Bari Doab Bank Ltd. vs Union of India (UOI) and Others

Jawahar Lal Gupta, J. 1. Is the action of the Central Government in ordering the amalgamation of the petitioner-bank with the Oriental Bank of Commerce and in rejecting its request for conversion into a non-banking company illegal ? This is the primary question that arises for consideration in this case. A few facts may be noticed.

The petitioner-bank was established in the year 1915. While it was continuing its business, the Reserve Bank of India filed an application u/s 45(1) of the Banking Regulation Act, 1949, for an order of moratorium. On September 30, 1996, the Government of India imposed a moratorium on the petitioner up to December 31, 1996. It was, inter alia, ordered that during the period of moratorium, the bank would not, without the permission of the Reserve Bank of India in writing, grant any loan or advance, incur any liability or make any investment, etc. The petitioner challenged this order through a petition in the Delhi High Court. The Central Government as well as the Reserve Bank of India contested the petition. It was pleaded that various inspections had been conducted and that the impugned order had been passed in public interest. The writ petition was dismissed Bari Doab Bank Ltd. Vs. Union of India and others, . The Letters Patent Appeal filed by the petitioner having been dismissed, vide order dated March 20, 1997 Bari Doab Bank Ltd. Vs. Union of India and others, it approached the apex court through a petition for Special Leave to Appeal (Civil) No. 6900 of 1997. This petition was disposed of, vide order dated March 31, 1997 Bari Doab Bank Ltd. Vs. Union of India (UOI) and Others, Their Lordships found no "infirmity" in the view taken by the High Court that (page 463) "the petitioner will have post decisional opportunity at the stage of filing objections to the draft scheme framed u/s 45(4) when forwarded by the Reserve Bank of India u/s 45(6) of the Act". In view of the statement made on behalf of the Reserve Bank of India that (page 464) "the objections submitted by the petitioner against the order of moratorium dated September 30, 1996, as well as the draft scheme framed by the Reserve Bank of India u/s 45(4) have to be considered by the Central Government u/s 45(7) of the Act in the light of the comments that are made by the Reserve Bank of India on the said objections", their Lordships were pleased to observe that (page 464) "the apprehension of the petitioner that the said objections will not be considered by the Central Government is unfounded ..." and that (page 464) "no fault can be found in the matter of post-decisional hearing in respect of the order of moratorium passed u/s 45(2) of the Act". Their Lordships were also pleased to observe that (page 464) "while considering the objections submitted by the petitioner, the Central Government should give due consideration to the submission made by counsel for the petitioner about being allowed to continue" as non-banking company after it has "paid off the dues of all depositors and creditors". Lastly, it was also held that the order (page 465) "would not preclude the petitioner from challenging the validity of the order passed by the Central Government u/s 45(7) of the Act on all the grounds available under the law". Their Lordships were also pleased to extend the moratorium imposed, vide order dated September 30, 1996, "till April 7, 1997". Thereafter, the Central Government passed three orders on April 7, 1997. By the first order, a copy of which has been produced as annexure P-2 with the writ petition, it was held that "there is no merit in the contentions ... regarding the moratorium, the merger and the request for conversion of the banking institution into a non-banking financial company and/or a non-banking company". By another order of date, the Central Government notified the "Bari Doab Bank Limited (Amalgamation with Oriental Bank of Commerce) Scheme, 1997". A copy of this order is at annexure P-9 with the writ petition. The Central Government issued another notification on the same day by which it specified the dates with effect from which various paragraphs of the scheme shall come into force. A copy of this notification is at annexure P-10 with the writ petition. The petitioner alleges that the order of moratorium passed on September 30, 1996 (annexure P-1 with the writ petition) and the three orders passed on April 7, 1997, copies of which are at annexures P-2, P-9 and P-10, respectively, are illegal and, thus, liable to be set aside.

Three separate written statements have been filed on behalf of the respondents. The petitioner has filed separate replications. Respondent No. 2 has even filed a rejoinder.

Counsel for the parties have been heard.

