Babasaheb Naik Kapus Utpadak ... vs The Reserve Bank Of India, Thr. ...
2023 Latest Caselaw 2803 Bom

                 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                                       NAGPUR BENCH, NAGPUR

                          CIVIL WRIT PETITION NO.4526 OF 2022
Babasaheb Naik Kapus Utpadak Sahakari                              ]
Soot Girni, Kasola, Tah. Mahagaon, Dist. Yavatmal                  ] .. Petitioner
                             Vs.
1. The Reserve Bank of India, Mumbai                               ]
2. Union of India,                                                 ]
     Through the Secretary, Ministry of Finance, New Delhi         ]
3. The Malkapur Urban Cooperative Bank Ltd., Buldhana              ] .. Respondents

Mr. R.K. Khapre, Sr. Advocate, with Mr. K.S. Narwade, for the Petitioner. Mr. M.G. Bhangde, Sr. Advocate, with Mr. Dhruv Sharma, for Respondent No.1. Mr. Akshay A. Naik, with Mr. H. Deshpande, h/f. Ms. Meghna Munshi, for Respondent No.2.

CORAM : SUNIL B. SHUKRE & ANIL L. PANSARE, JJ

ARGUMENTS CONCLUDED ON : 20TH MARCH, 2023.

JUDGMENT PRONOUNCED ON : 23RD MARCH 2023.

[ IN CHAMBER - THROUGH VIDEO CONFERENCE ]

JUDGMENT : { Per Sunil B. Shukre, J. }

1. RULE. Rule made returnable forthwith. Heard finally by consent of

learned counsel for the parties.

2. By this petition, the petitioner, a registered Co-operative Spinning Mill,

has questioned legality and correctness or otherwise of the action of the Reserve

Bank of India, respondent no.1, in imposing certain restrictions on respondent

no.3, a registered Co-operative Bank and a banking company within the

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contemplation of the Banking Regulation Act, 1949 (for short "Act of 1949"), in

making investments, refunding deposits, incurring any liability and so on and

so forth without prior approval of respondent no.1-RBI.

3. The petitioner contends that it being a Co-operative Spinning Mill, it has

compulsions to maintain all its accounts and deposits with a Co-operative Bank

like the respondent no.3. It submits that it had initially deposited an amount of

Rs.11 crores from out of its working capital in the fixed deposits in the year

2017 with the respondent no.3 and against these deposits, the respondent no.3

granted overdraft facility to the petitioner. The petitioner submits that since

then the petitioner was diligently utilizing the overdraft facility without a single

default. It further submits that it has been using the overdraft facility for

meeting its working capital needs as well as business, operational and

administrative needs. It further submits that it is also using overdraft facility for

paying half-yearly loan installment of Rs.4,42,17,935/- for repayment of the

loan it has taken from National Co-operative Development Corporation. The

petitioner further submits that due to restrictions imposed by respondent no.1,

the petitioner is unable to operate its overdraft account and meet its various

liabilities. It also submits that even though the petitioner is maintaining

overdraft and other accounts with other banks, it is the overdraft account

maintained by it with respondent no.3, which mainly caters to the business,

operational and administrative needs of the petitioner including the need for

payment of half-yearly loan installments.

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4. According to the petitioner, the restrictions imposed by respondent no.1

are unreasonable, belated and arbitrary as they do not consider the position of

an operational unsecured creditor like the petitioner. The petitioner says that it

is an operational creditor vis-a-vis its employees and cotton growers, to whom

it makes payments in various forms from time to time and therefore, it is not in

the same position as the other depositors. Besides, the petitioner further submits

that the petitioner has an excellent financial track record with respondent no.3

and it is an entity which directly supports nearly 600 skilled and unskilled

female and male labourers and indirectly helps thousands of families and

therefore the petitioner could not be treated at par with the other depositors.

The petitioner contends that respondent no.1 had already got a fair idea about

sinking financial condition of respondent no.3 during the statutory inspection

of respondent no.3 taken by respondent no.1 in 2019-20 and that it had also

imposed moderate restrictions as per its letter dated 4 th June 2020; for example,

to not declare dividends, to not make donations, to not incur capital

expenditure exceeding Rs.50,000/- per year and so on, but, subsequently, when

it became fairly clear that the financial condition of respondent no.3 was not

improving, rather deteriorating, it was necessary for respondent no.1 to have

taken serious action immediately, but, it did not do so and allowed respondent

no.3 to go further down in its health. According to the petitioner, if timely

action had been taken by respondent no.1, the stage for taking impugned action

would not have arrived.

5. The petitioner thus submits that the entire action of respondent no.1,

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which is impugned here, is arbitrary, unreasonable and amounts to giving

equal treatment to unequal and it is not permissible in law.

6. Respondent nos.2 and 3 have not filed any reply. Respondent no.1-RBI

has, however, filed its preliminary submissions staunchly opposing the

petitioner. According to it, the impugned action has been taken to protect the

interest of the depositors, to preserve the resources of the bank and restrict the

possibility of preferential payment of deposits or reckless lending being made in

the interregnum until a view is taken on the future set-up of the bank, while

simultaneously giving the respondent no.3-bank time and opportunity to

improve its financial position, apart from exploring the possibility of its merger

with another strong bank.

