Case Note & Summary
The petitioners, Surendra K. Kambli and another, were members and shareholders of the Bhandari Co-operative Bank Ltd. (First Respondent), a co-operative bank established under the Maharashtra Co-operative Societies Act, 1930, holding a banking licence from the Reserve Bank of India. Due to various irregularities committed by the Managing Committee, including sanctioning of bogus loans, the Registrar of Co-operative Societies initiated action under Section 88 of the MCS Act, and FIRs were registered under the Indian Penal Code and Prevention of Corruption Act. On 11 August 2011, the Reserve Bank of India issued an order under Section 35-A of the Banking Regulation Act, 1949 imposing financial restrictions for six months. On 17 August 2011, it issued directives under Section 110A of the MCS Act for appointment of an administrator. A show cause notice under Section 22 of the BR Act was issued for cancellation of the banking licence. The administrator submitted replies and progress reports. On the petitioners' representation, the Board of Administrators was reconstituted on 7 October 2011, including the petitioners. Further recoveries were made and progress reports submitted. However, not satisfied with the financial position, the Reserve Bank cancelled the banking licence on 11 November 2011 under Section 22(4) of the BR Act. The appeal under Section 22(5) was rejected by the Appellate Authority, Department of Economic Affairs. The petitioners then filed a writ petition under Article 226 of the Constitution of India. The petitioners argued that the cancellation order was not passed judiciously; that before the expiry of the six-month period under Section 35-A, the order was passed without considering that the Board of Directors was removed based on the financial position as of 31 March 2011, that a new Board of Administrators was substituted and made good recoveries, that liabilities were only Rs.84 crores, and that funds of Rs.34 crores and other assets were sufficient to clear liabilities. They urged that more time should be given and they were willing to bring in funds. The respondents, including the Reserve Bank, supported the cancellation. The court held that the Reserve Bank had considered all relevant material including progress reports and was not satisfied with the financial position. The court noted that the Reserve Bank is an expert body and its decision should not be lightly interfered with. The court found no error in the decision-making process and dismissed the writ petition, upholding the cancellation of the banking licence.
Headnote
A) Banking Law - Cancellation of Licence - Section 22(4) Banking Regulation Act, 1949 - Judicial Review - The court examined whether the Reserve Bank of India's order cancelling the banking licence of a co-operative bank was vitiated by non-consideration of subsequent recoveries and financial improvements made by a reconstituted Board of Administrators. Held that the Reserve Bank had considered all relevant material including progress reports and was not satisfied with the financial position; the court in writ jurisdiction cannot substitute its own satisfaction for that of the expert regulatory body. (Paras 1-4)
B) Banking Law - Opportunity of Hearing - Section 22(4) Banking Regulation Act, 1949 - Natural Justice - The petitioners contended that the order was passed without giving adequate opportunity and before expiry of the six-month period under Section 35-A. Held that the show cause notice was issued and replies considered; the cancellation order was passed after considering the financial position and progress reports, and the appellate authority also gave a hearing. No violation of natural justice. (Paras 2-4)
C) Banking Law - Scope of Writ Jurisdiction - Article 226 of Constitution of India - Interference with Expert Decisions - The court held that the Reserve Bank of India is an expert body in banking matters and its decision to cancel a licence based on financial viability and public interest should not be lightly interfered with unless there is a clear error of law or procedural irregularity. The petitioners' willingness to bring in funds was not a ground to compel the Reserve Bank to grant more time. (Paras 3-4)
Issue of Consideration
Whether the order of cancellation of banking licence passed by the Reserve Bank of India under Section 22(4) of the Banking Regulation Act, 1949 and confirmed by the Appellate Authority under Section 22(5) is liable to be set aside in writ jurisdiction on the grounds of non-consideration of subsequent recoveries and financial improvements.
Final Decision
The writ petition is dismissed. The order of cancellation of the banking licence passed by the Reserve Bank of India under Section 22(4) of the Banking Regulation Act, 1949 and confirmed by the Appellate Authority under Section 22(5) is upheld.
Law Points
- Cancellation of banking licence under Section 22(4) of Banking Regulation Act
- 1949
- Scope of judicial review under Article 226
- Adequacy of opportunity of hearing
- Consideration of subsequent improvements
Case Details
2013 LawText (BOM) (12) 58
WRIT PETITION NO. 8393 OF 2012
Mr.A.S. Desai for Petitioners, Mr.P.B. Naiknaware for Respondent No.1, Ms.M.P. Thakur, AGP for Respondent Nos.3 and 6, Mr.S.K. Talsania, Senior Advocate with Mr.Parag Sharma i/b. M/s.Udwadia Udeshi and Argus Partners for Respondent No.4
Surendra K. Kambli & Anr.