On behalf of the petitioner, Mr. Salman Khurshid contended that in the circumstances of the case, no ground for imposing the moratorium u/s 45 was made out. The order was wholly unjustified. In any event, an effective post-decisional hearing was required to be given to the petitioner to show that the moratorium was not justified and that no ground for ordering the amalgamation of the bank with the Oriental Bank of Commerce or the sanctioning of the scheme was made out. The respondents had erred in not granting an effective opportunity. Still further, it was contended by the learned counsel that the petitioner had neither violated the provisions of the Act nor those of any scheme. Consequently, the impugned orders could not be justified under the law. Lastly, it was submitted by learned counsel that the respondents had arbitrarily rejected the petitioner''s request for permission to function as a non-banking company.

On the other hand, Mr. K.N. Bhatt submitted on behalf of the respondents that the reasons for imposition of a moratorium had been disclosed in the written statement to Civil Writ Petition No. 5885 of 1996 which had been filed by the petitioner in the High Court of Delhi. The petitioner could have controverted those reasons by filing objections at the stage of post-decisional hearing. It did not. Still further, even though the petitioner was permitted to raise all objections before the Reserve Bank of India as well as the Central Government, it chose not to do so. In this situation, the petitioner cannot justifiably complain that an effective opportunity was not granted or that it was not aware of the reasons for the impugned action. It was also submitted that the petitioner had initially made a request for being permitted to function as a non-banking company. However, for reasons best known to it, it had rescinded its resolution. Still further, the petitioner could not be permitted to function as a non-banking financial company in view of the amendment in the provisions of the Reserve Bank of India Act. The petitioner itself having failed to avail of the opportunity, it cannot challenge the orders passed by the competent authority.

In view of the submissions of counsel for the parties, the questions that arise for consideration are :

(i) Was there any justification for the order of moratorium ?

(ii) Are the impugned orders vitiated on the ground that the petitioner was not granted an effective post-decisional hearing ?

(iii) Have the respondents acted illegally in not accepting the petitioner''s request for permission to function as a non-banking company ?

Reg : (i)

Admittedly, the petitioner had filed Civil Writ Petition No. 3885 of 1996 to challenge the order of moratorium passed on September 30, 1996. The writ petition was dismissed by a learned single judge. The petitioner had filed a letters patent appeal which was dismissed, vide order dated March 20, 1997. Their Lordships were pleased to hold as under ;

(i) The petitioner was a "family controlled" bank and was "hardly doing any banking business".

(ii) The "moratorium is... to maintain a particular status quo ... no principles of natural justice can at all be attracted at that stage. The natural justice can be relegated to later stage."

(iii) The application filed by the Reserve Bank of India gave "ample details of the financial position of the Bari Doab bank . . . and that it is a small bank which, in the interest of the bank, its depositors and the policy of the Reserve Bank, be merged with a bigger bank . . ." The court could not "go into the correctness of the expert opinion of the bank".

(iv) "The reasons specified in the files by the Government of India for preparing draft schemes . . . which we have perused are also based upon facts and figures as evaluated by the Reserve Bank of India and its inspectors from time to time and we are satisfied that the reasons are relevant for purposes of Section 45(1) as well as Section 45(4)".

(v) "As the reasons are now set out substantially in the counter-affidavits and as it has been fairly stated by the learned Solicitor-General of India that the appellants can file objections to the reasons so set out in the counter affidavit, it will be for the appellants to include in their objections their response to the said reasons referred to in the counter-affidavits". The reasons are "certainly relevant to the passing of an order of moratorium and for preparing a draft scheme". Thus, it is "not for this court to go into their sufficiency".

The petitioner had admittedly filed a petition for special leave. However, it was not suggested that any of the above findings has been reversed by their Lordships of the Supreme Court. These finding''s clearly show that there were reasons for imposition of moratorium and those reasons were "relevant for purposes of Section 45(1) as well as Section 45(4)". In accordance with the orders of the court, the petitioner had the right to file objections to even show that there was no justification for the order of moratorium. However, it has not even been suggested that the petitioner had raised any objections against the order of moratorium dated September 30, 1996, after the matter had been decided by their Lordships of the Supreme Court, Thus, it cannot be said that there was no justification for the order of moratorium or that no grounds actually existed.