7. Respondent no.1-RBI submits that the restrictions imposed upon

respondent no.3-Bank are drawn from the material available on record of

respondent no.1 and it mainly comprised reports of statutory inspections taken

by respondent no.1 of respondent no.3. These reports, it further submits,

revealed that the net worth of respondent no.3 deteriorated from Rs.71.60

crores as of March 31, 2019 to Rs.(-)37.11 crores as of March 31, 2021. It

further submits that the material available with respondent no.3 also showed

that Capital to Risk (Weighted) Assets Ratio (CRAR) was at (-)5.42% against the

regulatory requirement of 9%. According to respondent no.1, it were these

negative financial indices that necessitated respondent no.1 to swing into action

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and exercise its power under Section 35A of the Act of 1949 to protect the

interest of the depositors.

8. The respondent no.1-RBI further submits that although there were some

representations made by respondent no.3 as well as the petitioner seeking

modification of the restrictions imposed by respondent no.1, those

representations could not have been accepted as their acceptance would have

been unfair to the other depositors and also other lender-banks. It submits that

the petitioner could not be singled out for differential treatment and petitioner

being a depositor like other depositors cannot be given separate treatment or

otherwise it would amount to making discrimination between the depositors.

Respondent no.1 also submits that since most of the depositors are insured with

Deposit Insurance and Credit Guarantee Corporation for payment upto Rs.5

lakhs during the period of All Inclusive Directions or Restrictions, respondent

no.1 has taken care that the depositors are paid back certain amounts of their

deposits within the permissible limits. It also submits that it has also allowed

withdrawal on hardship such as medical expenses and non-medical expenses

like educational expenses, marriage expenses upto certain limits. Respondent

no.1 therefore submits that the restrictions imposed by it upon operations of

respondent no.3, which are only for a temporary period of time, cannot be seen

as unreasonable, unequal and arbitrary and therefore, it further submits that

the petition is liable to be dismissed.

9. Mr. Khapre, learned Senior Advocate for the petitioner submits that the

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restrictions imposed by respondent no.1-RBI upon respondent no.3-Bank have

brought sufferings beyond imagination for an honest depositor and beneficiary

of overdraft facility like the petitioner. He submits that the overdraft facility that

has been granted to the petitioner is against the security of deposit of about

Rs.11 crores made by the petitioner with respondent no.3-bank and this

amount has been drawn by the petitioner from out of its working capital. He

submits that the petitioner had never defaulted in the overdraft facility and the

account so operated by it is not purely a deposit account but an overdraft

facility, which was being used by the petitioner for not only meeting its

working capital needs but also for paying of the salary and other benefits to its

about 700 employees, paying electricity bills etc. and also for discharging its

debt towards National Cooperative Development Corporation. He submits that

the business of the petitioner mainly comprises spinning and weaving of cotton

purchased from Cotton Growers during cotton season, which begins around

mid-October and lasts for another two to three months thereafter every year.

He submits that since restrictions were imposed at the start of new cotton

season 2021-22, the petitioner could not utilize the overdraft facility for

purchase of good quality cotton at cheaper price and as a result, it was forced to

buy cotton at much higher rate, resulting in incurring of huge losses. He further

submits that the losses suffered by the petitioner-Spinning Mill have had their

cascading effect on the employees and their family members directly and also

on the other subsidiary units dependent upon the product manufactured by the

petitioner, all of whom are also made to suffer for no fault on their part.

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10. Mr. Khapre submits that it is for aforestated reasons that it is necessary

that the petitioner shall not be treated equally with other depositors and

petitioner deserves a special treatment by making an exception for it from out

of the restrictions imposed by respondent no.1-RBI upon respondent no.3-Bank.

The learned Senior Advocate for the petitioner relies upon the decisions of the

Hon'ble Supreme Court in Swiss Ribbons Pvt. Ltd. and Anr. Vs. Union of India

and Ors.1 and Atyant Pichhara Barg Chhatra Sangh and Anr. Vs. Jharkhand

State Vaishya Federation and Ors.2 in support of his submissions.

11. The learned Senior Advocate further submits that the respondent no.1-

RBI knew it very well after it has done its statutory inspection for the year

2019-20 that financial condition of respondent no.3-Bank was deteriorating

fast, but, instead of taking any serious action against respondent no.3,

respondent no.1 only gave advises and it was after a great delay that it imposed

impugned restrictions upon respondent no.3. He submits that the petitioner was

not knowing about the cautions and advises issued by respondent no.1 to

respondent no.3 and had they been known to the petitioner, it would not have

invested huge amount by way of deposits with respondent no.3-Bank. The

learned Senior Advocate for the petitioner further submits that the petitioner

made representations to respondent no.1 for modifying the restrictions by

virtue of the power conferred upon it under sub-section (2) of Section 35A of 1 AIR 2019 SC 739 2 (2006) 6 SCC 718

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the Act of 1949, which enables respondent no.1-RBI to modify or cancel any

direction issued by it under sub-section (1) of Section 35A either on any

representation made to it or on its own motion. He submits that various grounds

taken by the petitioner in its representation made to respondent no.1 were not

considered in any manner and by a cryptic order dated 26 th September 2022,

the representation of the petitioner came to be rejected by respondent no.1. He

further submits that respondent no.1 talks of huge increase in percentage of

NPA beyond permissible limits and sliding down of net worth of respondent

no.3 to Rs.(-)37.11 crores and CRAR to (-)5.42% against the regulatory

requirement of 9%, but the blame for it must be taken by respondent no.1 as it

failed to take timely measures for arresting the negative growth of respondent

no.3. He submits that by imposing blanket restrictions treating all depositors

equally, the respondent no.1 has acted disproportionately to the ailment of

respondent no.3 and that this is a case of the medicine being worst than the

ailment. He relies upon the case of Internet and Mobile Association of India Vs.