Bhandari Co-op.Bank Ltd. & Ors.
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Nature of Litigation
Writ petition under Article 226 of Constitution of India challenging the order of Reserve Bank of India cancelling the banking licence of a co-operative bank and the appellate order confirming it.
Remedy Sought
The petitioners, members and shareholders of the bank, sought to set aside the cancellation order and allow the bank to continue operations.
Filing Reason
The petitioners were aggrieved by the cancellation of the banking licence of the First Respondent Bank by the Reserve Bank of India under Section 22(4) of the Banking Regulation Act, 1949, confirmed by the Appellate Authority under Section 22(5).
Previous Decisions
The Reserve Bank of India passed an order under Section 35-A of the BR Act on 11 August 2011 imposing financial restrictions for six months. On 17 August 2011, directives under Section 110A of the MCS Act were issued for appointment of an administrator. A show cause notice under Section 22 of the BR Act was issued. The Board of Administrators was reconstituted on 7 October 2011. On 11 November 2011, the banking licence was cancelled under Section 22(4). The appeal under Section 22(5) was rejected by the Appellate Authority.
Issues
Whether the order of cancellation of banking licence under Section 22(4) of the Banking Regulation Act, 1949 was passed without considering the subsequent recoveries and financial improvements made by the reconstituted Board of Administrators.
Whether the Reserve Bank of India ought to have granted more time to the bank to improve its financial position before cancelling the licence.
Whether the impugned order is liable to be interfered with in writ jurisdiction under Article 226 of the Constitution of India.
Submissions/Arguments
The petitioners argued that the cancellation order was not passed judiciously; that before the expiry of the six-month period under Section 35-A, the order was passed without considering that the Board of Directors was removed based on the financial position as of 31 March 2011, that a new Board of Administrators was substituted and made good recoveries, that liabilities were only Rs.84 crores, and that funds of Rs.34 crores and other assets were sufficient to clear liabilities. They urged that more time should be given and they were willing to bring in funds.
The respondents, including the Reserve Bank of India, supported the cancellation order, contending that the Reserve Bank had considered all relevant material and was not satisfied with the financial position of the bank.
Ratio Decidendi
The Reserve Bank of India is an expert body in banking matters. Its decision to cancel a banking licence under Section 22(4) of the Banking Regulation Act, 1949, based on the financial viability and public interest, should not be lightly interfered with in writ jurisdiction under Article 226 of the Constitution of India unless there is a clear error of law or procedural irregularity. The court cannot substitute its own satisfaction for that of the Reserve Bank. The fact that the petitioners were willing to bring in funds or that some recoveries were made does not compel the Reserve Bank to grant more time.
Judgment Excerpts
The Petitioners, who are members and shareholders of the First Respondent Bank, have challenged the order passed by Reserve Bank of India and confirmed in appeal by the Appellate Authority, Department of Economic Affairs, cancelling the banking licence of the First Respondent Bank, in this writ petition.
The learned Counsel appearing for the Petitioners submits that the impugned order of cancellation of licence has not been passed judiciously; that though six months' time was granted to the Board of Administrators under Section 35-A of the BR Act, even before the expiry of that period the order of cancellation of licence was passed without considering the following...
Procedural History
The Reserve Bank of India issued an order under Section 35-A of the BR Act on 11 August 2011 imposing financial restrictions for six months. On 17 August 2011, directives under Section 110A of the MCS Act were issued for appointment of an administrator. A show cause notice under Section 22 of the BR Act was issued for cancellation of the banking licence. The administrator submitted replies and progress reports. On the petitioners' representation, the Board of Administrators was reconstituted on 7 October 2011. Further recoveries were made and progress reports submitted. On 11 November 2011, the Reserve Bank cancelled the banking licence under Section 22(4) of the BR Act. The appeal under Section 22(5) was rejected by the Appellate Authority, Department of Economic Affairs. The petitioners then filed the present writ petition under Article 226 of the Constitution of India.
Acts & Sections
- Banking Regulation Act, 1949: Section 22, Section 22(4), Section 22(5), Section 35-A
- Maharashtra Co-operative Societies Act, 1930: Section 88, Section 110A
- Constitution of India: Article 226