The first question is, accordingly, answered against the petitioner.

Reg : (ii)

It is not disputed that in accordance with the orders of their Lordships of the Supreme Court, the petitioner was entitled to post decisional hearing. It had the right to file objections against the draft scheme prepared by the Reserve Bank of India u/s 45(4). These objections had to be considered by the Central Government u/s 45(7) of the Act in the light of the comments that may be given by the Reserve Bank of India. Curiously, in spite of the grant of such an opportunity by their Lordships of the Supreme Court, the petitioner did not file any objections after the passing of the order dated March 31, 1997. Thus, the grievance as now sought to be made out is wholly unwarranted and unjustified.

Mr. Salman Khurshid very adroitly submitted on behalf of the petitioner that the objections had been filed, vide letters dated March 17, 1997, March 18, 1997, and March 20. 1997. Copies of these three communications are at annexures P-6, P-7 and P-8 with the writ petition. These communications had been sent by the petitioner to the Reserve Bank of India prior to the hearing of the petition for special leave. It is the admitted position that after the matter was disposed of by their Lordships, the petitioner did not file any objections before the Reserve Bank of India or the Central Government. Still further, in the communication dated March 17, 1997, the petitioner had, inter alia, stated the "voluminous scheme of amalgamation which has been prepared by your esteemed bank, an expert body in India ... contains complicated provisions of far reaching financial implications as well as legal consequences". The petitioner further stated that "our board of directors does not have amongst themselves any of the legal or financial experts. As such the scheme may be referred to the chartered accountants of the bank already approved by the Reserve Bank of India ... so as to protect and safe-guard the interests of all the depositors, public at large, shareholders of the bank, employees and staff of the bank, etc." The petitioner asked for extension of time by four weeks. With regard to the order of moratorium, the petitioner submitted that it has "raised several objections regarding" the action of the Reserve Bank of India u/s 45(1) . . ." in Civil Writ Petition No. 3885 of 1996 which "may be treated as our preliminary objections as at present". The bank also requested that it may be allowed to function as a non-banking company. It sent another communication on the next day. It was, inter alia, stated that the scheme of amalgamation is "draconian". It is "heavily biased in favour of the transferee-bank". Various objections to the Scheme were raised. The letter dated March 20, 1997, was only to reiterate the earlier objections and to point out the compulsory amalgamation with the Oriental Bank of Commerce tantamounts to backdoor nationalisation.

A perusal of the record clearly shows that these matters have been duly considered by the competent authority before passing the impugned orders. Learned counsel did not suggest that any of the objections raised by the petitioner had not been considered.

In view of the above, it cannot be said that the petitioner did not have an effective post-decisional hearing. The fault, if any, lay with the petitioner. It had failed to avail of an opportunity which had been clearly granted.

Resultantly, the second question is also answered against the petitioner.

Reg : (iii)

It was contended on behalf of the petitioner that the request for permission to function as a non-banking company had been arbitrarily rejected. Is it so ?

This matter has been considered in detail by the Central Government. The request was declined with the following observations :

"The third issue which remains to be addressed is the request of the managements of these two banks to permit the conversion of these two banks into a non-banking financial company and/or a non-banking company. The conditions relating to the setting up of a non-banking financial company have been detailed in Section 45-IA of the Reserve Bank of India Act, 1934, as amended in 1997. The Act envisages the coming into being of a non-banking financial company in one of the two ways.

(i) an existing non-banking financial company (NBFC) fulfilling the criteria prescribed in the Act.

(ii) a new NBFC being set up in accordance with the provisions of the Act.

The Act does not envisage the conversion of a banking company into an NBFC. Even if the request for conversion is examined independent of these statutory provisions, it would be seen that the track record of the management of these two banks does not enthuse enough confidence to authorise their setting up of a NBFC or a non-banking company. Further, during the long period that the banks were in existence and taking into account their inability to expand banking operations and to comply with the requirements necessary for grant of a banking licence, the Reserve Bank of India had urged the Bari Doab Bank Ltd. to convert into NBFC. The suggestion of the Reserve Bank of India was not seriously considered by the bank''s management at that time. The present request appears to be a last-ditch effort to hold on to the non-banking assets in the company. The materials presently available do not indicate that public interest would be served by such conversion.