Reserve Bank of India3.

12. Mr. Khapre, learned Senior Advocate for the petitioner further submits

that by imposing total ban on withdrawal of deposits, operating of loan

accounts and so on, respondent no.1 has completely blocked access of the

petitioner to banking facility, which is violative of petitioner's fundamental

right to carry on trade and business under Article 19(1)(g) of the Constitution

3 (2020) 10 SCC 274

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of India. He relies upon the case of Dharam Dutt and Ors. Vs. Union of India

and Ors.4 in support of this submission.

13. Mr. Bhangde, learned Senior Advocate for respondent no.1-RBI submits

that the restrictions imposed by respondent no.1 vide orders dated 24 th

November 2021 and 25th May 2022 are reasonable and have been imposed to

protect the interest of the depositors considering failing financial condition of

respondent no.3 and these restrictions have been imposed in exercise of power

conferred upon respondent no.1 under Section 35A(1) of the Act of 1949. He

submits that these restrictions having been taken in the larger interest of

depositors and to secure proper management of respondent no.3, cannot be said

to be arbitrary or illegal. He submits that ultimately it is the overall interest of

the depositors and the banking company, which is required to be considered

and protected, and if respondent no.1 were to create special class amongst the

class of depositors, it would be violative of rule of equality and reasonableness

under Articles 14 and 21 of the Constitution of India. He further submits it is

for this reason that it is not possible for respondent no.1 to give separate and

unequal treatment to the petitioner.

14. Learned Senior Advocate Mr. Bhangde further submits that the petitioner

has not challenged legality and correctness of its orders dated 24 th November

2021 and 25th May 2022 and has only sought modification of its orders so as to

allow the petitioner to operate its overdraft facility and withdraw funds

4 (2004) 1 SCC 712

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therefrom. He submits that if the impugned orders are modified, as desired by

the petitioner, it would only lead to treating unfairly the other depositors. He

submits that it is impermissible for a regulatory body like respondent no.1 to

give preferential treatment to any of the depositors of a banking company. He

relies upon the case of Ashok Kumar and Co. Vs. Reserve Bank of India5.

15. The learned Senior Advocate further submits that it is not the case that

the respondent no.1 did not take any serious action against respondent no.3

when it noticed in the year 2019-20 the failing health of respondent no.3. He

submits that before any drastic measures are taken, some soft measures are

required to be taken so that opportunity is granted to the banking company to

arrest its negative growth by initiating strong measures. He further submits that

respondent no.1 is a body of experts and it knows how to go about its job and

perform its duty and therefore decisions taken by it on various occasions, from

time to time, which are based upon the material before it, cannot be questioned

in a court of law unless the decisions are upon non-consideration of relevant

material or are perverse in nature or contrary to any provision of law or settled

principles of law. He submits that such is not the case here. The learned Senior

Advocate for respondent no.1-RBI further submits that even though the

petitioner has stated that some funds of respondent no.3 have already been

lodged with respondent no.1 on account of maintenance of Statutory Cash

Reserve Ratio (SCRR) and Statutory Liquidity Ratio (SLR), there is no question of

5 2014 SCC OnLine All 15546

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utilizing these amounts for refunding the deposits at this stage as these amounts

can be utilized only when the banking company goes into liquidation. Thus,

learned Senior Advocate for respondent no.1 urges that this petition deserves to

be dismissed.

16. Before we deal with the issue involved in this petition, let us make an

attempt to understand the role of Reserve Bank of India, the respondent no.1, in

Indian Banking System, as that would give us sufficient insight into scope of

judicial review of affairs of the respondent no.1. After all, by this petition, this

court has been called upon to judicially review the impugned restrictions

imposed by it on the respondent no.3-Bank.

17. Reserve Bank of India is considered to be the bankers bank. As per the

Reserve Bank of India Act, 1934, it has been constituted to regulate the issue of

Bank Notes and the keeping of India's reserves with a view to securing

monetary stability in India and generally to operate the currency and credit

system of the country to its advantage. Under this Act, the Reserve Bank of

India has also been entrusted with the duty to operate Monetary Policy

framework in India. Under the other Act, which is Act of 1949, it acts as a

Regulatory Body for banks and financial institutions in India. Speaking about

the regulatory role of the Reserve Bank, the Supreme Court, in the case of

Joseph Kuruvilla Vellukunnel Vs. Reserve Bank of India6, observed as follows :

6       AIR 1962 SC 1371

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Dixit

"....The first is that the whole intent and purpose of that Act is to secure the interests of the depositors. The second is that the Reserve Bank is the instrumentality by which this intend (*sic. intent) is to be achieved. The act, at every turn, makes the Reserve Bank the authority to sanction, permit, certify, inspect, report, advise, control, direct, license and prohibit. There is hardly any provision where the Reserve Bank's judgment is not made final vis-a-vis a banking company except rarely where an appeal to the Central Government can lie. No useful purpose will be served in referring to these sections in details."

18. The Supreme Court reiterated this view in the case of Peerless General

Finance and Investment Company Limited Vs. Reserve Bank of India 7, when it

said,

"Before examining the scope and effect of the impugned paragraphs 6 and 12 of the directions of 1987, it is also important to note that Reserve Bank of India which is bankers bank is a creature of Statute. It had large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the impugned directions of 1987. The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country. It is the duty of the Reserve Bank to safeguard the economy and financial stability of the country...."

