it was quite
likely that it would land into. diffic~lties.
The phrase "good reasons" in sub-section (I) of Section 45 is a term G
of wide amplitude and it will not be correct to restrict it only to the actions
mentioned under sub-section (2) of Section 45 of the Act as is contended by
the appellant. The provision is concerned with preparing a scheme of
reconstruction or amalgamation which would become necessary where the
RBI is satisfied about the ex~tence of any of the four grounds mentioned in H
t
452
SUPREME COURT REPORTS [2006] SUPP. 5 S.C.R.
A Section 45(4). Apart from public interest and the interest of the banking
system, which are provided in sub-clauses (a) and (d) thereof, Section 45(4)
provides for the necessary action in the interest of the depositors or with a
view to secure proper management of the bank which are grounds (b) and ( c)
in that sub-section. Precursor to the framing of the scheme is the imposition
B of the moratorium which is provided in sub-sections (I) and (2) of Section 45.
Existence of court proceedings, mentioned in section 45(2), would certainly
be one of the good reasons to impose moratorium, but that certainly cannot
be the only one. Considering that object of the Act is protection of the
interest of the depositors, such an interpretation of the concept of "good
reasons" will have to be adopted, and not a narrow one.
c
It has been contended that there was a negative impact when moratorium
was imposed, and there were long queues at four branches of the appellant
Bank on 8th January 2006. The RBI arranged to send an amount of Rs.2 crores
to the Bank from its Current Account to meet the depositors' demands. The
manager of the Appellant Bank's branch at Dadar has made an affidavit to
D state that he had not asked for an amount of Rs.2 crores and yet it was sent
by RBI. The branch manager has further stated that depositors were unhappy
with the decision of RBI. These are all disputed questions as rightly noted
by the High Court. As far as the views of the depositors are concerned, they
are bound to vary from person to person and no definite conclusion can be
E drawn merely on the bank manager's affidavit that people were angry against
RBI. Besides, no depositor has questioned legality of the action. It can be
said that the action of the RBI is a pre-emptive action which it took considering
the then financial position of the appellant Bank and to prevent further
difficulties which were likely.