Notwithstanding these observations, it is open to the persons in charge of the management of these two banks to apply to the Reserve Bank of India in accordance with the provisions of the Reserve Bank of India Act for setting up a new NBFC or to the concerned authorities for setting up a non-banking company. The merger of these two banks with Oriental Bank of Commerce and the coming into being of a new NBFC and/or a non-banking company are unrelated acts and the request presently made for conversion of these two banking companies into an NBFC and/or a non-banking companies into an NBFC and/or a non-banking company is not tenable."

It is the admitted position that the provisions of the Reserve Bank of India Act, 1934, were amended by Act No. 23 of 1997. In view of these provisions, no non banking financial company can commence or carry on the business of non-banking financial institution "without obtaining a certificate of registration" as contemplated under the Act. As such, the petitioner could not have been permitted to convert itself into a non-banking financial company. Still further, it was not disputed that an opportunity had been afforded to the petitioner to function as a non-banking company. It had initially passed a resolution in May, 1984, in that behalf. The petitioner had been advised to take concrete steps to implement the decision. The Reserve Bank had written letters dated June 30, 1988, October 6, 1988 and December 2, 1988, asking the petitioner to amend its name as Bari Doab Finance and Trading Ltd. In October 1991, even a no-objection certificate for alteration of the memorandum of association u/s 49C of the Banking Regulation Act, 1949, was issued. However, on May 2, 1992, the petitioner had rescinded its earlier resolution regarding conversion into a non-banking company. In this situation, it is not surprising that the petitioner''s request has been dismissed as "a last ditch effort to hold on to the non-banking assets in the company".

It was also suggested that under the provisions of Section 36A of the 1949 Act, it was still permissible to allow the petitioner to function as a non-banking company.

Even this contention cannot be accepted.

The provisions of Section 45A as introduced by Act No. 23 of 1997 override the provisions of Section 36A. Parliament has clearly provided that notwithstanding the provisions contained in any other law, the permission can be granted only after the provisions of Section 45-IA are complied with. Such is not the situation in the present case. Secondly, even the ingredients of Section 56A are not fulfilled as there is no "compromise, arrangement or scheme sanctioned by a court or by any order made in any proceeding..." Equally, the petitioner was never granted a licence which may have been cancelled u/s 22. Thus, the petitioner''s request cannot be accepted.

In view of the above, it cannot be said that the petitioner''s request for conversion into a non-banking company was arbitrarily rejected.

The third question is, accordingly, answered against the petitioner.

It may be noticed that in the pleadings, a preliminary objection regarding" the maintainability of the writ petition before this court had been raised. It was suggested that the petitioner had initially chosen to approach the Delhi High Court. No ground was made out for now filing the petition before this court.

In view of our conclusion on the merits, it does not appear to be very necessary to go into this question. It is all the more so in view of the fact that at the time of hearing, the objection was not even seriously pressed on behalf of the respondents. Still further, it was not even contended that the court at Chandigarh did not have the jurisdiction.

Certain miscellaneous applications had also been filed. It was submitted that the depositors were entitled to the money deposited by them with the petitioner-bank. Equally, the persons who had been allotted lockers were entitled to operate the same.

There was a contest between the parties on this issue. On behalf of the respondents, it was contended that the depositors will have to satisfy the bank about their claim. In the circumstances of the case, it does not appear to be possible to effectively decide the dispute in these proceedings. Of course, the persons who are able to satisfy the bank with regard to the factum of deposit shall be entitled to operate their accounts or withdraw the money. Equally, the clients of the bank shall also be entitled to operate their lockers. However, they will have to satisfy the bank with regard to their respective claims.

In view of the above, we find no ground to interfere. The writ petition is, accordingly, dismissed. However, in the circumstances, there will be no order as to costs.