19. Considering the character of the Reserve Bank as central regulator of

Banking System in India, the nature of expertise possessed by it and the powers

7 (1992) 2 SCC 343

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given to it under Act of 1949, the Supreme Court has held in many cases that

scope of judicial review of decisions and actions of the Reserve Bank is very

limited and it is not for the court to substitute its own view for that of the

Reserve Bank, unless the view taken by it is perverse or illegal or is the result of

non-application of mind. One of such cases is the case of Ganesh Bank of

Kurandwad Ltd. Vs. Union of India 8, wherein the Supreme Court held as

follows :

"The ultimate question is whether the inference drawn by the RBI is a possible inference or is something which can be said to be a perverse one. Even if two views are possible since the regulating body has arrived at a conclusion on the basis of the facts and figures before it, and it has pointed out that it has been warning the appellant Bank for the last over 3 years, it will not be proper for the Courts to substitute their judgment for that of RBI. In the circumstances, it cannot hold that the decision of RBI to impose the moratorium was unjustified or against the provisions of Section 45(1) or such that one can call it a perverse one and interfere with it. The RBI is an expert body to regulate the banking activities..."

20. The law so settled by the Apex Court has been followed by the Division

Bench of Allahabad High Court in the case of Ashok Kumar and Company Vs.

Reserve Bank of India9. It held that in matters governed by expert

determination, the jurisdiction of the Court to interfere in the exercise of power

of judicial review is extremely limited. It further held that Court may interfere

only where the action which has been taken is wholly extraneous to the object

8 (2006) 10 SCC 645 9 2014 SCC Online ALL 15546

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and purpose underlying the conferment of the power or where ex facie the

decision is found to be perverse and contrary to binding statutory norms.

Relevant observations of the Division Bench appearing in paragraph No. 14 are

reproduced as follows :

"14. The Reserve Bank, it is well settled is an expert statutory body which is vested with control over the banking system. This power is vested in the Reserve Bank of India to foster public interest and to ensure a suitable financial and monetary system. It is well settled that in matters governed by expert determination, the jurisdiction of the Court to interfere in the exercise of the power of judicial review is extremely limited. The Court may interfere where the action which has been taken is wholly extraneous to the object and purpose underlying the conferment of the power or where ex-facie the decision is found to be perverse and contrary to binding statutory norms."

21. In this case the petitioner has assailed the legality and correctness or

otherwise of the various restrictions imposed by the Reserve Bank, the

respondent no.1, vide its orders dated 24.11.2021 and 25.05.2022, which have

been issued in exercise of the powers vested in respondent No.1 under Section

35A of the Act of 1949. These restrictions impose various prohibitions upon

respondent No.3. They indicate that respondent No.3 cannot, without prior

approval of respondent no.1;

             (i)       grant or renew any loans or advances,
             (ii)      make any investment,
             (iii)     incur any liability including borrowing of funds and
                       accepting fresh deposits,


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Dixit




              (iv)     disburse or agree to disburse any payment whether in

discharge of its liability and obligations or otherwise and

(v) enter into any compromise or arrangement of sale, transfer or otherwise dispose of any of its properties or assets except as notified in the Reserve Bank of India directions.

22. The impugned restrictions, however, make an exception. They allow

withdrawal of a sum not exceeding Rs.10,000/- (Rs. Ten Thousand only) of the

total balance across all savings bank account or current accounts or any other

account of a depositor and also allow withdrawals upto certain limit on

emergency grounds. These prohibitions were imposed initially for a period of

six months and later on they have been continued from time to time.

23. In view of the Reserve Bank of India i.e. respondent No.1 being an expert

body playing a regulatory role with sufficient autonomy in the field of

regulation of banking system in India, a question arises - whether the above

referred restrictions imposed by respondent No.1 upon respondent No.3 could

be challenged on such grounds as, the restrictions,

(i) have the effect of treating unequals equally;

(ii) are disproportionate to the regulation actually required;

(iii) take away fundamental right of the petitioner to carry on

trade and business under Article 91(1)(g) of the

Constitution of India.

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(iv) are arbitrary and insensitive in nature and have been

belatedly brought into force so as to cover up own failure

of respondent No.1 to take timely action to prevent further

deterioration of health of respondent No.3 Bank.

24. Principally, yes, they can be challenged on these grounds or any one of

these grounds as these grounds touch upon the legality or constitutionality or

rationality or reasonableness of the action of respondent no.1 and these

grounds do fall within the amplitude of judicial review power of this court. But,

the question is - do these grounds or some of them exist here so as to enable this

court to make interference ? To find out an answer, let us now deal with the

rival arguments in the light of the applicable law, some of which is already

discussed earlier.

25. The principles on which judicial review of the action and the restrictions

imposed by a regulatory body like Reserve Bank of India can be undertaken by

this Court, as referred to in the earlier paragraphs, are well settled. The test is

as to whether or not the inference drawn by the Reserve Bank of India or the

respondent No.1 is a possible inference or is something which could be said to

be impossible or perverse. This is because of the fact that the Reserve Bank is a

body of experts and therefore, wherever there is an expert determination the

scope of judicial review is very limited and Court can interfere only where the

action is seen to be wholly extraneous to the object and purpose underlying the

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conferment of the power or where ex facie the decision is found to be perverse

or contrary to binding statutory norms or where the decision is the result of

non-application of mind.

26. The impugned orders imposing restrictions upon respondent No.3, as

stated earlier, have been issued by respondent No.1 in exercise of its power

under Section 35A(1) of the Act of 1949. The object and purpose of the power

of respondent No.1 - Reserve Bank of India behind such restrictions are to be

seen in Sub-Section 1 Section 35A itself. The object and purpose are to

safeguard public interest or to have proper banking policy or to prevent the

affairs of any banking company from being conducted in a manner detrimental

to the interest of the depositors or in a manner prejudicial to the interest of the

banking company or to secure the proper management of any banking

company generally. For the sake of convenience, Section 35A (1) is reproduced

as under :-

"35A Power of the Reserve Bank to give directions.

(1) here the Reserve Bank is satisfied that -

(a) in the [public interest]; or [(aa) in the interest of banking policy; or]

(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the banking company; or

(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking

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company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions."

27. It can be seen from these provisions that whenever the Reserve Bank is

satisfied that it is necessary to issue directions to banking companies generally

or to any banking company in particular, it may, from time to time, issue such

directions as it deems fit and whenever such directions are issued, the banking

companies or the banking company are or is, as the case may be, bound to

comply with such directions.

28. In the present case, the respondent No.1 has exercised its power under

these very provisions. The exercise of the power by respondent No.1, as can be

seen from its communication dated 26 th September, 2022 was founded upon

the determination made by it that the failing financial position of respondent

No.3 Bank, as disclosed by the statutory inspection conducted by respondent

No.1, necessitated respondent No.1 to protect the interests of depositors, to

preserve the resources of the bank and restrict the possibility of preferential

payment of deposits or reckless lending in the interregnum until a view was

taken on the future set up of respondent No.3 Bank and, therefore, all inclusive

directions imposing various restrictions upon respondent No.3 Bank were

issued by respondent No.1. This decision of respondent no.1 is a decision of an

expert in banking matters and is also in consonance with the object and

purpose of Section 35A (1) of the Act of 1949. The decision is primarily to

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protect interests of the depositors and to restrict the possibility of preferential

payment of deposits or reckless lending in the meantime by respondent no.3-

Bank, lest there be further deterioration of financial health of respondent no.3-

Bank.

29. The above referred decision, it appears, has been taken on the basis of

material available before respondent No.1 Bank which, though not disclosed in

any of the initial orders or communications of respondent No.1 Bank, was

briefly disclosed in its communication dated 26 th September 2022 and thus was

very much there and it has been referred to in the written submissions of

respondent No.1 Reserve Bank of India. This material indicated that the net

worth of respondent No.3 Bank deteriorated from Rs. 71.60 Crores as of March

31, 2019 to Rs (-) 37.11 Crores as of March 31, 2021. It further indicated that

CRAR of respondent No.3 Bank was at (-)5.42% as against the regulatory

requirement of 9.00%. It further indicated that the percentage of Non

Performing Assets of respondent No.3 Bank increased to 44.00%. Thus, as per

the material available before the Bank, all the vital parameters of financial

health of respondent No.3 Bank had turned negative and the respondent No.3

Bank was sliding down on these parameters day by day. It may be noted here

that about these negative parameters, no dispute has been raised by the

petitioner. It is this material that has gone into the decision that respondent

No.1 has taken here, which ultimately has led to imposition of various

restrictions upon respondent No.3 Bank, which are impugned herein. These

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restrictions having been based upon material available with respondent No.1,

which is relevant, cannot be said to be the result of non-application of mind or

perverse or having been taken upon any extraneous consideration. The

impugned restrictions being what they are can also not be said to be beyond

the scope of the power under Section 35A (1) of the Act of 1949 that has been

conferred upon respondent No.1 nor could it be said that they are contrary or

extraneous to the object and purpose of Section 35A (1) of the Act of 1949. If

this is so, there is hardly any scope for this Court to make any interference in

the matter.

30. Mr. Khapre, learned Senior Advocate for the petitioner has contended

that the impugned restrictions have the effect of treating an unequal entity like

the petitioner equally with the rest of the depositors and that they are

disproportionate to the object sought to be achieved by them. Shri Bhangde,

learned Senior Advocate for respondent No.1 disagrees. According to him, the

petitioner, in so far as respondent No.3 Bank is concerned, is no more than a

depositor and a borrower and therefore, there can be no separate class created

for the petitioner. He also submits that a mere look at the restrictions imposed

by respondent No.1 would be sufficient to hold that they are perfectly within

the scope of Reserve Bank of India's powers under Section 35A (1) of the Act of

1949 and that they have been imposed only for certain period of time just to

give opportunity to respondent No.3 Bank to improve its performance. He

further submits that the banking license of respondent No.3 Bank has not been

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so far cancelled. On these grounds, he submits that the impugned restrictions

cannot be said to be disproportionate in measure or violating rule of equality.

31. Upon overall consideration of the matter, we find no substance in the

submission of learned Senior Advocate for the petitioner and find great merit in

the argument of learned Senior Advocate for respondent No.1 - Reserve Bank of

India. The reasons for our such conclusion are to be seen in the material on the

basis of which the impugned restrictions have been imposed by respondent

No.1 and the scope of power of respondent No.1 under Section 35A (1) of the

Act of 1949, discussed at length in the earlier paragraphs.

32. Although the mandate of Article 14 of the Constitution of India is to treat

similar similarly and different differently, as held in the case of Atyant Pichhara

Barg Chhatra Sangh (supra), here, there can be no doubt about the fact that in

relation to respondent no.3-Bank, the position of petitioner is no different than

any of its other depositors and borrowers. It may be true that situation of the

petitioner Society vis-a-vis its employees, its creditors, its debtors, its consumers,

its suppliers of raw material and so on, is different. It may be true that several

hundreds of families of its employees are directly dependent upon the

employment provided by the petitioner Society. It may be true that it has a debt

liability which it has to discharge. It may also be true that several of its

consumers and suppliers look upon the petitioner-Society for its services and

procurement of cotton. But, such distinctive standing of the petitioner-Society

is in the field which is beyond the field of banking and so is not liable to be

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considered by a Regulatory Body like Reserve Bank of India whose job is to

monitor, supervise and regulate the affairs of banking companies in general or

a banking company in particular like the respondent No.3 for achieving the

object and purpose of Section 35A (1) of Act of 1949. In relation to respondent

No.3 Bank, the petitioner-Society nevertheless is and will always be one of its

depositors and borrowers. What it is and what it can be outside the field of

banking cannot be the aspect of consideration for respondent No.1 to impose

various restrictions to protect interests of the depositors in exercise of its power

under Section 35A(1) of the Act of 1949 and if respondent No.1 were to really

consider it, respondent No.1 would be exceeding its jurisdiction under Section

35A (1) of the Act of 1949.

33. If the position of petitioner Society in the market or outside the field of

banking is considered by a Regulatory Body like Reserve Bank of India for

making its decision to protect interests of the depositors in general, it would be

something extraneous to its authority under Section 35A (1) of the Act of 1949

and thus, would amount to committing perversity in taking its decision. Besides,

it would also be like creating a separate class of depositors and borrowers

within the general class of depositors and borrowers without there being any

rationale to it or any intelligible differentia to create a separate class within a

class for giving separate treatment to a particular person or entity in the name

of protecting an unequal. To do so, there must be a differential existence

between one person or entity and another or entity on the same plane or

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platform; there must also be a need or purpose to throw a protective cover

around that unequal, and the purpose must have a reasonable nexus with the

object sought to be achieved by giving such differential treatment. It must not

happen that in our zeal to protect the position and existence of one person or

entity, outwardly, though not in reality dissimilar, the situation and very

existence of another person or entity is destroyed, for rule of equal protection

amongst equals is founded upon the universal idea of 'Live and Let Live'; and is

about co-existence, about inclusiveness, about happiness for all and not about

happiness in the name of parity to the point of perishing of others or excluding

others.

34. In the present case, when we weigh the position of the petitioner on the

same scale as other depositors are on, insofar as its banking activities are

concerned, which is the first requirement of applying the principle of equal

protection to equals, we find that it is in the same placement as other depositors

and borrowers of respondent no.3-Bank. To say that because the petitioner

Society has its own commitments and liabilities towards its creditors, suppliers,

employees and some statutory agencies, it deserves to be placed in a different

class would be like admitting that the other depositors and borrowers do not

have any engagements, commitments and liabilities in their own life. If the

petitioner Society has its own liabilities, commitments and difficulties, every

other depositor or borrower too has his or its own liabilities, difficulties,

expectations and promises to fulfill and the only difference between them is of

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the nature of their liabilities, commitments, promises and difficulties. Therefore,

any separate treatment of petitioner Society to enable it to operate its overdraft

facility would only amount to unreasonable classification between similarly

situated persons or entities. In fact, considering the own difficulties of

depositors and borrowers of respondent No.3 Bank, the respondent No.1 has

already permitted withdrawal of deposits by all depositors, irrespective of their

positions outside the field of banking in the sums not exceeding Rs.10,000/- (Rs.

Ten Thousand only) and has also allowed withdrawal by all depositors of sums

of money up to Rs.5,00,000/- (Rs. Five Lakh Only) for treatment of serious life

threatening illnesses and other limited purposes. The respondent No.1 thus has

taken care of the difficulties and hardships faced in life by its various depositors

and thus here also respondent No.1 has treated all the depositors equally. If the

petitioner Society is permitted to operate its overdraft facility, it is very likely to

lead to rapid depletion of funds and resources of respondent No.3 Bank and that

would mean that very little would be left for the rest of the depositors. It would

be like giving special treatment to an equally situated depositor and borrower,

bringing about a situation of 'Live and Let Die' eulogized in a James Bond

thriller of same title. So, here neither the position of petitioner Society can be

considered to be different than that of the rest of the depositors nor the object

for which differential treatment is sought for by the petitioner Society can be

seen to be reasonable. We, therefore, do not find the impugned restrictions to be

so arbitrary and unreasonable for the petitioner - Society as to violate the

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principles of equality and fairness under Article 14 and 21 of the Constitution

of India.

35. There is one more point pressed into service by Shri Khapre, learned

Senior Advocate for the petitioner to show why a registered co-operative society

like the petitioner holds a distinctive position from that of the other depositors

thereby justifying its differential treatment. According to him, the petitioner

Society is in the same position as an unsecured creditor as against a secured

creditor like a banking company and he submits that while a banking company

would be a financial creditor for its borrowers, the petitioner-Society would be

an unsecured operational creditor for supply of goods and services to its

consumers and employees and, therefore, it needs a different treatment. He

submits that while a financial creditor by virtue of its typical loan agreement

containing specified repayment schedules and dealing with defaults and right

to recall a loan in totality stands on a safe and different footing, it is not so in

case of an unsecured operational creditor like the petitioner and, therefore,

position of operational creditor is vulnerable as compared to the secured

financial creditor like the respondent no.3-Bank. He invites our attention to the

observations of the Supreme Court made in the case of Swiss Ribbons Pvt. Ltd.

Vs. Union of India (supra) wherein in paragraph Nos.27 and 28, the Supreme

Court has made the distinction between financial creditor and operational

creditor holding that there is an intelligible differentia between the two and this

distinction has a direct relation to the object sought to be achieved by the

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Insolvency and Bankruptcy Code, 2016 (for short the "Code") and, therefore, a

reasonable one.

36. We must say that the distinction so found between a financial creditor

and operational creditor in Swiss Ribbons Pvt. Ltd. has its genesis in the

classification made between a financial creditor and an operational creditor of

any corporate debtor in the Code itself, which distinction is not to be found in

the Act of 1949. The Supreme Court while examining reasonableness or

otherwise of such classification made in the Code, found that there was an

intelligible differentia separating two kinds of creditors and it had a direct

relation to the object sought to be achieved by the Code and, therefore, the Apex

Court found the difference between a secured creditor and an operational

creditor made in the Code to be a case of reasonable classification. As stated by

us just now, the Act of 1949 does not make any such distinction between a

financial creditor and an operational creditor and, therefore, in our considered

view, it is not possible to accept the argument of learned Senior Advocate for

the petitioner. If this Court is to create such a classification artificially without

there being any basis provided in the legislation, which is the Act of 1949, this

Court would be acting beyond its powers and authority in law. Similarly, a

regulatory body like respondent No.1 which is bound to perform its duty within

the parameters of the law conferring upon it a supervisory function cannot

create a separate class of a depositor on the ground that a particular depositor is

an unsecured operational creditor as well as a

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corporate debtor vis-a-vis respondent No.3 Bank, whose character as a going

concern is required to be preserved, unless the legislation permits it to do so,

which is not the case here. The argument is, therefore, rejected.

37. This takes us to the next challenge raised by the petitioner Society which

is about the impugned restrictions being disproportionate to the actual

requirement of protecting the interests of the depositors. In this regard, case of

the Internet and Mobile Association of India (supra) would have to be referred

to for having an enlightenment on the concept. This case holds that whatever

may be the power of the Reserve Bank, the measure taken by the Reserve Bank

should pass the test of proportionality. The concept comprises four-pronged test

prescribed in the case Modern Dental College & Research Centre Vs. State of

M.P.10. In Internet and Mobile Association of India (supra), the Supreme Court

made a useful reference to it and the four indices of the test, as indicated in

these cases, are :-

(i) that the measure is designated for a proper purpose,

(ii) that the measure is rationally connected to the fulfillment of the purpose,

(iii) that alternately there is no less invasive measure available and

(iv) that there is a proper relation between the importance of achieving the aim and the importance of limiting the right.

38. Applying the above referred four pronged test to the restrictions imposed

10 (2016) 7 SCC 353

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by respondent No.1 upon respondent No.3, we find that the restrictions fulfill

each of the four corners of the test. We find that the impugned restrictions are

designated for a proper purpose, as found in Section 35A(1), have a rational

connection to the object and purpose of Section 35-A (1) of the Act of 1949 and

that there is a proper relation between the object and purpose to be achieved

and the extent of restrictions imposed. In addition, though the respondent No.1

has the power to take extreme measure like suspending or cancelling the

banking license, the respondent No.1 has not done it and has resorted to impose

restrictions for the time being, which are less invasive in nature, which is

nothing but an instance of proportionality of the measure. Therefore, we

cannot but find that the impugned restrictions pass the four pronged test of

proportionality and accordingly we do not accept argument of learned Senior

Advocate for the petitioner in this regard.

39. There is one more argument made by learned Senior Advocate for the

petitioner to show why the imposed restrictions could be said to be violative of

principle of proportionality. He submits that instead of imposing impugned

restrictions, the respondent no.1 could have withdrawn funds, which the

respondent no.3-Bank maintains with respondent no.1 in the nature of SCRR

and SLR. Respondent no.1 has already made it clear that as per rules, these

amounts can be utilized only when the banking company goes into liquidation

and respondent no.3 is not being liquidated as of now. This stand has not been

denied by the petitioner. Besides, irrespective of permissibility of it at this stage,

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the respondent no.1 being an expert body, has a right and autonomy to decide

as to how to protect interest of depositors of a banking company, and it's

wisdom in such matters cannot be questioned in court, except on limited

grounds discussed earlier and found by us to be not available to the petitioner.

The argument is, therefore, rejected.

40. Relying upon the cases of Dharam Dutt and Others and Internet and

Mobile Association of India (supra), the learned Senior Advocate for the

petitioner has laid much stress upon the adverse impact the impugned

restrictions are having on the position of petitioner-Society as a going concern,

thereby virtually denying its fundamental right to carry on trade or business

under Article 19(1)(g) of the Constitution of India.

41. In the case of Dharam Dutt and Others (supra) it is held that since Article

19 confers fundamental rights on citizens, these rights cannot be taken away by

any legislation and a legislation can only impose reasonable restrictions on the

exercise of the right. In the case of Internet and Mobile Association of India

(supra) it is held that bank channels provide the lifeline of trade or business and

therefore, the moment a person is deprived of the facility of operating a bank

account, the lifeline of his trade or business is severed, resulting in the trade or

business getting automatically shut down. It is further held that such being the

nature of banking facility, the burden of showing that larger public interest

warranted such a serious restriction bordering on prohibition is heavily upon

the Reserve Bank.

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42. When we examine the nature of the restrictions imposed on respondent

no.3, we find that the restrictions so imposed are reasonable and respondent

No.1 has also sufficiently discharged its burden to show their reasonableness.

43. There is no doubt that the impugned restrictions, though imposed for a

temporary period of time, do have the effect of virtually prohibiting the

petitioner from operating its overdraft facility and withdrawing its deposits

made with respondent No.3 Bank. But, it cannot be ignored that such

restrictions bordering on prohibition have been imposed by respondent No.1 in

the overall interest of all the depositors of respondent No.3 Bank and also for

arresting the further down fall of respondent No.3 bank. Besides, they have

been imposed for a limited period of time while the respondent No.1 examines

the performance and future set up of respondent No.3 Bank. Eventually,

respondent No.1 would take its final decision keeping in view the object and

purpose of Section 35A (1) of the Act of 1949. The decision so taken by

respondent No.1 for the time being is in accordance with the provisions made

in Section 35A (1) of the Act of 1949 and is based upon reasonable material

and as such, it is not a perverse decision, which we have already found. The

decision is in the nature of a determination made by an expert regulatory body

and, therefore, it is not for this Court to question the wisdom of respondent

No.1 in imposing impugned restrictions and substitute its own view for that of

respondent No.1, as held in the case of Ashok Kumar and Co. (supra). Even if

two views are possible, still, it is not permissible for this Court to interfere in the

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matter, especially when one of the two views is already preferred by respondent

No.1, a regulatory body having expertise in the field of banking, unless the view

is perverse or dictated by any extraneous consideration, as held in the case of

Ganesh Bank of Kurandwad Ltd. (supra), which is not the case here. Then,

there is no altogether denial of banking facility to the petitioner Society and

withdrawal of deposits up to certain limit has been permitted by respondent

No.1. It then fallows that the result of impugned restrictions is not total

deprivation of the fundamental right of the bank to carry on trade or business

rather it is of imposing reasonable restrictions upon banking facility available to

the petitioner and the burden to show reasonableness of the restrictions, as we

have seen, has been sufficiently discharged by the respondent No.1. The

argument of the learned Senior Advocate for the petitioner is therefore rejected.

44. Insofar as the aspects of inaction for a long time, belated action taken as

an attempt to cover up own inaction of respondent No.1 and insensitivity of

respondent No.1 to the dangerous condition of petitioner are concerned, we

must say that it is well settled law that once it is seen that the measures taken by

an expert regulatory authority like the Reserve Bank are within the scope of its

power under Section 35A(1), are based upon the material before it, are not

extraneous to the object and purpose of Section 35A (1) of the Act of 1949 and

are not perverse or impossible, interference with them is not permissible and is

beyond the scope of power of judicial review of this court. We have already

found that the action of respondent no.1 here is perfectly within these

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parameters of law, insofar as exercise of its power under Section 35A(1) of the

Act of 1949 is concerned. Now, the question is whether these aspects should

have been considered by respondent no.1 for exercising its power under Section

35A(2) or not. We would make an attempt to deal with it later. Before that, we

would like to make it clear that it is not for this court to consider them here. If

these aspects were to be considered by this court, it would amount to usurping

the regulatory function of respondent no.1 by this Court and

micromanagement of respondent no.3-Bank. Law does not permit this Court to

decide as to which particular measure ought to have been taken by the Reserve

Bank and when, so as long as the action of respondent no.1 meets requirements

of law, which is the case here.

45. Now coming back to the question of failure of respondent No.1 to

exercise its power under Section 35A (2) of the Act of 1949, which enables the

Reserve Bank to modify or cancel any direction issued Sub-Section 1 of Section

35A, either on representation made to it or on its own motion, we find that it is

necessary for respondent No.1 to duly consider various issues raised by the

petitioner in its representation dated 27 th July, 2022, which appear to be not

considered appropriately when respondent No.1 rejected the representation

vide its communication dated 26 th September, 2022, which is impugned herein.

This is for the reason that Section 35A(2) of the Act of 1949 casts a duty upon

respondent no.1 to consider modification of its measures initiated as per its

power under Section 35A(1) when a representation is made to it on various

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grounds. The duty so cast envisages application of mind by it to all the issues

raised in the representation. But, in rejecting the representation of the petitioner

by its communication dated 26 th September 2022, we do not see any

appropriate consideration of all issues raised in the representation received by

it. We are of the view that even now, respondent No.1 can have a re-look at and

reconsideration of the representation of the petitioner dated 27 th July, 2022 in

the light of its power under Section 35A (2) of the Act of 1949, but for that

matter, there is no need to quash and set aside its letter dated 26 th September

2022 by partly allowing this petition.

46. We thus find that there is no merit in the petition. The Writ Petition

stands dismissed.

47. We, however, direct respondent No.1 to reconsider the representation of

the petitioner dated 27th July, 2022 in the light of its power under Section 35A

(2) of the Act of 1949 and take its appropriate decision afresh thereon,

notwithstanding its earlier decision communicated vide its letter dated 26 th

September, 2022.

48. Rule is discharged. No order as to cost.

49. At this stage, liberty is granted to the respondent no.1 to move this Court

by filing a miscellaneous application for claiming restoration of the amount to

the respondent no.3-Bank, which was disbursed as per the order passed by this

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Court on 5th September 2022, after a fresh decision is taken by respondent no.1

upon the representation of the petitioner dated 23 rd July 2022, which decision

shall be subject to rights of the parties to challenge this judgment or any finding

or any decision contained in the judgment or taken in compliance with the

directions given here-in-above.

   [ ANIL L. PANSARE, J. ]                            [ SUNIL B. SHUKRE, J. ]





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